§ 4.16 p.m.
§ Lord WELLS-PESTELL
My Lords, I beg to move that the Social Security (Contributions, Re-rating) (No. 2) Order 1977, a draft of which was laid before your Lordships' House on 1st December, be approved. My right honourable friend the Secretary of State for Social Services has carried out the review of National Insurance contributions which he is required to make each year under the Social Security Act 1975. He has had regard to the present level of the National Insurance Fund and the likely level of future expenditure from it, and in the draft order now before your Lordships he has proposed revised rates and levels of contributions from the 6th April 1978. I hope that in the years to come the 6th April 1978 will be seen to be a very significant date in the history of social progress in this country. This is when the Social Security Act 1975 takes effect, and employees will begin to build up for 1886 themselves on an earnings-related basis better provision for retirement, widowhood and chronic ill health.
An important feature of the new scheme is that there will be a partnership between good occupational pension schemes and the State whereby employees who are members of the occupational schemes may receive some of the new benefits from those schemes rather than from the State scheme. Thus, employees will build up for themselves greatly improved benefits, either entirely through the State scheme or by a combination of State and occupational pension provision. The new arrangements will mature in 20 years' time, and will then enable millions of employees to retire on more than half pay. These important developments in benefit provision had the general support of all Parties when the pensions Bill was before your Lordships' House in 1975. I hope there will also be general support for the draft order, which now sets out the contributions which will be levied for the first year of the new scheme.
The pensions Act recognised that contributions for employees who were not contracted out—that is, those whose rights to the improved benefits would be provided entirely by the State scheme—would need to be increased next year. The Act also provided for contributions of those who were contracted out to be at a reduced rate, in recognition of the responsibility for benefits which their occupational pension schemes had taken over from the State. The self-employed, unlike people who work for an employer, will not be covered by the new earnings-related pension arrangements. My right honourable friend has taken account of the different cover for benefits which these different types of contributor will have under the new scheme and has sought to set rates and levels of contributions for the next year which are fair to them all.
I will mention, first, the contributions for employees who are not contracted out of the State scheme. As I have indicated, there is statutory provision for their contributions to be increased from April 1978. The contributions may be set at rates which are not higher than 6.5 per cent. for the employees and 10 per cent. for their employers compared with the present rates of 5.75 per cent. for employees and 8.75 per cent. for employers. It 1887 has not been possible to set rates which are lower than the 6.5 per cent. for employees and the 10 per cent. for employers. Indeed, as the Government Actuary's report on the effect of this order shows, it is expected that, on given assumptions as to factors such as the level of unemployment and earnings, the National Insurance Fund will not quite break even in the year 1978–79. The deficit for that year is expected to be in the region of £25 million. The surpluses which have accrued in recent years make this deficit acceptable.
The upper and lower limits on earnings on which employees and employers pay contributions are also being raised for the coming year. They will then be £17.50 and £120 a week in place of the present limits of £15 and £105 a week. The effect is that a person who earns at least £17.50 a week will pay contributions on all his earnings up to £120 a week. These new earnings limits are not specified in the draft order because, under the pensions Act, they now are a matter for regulations. My right honourable friend has already made the regulations which are subject to the Negative Resolution procedure, but I must mention them for the sake of giving your Lordships a complete picture.
The new lower and upper limits are consistent with the requirements of the pensions Act, which is that they should be, respectively, about equal to and about seven times the amount of the basic rate of the retirement pension which, as your Lordships know, is at present £17.50. These changes mean that an employee who is a full member of the State scheme and who earns £80 a week (which is approximately the amount of average earnings for men employed full-time) will pay an additional 60p a week and his employer will pay an extra £1 a week. The maximum increase will be £1.76 a week for employees and £2.81 a week for employers and will be payable where employees earn £120 or more a week.
Increases at this level result, partly, from the increase in the percentage rate and, partly, from the increase in the earnings limit. As your Lordships will appreciate, increases in the limit result in people whose earnings are above the existing limits paying additional contributions from the start of the new tax 1888 year corresponding to the increases which lower earners face immediately they receive a pay increase in the course of the preceding tax year.
