§ 3.12 p.m.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)
My Lords, I beg to move that the Bill be now read a second time.
The Bill is a short one and has two main purposes. First, it introduces a 1 per cent. additional rebate for holders of personal pensions who are aged 30 or over. This was promised in the Government's manifesto. Secondly, it provides for the availability of a Treasury grant to the National Insurance Fund as announced by my right honourable friend the Secretary of State in his Statement in another place on 12th November 1992. I shall, of course, say more about the precise provisions in the Bill during the course of my speech, but first it may be helpful to the House if I say something about the background to the measures.
The present arrangements for personal pensions were established by the Social Security Act 1986 and came into force in 1988. It is fair to say that the success of the policy has surprised even its staunchest advocates. Nearly 5 million people have taken out personal pensions since 1988. It is also worth bearing in mind that despite predictions to the contrary this has not been at the expense of occupational pension schemes. The overall number of people in occupational pension schemes had been relatively static for many years. The 5 million personal pension holders are largely additional to the 11 million occupational scheme members.
The success of personal pensions has generated a committed flow of funds for investment, thus building up assets which will pay pensions in the future. This can be compared with the state scheme which is run on a pay-as-you-go basis and where this year's contributions pay for this year's benefits. There is no investment to pay for tomorrow's pensions, whereas the 5 million people who have taken out personal pensions are investing in the future and will ease the burden of the State Earnings Related Pension Scheme for future generations.
Personal pensions have proved particularly attractive for younger people encouraging them to make their own provision rather than to rely solely on the state. More than half of all personal pension holders are under 30 while more than 80 per cent. are under 40. Many younger people who have taken out personal pensions will have had no access to an occupational scheme. Personal pensions have given them an alternative to the State Earnings Related Pension Scheme.
However, the flat rate nature of the current contribution rebate arrangements for contracting-out has meant that the advantages of personal pensions are greater for younger people. This is because the benefits from a personal pension depend, among other things, on the return on investment which accumulates steadily over time. The return from a flat rate rebate paid to a younger person therefore has longer to accumulate than the return from a similar rebate to an 819 older person. The current flat rate rebate system encourages individuals to contract back into SERPS as they get older. That cannot be right.
I therefore come to the precise proposals in Clause 1 of the Bill. Clause 1(1) provides for a 1 per cent. addition to the contribution rebate for those aged 30 and over. It does so by amending the provisions in the Social Security Act 1986 which set out the amount of the minimum contributions paid to an earner's personal pension scheme. It will apply to those who are 30 or over at the beginning of the tax year commencing this coming April and to those who are over age 30 at the beginning of any future tax year. As indicated in the Explanatory and Financial Memorandum to the Bill, the annual cost is estimated to be about £165 million from 1994/95. This cost will fall on the National Insurance Fund from 1994–95 because, in order to reduce the burden on employers, minimum contributions are paid by DSS direct to personal pension providers after the end of the tax year. We estimate that about 2 million personal pension holders will benefit.
The 1 per cent. additional rebate is a temporary measure which is intended to ensure that the majority of personal pension holders continue to find it worthwhile to maintain their pensions in the short term.
For the longer term we will be considering proposals for replacing the present flat rate rebate structure and the 1 per cent. additional rebate by an age related system which is intended to be in place from April 1996. We will be looking at the rebate structure not only for personal pensions but also for money purchase and salary related occupational schemes. As part of the review we will be consulting widely with all interested parties including industry and consumers' organisations.
I now turn to the second aspect of the Bill; a Treasury grant to the National Insurance Fund. As the House will be aware, in a pay as you go scheme, the balance in the National Insurance Fund is influenced by the state of the economic cycle. A slowdown in the economy has an adverse effect on both income and outgo; contribution income tends to fall while expenditure on benefits rises. The House may already have studied the detailed position as set out in the Government Actuary's report on the financial provisions of the Bill which was laid before the House last November. The report shows that the fund will carry forward a surplus balance of some £3.6 billion in April, but that this will be more than dissipated by the projected shortfall between income and expenditure in 1993–94. Current legislation makes no provision for the fund to go into deficit. So, without legislation of the sort now before the House it would be necessary either to curb entitlement to benefits or to increase national insurance contributions.
