HL Deb 30 January 1978 vol 388 cc599-604

3.54 p.m.

Lord WELLS-PESTELL rose to move, That the draft State Scheme Premiums (Actuarial Tables) Regulations 1977, laid before the House on 15th December, be approved. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. These regulations are concerned with the method of calculating certain State Scheme premiums payable under the Social Security Pensions Act 1975. The premiums involved are limited revaluation premiums, pensioners' rights premiums and the accrued rights premiums. The regulations would revoke the existing Actuarial Tables Regulations (Statutory Instrument No. 1217 of 1976) which I explained to your Lordships in some detail on 27th July 1976. At that time I gave a detailed explanation of the situations in which the various premiums are payable.

I do recognise that the existing regulations are indeed complicated, and I must confess that it has not proved possible to simplify the new draft. They are I think the most complicated that I have ever looked at, and I would not presume to stand before your Lordships and pretend to know them from A to Z. I think I might know them from A to B. Basically the complexity results from the requirement, which was recognised and incorporated in Section 46 of the Pensions Act 1975, that the premiums are intended actuarially to represent the cost to the State of taking over liabilities relinquished by pension schemes, and should have regard to the market value of stocks and equities prevailing at the time they are due, since pension schemes might well have to sell investments to pay the premiums.

It may help your Lordships if I explain the background to the requirement for the relationship of premiums to prices of stocks and shares. A contracting out application has to be accompanied by an actuarial certificate. That certificate covers the situation that would arise if the Scheme were to be wound up within a five-year period and states that the Scheme's resources would be sufficient to meet the priority liabilities. These priority liabilities include guaranteed minimum pensions and State scheme premiums, and clearly if there were no relationship between the amount of premiums and the current market value of investments it would be difficult for an actuary to certify that a Scheme's resources were sufficient.

The means of adjusting the premiums is through a factor employed in the calculation called the "market level indicator", which I think is reasonably clearly set out in the Instrument. In the existing regulations this is based in part on an index number applicable to 20-year Government stocks. When we were considering those regulations, which was last in July 1976, I explained to your Lordships that it was generally recognised that the index had shortcomings—I was quite frank in admitting that—and that a more suitable index, we hoped, was in the course of preparation. Nevertheless, it was decided to go ahead with the regulations so that employers and pension schemes would know approximately the amount of premiums they would have to pay. I explained that when the new index was available revised regulations would be required. The revision of the indices was completed by the Financial Times Actuaries Committee early in 1977, and from 17th May, 1977 a new set of indices began to be published in the Financial Times. Publication of the 20-year stock index was discontinued with the result that the existing regulations referred to a moribund index.

Following urgent discussions with the Government Actuary's Department, we prepared and circulated in August last a consultative document setting out our proposals for substituting new indices. The proposals were generally well received, and—I wish your Lordships to know this—comments by the pensions organisations were taken into account in preparing the regulations, the first draft of which was distributed to those organisations last November. The draft regulations which we are now considering, and which were laid before your Lordships' House on 15th December, 1977, were prepared in the light of comments received. On that basis, I would claim that there has been considerable consultation and that these regulations should in no way be contentious—at least I hope that they will not be.

As provided for in Section 46 of the Pensions Act 1975 they have been drafted after consultation with the Government Actuary. Section 46 is the section which requires the Government to consult with the Government Actuary in this matter. They use gross redemption yield figures, which your Lordships will find in Schedules 6 and 7, to enable the premium calculations to be made much in the way provided for in the existing regulations. I assure your Lordships that these regulations are essentially the same, except where amendments have been incorporated to accommodate the changed format and construction of the new yield indices. I therefore commend the regulations to your Lordships, having acknowledged that they are complicated and very technical. I beg to move that these regulations be approved.

Moved, That the draft State Scheme Premiums (Actuarial Tables) Regulations 1977, laid before the House on 15th December, be approved.—(Lord Wells-Pestell.)

4.1 p.m.

Lord LYELL

My Lords, the noble Lord, Lord Wells-Pestell, has been kind enough to admit that he gave us a very detailed explanation as to the previous set of actuarial tables in July 1976. I think the House will agree that he has done the same today. He has given a very detailed concise and, I believe, necessary explanation of these particular tables. First, I believe that the House will note the comments of the noble Lord, Lord Wells-Pestell. We are grateful for his kind comments on the Life Offices Association and the pension funds, with particular reference to the consultations that were held with these large institutions and the Government in drawing up the new tables.

