§ 6.13 p.m.
§ Second Reading debate resumed.
§ Lord Banks
My Lords, after two and a quarter hours of Statements, we return now to the Social Security Bill. I should like to thank the noble Baroness, Lady Trumpington, for the speech that she made some time ago, when she gave a very comprehensive exposition of the contents of this Bill. As the noble Lord, Lord Stallard, suggested, this Bill will perhaps seem somewhat old hat after the publication today of the Green Paper, and it may be a little difficult to concentrate on the contents of the Bill when more interesting and controversial matters are being widely discussed.
The Bill is inevitably something of a rag bag, as so many social security Bills which come before us are, but we on these Benches give it our general support with some important reservations. Since the Bill deals with occupational pensions among other matters, perhaps I should declare an interest, in that I am a director of a firm of insurance brokers specialising in pensions and life assurance.
I should like to concentrate on four main features of the Bill; the position of the early leavers, the restoration of the abatement of invalidity pension, the extension of statutory sick pay from eight weeks to 28 weeks, and the restructuring of national insurance contributions. Perhaps I may say a few words about each of those in turn.
Taking first the case of early leavers, the principal feature so far as they are concerned—and as the noble Baroness made clear—is that their preserved pensions are to be revalued by 5 per cent. per annum compound to retirement date, or by the rise in prices if that should be less. This is to apply to all who leave after 1st January 1986 and is to apply to all benefits accruing after 1st January 1985.
I believe that we are all familiar with the problems which face early leavers—particularly those who are in final salary occupational schemes. It is right that something should be done to tip the balance in their favour. The figure of 5 per cent. recommended by the Occupational Pensions Board is probably about right. Nevertheless, the cost cannot be ignored. The Occupational Pensions Board says that the cost will be from 1 to 2 per cent. of payroll; that that will be the cost to employers. If one has an occupational scheme where the employer is paying 10 per cent. of payroll to the scheme (which, if it is an ordinary final salary scheme, might well be the figure he is paying), then an increase of 2 per cent. will mean a 20 per cent. increase of cost—if it is all met by the employer. That is not an inconsiderable sum.
As the noble Baroness pointed out, the employer can share the cost with the employees, or he can reduce the overall benefits of the scheme, or he can reduce the benefits of those who stay and who do not become early leavers. But that latter course is one which employers would be reluctant to take.
Since the proposal in the Bill applies only to those leaving after 1st January 1986 and to benefits accruing after 1st January 1985, there will be a very slow 538 introduction of benefit. There will be virtually no immediate impact. There will be minimal benefit to be derived by those leaving in the 1980s. But ultimately, as we have seen, there will be quite a considerable cost. In occupational schemes, the future costs will have to be met by funding in advance. In occupational schemes, however, there are different ways of funding—some of which would take up the full cost sooner than others.
I should like to ask the noble Baroness what the Government estimate the immediate overall cost will be. Do the Government foresee a rising cost from this proposal over the years ahead? I should also like to know the position with regard to individual pension contracts, where an employer effects a single policy for the benefit of his employees at retirement. No more premiums would normally be paid after the pension is preserved, as things are at the moment. I can see that in the case of new entrants the premium could be increased to take account of the increase in the cost of the contingency, but what about individual contracts already in existence with a fixed premium but on which a preserved pension is taken after 1st January 1986? How will the increased cost be funded in that case?
Another factor affecting preservation is transfer value. Most funds provide the option of taking a transfer value, and most individual pension contracts effected by employers provide either for a transfer value or for the individual policy to be assigned to a new employer. Nevertheless, I support the introduction of an obligation to provide a transfer value. That provision is made more significant by the increasing popularity of Section 32 policies; that is to say, where a transfer value is transferred to an individual single premium policy with a life office. That can be on a with-profits or unit-linked basis and offers the possibility of a much better rate of increase than 5 per cent. per annum. The transfer value is to be the equivalent cash value of the preserved pension. Can the noble Baroness say how the discussions with the actuarial profession are progressing and whether the Government are well advanced with the provision of the necessary regulations determining the equivalent cash value?
Turning now to the restoration of the 5 per cent. abatement of invalidity pension, the noble Lord, Lord Stallard, pointed out that this was a temporary measure introduced in 1980 pending the application of taxation to the invalidity pension. We on these Benches opposed it at the time and now we find that, in fact, this benefit is not to be taxed. Therefore, it would seem that the measure was originally introduced for no ultimate purpose. Of course, we welcome the restoration of the abatement but regret that nothing is done to compensate for losses sustained in the years 1980 to 1985. I think it is right to say—no doubt the noble Baroness will correct me if I am wrong—that by November 1985 a single person will have lost a cumulative total of £354 and a married couple a total of £569 as a result of this temporary abatement which was imposed for no good reason, as it turned out in the long run, unless a Government saving is so regarded in this connection. Do the Government feel that there is a moral obligation to replace that loss?
539 On the extension of the statutory sick pay from eight weeks to 28 weeks I must say that I felt the Government went ahead rather quickly when they put this provision into the Bill now before us; which, of course, has been before Parliament for some time, though it only now comes before your Lordships' House. I do not feel that at the time they decided to embark on it they had full information as to how their original eight-week period was working out in practice. According to the noble Baroness—and I believe this is so—it has gone into operation reasonably smoothly. Nevertheless, the Public Accounts Committee in another place said in March that one in three sickness payments made to staff under the statutory sick pay scheme were found to be wrong. That figure is disturbing.
As a result of the extension to 28 weeks most employees will no longer be entitled to state sickness benefit at any time because at the end of 28 weeks they pass, if they are still sick, to invalidity pension. It is only the self-employed, the unemployed and a small proportion of employees who are excluded from statutory sick pay, but the rate of national insurance sickness benefit compares favourably with the rates paid under statutory sick pay, particularly so far as low paid workers are concerned. For example, a married man on £60 per week would get a sickness benefit, if he were on that, of £44.5 but a statutory sick pay benefit of only £32.26. That is nearly £12 per week less.
We on these Benches are not happy about these different rates. As I understand it, the Government are making a saving of £200 million on the move to the 28-day period. There are offsetting expenses and I believe that, in the end, because they are going to compensate employers in a particular way, the Government lose more than they gain. But the Government are making a saving on this particular operation of £200 million, which would seem to be £200 million at the expense of the poorest; but perhaps the noble Baroness can show me whether I am wrong.
There is also the question of protection for the employee. The employee can take his employer to the county court if he feels that he is not getting the correct amount. However, would it not be right to give power to the Department of Health and Social Security to force a reluctant employer to pay the correct amount?
Finally, I should like to say a few words about restructuring of national insurance contributions. This, as has been pointed out, was not in the original Bill but was introduced following the Budget. We support the extension of payment by the employer to earnings about £265 per week. Indeed, I have advocated that in this House in the past. The objection is made that this means additional cost for employers, but it is important to emphasise that the case for payment by employers—and employees, I would say—on earnings over £265 per week is quite separate from the question of the rate of contributions. For example, if the Government wish to receive the same revenue into the National Insurance Fund, they could apply the percentage contribution by employers and employees to all earnings above the present upper limit and reduce the rate of contributions. I think that would be a fairer system.
540 Of course, we on these Benches want to see employees' national insurance contributions integrated with income tax. I have suggested that that income tax should be divided between two accounts: one going to projects which involve the Government in the consumption of resources and the other to transfers of income. We should like to see the employer's contribution become a payroll tax. We appreciate very much the intention to ease the national insurance burden on the lowest paid, but it raises certain problems. It replaces one major poverty trap with a series of lesser traps at £35.50 per week, £55 per week and £130 per week. It may lock groups of workers into wage bands just below one of these points to avoid the poverty trap, on the one hand, and higher national insurance contributions for the employer, on the other. To avoid these difficulties it might have been better—I say no more than that—to exclude, say, the first £10 of earnings and pay the full 9 per cent. rate on earnings above that. I say 9 per cent. which is, of course, the rate for employees, and the appropriate rate for employers is 10.45 per cent. It will cost about the same as the Government's changes. Admittedly, it gives some benefit to all, but it will be of greater proportionate benefit to the lowest paid contributors, though to a slightly lesser extent than the Government changes.