As the House will be aware, despite the tight financial situation, my right honourable friend was able to announce on 12th November last year that all main benefits are to be increased in line with inflation from April and that national insurance contribution rates would not be changed apart from the usual 820 adjustments for inflation. My right honourable friend's proposals have been widely welcomed but it does mean that we need to introduce measures to ensure that the fund is kept in balance. It is therefore proposed to make additional resources available to the fund by means of a new grant from the Consolidated Fund in 1993–94 and which will be available in future years if needed. As my noble kinsman Lord Russell reminded the House on 12th November, it is not a new idea to assist the fund by means of a transfer from the Consolidated Fund.
The National Insurance Fund was originally set up with income from employers, employees and the state, but the former Treasury supplement which the Government abolished in 1989 was outdated and inflexible. The fund had to take a supplement whether it needed it or not, even when it was in surplus. The grant proposed by the Bill is more suited to today's needs. It is flexible; it is not automatic; it will be called upon only when needed.
Clause 2 contains the detailed provisions for the Treasury grant. The House will note that slightly different arrangements are proposed for 1993–94 than for later years, but they are based upon the well-established principle in managing the National Insurance Fund that we should plan its finances for the year ahead with the aim of maintaining a prudential minimum balance of some two months of benefit expenditure. The Government Actuary has advised that such a figure will represent an entirely adequate safety margin if events turn out differently from forecast.
In the current year, the balance has fallen below the two month level and we expect to carry forward the equivalent of just over a month's benefit expenditure at April 1993. That is not a cause for concern. The balance is fulfilling the very purpose for which it was designed. But it does mean that in order to plan for a two month balance at April 1994 we need to recover that lost ground. That is why the maximum amount of grant proposed for 1993–94 is higher than for subsequent years.
The House will note that the maximum grant available for 1993–94 will be 20 per cent. of estimated expenditure on benefits—nearly £8 billion. In later years the maximum will be 17 per cent.
I should emphasise the flexibility of the approach. No grant will be payable unless my right honourable friend makes an order after consultation with, and with the consent of, the Treasury.
As with a re-rating order, the order will be subject to the affirmative procedure in both Houses and will set the percentage of grant which is to be available for the year concerned. But my right honourable friend will not be obliged to draw the full amount set by the order; he may determine to draw less as the fund may require. I expect that any order would be debated by the House at the same time as the usual annual proposals for changes to national insurance contributions.
There are just two further points I should like to make. First, the grant represents a transfer of money 821 within the public sector to meet existing expenditure commitments. It therefore has no effect on overall public expenditure.
Secondly, there has been some concern that the amount of grant may prove to be insufficient to keep the fund in balance, given that my right honourable friend proposes to draw very close to the maximum available in the first year.
I have explained why the sum needed in 1993–94 is rather higher. I very much hope that we shall not need to draw anything like the maximum in later years. But whatever happens the House will recognise, I am sure, that the grant cannot be expected to guarantee the fund's solvency in all circumstances. The existing measures available to adjust the various rates, thresholds and limits in the contributions system must remain available, and it will be for consideration at the time as to which measures are most appropriate to keep the fund in balance.
In the debates in another place, my right honourable friend referred to the passage of 50 years since the Beveridge report. He noted that Beveridge considered that the state should, in establishing a national minimum, provide room and encouragement:for voluntary action by each individual to provide more than that minimum for himself and his family".The measures that we propose on personal pensions are designed to do just that. The new grant will maintain the National Insurance Fund on a firm footing while offering greater flexibility with appropriate accountability to Parliament.
I commend the Bill to the House. I beg to move. Moved, That the Bill be now read a second time. —(Lord Henley.)
§ 3.23 p.m.
§ Baroness Hollis of Heigham
My Lords, I thank the Minister for his clear introduction to the Bill. As he told us, the Bill seeks to amend the Social Security Act 1986, which came into effect in 1988. That Act sought to downgrade the attractiveness of SERPS, for ideological rather than financial reasons as we shall see, while at the same time privileging private sector pensions by giving them a 2 per cent. incentive—or bribe—over and beyond the actuarially appropriate rebate to encourage people to switch out of SERPS into the private sector.
The 1986 Act succeeded all too well. It threw so much money at the private pension option that, as the Minister told us, far more people than expected took advantage of it. Such loss-leader arrangements have now contributed to the deficit in the National Insurance Fund.
The Bill which is before us today, far from abolishing such bribes, proposes within the private pension world to privilege private pension schemes over occupational schemes, to the disquiet of the pensions industry. To the cost of those incentives and bribes has been added the deeper problem, mentioned by the Minister, of mounting unemployment which has reduced contributions to the fund while increasing its commitments. That is no accident; it is the price of 822 government economic mismanagement, which is now reflected in the expected deficit on the National Insurance Fund which in 1993–94 will be in the red. Therefore, the Government are having to reintroduce the Treasury subvention, which they proudly abolished in 1988, in order to balance the books. That is reflected in the second part of the Bill. On this side of the House we shall not oppose the Bill, but it is a sad and sorry tale.
