HL Deb 12 July 1979 vol 401 cc1034-8

4.14 p.m.

Lord CULLEN of ASHBOURNE rose to move, That the draft order laid before the House on 12th June, be approved. The noble Lord said: My Lords, I readily accept that the term "earnings factors" is likely to mean little to the majority of your Lordships, so I must start by explaining what earnings factors are, and I may add that I have only just learned it myself. Earnings factors are derived from earnings-related national insurance contributions and, among other things, they determine (under the new pensions scheme) the amounts of earnings-related additional component payable with national insurance retirement pensions and other long-term benefits, and the amount of the guaranteed minimum pensions to be provided by contracted-out occupational pension schemes. Earnings factors have to be reviewed and revalued annually to ensure that they keep in line with the increase in national average earnings.

The purpose of this is to ensure that, broadly speaking, when the additional components and guaranteed minimum pensions are being calculated by reference to earnings factors—for example, when a person retires—those earnings factors bear the same relationship to national average earnings as they did when the contributions were paid, perhaps several years previously. This is what is called the "pre-award dynamism" of the new pension scheme. The necessary provisions are contained in Section 21 of the Social Security Pensions Act 1975, as amended by Section 10 of the Social Security Act 1979, and this is the first order made under those provisions.

Your Lordships may recall that the purpose of the amendment in Section 10 of the 1979 Act was to enable the order under Section 21 of the Pensions Act to be made as close as possible to the beginning of the tax year to enable contracted-out occupational pension schemes to calculate their liabilities for early leavers without delay. The amendment achieved this by providing that, for the first review, the period over which earnings movements were to be calculated was to be the latest 12-month period for which figures were available at the time the review was carried out.

Although it was the intention to make the order in April or May this year, following a review carried out in April when the latest available 12-monthly index figures were those for December 1977 to December 1978, the dissolution of Parliament and the election prevented the making of the order at that time. Neverthe- less, the former Secretary of State did in fact carry out the review on 17th April this year and, in view of the unusual circumstances which applied, very kindly informed the present Secretary of State of his action at that time; this is therefore the earliest opportunity which this House has had in the current tax year of considering the order.

I must also explain that the original draft order which was laid before Parliament had to be withdrawn and replaced by the order we are now considering solely because the original draft contained a coming into operation date of 18th June 1979 which, because of the time it took to formulate a Joint Committee on Statutory Instruments, unfortunately proved too optimistic. Next year's order will, I hope, be made much closer to the beginning of the tax year, as was intended.

Turning to the order itself, this provides quite simply that earnings factors for the 1978–79 tax year shall be increased by 13.3 per cent.; 13.3 per cent. is the percentage by which the Department of Employment's Index of Average Earnings of all Employees increased between December 1977 and December 1978. That period was the latest 12-month period for which earnings figures were available when the former Secretary of State carried out the review on 17th April 1979. For next year's review, the period will start from the end of the period taken into account for this year's review; that is, December 1978. This will enable that review, and, consequently, subsequent reviews, to be carried out at the beginning of the tax year and the order to be made as soon as possible thereafter.

The increased earnings factors will not be of relevance for the purpose of calculating the additional component in State pensions until 6th April 1980. This will be in respect of people who attain pensionable age, or where other relevant events occur, on or after that date. However, as your Lordships will be aware, contracted-out occupational pension schemes need to know increased earnings factors now for the purpose of calculating their guaranteed minimum pension liabilities in respect of early leavers. It is of course for the occupational pension scheme concerned to notify the member of his preserved pension rights, including the guaranteed minimum pension.

The order does not contain any reference to revaluation for the purposes of the calculation of these guaranteed minimum pensions. This is provided for by another part of the Pensions Act. I hope your Lordships will agree that the order is basically technical and strictly in accordance with the provisions of Section 21 of the Pensions Act, as amended. I trust your lordships will approve the order. I beg to move.

Moved, That the draft order laid before the House on 12th June, be approved.—(Lord Cullen of Ashbourne.)

4.20 p.m.

Lord WELLS-PESTELL

My Lords, as the noble Lord the Minister has said, the order is technical and is mainly, if not entirely, an administrative convenience. I do not think that any useful purpose would be served by my attempting to cross the noble Lord's t's and dot his i's. I am grateful to him for drawing our attention to this crucial matter.

Lord BANKS

My Lords, I should like to join in thanking the noble Lord for his very clear explanation of the purpose of the order and of how it fits into the working of the new pensions scheme. I suppose that the only argument that could arise would be over the actual figure given for the increase in earnings, but the noble Lord has explained, and the Explanatory Memorandum has set out, how the Government arrived at this figure, and I do not think there can be any quarrel with that. However, I wonder whether there is any way in which the Government might take steps to make the whole procedure better known and better understood by potential beneficiaries. Of course 13.3 per cent. is a high figure, and in passing I would draw attention to the burden which such a rate of increase must be imposing on the funding of final salary occupational schemes. The figure reflects inflation, whether it runs behind or ahead of prices, and one is bound to speculate gloomily about the figure which will appear in a similar order next year. However, so far as the present order is concerned, we on these Benches are content that it should receive the approval of the House.

Lord CULLEN of ASHBOURNE

My Lords, I am grateful to both noble Lords for their approval of the order.

On Question, Motion agreed to.