There are many other proposals in the Bill to which I have made no reference. No doubt other speakers will deal with them, or we shall discuss them in Committee. But in dealing with the four areas of early leavers, invalidity pension, statutory sick pay and national insurance contributions I have shown that while we do not oppose the Bill—indeed, we welcome much that is in it—nevertheless we have some significant reservations.
§ 6.29 p.m.
§ Lord Boyd-Carpenter
My Lords, your Lordships' House is in rather an odd situation on the Second Reading of this very important Bill. First, for the past few weeks we have had not so much leaks as the equivalent of a burst water main of information about the forthcoming Statement, including wholly accurate forecasts in the press on the treatment of the state earnings related pension. Then, after two speeches on the Second Reading, from my noble friend and the noble Baroness on the Front Bench opposite, we had one of the most important Statements this House has heard for a long time on the same subject as the Bill. Although I am too old a hand to start trying to pronounce on the Statement without having read it carefully, it seems possible that it makes a part of the Bill out of date.
I would say to my noble friends on the Front Bench in all seriousness that this kind of procedure is not quite fair to the House. I do not think that it does the House very much good to have broken-up debates of this kind. I suggest that if the Statement were to be made this afternoon, the Second Reading of the Bill ought to have been taken on another day and other business substituted for it. With all due respect, I should like to make a protest along those lines.
The Bill itself, as the noble Lord, Lord Stallard, said, is in the circumstances made to seem a little unreal, which is a pity in view of the fact that, if one omits 541 contrast with the contents of the Statement, it is of very considerable importance. I am bound to say that I had a good deal of what I might almost describe as professional sympathy with my noble friend. I was Minister of Pensions and National Insurance, as some of your Lordships may recall, for six-and-a-half years, and it fell to me to introduce the Second Reading of quite a number of national insurance Bills. I am bound to say that I never allowed my colleagues to interpose a Statement on the same subject in the middle of them.
§ Lord Boyd-Carpenter
My Lords, I would hope that my noble friend is not suggesting that another place conducts its business better than this House. That would be a remarkable observation. However, she is perfectly right in saying that I had the task of doing that in another place, and that made me admire all the more the way that she introduced the Bill and then indulged in considerable exertions in reply to criticisms of the Statement. I am not, as I said, going to seek to comment at this stage on the Statement. With the noble Lord on the Liberal Benches, I hope and believe that we shall be debating that before very long. It is of such great importance that this House would not be fulfilling its proper role if the Government did not find time for a debate upon it.
But I shall comment, if I may, briefly on one or two aspects of the Bill. I come first to the provision in Clause 2 about early leavers. Everyone has sympathy with the position of early leavers, but I wonder whether your Lordships have reflected on certain aspects of the provision under which an early leaver, if other arrangements are not made, is to have his or her preserved pension uprated by either 5 per cent. or the rate of inflation, whichever is the lower.
In the first place, there is no obligation on an employer to have a private scheme at all, and it is therefore perhaps rather odd, if some employer decides to operate one, to impose an additional and quite expensive obligation upon him. Then there is the fact that there is no provision in law to compel an employer to uprate or update the pensions being earned by those of his employees who stay with him. Not many employers outside the public sector grant full indexation. Some do not feel able to afford even a modest increase in the pensions earned by those who stay with them. Therefore one of the possibly odd consequences of the Bill and this provision could be that those who leave an employer and go to work elsewhere will get a better deal in respect of their preserved pension than would be obtained by way of uprating by those who stay with that employer. That could create considerable anomalies, and I wonder whether it has been seriously considered by the department.
Then Clauses 3 and 5 impose additional burdens on those employers who operate employers' occupational pension schemes. I again remind your Lordships that there is no obligation on an employer to operate such a scheme at all. It would seem to me that those provisions in Clauses 3 and 5, on top of that which I have already referred to in Clause 2, could well operate as a discouragement to employers. They would 542 certainly discourage employers who do not have a scheme at the moment from operating one and discourage employers who have a scheme from improving it.
Comment was made, and rightly, that if not one of the consequences then one of the sequels of the Labour Government's 1975 Act was to check the flow of development of private occupational schemes. In that context I am sorry that the noble Lord, Lord Ennals, is not in his place. He is of course quite wrong in saying that the 1975 Act introduced earnings-related pensions into the national insurance scheme. They were in fact introduced by the Act of 1959. That Act, with its contracting-out provisions—and this is the relevance of this point—was deliberately designed to encourage the development of schemes in the private sector. It did in fact have that effect, and for the years following 1959 there was a substantial growth in those schemes.
I am very much afraid that those provisions in the current Bill will certainly do nothing to revive the tendency of employers to introduce schemes and may indeed have a discouraging effect. I hope that my noble friend when she replies will be able to say something by way of encouragement to employers to proceed with the development of schemes and to encourage those employers who do not have them—and there are still a considerable number—to introduce them.
The next point to which I want to refer is in Clause 7, with its enormous uprating of the employers' contribution in national insurance carried without limit to the limit of salaries. When I was responsible for national insurance the contributory principle which Beveridge had enunciated held sway. Most people made their national insurance contribution with a feeling, and a right feeling, that they were getting a jolly good bargain. Their employers were compelled to make the employers' contribution, the Exchequer put in a contribution and in fact people felt that they were getting a very good bargain from a favourable contributory scheme.
With the abolition of the card and stamp and the move to collection through the Inland Revenue and through PAYE that feeling of the contributory principle—call it, if one likes, emotion—was very much diminished. But when we now proceed to use national insurance contributions as a means of taxation, I think that we are finally putting paid (perhaps that is the appropriate word) to the contributory idea. The late Labour Government were very much to blame for the surcharge which they imposed on employers' national insurance contributions, and they were very properly and rightly criticised for that by my noble friends. But to carry the employers' contribution up to the limit of whatever salary there may be is surely to throw any idea of the contributory principle out of the window.
More important than that could be its practical effects. The changes being made in contributions both by employer and employees are going, and rightly, to give considerable relief in respect of the lower paid—their own contributions and those of their employers. But for certain types of company, particularly in the service industries, carrying the 10.45 per cent. charge on salaries right up to the limit of salaries will involve a very considerable additional charge.
543 This is not perhaps serious in the case of the old fashioned type of heavy industry where the great majority of people are on moderate levels of pay. But when you are dealing with advertising, public relations, and types of banking and insurance, there are often, proportionately, a very substantial number of people on very high rates of salary. Those companies will find themselves exposed to a substantial additional tax. I received only this afternoon a letter pointing this out from a firm, which I do not know, engaged, I understand, in the advertising industry. I really think that my noble friend should look at this to see whether, inadvertently, some harm may be done to these very important service industries which today contribute so substantially to our favourable balance of payments.
My final point relates to statutory sick pay and the extension of it to 28 weeks. The figure of 28 weeks is an odd one. It almost has a touch of "Think of a number". If it had been 26, I could have understood it as representing half a year. But 28 has an arbitrary look about it. I wonder whether it has been very fully and carefully considered in regard to its effects. What about the small employer? What about the person who goes sick within a few weeks of retirement? Is his employer, if he goes sick perhaps four or five weeks before he is due to retire, to be responsible for operating the statutory sickness pay for another 21 or 22 weeks after he would normally have finished his job? I wonder again whether this has been thought out. I wonder very much how the particular figure—if there was to be an increase at all—of 28 weeks was arrived at.
While there is much in the Bill that I feel is excellent—the reduction in the Class 2 contribution is a real contribution to social justice and to good sense—I am inclined, as your Lordships may have guessed, to regard it as being something in the nature of what used to be called the curate's egg but which, with inflation, perhaps we should now call the bishop's theology.
§ 6.42 p.m.
§ Baroness Faithfull
My Lords, this Bill, in the main, is to be welcomed. However, like other noble Lords, I wonder why it is separate from the Bill that we are to consider later. I should like to make four brief points. On the question of the transfer of pension rights, I think that, from a practical point of view and from the point of view of the workforce, the possibility of transferring one's pension from one firm to another has enormous merits. I have had personal experience of this. I was able to transfer from central to local government. I believe that I was enriched in both my jobs by having had experience in another sphere. Like my noble friend Lord Boyd-Carpenter, I am worried about the fiscal side of the transfer and the transferred pensions. I am therefore in some difficulty. While agreeing in principle, I share with my noble friend Lord Boyd-Carpenter the view that it presents real difficulties.