As the noble Lord, Lord Wells-Pestell has said, it is a mere 18 months since he presented the regulations to us. However, he pointed out that we need a new set of regulations to take new circumstances into account. As he has said, these regulations are very much designed to assist the pension funds with all the information necessary to allow them to ascertain such liabilities when persons wish to contract back into the Sate scheme. However, I am afraid that I and, I am certain, the House are as baffled as we were in 1976 when examining the question of these complicated premiums, especially limited revaluation premiums, pensioner's rights premiums and the accrued rights premiums. The noble Lord, Lord Wells-Pestell, has gone a little way towards clarifying the operation of the premiums and what they mean. He has done much to help the House and certainly he has done much to help me, for which I am extremely grateful. I trust that I shall acquire greater knowledge of the various indices before very long.

However, there is one small question which I should like to raise in connection with these tables and it concerns the mix of equity to fixed interest investments. It clearly appears to be an average when the mix is declared to be 65 per cent. of equity and 35 per cent. of fixed interest. However, I wonder whether the noble Lord would not agree that the tables might be more comprehensive were they to take account of any possible variation in what one might term prudent investment, and particularly a prudent investment mix in what might be a very volatile investment market. Certainly, flexibility of investments is especially needed in the pension funds industry. Surely it would be wise to give the maximum flexibility to these funds, so ensuring that their liabilities reflect changing market conditions? I do not think that there is much between us on this point—at least I hope not. I wonder whether the noble Lord can give me a very brief answer, but probably we can settle the question later.

I know that the pension funds are very grateful for one particular point which has arisen in the actuarial tables and in the new indices: it is the ending of the completely open-ended commitment which was implicit in the 1976 regulations. Certainly, we on these Benches should like to thank the noble Lord, Lord Wells-Pestell, for his customary courtesy and, above all, his patience in explaining how these actuarial tables are meant to work and do work.

4.6 p.m.

Lord BANKS

My Lords, I should like briefly to add a word of thanks from these Benches to the noble Lord, Lord Wells-Pestell, for explaining on this and a previous occasion the exact nature of these regulations. The noble Lord has warned us that we must expect that, from time to time, the regulations setting out these premiums will be revised to take account of market conditions. As the noble Lord has said, this particular revision was forecast and has been the result of consultation with all those interested. The new set of tables, although extremely complicated, is not contentious and we therefore support their approval by the House.

4.7 p.m.

Lord WELLS-PESTELL

My Lords, I am grateful to both noble Lords for their support of these regulations. The noble Lord, Lord Lyell, raised two matters relating to what was really meant. The limited revaluation premium is payable when an employee leaves contracted out employment and his guaranteed minimum pension is preserved in his occupational pension scheme and revalued at the rate of 5 per cent. That is a brief explanation.

The accrued rights premium is to transfer the accrued guaranteed minimum pension of a contracted out employee to the State scheme, if his pension scheme ceases to be contracted out and if the Occupational Pensions Board does not approve arrangements for the guaranteed minimum pension to be preserved or transferred to another contracted out scheme. The pensioner's rights premium is payable in the same circumstances as an accrued rights premium, but in respect of a person who has already become entitled to receive a guaranteed minimum pension. As I have said, the existing regulations are complicated, but as the noble Lord, Lord Banks, has indicated that they are acceptable, I feel disposed to say that, if they meet with his approval, I have not very much to worry about.

The noble Lord, Lord Lyell, raised the question of what is called the mix▀×65: 35. The mix is according to market values in normal conditions and automatically takes account of different movements in values of equities and fixed interest securities. There were certain representations made as to whether it could not be 50: 50 or 60: 40, 70: 30 or 75: 25, but, looking at it from the Government Actuary's point of view, it is felt that a mix of 65: 35 will give us, shall I say, the security that we need over a very long term period. One must remember that a lot of pensioners these days live for a good many years after they have started their pension. Obviously, it must be seen that there is some sort of security of income. I hope that the noble Lord, Lord Lyell, is satisfied with that explanation.

On Question, Motion agreed to.