I should like to explore both of those points a little more fully. First, I shall deal with the privileging of private pension schemes over occupational pension schemes. The Government have always been, certainly since the 1986 Act, hostile to SERPS which would, by the year 2010 or so, have taken most elderly people off supplementary benefit, as it then was, or income support as it is now. However, because SERPS (the State Earnings Related Pension Scheme) contained an element of redistribution as well as of insurance and was based on the 20 years of best earnings and therefore aided manual workers, the partially disabled, part-time workers and women in particular; and because it was a state sector scheme, the Government were profoundly hostile to it. The 1986 Act reduced the benefits of the scheme while simultaneously bribing people to move out of SERPS into the occupational and then the personal pension world.
We on this side of the House have no objection to personal pensions. I am lucky enough to enjoy one myself. However, we did object and we continue to object to the way in which that choice was baited. The Government have always insisted that they moved away from SERPS because of its escalating costs. Now we have the sums and they give the lie to that version. The National Audit Office shows that the Government's package of incentives, rebates and bribes would have cost the taxpayer £9.3 billion in rebates and incentives to save some £3.4 billion in lower state related pensions some time in the next century. In other words, to save money on SERPS the Government have spent three times as much on bribing people to move into the private sector.
So far so bad. What we now see with this Bill is a further warping of the system. Within the private pension field good occupational pensions based on contributions are to be disadvantaged against personal pensions which are based on the much riskier principle of a return on investment rather than contributions. Occupational pensions are required to offer a guaranteed minimum pension which must at least match the return on SERPS. It is supervised by the Occupational Pensions Board, of which my noble friend Lady Turner is a distinguished member. The Occupational Pension Scheme Joint Working Group, comprising among others the Association of British Insurers and the National Association of Pension Funds, wrote to the Secretary of State in September 1992. It set out its fears that the 1 per cent. rebate proposed in the Bill for those in personal pensions and those over 30 would encourage instability in the pension industry, would encourage people to switch to and fro between schemes and might encourage people into schemes which in the long term would be 823 financially disadvantageous to them. In particular, it complained that its own contracted out money purchase schemes would be undermined.
I believe that all of us in the House accept that the Maxwell affair threw up problems even with occupational pension schemes when there is in-sufficient supervision by insufficiently independent trustees and insufficiently independent accountants and auditors. We all welcome and look forward to the Goode Committee report. Nonetheless, the occupational pension schemes are based on a contributions record which, employer theft apart, offers a more secure financial prospect for employees than the much riskier path of return on investment associated with personal pensions. It is for that reason almost every newspaper commentator is urging people not to follow the path which the Government are now baiting with their 1 per cent. rebate. It is precisely because it is such a poor buy that the Government are having to bait it. That is surely not a sound basis on which to proceed.
I accept that for many people occupational pensions are not available. That relates to about 50 per cent. of the workforce. The bait is not helpful for those with small businesses, for part-time workers, the very mobile or perhaps for women. Surely the answer is to redefine SERPS rather than sending people down he baited risky path of privileging personal pensions.
The second part of the Bill relates to the funding of the national insurance scheme. The fund was in surplus in 1988–89 by about £3 billion. The anticipated deficit for 1993–94 is nearly £5 billion even though funding of industrial injury benefit, statutory sick pay and maternity pay—worth £1.7 billion—has been transferred to the Treasury. Why? There are three crucial factors which the Minister has already indicated. First, with the recession, fewer people are paying in; and they are paying in less because of their falling incomes. Secondly, given the recession, there is an increased number of people drawing on the fund. The third factor relates to the cost of those incentives, baits and bribes to which we have referred.
According to the government actuary, contributions are likely to fall by £1118 million in 1993–94, a consequence of both rising unemployment and lower earnings of those remaining in work. With regard to payments out, the Government Actuary assumes that it will cost an additional £832 million this year due to the increased numbers of unemployed, and by almost a further £2 billion by 1993–94, partly through uprating of benefits and partly through increased numbers of pensioners, assuming that the number of unemployed remains the same.
In addition, the cost of Government incentives, bribes and rebates to persuade people to move from SERPS into the private sector is running at £2.9 billion this year. As a result, the Bill provides a grant for deficit funding of up to £8 million, or 20 per cent., next year and 17 per cent., or £7 billion, in following years.