The invalidity pension has been mentioned by the noble Lords, Lord Stallard and Lord Banks, and by my noble friend Lord Boyd-Carpenter. The restoration of the 5 per cent. abatement of invalidity pension 544 gives cause for concern that many invalidity pensioners will not gain the full benefit because of other changes to the payment of invalidity pension proposed in the Bill. This was a point made by the noble Lord, Lord Banks. Invalidity pensioners deserve compensation for the five years during which their pension will have been abated. The original justification for the abatement was that it was in lieu of taxation. It would appear that taxation has now proved impracticable. Should the invalidity pensioners have to hear the cost of this mistake?
Will not the extension of the duration of statutory sick pay to 28 weeks mean lower benefits for the low paid, who are subject to a wage stop under the statutory sick pay scheme, and for those with adult dependants? Now that the statutory sick pay scheme will have been replaced by sickness benefit for most people, must there not be improvements to give these two groups a fairer deal?
The position of those employed by small businesses should also be examined closely, as a recent survey by the National Federation of Self-Employed and Small Businesses suggested that nearly one in four of small businesses are making errors in the payment of statutory sick pay.
Finally, on the question of housing benefits, a new clause to the Bill was tabled just before Report stage in the other place to amend the housing benefit subsidy provisions of the Social Security and Housing Benefits Act 1982. This now appears as Clause 20(1)(b), which has the effect of giving the Secretary of State power not to pay subsidy on any amount which he considers it unreasonable to meet in in any particular case. During the passage of the Social Security and Housing Benefits Act through Parliament many of us were concerned to ensure that satisfactory arrangements were made to protect the undertaking which has been given by the Government to the effect that there would be no additional costs to local authorities arising from the housing benefits scheme.
I imagine that this leads to the prevention of the exploitation of the subsidy arrangements by one or two local authorities which have sought to do so without the Government having to devise a solution by amending the subsidy order to meet each new ploy. This is fully appreciated. Nevertheless, is not the proposed new power unnecessarily wide, since it is left entirely to the Secretary of State to decide what is unreasonable? Furthermore, he could apparently make any reduction in the subsidy otherwise payable to any authority without reference to anyone. Perhaps my noble friend the Minister can comment on this matter in her reply.
§ 6.47 p.m.
§ Lord Mottistone
My Lords, like other noble Lords, I, too, welcome the broad principle of the intentions behind the Bill. I should like to congratulate my noble friend the Minister on the clear manner in which she explained the Bill to us. I have to declare an interest in that I am advised by the Cake and Biscuit Alliance and by the Confederation of British Industry to whom I am formally a parliamentary adviser. I have also been advised by the Engineering Employers' Federation and by other bodies. I wish to mention three particular matters of concern, all of which have been touched 545 upon by other noble Lords, though perhaps not in the detail with which I hope to mention them to your Lordships. I do not want however, to take too long in doing so.
The Cake and Biscuit Alliance points out to me the anomalies potentially introduced by the brackets created in Clause 7(2) of the Bill to which the noble Lord, Lord Banks, referred in some detail. The concept of wage/earnings bands with percentage levies rising as earnings increase seems fair and quite elegant, but it fails to take cognisance of problems induced at the thresholds of each band as it is traversed by the employees' wage or earnings increasing. Having studied the matter, one sees that a movement from one band to another imposes a penalty upon the employee and the employer by the increased national insurance contribution, particularly at the margin. This penalty could be a continuing penalty or a one-off penalty, depending on whether earnings fluctuate across bands regularly or whether, when wages are increased from time to time, the actual increase is devalued by the extra national insurance contribution involved. There may also be an effect of income tax. But for the purposes of the example that I shall give your Lordships, that is ignored.
One can imagine a wage bargaining situation where employees and their trade unions say that a wage increase which takes a person from a wage or earnings level just below a threshold to just above a threshold is devalued by the extent of the new contribution, which increases by 2 per cent. For example, a wage increase of, say, 5 per cent. can be reduced in this way to 3 per cent., and employees will certainly react quite strenuously to such a situation. What is more, this phenomenon can be almost a continuing one where wages and/or earnings fluctuate across thresholds week by week.
One effect of that might be to persuade employees that they should decline extra work or work on shifts or decline to earn small weekly bonuses if that means a loss of net pay. In addition, wages offices, supervisors and managers could have a hard time from employees whose wages and/or earnings cross thresholds, particularly if the numbers involved are a high proportion of the workforce—and in many companies that will be that case.
Another effect from this point of view will be that the employers will be the subject of both employee and union pressures to add the national insurance loss to the wage increase for employees caught by the band thresholds. For example, a 5 per cent. wage increase, devalued by 2 per cent. because it crosses a threshold, may be compensated wholly by a 7 per cent. increase for those employees affected. Wage structures for the whole workforce would then have gaps in them corresponding to the penalty areas. With each year's changes in the bands arising from the Budget, this could become an annual pain in the neck for negotiations, as the same people would get caught in the trap each year, particularly if the bands discretely move in accord with the RPI or the level of average wage increases.
The point of telling you Lordships this at some length is that I rather suspect that the Treasury and perhaps the DHSS are not as familiar with the problems of industrial relations and wage negotiations 546 as perhaps are their colleagues in the Department of Employment, who I think have had nothing to do with the preparation of this Bill. I believe that it would be very wise if my noble friend, if I may put it this way, invited her colleagues to get in touch with the department that understands about wage negotiations, because the value of what is suggested in these brackets may be nullified for the kind of reasons that I have endeavoured to spell out. I believe that that needs to be dealt with fairly quickly before we come to the next stage of the Bill. In fact, as I see it, it will be very difficult to produce suitable amendments to make the necessary changes without upsetting the whole principle of what the Government are clearly trying to achieve.
I think I gathered that the noble Lord, Lord Banks, had some form of a solution, and if he has I should be delighted to talk to him about it afterwards because this is what is needed. But perhaps he too was looking at it—and he will forgive me if I am wrong—from the point of view of pension management and that sort of thing rather than from the point of view of the industrial relations problems that will stem from this particular anomaly. I should be most interested if my noble friend the Minister has anything to say about that aspect of this particular problem when she winds up the debate. If not, perhaps we might discuss it at some stage so as to make sure that the Bill is workable, which I suspect in its present form in this particular area it is not.
My second point is raised by the CBI. It concerns the potential effect of the abolition of the upper earnings limit, especially in the larger and principal export-earning companies and in the newly-emerging and very important so-called high-tech companies. The abolition of the upper earnings limit for employers' contributions is, I understand, estimated by the Treasury to yield £820 million in a full year. The alterations of the rates at the lower end are estimated, again by the Treasury, to save employers enough to leave them better off by £80 million in a full year and £30 million in 1985–86.
The problem with those figures is that they are global, and in the Treasury's calculations "employers" covers the full range of both the private and the public sectors. Given the distribution of employees within different income bands in each sector, it is likely that the benefits to the private sector are less—probably considerably so—than the figure offered by the Treasury.
As the noble Lord, Lord Marsh, said earlier when my noble friend prevented him from developing his theme, there are many companies, particularly large ones and not necessarily high-tech companies—the service industries also fall into these brackets—which have calculated that they will lose several million pounds because of the way in which this abolition of the earnings limit has been worked out. To cope with their increased costs many of those firms may well choose an option which could produce the very opposite results from the Chancellor's point of view than that which he intended. Rather than lose employees at the upper end of the income scale, who are very often the most important employees for the company's development, firms will shed labour at the lower end.
547 In addition, there is the question of the dynamic impact of the new system. If firms have to cover the costs of the new charges out of profits, investment may suffer and the overall level of activity may fall. This will be particularly so if the firms most affected are those enterprises operating in the high value added areas of the economy.
I shall be tabling an amendment to enable advantage to be taken of the beneficial aspects of the scheme at the lower end of the scale while correcting the adverse impact at the higher end. It will seek to amend paragraph 17 of Schedule 5, which the Government amended at the last stages of the Bill's passage in another place, but they did not do it well enough to solve the problem for the companies concerned.