I will deal next with contracted-out employees. The pensions Act provides that employees and their employers will pay contributions which are initially at the rates which are 2.5 per cent. and 4.5 per cent. respectively lower than for other employees on earnings between the lower and upper earnings limit. Thus, on the first £17.50 a week of earnings—and I would remind your Lordships that I am referring to contracted-out employees—the rate will be 6.5 per cent. for employees and 10 per cent. for employers; but on earnings above that level, the rates will become 4 per cent. for employees and 5.5 per cent. for employers. As a result the contracted-out employee, for example, earning £80 a week will pay 96p a week less than at present. The maximum reduction will be £1.40 a week and will apply to a person earning £105 a week. These reductions relate only to contributions to the State scheme and do not take account of contributions at the occupational pensions scheme.
Your Lordships will wish to know whether there is to be any change in the rate of contribution payable by those married women and widows who retain the right to reduced contribution liability. The answer is that they will continue to pay the 2 per cent. of their earnings, subject, of course, to the new earnings limit, whether or not they are contracted out.
My Lords, I turn now to the position of people who are self-employed. If I may say so, this is a matter which I know from past experience concerns a good many of your Lordships. As you will know, the self-employed are not included in the new earnings-related pension arrangements although they will continue to be eligible for the basic retirement pension and other benefits currently available to them. My right honourable friend has given careful consideration to their position and has decided that, in fixing the level of their future contributions, it would be only right to take account of the changes being made for other contributors. If the self-employed had to continue to pay contributions on the present basis, this would 1889 seem unfair because employees who are contracted out and who, therefore, also get less than the full benefit cover of the State scheme, will pay reduced contributions under the new scheme. The new rates of contribution for the self-employed have therefore been calculated in the same way as those for the contracted-out employees; that is, by starting with the contribution payable for employees who are full members of the scheme and by reducing it to allow for the benefits which are not available under the scheme. As a result, the self-employed will pay lower contributions than they do now and they will be able to use this saving, if they so wish, to make extra pension provisions for themselves.
The draft order shows that the flat rate Class 2 contribution is being reduced from next April from £2.66 per week to £1.90 per week, a reduction of 76p. The rate of the earnings-related Class 4 contributions is to be reduced from 8 per cent. to 5 per cent. The lower limit of annual profits or gains at which a Class 4 contribution begins to be paid, is being increased from £1,750 to £2,000 a year. The upper profits limit is being increased from £5,500 to £6,250 a year, so that will be in line with the new upper earnings limit for employees. Because of your Lordships' concern in the past for the self-employed, may I give one figure. I have not selected it because it happens to be the nicest figure. I have been quoting the contributions that are going to be paid by employees earning about £80 a week—£4,000 a year. The self-employed person whose annual profits or gains amounts to £4,000 a year is paying at the present moment in contributions £318.32. From 1st April, he will be paying £198.80—a decrease in the year of £119.52. I mention this because at least my right honourable friend the Secretary of State has tried to be as fair as is humanly possible in matters of this kind.
At this point, I must add a further comment about the contributions of the self-employed so that there will be no risk of misunderstanding the future position. The substantial reduction proposed for next year is achieved, as I have already explained, by calculating contributions as for people who are contracted-out. However, contracted-out contributions can be expected to rise in 1890 real terms over the years. This is because the cost to occupational pension schemes of funding the pensions, which would otherwise be provided by the State scheme, will fall and it will then be right to reduce the extent to which contracted-out contributions are lower than full contributions. As contracted-out contributions rise progressively in real terms, so therefore will the contributions of the self-employed. However, let me make it quite clear that in our deductions—and I may be wrong—this is not expected to happen in the first five years. We expect it to be static, although there will doubtless be increases in Class 2 contributions rate, and the Class 4 profits limit, as a result of the rise in the general level of earnings.
I now come to the remaining changes which the draft order makes. First, the level of earnings below which a self-employed person can be excepted from liability for Class 2 contributions is being raised from £875 a year to £950. Secondly, the voluntary Class 3 contribution is being reduced to £1.80 per week in consequence in the reduction of Class 2 contribution to £1.90. Finally, I should like to mention something which is already established and not therefore in the order. This is that from April employees and the self-employed will not pay contributions for work done after they have reached the pensionable ages of 65 for men and 60 for women.