We on this side of the House cannot quarrel with the need to balance the fund, but we can and do insist that the need to do so is a direct result of government policies: on the one hand of the management of the 824 economy and on the other of the Government's folly in pushing people into private pension schemes by baits and rebates that the insurance fund clearly could not sustain. We also query the actuarial basis on which that Treasury grant is calculated.
The need for deficit funding is quite clearly a consequence of an economic policy which has produced 1 million more unemployed people than two years ago. Over 110,000 businesses have failed since two years ago. No doubt the Minister will tell us that we can confidently look forward to recovery in the fifth quarter of the year! The deficit grant proposed assumes that unemployment will run no higher than 2.8 million. However, all the economic forecasters suggest that by spring 1994 the number of unemployed will be 300,000 to 500,000 higher, pushing an additional £750 million, at the very least, on to the deficit. The Government's accountancy figures are also based on the assumption that there will be a rise in earnings of 5 per cent. per annum when we all know that other branches of the Government are holding the public sector to a rise of just 1.5 per cent.
If either of those assumptions by the Government are flawed —if unemployment runs higher than the 2.8 million or earnings rise by less than 5 per cent. a year —we believe (and we have been supported by much commentary in the press) that the Government's figures of 20 per cent., or £8 million next year, and 17 per cent., or £7 billion the year after, will not be sufficient to balance the books and the Government will have to come back to this House with another Bill to allow them more head space in order to remedy the deficit.
We recognise that there is a real problem about a pension system based on insurance at a time when growing numbers are not in full-time work or, if they are women, are in and out of work, or, if they are semi-disabled, form part of the great reserve army within the labour force. We also accept that, as people live longer, more years of pension have to be funded from fewer years of working life. It is for that reason, among others, that the Labour Party has set up its independent commission on social justice. But by undermining SERPS since 1986 the Government have transferred the cost of supporting the poorest pensioners, mainly women, onto income support. They have not saved money. They have transferred costs.
We see those in later middle age who are unemployed but below retirement age going on to disability benefit to massage the unemployment figures, thus losing years in which to build up their pension entitlement. We see another band of contributors going on to risky portable pension plans, many of which, say financial experts, will produce a lower return than SERPS; but they will have sacrificed that gain for the temporary rebate.
Finally, we see an occupational pensions world scarred by the Maxwell affair, in part because the Government's Financial Services Act delegated regulation to whistle blowers who showed that they had no will to whistle. All those factors come from a Government who should have acted as trustee for all 825 our pensions through a national insurance fund which for most people represents their deferred wages and their key savings.
We accept that the Treasury deficit grant seeks to amend that situation. However, we insist that it is a situation of the Government's own making. It is a combination of the unemployment that they have manufactured and the warped pension provision that they have constructed since 1986. The Financial Times called the saga a pensions débâcle. It was quite right.
§ 3.36 p.m.
§ Earl Russell
My Lords, it may surprise some people on the other side of the House that it is no great pleasure to those who speak from the Front Bench of the Opposition party to express shock, horror, outrage and moral indignation. It is therefore somewhat of a relief to greet a Bill about which I do not feel the need to express those emotions. It is rather restful. The Bill achieves two purposes, one of which I warmly welcome and to the other of which I make no great objection. I have one or two suggestions and one or two small points to make. I do not believe that my noble kinsman will find this one of the more critical speeches that he has heard me make.
In considering the Bill I am tempted by the hypothesis that it is now the policy of the Department of Social Security to put the minor matters into Bills and to keep the really contentious issues for regulations. Perhaps slightly wryly, I should like to congratulate my noble kinsman on the tightness with which the Long Title to the Bill is drawn. It states:To amend Sections 3 and 85 of the Social Security Act 1986, to provide for the making of certain payments into the National Insurance Fund, and for connected purposes".That is a long way from the Long Titles that we used to have to amend the law relating to social security. I can understand that, from the Government's point of view, that has great advantages. On the other hand, if this House wishes—as Houses of Parliament do from day to day—to change certain matters in the law relating to social security, it may create an occasional problem. At some stage that might be worth a certain amount of thought.
The first point is the restoration of the Treasury supplement to the National Insurance Fund. Almost the first amendment on which I spoke from this Bench in 1989 asked the Government to desist from abolishing that supplement. I argued then that there might come a rainy day when the Government would need it. That rainy day has indeed come; and it is coincidental that the front pages of today's papers are covered with photographs of floods. I am glad that the Government have restored the supplement. I wish that they had stuck with the original situation. I welcome the fact that they have done so the more warmly because it has enabled the department this year to keep up benefit levels. I am very glad indeed that it has done so.