Thirdly, the Engineering Employers' Federation has pointed out that there are certain aspects of the revised rules for occupational pensions which cause concern. That was spoken to very thoroughly by the noble Lord, Lord Banks, and indeed by my noble friend Lord Boyd-Carpenter, and I shall not detain your Lordships long on this particular point. The federation has strong reservations about the changes for the revaluation of pension rights of early leavers and for the disclosure of pension scheme information. Its members are firmly committed to good practice in both fields. But the Government's proposals go far beyond what is reasonable to impose on employers whose schemes are, after all—and my noble friend Lord Boyd-Carpenter made this point very thoroughly at least twice—voluntary in nature.
The essence of their anxieties is, first, that the proposed 5 per cent. per annum maximum revaluation figure for early leavers is excessive and should be reduced to 3 per cent. I noticed that the noble Lord, Lord Banks, thought that 5 per cent. was about right, but they definitely and for other reasons—and I shall not waste your Lordships' time now in explaining—thought that 3 per cent. seemed more reasonable. This is because deferred pensioners should not be given preferential treatment over active pensioners. This was again a point made by my noble friend Lord Boyd-Carpenter. Also other revaluation should be calculated on a year-by-year basis and not over the period of deferment as a whole.
It so happens that my occupational pension revaluation figure is 3 per cent. I should like to suggest that this is a good reason why I support the present Government, because I believe that they are the only Government who could possibly get the inflation rate down to 3 per cent. They have not succeeded, but no other Government have a chance of doing that with their policies.
The second point is that the proposal for a public deposit register of pension schemes is quite unnecessary and should be discarded. It also trespasses on the ground of investigating private information. I was pleased to note that my noble friend the Minister said that she was open minded on this point. I hope that this means there will not be much trouble when we put down an amendment to try to get it swept away.
Those are my main points which will give cause to amendments of various sorts as we take the Bill 548 through its later stages. There are two main points in all these matters of detail in this complicated Bill which I believe require emphasis. First, the proposals almost certainly hit seriously at the competitive ability of our most important export-earning companies. Secondly, in those and other efficient companies they will probably have the reverse effect to that intended by causing companies to dispose of their lower-paid employees rather than hold on to them in order to ensure the retention of their higher paid vital experts and capable managers. I trust that the Government will listen and endeavour to accept changes to the Bill which will safeguard the competitive ability of all our companies on which the wellbeing of us all absolutely depends.
§ 7.3 p.m.
§ Lord Kilmarnock
My Lords, as my noble friend Lord Banks has already said, there are parts of this Bill that we can welcome and others which cause us some misgivings. The noble Baroness, when introducing the Bill, referred to her speech as a "magical mystery tour". It might perhaps have been less so if the Bill had not been at least partly overtaken by the Statement which she repeated this afternoon.
As regards Part I, dealing with the rights of early leavers in occupational pension schemes, I believe that this represents a step in the right direction. The phrase "early leaver" has always struck me as slightly unfortunate, with its pejorative ring conveying the impression of someone who drops out and does not stick to his last, whereas the people we are really talking about are those affected by takeovers and involuntary redundancies as well as those who voluntarily change jobs in order to improve their prospects in a rapidly changing labour market.
The measures proposed by the Government in the Bill, and not least the obligation to provide a transfer value, represent a gain in fairness and a contribution to job mobility. Both the noble Lord, Lord Boyd-Carpenter, and the noble Lord, Lord Mottistone, said that there was no obligation on employers to have a scheme at all at present, but after the Statement today it appears likely that such schemes will become obligatory in future. I think that that gives an added point to these proposals.
There can of course be arguments about the precise percentage of revaluation of deferred pensions. As the noble Lord, Lord Mottistone, said, some employers have complained that a ceiling of 5 per cent. is too high and that 3 per cent. would be more appropraite. We as a party, as an alliance, are very much against unduly increasing employers' costs. However, certain commentators have pointed out that many pension funds are actually revaluing by as much as 8 per cent. per annum and have suggested that a 5 per cent. ceiling is too low. This might seem to suggest that on this occasion at least the Government have got it about right.
However, I hope that the Government will keep the ceiling figure under review. If pension fund managers and trustees have a good case for revision downwards after a year or so, the Government will no doubt listen to them. Equally, if inflation continues to edge upwards and the RPI rises significantly above 5 per cent. over any extended period of time, members of 549 pension schemes affected by the Bill are going to look increasingly askance at indexation in the public sector and contrast this with their own more precarious position. On all these counts, then, the 5 per cent. ceiling should be kept under review.
On the proposal to set up a register I must say that I disagree with the noble Lord, Lord Mottistone, here. It seems to me that this is right, particularly in view of the Government's intention, announced earlier today, to shift more of the responsibility for income protection in retirement into the private sector. No respectable scheme has anything to fear from it, and it will provide a significant safeguard for employees in a field with many thousands of schemes, not all of equal quality. I hope therefore that the Government will not weaken in this resolve. The noble Baroness spoke of "open mindedness and flexibility", but I hope there will not be too much flexibility here.
It is of course open to debate whether a new body is required for this or whether it could not be done by the existing Occupational Pensions Board. That is certainly a debatable point. But however the register is administered, I have for a long time believed that the greatest possible transparency of operations should be a requirement on the pensions industry. The Company Pensions Information Centre has been doing some valuable work over a considerable number of years in this respect, and there are many instances of good practice. But these are not universal. It is, for example, well known that there is considerable misuse of the tax provisions relating to occupational schemes by some corporate treasurers who use them to park surplus funds so that they will increase without taxation.
It was suggested in another place by Sir Brandon Rhys Williams and others that the register could perform a useful function if, among other things, it required schemes to declare the element that is funded on behalf of individual beneficiaries separately from that part of the fund held by the trustees but not allocated to individuals, the income of which it might then not be unreasonable to tax. This, it was suggested, would influence managers and trustees to allocate the maximum to individuals with a corresponding improvement to employees' entitlements. I would be interested to hear the Government's comments on this suggestion.
A further point is that Schedule 2 appears to be only permissive. Can the noble Baroness say whether the register will definitely be set up and, if so, when? I am afraid I have to tell the noble Lord, Lord Mottistone, that if he tables an amendment, I, at any rate, shall oppose it.
As regards Part II, concerning the new method of calculation of national insurance contributions, apart from the problems my noble friend Lord Banks mentioned in relation to the poverty trap in that new minitraps are introduced at £55, £90, and £130, I think it is important to consider the likely general effect of the proposals. According to Simon and Coates, the City analysts, there is in fact going to be little aggregate effect on labour costs, because in a full year firms will save about £900 million on the national insurance contributions of those earning below £130 a week and pay out £800 million more on those earning above £265 a week.
550 The danger is surely that when these large sums are disaggregated we could have a situation in which firms employing high-skilled operatives are disproportionately penalised and may then be tempted to cut back on hiring high-skilled employees. This, I think, was the point which the noble Lord, Lord Marsh, was trying to make when he clashed swords with the noble Baroness earlier in the debate. There is in fact a general tendency in much of the Government's legislation to promote a low wage, low-skilled economy, whereas the national interest surely demands a high-wage, high-skilled, high-value added economy.
I think it has been calculated that these proposals may have the effect of creating 100,000 low-paid and mainly part-time jobs. In the present climate this is not to be sniffed at. But it would be a great pity if there were a corresponding decline in jobs in high-technology industries, and some service industries, as the noble Lord, Lord Boyd-Carpenter, mentioned. A close watch should therefore be kept on the overall effect of this restructuring of national insurance contributions.
My noble friend has welcomed—and I fully agree with him—the decision to restore the abatement of the invalidity pension which was made by the Social Security (No. 2) Act 1980. But I have to say that I have heard from RADAR—the Royal Association for Disability and Rehabilitation—that their joy is tempered by the counter-effects, in their view, of Clauses 9 and 12. The Explanatory and Financial Memorandum tells us that in the first full year, 1986–87, the cost of restoring the abatement of invalidity pension in Clause 15 is £65 million, but according to RADAR the Government will save £70 million under Clause 9 and £20 million under Clause 12. They therefore contend that the overall effect will be to reduce the income of the long-term sick and their families by £25 million. I shall not go to the stake on these figures, but they appear in the brief and I should like to check them. I think the noble Baroness referred to duplication of cover and said that the combined effect of the Government's proposals would be cost-neutral. But if the figures that I have been quoting are anything like correct the provision does not seem to be cost-neutral at the receiving end. This is something we shall want to address at the Committee stage.
