HL Deb 01 April 1987 vol 486 cc662-8

8.50 p.m.

Lord Hesketh

My Lords, I have to apologise to the House that there are errors in the Motions standing in my name on the Order Paper. Reference is made to an order and regulations laid on 16th March and regulations laid on 18th March. The order and regulations were withdrawn by the Government on 30th March and replaced by a fresh order and regulations which I am now asking the House to approve.

With your Lordships' agreement, for the convenience of the House, I propose to deal in my opening remarks with the draft order to which I have just referred together with the two sets of draft regulations which appear next on the Order Paper.

The reports by my right honourable friend the Secretary of State for Social Services and the Government Actuary show the technical complexity behind the three statutory instruments to be debated. I propose, as did my predecessor when these matters last came before the House five years ago, to do my best to avoid burdening your Lordships with too many technicalities, but rather to concentrate as far as possible on the social and policy issues involved.

The terms for contracting-out of the earnings-related additional pension part of the state retirement pension scheme were contained in the Social Security Pensions Act 1975, which came into operation in April 1978. My right honourable friend the Secretary of State has a statutory duty to review these terms at least every five years. The revised terms will take effect from April 1988.

In 1986 widespread consultation took place on the terms of contracting-out on the basis of memoranda prepared by the Government Actuary. The comments received were taken into account by him in the preparation of his formal report.

The basis on which schemes have been contracting-out since 1978 has been that schemes guarantee to provide a pension that is broadly equivalent to the state additional pension. In return, national insurance contributions for contracted-out employments are reduced. This reduction is commonly called "the rebate". It was thought right in 1978, and again when the terms were first reviewed in 1982, that the rebate should contain a contingency margin. The margin was to allay anxieties that schemes would have an open-ended commitment, because accrued rights would be related to future earning trends and future returns from investments were uncertain. Other safeguards were provided when schemes had to buy back into the state scheme. The success of these arrangements is shown by the fact that of the 11 million members of occupational pension schemes, nearly 90 per cent. are contracted-out.

It is disappointing, however, that the number of people in occupational pension schemes has remained virtually static for two decades. The Government's wish to provide new opportunities for the expansion of occupational pension and personal pension coverage resulted in the provisions of the Social Security Act 1986. The provisions of that Act were widely debated here and in the other place during 1986. I do not, therefore, propose to refer to the detail contained in the Act. I will just say this. Our aim has always been to give everyone the chance of having their own pension and more choice of how to save for it. In future it is expected that it will be the exception for people to reach retirement without a pension of their own.

The 1986 Act introduced a new money purchase test for contracting-out and also contracted-out personal pensions. The minimum amount that is to be paid to money purchase and personal pension schemes is equal to the amount of the rebate that will apply to salary related schemes.

That is the background to the current review. The cost to salary related schemes of providing guaranteed minimum pensions was calculated as being 7 per cent. of reckonable earnings from 1978 to 1983, and currently it is 6.25 per cent. The cost for the five years from 1988 to 1993 is calculated to be 5.4 per cent. Your Lordships will see that the cost is decreasing as the average rate of accrual of guaranteed minimum pension declines. This is because those who were in the scheme from 1978 enjoyed a faster rate of accrual than those joining later. The figure of 5.4 per cent. includes, as do the figures for previous periods, a contingency margin of 7½ per cent.

My right honourable friend has decided that from 1988 to 1993 the rebate should be 5.8 per cent. This will include an additional margin of 0.4 per cent. over the average cost of providing a guaranteed minimum pension. The additional margin provides a further safeguard against any additional costs arising from the implementation of the 1986 Act. The amount of the rebate will give increased confidence to existing contracted-out schemes and encourage the setting up of new money purchase and personal pension schemes. The additional margin will apply for the period 1988–93 only. The 5.8 per cent. rebate will be shared so that employers receive 3.8 per cent. and employees 2 per cent. This reflects very closely the apportionment of the present rebate.

Contracted-out schemes may in certain circumstances transfer their liabilities for guaranteed minimum pensions to the state scheme by paying premiums. This is commonly referred to as "buying-back". It is necessary to provide different actuarial tables in respect of guaranteed minimum pensions that accrue up to April 1988 to those that accrue from April 1988. This is because guaranteed minimum pensions paid on account of accruals from April 1988 will include revaluation of up to 3 per cent. per annum. The tables represent the average cost of providing guaranteed minimum pensions. This cost is adjusted by a device called the market level indicator which allows for investment yields at the time of the buy-back. Without this protection a scheme could find itself in difficulty in meeting the cost of premiums if there were a fall in the market value of its investments. In current investment conditions the premiums are roughly equivalent to the amount of the rebate and the scheme is able to retain the profit from the investment appreciation. The new market level indicators will ensure that schemes are fully protected against sudden falls in the market value of their investments whilst reducing the scope for profits to be made from ceasing to contract-out.