I have spoken at some length because this year the setting of the new rates and levels of contributions is of special importance since the contributions are those needed for the start of the new pensions scheme. In conclusion, all I need say—and there are Members of your Lordships' House who know this to be true—is that, in order to try to get the whole situation right, my right honourable friend has given a great deal of thought to this matter, and has seen a large number of people. As I say, a good deal of that consultation has gone into this order. I hope that, as a result, this draft order will commend itself to your Lordships and that you will pass it. I beg to move.
§ Moved, That the draft Social Security (Contributions, Re-rating) (No. 2) Order 1977, laid before the House on 1st December, be approved.—(Lord Wells-Pestell.)1891
§ 4. 35 p. m.
§ Lord SANDYS
My Lords, the House will be grateful to the noble Lord, Lord Wells-Pestell, for describing the order which is before your Lordships because the background to it is particularly interesting and significant in both political, inflationary, and pension terms and even in the thinking of the Government. It is a metamorphosis. Let us go back to 1973, when the Social Security Act was placed on the Statute Book by the last Conservative Government. That Act included provisions for a second pension which we believe to be a very satisfactory one.
One of the very first acts of the present Government when they reached office in February 1974 was to overturn the pension provisions of the Act of 1973. As I shall describe in a few minutes, it has had a very important result, a very adverse result, and a deeply serious result to all those who wish to benefit from the pensions scheme. The reason of course is this. The Act of 1973, which would have come into effect in 1975, would have meant that a three year start would have been made on building up those very desirable benefits which the noble Lord, Lord Wells-Pestell, described. I admit that they were not the same benefits but they were parallel and somewhat similar.
Unfortunately—and we believe it is very unfortunate—the Government decided to overturn the whole scheme. As everybody knows who has had involvement in the insurance field, the first thing one does not want to do in an inflationary period is to overturn an existing scheme because it means that all the machinery, the checks and balances, the updating procedures—and the benefits themselves—are thrown out of gear; and, to coin a phrase, one has to "throw six and start again" if the policy is changed. The Government did change the policy and they changed it in a somewhat dramatic manner because when the noble Lord's right honourable friend Mrs. Barbara Castle assumed office as Secretary of State, in her very first speech (to which my noble friend Lady Young and I listened in another place on 10th April 1974) she said exactly what she was going to do. The misfortune is that we have lost three years. The noble Lord may well say that the 6th April 1978 is going to be significant. It will be significant; 1892 but those who understand what has happened will wring their hands rather than ring bells on that occasion because they will realise the Government have changed their mind on the situation.
I should like to put it to your Lordships that the Government have passed through a metamorphosis in their thinking, because during the course of 1974—the first year of office of the present Government—a decision was reached to make variations in the Social Security provisions in the Social Security Amendment Bill of that year. A very interesting debate took place in your Lordships' House on 2nd December 1974 at which the noble Lord, Lord George-Brown (whose absence we regret this afternoon) said that he believed that the new levels of contributions were going to be intolerable. How right he was! The new levels of self-employed contributions were raised from 5 per cent. to 8 per cent. It is very significant that the Government have now come to the same conclusion as the noble Lord, Lord George-Brown: that it would be much better to revert to the original decision of the previous Conservative Government to have a level of contributions set at 5 per cent. We welcome this; we were right in 1973. The Government have come to the same conclusion in 1977 but, alas, those three years have been lost.
Many other matters will be referred to, but I should like particularly to comment on the situation regarding the accumulated surplus in the Government Actuary's report. We welcome, of course, the publication of that report which comes, as usual, at the same time as the order. I should like to put one question to the noble Lord, Lord Wells-Pestell. He may not have the information beside him, but may I ask him whether he will bear in mind that a Written Answer to the same Question was given in another place on 23rd December last year as to what the surplus was? At that time, almost a year ago, it was stated that the accumulated surplus stood at £3,000 million. We believe that in April 1978, if we add the profits shown for this year, it would be £3,650 million. The significant point here is that this very large sum of money which is available within the insurance scheme appears to be used for one purpose only: the reduction of the public sector borrowing requirement.