On Part III of the Bill, extending statutory sick pay from eight weeks to 28 weeks, I have some serious reservations and a number of queries to put to the Government. The likely effect on employers' costs of this measure is worrying, and this applies particularly to small businesses—that was a point made by the noble Lord, Lord Boyd-Carpenter—for which the scheme will involve extra paperwork, to say nothing of cash flow problems. The absence of one or two members of staff for a lengthy period could create serious cash difficulties. We may therefore want at Committee stage to move an amendment to exempt businesses with, for example, fewer than 20 employees, unless the Government can offer some alleviation of these problems. I shall listen with interest to what the noble Baroness has to say on this point.
More generally, I should like the Government to explain with greater clarity the financial reasoning behind this measure. In the Explanatory and Financial Memorandum, on page viii, the Government say that 551 there will be a manpower saving of between 300 and 400 in the DHSS, which leads one to suppose that an equivalent cost, or something like that, will be unloaded on to employers. In fact, I think the noble Lord, Lord Stallard, implied that it would cost employers more because they would not have the benefit of the same economies of scale. On page vii, in the section headed, "Financial Effects of the Bill", we learn that the National Insurance Fund will lose about £285 million in a full year as a result of reimbursement of employers under the extended scheme, but will gain £200 million in savings on sickness benefit which will no longer be paid out, and a further £40 million, mainly from employees' contributions on SSP. At the same time the Consolidated Fund will gain from income tax on SSP to an unspecified amount; and the overall effect, the Government estimate, will be to save about £200 million in public expenditure terms. That seems to coincide neatly with the loss to recipients of £200 million in sickness benefit, which reinforces the point made by my noble friend Lord Banks that this will hit people at the lower end of the scale.
Finally, can the noble Baroness say whether these figures take into account the manpower savings? At first sight it would appear that they do not. I am not trying at this stage to pass any final judgment on these figures. I simply believe it would be helpful if we had a clearer picture of what net overall savings the Government expect to make out of this extension of statutory sick pay. Only then can we form a clear view of the real cost to employers and employees, both of which groups, it seems to me, are likely to be adversely affected by the scheme.
I have one final point to make, which concerns Clause 20. It is essentially the same point as that made by the noble Baroness, Lady Faithfull. The Association of District Councils, of which I have the honour to be a vice-president, is extremely worried that the effects of this clause will be to breach the undertaking which was given by the Government that there would be no additional costs to local authorities arising from their new responsibilities for the housing benefits scheme. It was as a result of ADC representtions that Section 32(3) was written into the 1982 Act. One of the planks of this agreement, it will be remembered, was that local authorities would be subsidised to the full extent of the costs of administration of the scheme, and also would not incur more than 10 per cent. of the rebate costs.
They fear now that Clause 20(1)(b) of the present Bill could undermine the 90 per cent. subsidy principle, in that it is too unfettered and too wide-ranging, as deductions made under it would be entirely within the Secretary of State's discretion and would not be subject to affirmative or negative resolutions in Parliament, nor any statutory requirement to consult bodies representing local authorities. While appreciating the Government's wish to prevent exploitation of the scheme by a few authorities (which was mentioned by Lady Faithfull) the association considers that the existing powers of the Secretary of State are adequate for this purpose and that the proposed powers in subsection (1)(b) are unnecessary and undesirable.
552 I shall listen with interest to what the noble Baroness has to say, and if she cannot satisfy me on this point then I shall want to move an amendment at Committee stage to ensure that local authorities are left in no worse a position than they are at present in relation to housing benefit. If that is possible it is something that the noble Baroness, Lady Faithfull, and I might talk about.
As my noble friend has said, there is a good deal in this Bill that we support, but we have significant reservations. We believe that there is room for considerable improvement in Committee. The Government may therefore expect, and I give the noble Baroness notice, that we shall table quite a number of amendments from these Benches.
§ 7.16 p.m.
§ Baroness Jeger
My Lords, I feel there is an air of unreality in this Chamber as we try to return to the Social Security Bill after the important and far-reaching Statement that we listened to earlier on the same subject. In view of that news, this debate is largely a grotesque irrelevance. The Bill is also grotesque in its form and purpose. This is, I regret to say, true to recent tendencies in the DHSS to send to Parliament Bills which are a ragbag of disparate ingredients, of what are called in the Long Title "connected purposes" but which are manifestly disconnected. In this one measure we are to deal with occupational pensions, gratuities to members of the Horserace Totalisator Board, statutory sick pay, pensions for members of the Gaming Board, changes in pneumoconiosis benefit and subsidies in housing benefits. I welcome the inclusion of the fact that married women entitled to the over-80s pension at the lower rate will qualify for the standard rate paid to men and other women over 80. This is no way for legislation to be drafted and brought to this House. It makes it difficult to have a coherent discussion at Second Reading. When we look at the details we shall be raising many more points in Committee, but I feel I want to register my protest because we have had several social security Bills which have been unsatisfactory in their form.
I join with other noble Lords who have welcomed the restoration of the 5 per cent. abatement in invalidity pensions, but it seems that there is to be no back-payment compensation for this deprivation. I hope that the noble Baroness will be able to confirm whether these people are to receive any compensation for their five year's deprivation. Discussion in another place suggested that only half of them would benefit.
I was interested in what the noble Lord, Lord Kilmarnock, said about the unsatisfactory aspects of other clauses, particularly Clauses 12 and 14. If we are to reinstate the 5 per cent. invalidity benefit it seems to me that the Government are saving £70 million by the provisions of Clause 9, which I shall not weary your Lordships by reading, and that about £20 million will be clawed back under Clause 12. It may be that I am wrong because I am totally innumerate, but these are the figures I have been given, and it is worrying in what seems to be a generous part of the Bill to find, if one reads further, that that generosity is dissolved.
553 I share the feelings of the noble Lord, Lord Stallard, that there was absolutely no need to put these upratings into the Bill. I wish that I could understand why. There is no need for primary legislation to uprate benefits. Surely this could have come in the annual upratings. Why could not these restorations be paid immediately instead of having to wait for the tedious processes of this massive Bill? This is a carelessly-thrown-together Bill and it takes on board substantial provisions which were born in the Budget and which should have been included in the Finance Bill. This is much more a Treasury Bill than it is a Social Security Bill. It is such a shoddy Bill that after Committee stage in the other place the Government themselves introduced at Report stage 41 amendments and new clauses. I cannot remember in all my years in the other place a Bill coming to Report stage with so many amendments which had not been considered in Committee. I think that that alone is evidence of the poor drafting and of the uselessness of this Bill. Many of those amendments were very substantial changes to the Bill as it was committed after Second Reading and during Committee stage.
This House is a revising Chamber, so we shall endeavour somehow to do our duty; but improving this Bill would make the labours of Sisyphus, as he rolled his heavy stone eternally uphill, look like a rest cure. But the greater part of the Bill, as other noble Lords have said, is concerned with occupational pension schemes, and your Lordships will be relieved to hear that I do not propose to take up your time with a great dissertation on that. Of course the proposition which we heard earlier about the abolition of the state earnings-related pension scheme means vast changes in the whole field of occupational pensions and we cannot discuss these things separately. There will be a transfer of thousands of workers from the state scheme to private schemes, so that today, to a large extent, we are wasting our time. We appreciate the need for occupational pensions to be portable; we deplore the losses of early leavers, especially when the present economic climate increases the necessity for frequent job changes; but we have to ask why the revaluation arrangements omit all pensions deferred before 1st January 1985. Would it not be fairer to backdate changes to the publication of the Occupational Pensions Board report of 1981?
Surely pension funds have been building up substantial, actuarial surpluses. I do not have any evidence but I shall wait to hear that occupational pension funds are very hard up at the present time. As far as we can see—and I think that on Second Reading it is fair to make this point—the intention seems to be towards privatising pension schemes and to moving the earnings-related part of state pensions into private schemes. I think that that is not to the advantage of the majority of our people.