The Government announced on 18th March that new personal pensions will be introduced in January 1988. Not only is this three months earlier than originally planned but those without a pension will be able to backdate contracting-out to April of this year. This is a considerable achievement. Premiums may be payable by schemes that have ceased to be approved as "appropriate" by the Occupational Pensions Board. Although it is extremely unlikely that a scheme would cease to be appropriate before April 1988 it is still necessary to provide legislative cover against that contingency. The transitional regulations provide that cover.

I opened by referring to the technical complexity of this subject; but I believe I have been able to indicate to your Lordships the importance of these statutory instruments and how they fit in to the Government's overall pension strategy. I beg to move.

Moved, That the Social Security (Class 1 Contributions—Contracted-out Percentages) Order 1987 laid before the House [16th Report from the Joint Committee]; the State Scheme Premiums (Actuarial Tables) Regulations 1987 laid before the House [16th Report from the Joint Committee]; and the State Scheme Premi urns (Actuarial Tables—Transitional Provisions) Regulations 1987 [16th Report from the Joint Committee] be approved.—(Lord Hesketh.)

Baroness Jeger

My Lords, I must begin by protesting at the inconvenience that has been caused to the House by the fact that these measures were due to be put before your Lordships on Monday and that they were then taken off. I am told, and I have a letter from the Printed Paper Office in front of me which says: The reason for re-laying these instruments was indeed a drafting error". I think it is quite fair for me to ask who made the drafting error and why that error was not put right. It has been a great inconvenience to many noble Lords that the timing was altered from Monday to Wednesday.

I understand also that these provisions have not been laid in the other House. Although I realise that it is not absolutely essential for the other place to take them first, there is some anxiety about when they are to go to the other place in order that they can be legalised. Of course, the provisions arise out of the Social Security Act and therefore there is no reason why we should take a great deal of time dealing with the details.

However, I must put on record that for many of us it has been of great inconvenience that there has been this muddle; that someone who is unidentified has put the papers in the wrong position and has not corrected the matter. This is not the first time that this has happened with the DHSS. The department seems to be in total confusion. There have been more mistakes—and I say this as a former civil servant—from that department than from any other with which I have had contact.

I shall not propose that we have any unkind discussion tonight. I shall say only that it is an absolute disgrace that my noble friends and I are pushed around from Monday to Wednesday and that nothing seems to be correct that comes from that department. I have every sympathy with the noble Lord who has to deal with these matters. In that spirit, I hope that he will appreciate that we give a grudging consent tonight.

9 p.m.

Lord Kilmarnock

My Lords, I thank the Minister for having explained these orders and regulations, complicated though they are. I speak on behalf of my noble friend Lord Banks, who was prepared to deal with them when they were originally due to have been introduced. He has asked me to express his great regret that he is unable to be here tonight. He is disappointed to be unable to intervene on a matter on which he is perhaps the greatest acknowledged expert in the House.

The measure that excites the most interest is the Social Security (Class 1 Contributions—Contracted out Percentages) Order 1987. This interest arises because all employers with contracted-out schemes need to know the amount of the contracted-out rebate from April 1988 in order to reassess their positions. Most particularly, all employers contemplating a new contracted-out occupational scheme—whether final salary or money purchased—under the new arrangements also need to know the position. Likewise, individuals contemplating contracting out by means of a personal pension plan need to know what rebate will be paid by the DHSS into their policy.

There has been considerable speculation as to what the new level of rebate might be. The figure of 5.75 was widely canvassed. It has turned out to be 5.8—not a great difference. It has always been understood that the rebate would reduce as those with higher accrual rates were gradually replaced by new people coming in with lower accrual rates, to which the noble Lord referred. Thus we have had the reduction in 1983 from 7 per cent. to 6.25 per cent. We now have a further reduction to 5.8 per cent. As the noble Lord, Lord Hesketh, told us, the Government Actuary thought that 5.4 per cent. would be sufficient, including the 7.5 per cent. contingency reserve. To be on the safe side the Secretary of State has gone to 5.8 per cent., for which contracted-out contributors will be grateful.