1893 I should also like to put a second question. Was the Treasury—the Department which brought pressure to bear—suggesting that these reductions were made?—because we assume that that is the case. We believe, however desirable it is to accumulate these very large surpluses, that they should be devoted to the main purpose of the National Insurance Scheme rather than attributed to other matters within the Treasury remit. It may well be a matter which the noble Lord can explain very easily, but we should be most grateful for his guidance on this matter.
§ 4.42 p.m.
§ Lord BANKS
My Lords, I should also like to thank the noble Lord, Lord WellsPestell, for the very clear way in which he explained the contents of this order. I should like to say at once that I very much welcome its content. Perhaps I might be permitted to make a preliminary observation. When we discussed last year's re-rating order, I drew attention to the considerable projected surplus in the National Insurance Fund to which reference has already been made, and I suggested either that contributions should be cut or benefits increased. I was told then that the accumulated surplus in the National Insurance Fund was only sufficient for three months' benefit. The implication was that the annual surplus could not be spent with safety. Now I see from the Government Actuary's report—and the noble Lord, Lord WellsPestell, has again pointed it out this afternoon—that a deficit of £25 million is projected for 1978–79. That is in spite of many imponderables; for example, the rate of increase in earnings, the level of unemployment and the number of employees who will be contracted out of the earnings-related scheme next April. However, I am not complaining and I am reassured by the fact that the figures for future contributions given in Table 3 of the Government Actuary's Report are estimated to give an excess of income over outgo throughout the period to the year 2008.
I am glad that the rates of contribution for employed persons by the employer and employee from next April are to be as originally forecast—because there was fear that they might be one-quarter per 1894 cent. higher on each side. I am glad that has not been found necessary. I welcome wholeheartedly the concession to the self-employed. In consultations I had with the Minister responsible for social security, as Liberal spokesman on the social services, I asked that since the self-employed did not receive earnings-related benefits and have a restricted range of other benefits, and since they will not benefit from the earnings-related part of the new scheme next April, they should have a corresponding concession. I suggested that the Government should contribute up to 3½ per cent. of earnings between the upper and lower limits, to match a similar contribution by the self-employed person towards a retirement annuity with an insurance company or friendly society. Three and a half per cent. from each side would have totalled 7 per cent., which is the same as the amount of reduction allowed for employees who have contracted out.
The Minister agreed to have the proposal carefully examined, and that was done. In the end, the Government decided that it would be better to give what is in fact a similar percentage concession to the one that I had suggested, simply by reducing the self-employed contribution. That has the advantage of involving no extra administrative cost, but it loses the incentive to save which my proposal provided. However, as the noble Lord, Lord Wells-Pestell, pointed out, the money freed by that reduction can be so used if the contributor wishes. It also has the advantage that the reduction is spread between the Class 2 flat rate contribution, which is helping the poorest, and the Class 4 contribution. I warmly welcome the reduction in the flat rate from £2.66 per week for a man and £2.55 per week for a woman to £1.90 per week for both, and also the reduction in the levy from 8 per cent. to 5 per cent. I have read with interest the Government Actuary's explanation of how those contribution rates are derived, and the noble Lord also made reference to those this afternoon. These are considerable reductions and a very welcome response to the representations which I and others made. I hope that the House will approve the order.
§ Baroness PHILLIPS
My Lords, I also should like to welcome the contents of this order. If I may say so, I thought it was 1895 a little ungracious of my noble friend from the Opposition Benches to suggest that the Government have had a change of mind. I would only remind him that during the time of the Conservative Government, when I had the privilege of sitting on the Opposition Front Benches where he is, I cannot recall any occasion when they had a change of mind in relation to social security, despite the pressures that we put upon them. Does the noble Lord wish to reject that? I think perhaps if he examines the matter he will find that it is so.