I understand also that the Bill provides that indexation applies only to early leavers after January 1985. Perhaps that could be confirmed. We previously expressed our anxieties about the statutory sick pay policy. This was introduced, as other noble Lords have reminded us, to cover the first eight weeks of sickness. It means that for the first eight weeks of sickness the employer has to pay the worker a sum related to his earnings and then reclaim the payment. The difference 554 between that worker receiving statutory sick pay and national insurance sick pay is that national insurance payments take account of family responsibilities, a franked national insurance contributions card, and they are not chargeable to tax. Now, from April 1986, I understand that the period is to be extended to 28 weeks. I agree with the noble Lord, Lord Boyd-Carpenter, when he asks, "Why 28?" I tried to work it out in months. It comes, I think, to seven months. I cannot think what is the particular relevance of seven months. Why not 12 months or six months? I am sure that both the noble Lord, Lord Boyd-Carpenter, and I will be interested to hear the reasoning behind the 28 weeks.
Then of course we are not altogether happy about Clause 17 of the Bill, which reimburses employers for national insurance contributions in respect of workers for whom they are paying statutory sick pay. I understand that this will cost £60 million. This means £60 million taken out of the national insurance fund and paid to the employers. If I am wrong, I shall gladly defer to those who can count better than I can. I should be interested to know what saving the Government expect to bring about by making this change and whether the impetus for all this change, for the extension from eight weeks to 28 weeks, is one of Treasury saving.
On housing benefits, in Clause 20, I share the anxieties that have been expressed by other noble Lords. I have read very carefully the debates in another place and I now understand the anxieties which prompted the insertion of this clause into the Bill. But it does seem to me that because one or two local authorities did not seem to be behaving as the Minister thought that they should, we now have a clause which penalises all local authorities because, as the Association of District Councils has very clearly said, and as the noble Lord, Lord Kilmarnock, has emphasised, it is giving total power to the Secretary of State to decide not to pay subsidy on any amount that he considers unreasonable in a particular case.
We had an undertaking that local authorities, with all the rate capping and all the other problems that they are having to put up with at present, would not be impoverished or penalised financially in any way by the housing benefit arrangements. Now, if we are to get into a situation where a Secretary of State, entirely by himself, can decide that a local authority is behaving unreasonably, apparently he could make a reduction in the subsidy otherwise payable. This seems to me not only to be financially difficult for many local councils—and certainly the Association of District Councils thinks it would be difficult—but to be one more step towards central Government interference in local council decisions.
It seems to me that the Secretary of State is being given more and more power in very many directions and this is just one more case of bringing these decisions to Whitehall. I remember that we used to be derided by the Conservatives because one Labour Minister was heard once to say in an unguarded moment, "The man in Whitehall knows best". Certainly this Government are standing up for that principle in many directions, and in this case for the principle that the man in Whitehall knows best. I very much regret that part of the Bill.
555 The noble Baroness also spent some time (and I shall spend just a moment or so) on the question of contribution changes creating new jobs. This I cannot understand. Nobody has ever proved to me that changes in national insurance contributions create jobs, especially when one considers the point that the noble Lord, Lord Marsh, tried to make: that it might result in top-paid people losing their jobs because their national insurance contribution had gone up. When looking at the salary of what I would call a top person—perhaps the chairman of ICI or somebody like that—I would describe his national insurance contributions as peanuts. If a man is worth employing because of his skill and ability, I should be very surprised if any firm were to say, "Sorry, but you must go because your national insurance contribution that we have to pay has gone up". At the lower end of the scale I have never seen any convincing proof that there is a connection between national insurance and job opportunities. Certainly, there is a lot of talk about the surcharge being taken off as an incentive to employment; but employment has not improved—or should I say unemployment has not improved—as a result of that. I honestly think that there has been some muddied thought in this connection.
My Lords, we have had a long day, and some of us have to last a bit longer, so I shall not give this Bill the blessing of my noble friends; I shall threaten the Government with a few amendments at Committee stage and hope that we can make some progress after that.
§ 7.31 p.m.
§ Baroness Trumpington
My Lords, we have had quite an afternoon full of variety and interest, and we have had a very thoughtful and constructive debate on this Bill. I shall do my best to respond to the points that have been made and to reply to the questions that have been asked.
Perhaps I can say first to my noble friend Lord Boyd-Carpenter and to the noble Lord, Lord Kilmarnock, that I think it would be very unwise of me to try to cover any of the points that have come up about the social security reviews and the timing of today's debate and the Green Paper. As I said at the beginning of the debate, there is really nothing to be gained by going over that ground now. The Government's proposals on the Green Paper will be a subject for consultation.
I might just add, in reply to the noble Lord, Lord Stallard, to my noble friend Lord Boyd-Carpenter, and to the noble Baroness, Lady Jeger, who said that the debate appeared in an unreal light, that there is nothing in the Green Paper which invalidates or puts in question the wisdom or usefulness of the proposals in this Bill. The Green Paper builds on the improvements being made in this Bill.
Let me now attempt to answer your Lordships' searching questions. If I omit to reply to any noble Lord, of course I shall write to him if he lets me know that I have erred in this way.
The noble Lord, Lord Stallard, first asked: why extend the SSP to 28 weeks now when this was resisted when the Bill was introduced? My answer is: because 556 SSP was a completely new concept for employers. It was considered advisable to restrict their involvement to the shortest spells of sickness first and then to look at the position again after the scheme had been running for some time. This was a sensible approach to take, and has led to the Government making the change now rather than at the outset.
The next question that the noble Lord asked me was: why are occupational pensions changes urgent? We have brought forward the changes in two main areas on occupational pensions, both of which, we think, are needed urgently. When the noble Lord, Lord Stallard, has been able to study the proposals in our Green Paper he will see that we shall build on the success of the occupational pensions schemes to provide decent levels of income in retirement. It is clear from the many representations that we have had that this action is needed as soon as possible to help early leavers. I can see no reason for delaying taking that action. I am sure that many early leavers in the country would agree with me. We should remember here that up to 90 per cent. of all workers may at some time be early leavers. Similarly, we believe that no matter what the future plans it must be right to give people basic information about their often most important asset, as I said in my speech. There are major improvements that many people will want to see come into effect as soon as possible. We can see no reason at all for delaying.
On the subject of the abolition of the earnings rule raised by the noble Lord, Lord Stallard—and some other noble Lords raised similar points, in which case I hope my replies to the noble Lord, Lord Stallard, will cover the other noble Lords as well—he was talking about the retired pensioners' earnings rule which it is the Government's intention to abolish when resources permit, but the earnings rules here relate to adult dependants. It is surely right that people should only get additional benefit for someone who is really dependent upon them, and that such a test of dependency should be the same for both men and women.
The noble Lord, Lord Stallard, and the noble Lord, Lord Banks, both stated that primary legislation is not needed to restore the 5 per cent. abatement in invalidity benefit. The noble Lords are quite right. The restoration could be done in the up-rating order, but by giving backing in primary legislation the Government were able to give an early earnest of their intention to restore the abatement and so to reassure invalidity beneficiaries.
The noble Lord, Lord Stallard, asked me: why the need for so many new clauses put down at Report stage in the other place? The new clauses on national insurance contributions were introduced at Report stage in order that the measures announced in the Budget could be introduced as quickly as possible. The measures benefit 8½ million people by reducing the cost of employment, and improve the job prospects of young people who are looking for their first job, usually at a wage of less than £90 a week. The cost to the Government of these measures, including those for the self-employed, amounts to £575 million in a full year.
The noble Lord, Lord Stallard, asked me why the Bill does not contain provision for married women to 557 receive invalid care allowance. The ICA was introduced in 1976 by a Labour Government. It was intended as an income replacement benefit for men and single women who had given up their main source of livelihood. The cost of extending ICA to married women would be prohibitively expensive—a new extra cost of £85 million.
Again, Lord Stallard asked me why Clause 22 was necessary, and various other Members of your Lordships' House have asked me why pensions for members of certain boards should be provided. This clause will provide occupational pensions for the chairmen of those boards. Successive governments since at least 1978 have agreed that it is unfair for someone to take on the chairmanship of these boards without any prospect of receiving a pension. We have taken the opportunity to put this straight, and I hope the House will agree that it was the right thing to do this in the Bill, it being the most suitable vehicle to meet the commitment.