To this extent the order is welcome. The difficulty is that the new provision for personal pensions takes effect from 1st January. The new rebate does not become effective until 6th April 1988. This means that for this period—approximately three months—the old rebate will apply to personal pensions. Will it not therefore be a little confusing for those effecting personal pension plans in the first three months of 1988 to be faced so soon with a reduction in the DHSS contribution that they can expect? Is there not a danger that people may jump in on one basis only to find that their long-term commitment is on another?

Turning to the actuarial tables, these indicate the cost of buying back into SERPS on ceasing to be contracted out. These tables have to be revised periodically to reflect market conditions and any consequent change in the cost of providing each £.1 worth of pension.

The second measure sets out the table required to replace the 1978 tables and the 1982 amendments. The first measure, which is a transitional one, is necessary to provide the appropriate tables for personal pensions in the period of this hiatus between 1st January and 6th April. This is a further complication resulting from the decision to start personal pensions from 1st January.

Two questions arise from that. Would it not have been better to have held back the personal pensions until April, especially as most potential providers are complaining that they do not yet have sufficient information about the general regulations—not these regulations—governing personal pensions, the terms of the policy, and so on? They do not have sufficient information to design and prepare their schemes in time. That is a complaint in the industry. Also, does not the initiation of the new personal pension on 1st January and the new money purchase employers' scheme in April favour the former against the latter, particularly as those who take out a personal pension plan between 1st January and 6th April can claim an extra year's contracted-out rebate in addition to the 2 per cent. incentive?

If this situation seems surprising I am assured that this is the pension industry's interpretation. If it is not true the noble Lord will tell me. If it is true, does it not provide the personal pension with an additional attraction for the new entrant at the expense of any money purchase scheme an employer may introduce from April? Would it not have been better to introduce the two types of schemes on all fours and on a level platform? I shall be most grateful if the noble Lord can comment on those remarks.

Baroness Turner of Camden

My Lords, I had not intended to intervene in the debate until I heard what the Minister said. In addition to the points raised by the noble Lord, Lord Kilmarnock, I am concerned by the additional incentive that the Government appear to be giving to personal private pensions. Noble Lords will know what we on this side felt at the time of the Social Security Bill about private personal pensions. Indeed, we hold that the Government by their attitude are assisting to some degree to undermine very good collective occupational pensions provision by their apparent support for PPPs.

I should like to put on record—although it is over and done with now—my objection to bringing the date forward to January 1988. I speak as a member of the Occupational Pensions Board and I think it is going to be very difficult to get everything in place in time to be ready for January 1988. This is a further complication.

I draw the attention of the Minister to the fifth report of the Social Security Advisory Committee where it deals with personal pensions. It expresses grave doubts about the degree of security that an individual will have if he switches to a money purchase-type arrangement with personal private pensions. That is made very clear in the final paragraph: We are concerned about the risk inherent in money purchase schemes since investment in a pension constitutes a major element of personal finance for most people". It is talking in that connection about private personal pensions. I put those points to the Minister because I think they are relevant in the context of these regulations.

Lord Hesketh

My Lords, first I take this opportunity of apologising to the noble Baroness, Lady Jeger, for the unfortunate situation. I am not entirely sure who is responsible, and I fear that that will come as no surprise to the noble Baroness.

The noble Lord. Lord Kilmarnock, questioned me with regard to the rebate for personal pensions taken out in 1987–88 which will be backdated to 1st April 1987. They will be the present rate of 6.25 per cent. Those involved in selling personal pensions will no doubt make it clear that the rebate from April 1988 will be 7.8 per cent.—that is, a rebate of 5.8 per cent. together with a 2 per cent. incentive rebate. The 2 per cent. additional rebate will also be available to contracted out group money purchase schemes.

The noble Lord, Lord Kilmarnock, also said that personal pensions providers will not have sufficient time. The regulations will be out towards the end of May this year, but personal pensions will be backdated only for those who are not contracted out between April 1987 and January 1988. In so far as concerns the other point raised by the noble Lord, Lord Kilmarnock, I will write to him.

The noble Baroness, Lady Turner of Camden, expressed her feelings concerning PPPs, and I fully understand her position. However, I am sure that she is well aware that the Government are very keen on promoting the concept of individuals being able to have individual pensions. But I fully understand the points that the noble Baroness makes and take them aboard.

I shall write to noble Lords concerning any further points which I have not covered. I hope that the regulations will prove to be a success. I am confident that the statutory instruments before us today form an integral part in the Government's strategy for the provisions of pensions for all. I commend them to your Lordships.

On Question, Motions agreed to.