We have had a very limited welcome, which is rather sad, because it is not often that we have before the House a proposition that actually reduces contributions. I am sad to see that there are so few noble Lords here to commend the Government on this particular order. I would hope that the Press will give it banner headlines just as they would have if there had been an increase in the contributions. The fact is that there has been this concession to the self-employed which many of us, including noble Lords from this side of the House, advocated; and the Government have listened. I think we should congratulate the Government on that. This is a Christmas gift not only to the pensioners but to all contributors. We would like to give it a very warm welcome, and I hope that the word will go forth from this House.
§ 4.49 p.m.
§ Lord WELLS-PESTELL
My Lords, I do not think it is necessary for me to detain your Lordships for very long. I cannot resist saying to the noble Lord, Lord Sandys, that I was delighted to hear him refer to the "last" Conservative Government. This is rather good news, I think, for the country as a whole, although I am sure he is going to tell me privately that he meant the previous Conservative Government.
In the last three years, if the noble Lord examines this scheme very carefully, I think he will find that there are not many people who are going seriously to suffer as a result of the Government's change of mind. On this occasion and on previous occasions, the noble Lord has made a good deal of the 8 per cent. which the Government fixed for the self-employed 1896 to pay. But I tried to point out then—obviously, not very successfully—that there was a very good reason for it.
What we tried to do on that occasion was to assess the cost of the benefits which the self-employed were getting, and are still getting, bearing in mind that it was costing at that time, and is still costing at the present moment, both the employee and the employer a total of 14½ per cent. The self-employed were to be called upon to pay 8 per cent. and they were getting, and are still getting, retirement pension, widow's benefits, sickness and invalidity benefits, maternity benefits, child's special allowance and death grants. They are getting all of the benefits that everybody else gets, with the exception of three—normal unemployment benefit, industrial injury benefit and earnings-related supplement to benefits.
I do not want to be unfair about this, but, if one costs what they were getting, the 8 per cent. then and now is not an unreasonable figure. I do not want to say anything more, but I did not want your Lordships to go away thinking that the self-employed were being soaked, although we realise that there was very strong feeling in this House and elsewhere about the 8 per cent. But we made a sincere and sustained effort to try to do it on the basis of what they were getting, in comparison with what other people were getting and for which they were paying a great deal more.
I do not know that I want to say very much more, other than that the National Insurance must be a self-contained system, but the effect on the economy must be borne in mind. In present circumstances, and bearing in mind past surpluses, Government as a whole, including the Treasury, accept that there will be a small deficit. But as the noble Lord, Lord Banks, said very clearly, all this was done on certain assumptions—the assumption of the number of people who would contract out of the scheme, which I believe is going into a good many millions; the number of unemployed that there may be; the restriction which there will be and has been, on earnings; and one must have a fairly substantial working margin to meet eventualities which may arise.
As always, I am grateful to the noble Lord, Lord Banks, for his contribution.
1897 I do not think that I need say a great deal, because the Secretary of State—and I mean what I say—has had the benefit of being able to discuss certain matters with the noble Lord, Lord Banks, and I know that the Secretary of State was anxious, so far as it was possible, to meet a number of these matters. But perhaps I may just repeat for the benefit of your Lordships that the Liberal Party, through the noble Lord, Lord Banks, proposed a scheme under which self-employed contributors who contracted with a life office for a retirement annuity would have their premium, up to a certain limit, matched by a State subvention allocated from their Class IV contributions.
The noble Lord, Lord Banks, was perfectly fair and pointed out the view of my right honourable friend, which was that there were two very considerable administrative difficulties—first, of staffing and, secondly, of procedures. I know that your Lordships have heard time and time before about this problem of staffing but more staff would be required to set up what would amount to individual accounts to prepare these issue vouchers, and it is probably a much more difficult process than many of us realise. There would also be technical difficulties flowing from the link with Schedule D tax; for example, delay in the agreement of earnings for tax purposes, adjustment of assessments and treatment of partners. We could see a good deal of difficulty and I hope that the noble Lord, Lord Banks, as well as your Lordships, will feel that perhaps the suggestion which the Government have made, and are asking your Lordships to accept in this order, really meets the situation, for it leaves the self-employed with a margin which he or she did not have before, which could probably be used for some kind of private insurance.
§ On Question, Motion agreed to.