The noble Lord, Lord Stallard, asked what evidence the Government can produce to show the statutory sick pay scheme was welcomed. Let me take employees first. The Department's own social security policy inspectorate recently carried out an inquiry into employees' attitudes to SSP. Their report has been published and is placed in the Library of your Lordships' House. The general conclusion of the report is that most of the employees interviewed considered that SSP was an improvement on the previous sickness benefit scheme. Indeed, 63 per cent. who could make the comparison considered that SSP was positively better than sickness benefit. I assume the noble Lord has seen this report, but I would be happy to send him a copy if he wishes.
Turning now to employers, there can be no doubt that the vast majority of employers have very success-fully taken the SSP scheme on board. The CBI welcomed its introduction, and there have been few queries. It is true that a minority of organisations were opposed to the principle of SSP, but such organisations are very much in the minority. This is not just the Government's view; I draw noble Lords' attention to the independent survey carried out by Income Data Services Limited.
The extension of SSP leading to increased overheads and costs for employers was the next point raised. I agree that the extension of SSP liability will cause some extra work for employers, but now that SSP has become a routine part of employers' payment arrangements, and because of the limited number of extra cases involved, we do not expect the ongoing administrative costs of the extension to be large. We are very conscious of the need to keep procedures as simple and as flexible as possible; but in recognition of the extra work involved in the extension of SSP liability it has been decided that, as well as continuing to allow the recovery of 100 per cent. of the SSP paid out, employers will also be relieved of their share of the national insurance contributions paid on all SSP. This will mean to employers the saving of up to £60 million a year. That is a significant concession, and it will operate retrospectively from the 6th April 1985—a full year before the extension comes into operation.
The noble Lord, Lord Stallard, in his wide-ranging speech, also mentioned the error rates of SSP. The 558 noble Lord referred to mistakes. I must emphasise that the mistakes which have been made have generally been of a minor nature, and they should reduce as employers become more familiar with the operation of SSP.
The noble Lords, Lord Stallard and Lord Banks, and my noble friend Lady Faithfull commented on the rates of SSP having an adverse effect on families and the lower paid. They referred to the rate of SSP and, in particular, related this to a family man The noble Lord, Lord Stallard, quoted a man earning £60 a week. Such an employee would be entitled to SSP of £37.20 a week, and not £32.60 a week, as I believe both noble Lords said. This compares with a state sickness benefit rate of £27.25 sickness benefit for single people and for married men with no entitlement to an increase for their wives. Nearly 80 per cent. of claims for sickness benefit do not include an increase for a wife. SSP is therefore significantly better for these people. The married person's rate of sickness benefit, as the noble Lord said, is £44.05. It is true, therefore, that the SSP rate is lower in these circumstances, but of course the claimant would be able to claim supplementary benefit if appropriate. A claimant may also be entitled to help with his housing costs. Also, it should be borne in mind that many employees will receive occupational sick pay from their employers over and above SSP when they are sick.
Finally, the noble Lord, Lord Stallard, compared SSP rates and sickness benefit rates for persons with children. I should make it clear that there is no difference in this respect, as increases for children are not paid either with sickness benefit or SSP.
The noble Lord, Lord Banks, together with the noble Lord, Lord Stallard, referred to the rates of SSP for the lower paid. As I have said, I think they got their figures wrong, and I hope I have corrected that. The noble Lord, Lord Stallard, asked: why restore 5 per cent. abatement on invalidity pension when benefit is not taxed? I have to tell him that it remains the Government's intention to bring invalidity benefit into tax as soon as this becomes operationally possible. Successive Governments have agreed that such benefits should be taxed, as are other income replacement benefits such as retirement pension. No date has yet been fixed for taxation but I would have thought the noble Lord would have been pleased that the Government have found it possible to restore the abatement before then.
As we know, the noble Lord, Lord Banks, is a very great expert on the subject of social security, and is to be treated with great caution by those who reply to his questions. He asked about PAC comments on error rates. The comment is that one in three cases that have been checked showed some error. I have already touched on this in replying to the noble Lord, Lord Stallard, but I should make it clear that since September 1984 the DHSS have been concentrating their checks on those employers who are thought to be most at risk. These are employers which the DHSS inspector noted as having made a mistake during the first phase of the visits made between April 1983 and August 1984 and new employers who may not have had any experience of operating SSP. It is true that these have shown an error rate of just over 30 per cent.—17 per cent. overpayments and 14 per cent. 559 underpayments. That is high, but, as I have said, the level should reduce as employers become more familiar with the operation of SSP. Mistakes have generally been of a minor nature, and the situation is being very closely monitored.
Now we come to the big question which was touched upon by the noble Lord, Lord Marsh, when he intervened during my opening remarks. It was also referred to by the noble Lord, Lord Banks, and my noble friends Lord Boyd-Carpenter and Lord Mottistone: that is, the point about the Government considering the financial effect on firms of abolishing the upper earnings limit. Some cases erred to the extent of £2.3 million a year extra. As a result of abolishing the upper earnings limit on employers' contributions, I accept there will be increases in the cost of employing the highest paid workers. Quite simply, this was necessary to finance the reduced contributions for the lower paid, but it has also removed what has always been an unwarranted distortion in employer contributions in favour of the higher paid.
Employers' contributions do not confer benefit rights, and therefore there is not the same technical constraint on removing the upper earnings limit that exists for employees' contributions. By getting rid of this distortion we will have a more sensible and progressive structure of contributions. Employers' costs will be reduced in respect of over 8,500,000 lower paid workers. Against this, abolition of the upper earning level means increased costs on behalf of only 1.7 million higher paid workers. By focusing the benefit of these changes at the lower end of the wage-scale we will secure the maximum impact on total employment, and overall the burden of national insurance contributions will still be reduced by £80 million.
It must be remembered, too, that the Government have already substantially reduced employers' costs by abolishing the national insurance surcharge, which was introduced by the last Labour Government, by bringing down employer contributions from 13.5 per cent in 1979 to 10.45 per cent. at the highest level now. In the majority of cases where there are extra employer contributions they will at worst amount to only about 2 or 3 per cent. of gross salary. The evidence we have suggests that earnings for the employees concerned have been rising at the rate of some 2 or 3 per cent. a year in real terms for several years, suggesting that costs of that order can be absorbed without too much difficulty. Many of the employers concerned are in firms which stand to gain in some cases overall from the reduction in contributions for the lower paid, or in firms where the extra contributions represent only a small fraction of the total profits. I imagine we shall come back to this on another day if your Lordships are not satisfied with my explanation.
The noble Lord, Lord Banks, referred to early leavers. I am very pleased that our proposals for early leavers find support from such an acknowledged expert in the field. The noble Lord also raised several detailed questions, but of course we shall have the chance to go into greater detail at a later stage of the Bill. We realise that our early leaver revaluation 560 proposals will involve extra costs, but clearly we could not allow the unfair treatment for early leavers to continue.
There is, of course, one other way of financing these improvements which the noble Lord did not mention. That is by meeting them from the investment yields that have been obtainable over the last few years. Cost will, of course, vary from scheme to scheme. It is difficult to be precise about costs, but providing the early leaver protection that we propose will add between 1 and 2 per cent. to the payroll for all benefit rights that accrue from 1st January, 1985. In other words, schemes will have to find funds for these increases immediately. As for schemes with fixed premiums, I believe the noble Lord was talking primarily about money purchase schemes. If that is not the case, then if the noble Lord will let me know, I will write to him. But money purchase schemes will not be subject to 5 per cent. revaluation. They will need only to give the same treatment to leavers and stayers subject to a deduction for reasonable administration costs for leavers. We hope within the next few weeks to publish our proposals for calculating transfer values. We shall consult fully on these and I hope the noble Lord will bear with me and await these proposals.
The noble Lord, Lord Banks, spoke about SSP saving £200 million and said that we will save £200 million on sickness benefit, but SSP paid out by employers will total £285 million for which they will be fully reimbursed. There is no question of saving £200 million on the low paid. This figure simply refers to the reduction in public expenditure.
The noble Lord, Lord Banks, asked whether there is protection if the employer fails to pay SSP. There is an existing procedure that an employee can use if he has not been paid SSP or thinks the amount paid is wrong and he cannot sort out the matter with his employer. The employee can ask the DHSS for an adjudication officers's decision on his SSP entitlement. A copy of the officer's decision goes to the employee and to the employer and either can appeal against it in the usual way. This procedure will continue. It is explained to employees in the leaflet Check your Right to Statutory Sick Pay, MI244, and to the employer in the Employers Guide to SSP, MI227.
The noble Lord, Lord Banks, advocated integration of income tax and national insurance contributions. As mentioned in my right honourable friend's Green Paper, there are significant differences between PAYE and national insurance contributions. Contributions are calculated on weekly or monthly earnings; income tax on annual income including unearned income and pensions. There are allowances against income for tax purposes but not for contributions. Complete alignment would be operationally very difficult indeed, but some differences may be more easily removable to the benefit of employers. This subject will receive further consideration in the forthcoming Green Paper by my right honourable friend the Chancellor in the consultation period.
The noble Lord, Lord Banks, referred to the replacement of one poverty trap or cliff edge at the lower earnings limit at each of the boundaries between the new reduced national insurance contribution rates. It is true that there will still be a cliff edge, when an 561 increase in pay causes an increased liability for national insurance contributions, but the cliff edge effects will be smaller than presently seen at the lower earnings limit, both in absolute terms and relative to each other. We will need to look more closely in Committee at the noble Lord's particular proposals for the kind of earnings above the LEL which is exempt from contributions.
My noble friend Lord Boyd-Carpenter, whose expertise is so daunting that I feel positively impertinent to interrupt him during his remarks, asked about early leavers and other burdens on occupational pension schemes. He emphasised that the occupational pension schemes were set up voluntarily and that imposing too heavy a burden on them could result in many winding up. This is all a matter of judgment and of balance. It is no good encouraging schemes if they do not provide reasonable benefits and information to all members. Our judgment is that we have struck a fair balance between the needs of early leavers and the ability of employers to fund benefits.
We must not forget that our economic well-being depends upon a mobile workforce. We are determined to remove all artificial barriers to job mobility. Here the noble Baroness, Lady Jeger, might listen when I refer to job mobility, because she said that these measures were not helping to reduce unemployment. There can be no doubt that occupational pension schemes can at present make such a barrier because of the treament of early leavers. We cannot allow that to continue.
So far as the difference between leavers and stayers is concerned, I have to say that we believe in schemes being free to make improvements without legislation wherever possible. Experience shows that voluntary increases for stayers are already common, but there is no incentive for schemes to look after early leavers and so we are legislating in the area where we believe a firm Government lead is necessary.
My noble friend Lord Boyd-Carpenter spoke of the demise of the contributory principle, because of the abolition of the upper earnings limit for employers' national insurance contributions. My noble friend's obituary for the contributory principle was premature; reports of its death have been exaggerated. There continues to be a link between contributions paid in and benefits received, but a commitment to the contributory principle does not entail a particular structure of contributions carved in stone. Adjustment to the employers' contribution in respect of the higher paid has made possible valuable changes to benefit the lower paid and their employers.
My noble friend said there was no obligation on employers to provide occupational pension schemes. He asked: what will the Government do to ensure that employers are encouraged to provide schemes? I agree with my noble friend that there is currently no obligation on employers to provide occupational pension schemes, but I am sure he would agree that this is not preventing, and should not have prevented, successive governments from ensuring fair treatment.
This Bill makes a number of important improvements to the way such schemes will operate. But we also acknowledge the importance of encouraging the spread of schemes. Indeed, we go 562 further, because we should like everyone to have his own pension, either a personal pension or an occupational pension, on top of the basic state pension. The proposal that I outlined earlier today in a Statement seeks to build on this and achieve that under coverage of schemes. The House will have an opportunity to debate these wider proposals in detail.
My noble friend Lord Boyd-Carpenter and the noble Baroness, Lady Jeger, asked why the period of 28 weeks was chosen for the extension of SSP. Twenty-eight weeks was chosen because that is the period covered by the state scheme of sickness benefit, which is designed generally to cover short-term sickness. After 28 weeks of sickness state invalidity benefit, which is a long-term benefit, comes into payment instead. This means people will go straight from SSP to invalidity benefit with no intervening payment of sickness benefit. In the example given by my noble friend Lord Boyd-Carpenter the employer would no longer be required to pay SSP once the employee had claimed retirement pension.
My noble friend Lady Faithfull and the noble Lord, Lord Kilmarnock, wished to know about the housing benefit scheme. The Bill will not alter the existing arrangements whereby the Secretary of State will pay benefit subsidy on the basis of rebates and allowances granted by authorities under the housing benefit scheme. We shall continue to list the items which will always be excluded from benefit subsidy, such as rent-free weeks awarded to tenants in the subsidy order, so that authorities know where they stand. We have, in fact, taken the opportunity to enable the subsidy order to be drafted in a much more straightforward way, so far as these exclusions are concerned, than at present.
Although the new power to make an order will have exactly the same effect as the existing power, it should mean that the subsidy order will be more comprehendsible. However, the amendment will also give the Secretary of State a new power to exclude items which it is clearly not reasonable to meet out of money voted by Parliament for the housing benefit scheme, This power will not be used lightly but it will be used to prevent blatant attempts at exploitation of the subsidy arrangements from succeeding.
My noble friend Lady Faithfull talked about transfers. She was concerned about the financial burden imposed on schemes by the transfer requirement. In fact, the transfer value will reflect the benefit rights held in the scheme, so it will not impose any additional burden upon schemes. My noble friend also asked whether all invalidity pensioners will get the full advantage of the restoration of the 5 per cent. abatement, in view of the other changes in the Bill. I think that she is referring to Clause 9 which deals with the overlap of invalidity allowance and additional component.
It is true that where the amount of the overlap between invalidity allowance and additional component is equal to or higher than the amount of the 5 per cent. increase, a pensioner will not gain from the restoration. But I should make it clear that many beneficiaries will be unaffected, because they currently do not get both additions to invalidity pension, For example, over 50 per cent. of invalidity pensioners do not get the additional component at all, while others who have gone on to invalidity pension only in later 563 life are not entitled to any invalidity allowance. It is estimated that about 375,000 beneficiaries, receiving both the invalidity allowance and the additional component, will be affected in November 1985 and for many of these the overlap will be small. I should also emphasise that the transitional provisions will ensure that no one's existing benefit is reduced.
My noble friend Lord Mottistone and the noble Lord, Lord Kilmarnock, expressed totally different reactions to the register of pension schemes, so I would repeat to them both that I emphasise we are open-minded about the pension scheme register. But I must also emphasise our determination to make the proposals for disclosure of reasonable information to scheme members work. My noble friend Lord Mottistone criticised the multiple cliff-edge effects created by the graduated structure of reduced national insurance contributions, and I have already answered a similar question from the noble Lord, Lord Banks. My noble friend asked about occupational pensions and the burdens which the legislation will impose for early leavers. On early leavers, we believe that we have the right balance. The Engineering Employers' Federation believes that we have gone too far, but many others believe that we have not gone far enough. That shows that you cannot please everyone at the same time.
The noble Lord, Lord Kilmarnock, asked me about SSP and the financial effects. The figures are very complicated and I think it would be best if I wrote to the noble Lord. In fact, I apologise to other noble Lords and to the noble Baroness, Lady Jeger. Coming last, I am afraid that I have already answered some of the points that she raised. But despite some of your Lordships' criticisms, I really feel that this is a Bill which contains good news for many people, particularly those who are at the lower end of the financial scale. It opens up doors for the young, it helps the very old and it simplifies procedures for those who are ill. These are all positive improvements and I commend the Bill to your Lordships.
§ Lord Kilmarnock
My Lords, before the noble Baroness sits down, she has given a very full answer for which we are very grateful. But will she write to me about the queries which I put to her on Clauses 9, 12 and 14?
§ Baroness Trumpington
Yes, my Lords.
On Question, Bill read a second time, and committed to a Committee of the Whole House.