On the subject of benefit levels, I hope in passing I may raise the point that if the exempt categories of VAT were to be abolished, particularly on food, that would create intense pressure for an increase in benefit levels. I hope therefore that the Department of Social 826 Security will, from the earliest stage, be involved in any discussions which might take place about whether that eventuality might come about. I appreciate that there are limits to the answers one can obtain to such a question, I just hope that it will be borne in mind.
Another point about which I wonder is the placing of a cap on expenditure from the Consolidated Fund. That kind of measure looks fine until there is a need. When there is a need, is it possible that we may once again have to take up the time of the House with a small Bill designed to take the cap off because it does not fit? That point should be borne in mind.
My noble kinsman pointed out that the Government are not quite going back to the situation that prevailed before 1989. At that time there was a regular contribution from the Consolidated Fund. It was paid in good years and in bad. My noble kinsman's phrase was, I think, "whether we needed it or not." I wonder whether that is quite the right approach. Is there not a case for arguing that it is precisely in the good years, when we are in surplus, when production is booming, when the balance of payments is favourable and when we are well off, that it is a good idea to put aside money for saving in case of a rainy day. If we only find the money on the rainy day, it puts an extra strain on public funds at precisely the moment when they are least able to take it. The department's argument reminds me a little of the schoolboy who was asked which was more important: the sun or the moon. He replied, "Undoubtedly the moon, because it gives light at night when we need it. The sun gives light in the day when we don't need it." Perhaps that is the argument we have here.
I am glad that the statutory instruments calling on this contribution will be under the affirmative procedure. I was a little concerned about the words in which the Secretary of State in another place made the announcement. He said that the House would be able to debate the instruments fully. At least in another place, where financial privilege is not a problem, one would have thought—if this is making law—that he might have acknowledged that the House should have the possibility of controlling as well as scrutinising what was proposed. That is an example of the increasing tendency to talk about regulations as if the Minister made them and the House merely listened. It is something we should view with misgiving.
The second part of the Bill—the personal pension rebate —enters into what I describe as the Schleswig-Holstein of pension law. Without wishing to impersonate Lord Palmerston, I do not wish to go into that hornet's nest with great confidence. The good point about personal pensions is that they are portable. They allow for changes of jobs and in an economy where at the moment firms are positively moulting labour, the possibility of taking one's pension with one when one leaves a job is extremely important. So from that aspect, the proposal is to be welcomed. The negative point is that the personal pension does not necessarily guarantee the same final pensionable income. Both points are valid. I must confess that I do not entirely see my way round the task of balancing one against the other.
827 In passing, I wish to utter a small word of warning. We shall shortly reach a situation in which considerable numbers of people retire, having perhaps in some cases not worked for 20 years. While I have great sympathy with the growth of occupational and personal pensions, they create problems for people who have for a large part of their working lives had no employer. Those problems should be borne very much in mind in any shift towards personal or occupational pensions. The problems of financing pensions for people who in many cases may not have worked since the age of 40 will be quite serious. It is yet another reason for doing what has often been requested in this House—making it easier for people above 50 to be taken into new employment. That is in the public interest for a great many reasons; I have given one of them.
We should bear in mind, if we are considering private provision, the situation that the Americans have run into with health care. A good many million people in America have no health care at all and the provision is not always adequate. So it is worth sounding a certain note of caution.
I shall not go deeply into the whole issue of SERPS. I have not forgotten the cartoon of the 1970s in which the Minister appeared as Laocoön, with SERPS encoiling him. It is an extremely complicated subject. The costs of this change are actuarially extremely difficult to calculate.
It is also fair to say that the word "bribe" means, "An incentive to do what I do not think should be done." I am not nearly as certain as some others about exactly what is the right thing to do here. I do not believe that the issue is quite as simple as it seems on either side of the House. I am anxious about the cost of SERPS. I have no objection to considering costs; I always ask for the costs to be got round. In this area I am not certain of what would be right: so much depends on the method of calculation.
There is one point on which I should welcome my noble kinsman's explanation. Clause 5(3) states:Section 1(3) of this Act shall be deemed always to have had effect".I do not believe that retroactive legislation is always wrong, but it should never go through on the nod. Where we find it, we should ask for an explanation. We should listen carefully to that explanation and I hope that my noble kinsman will give it.
Finally, I must offer my apologies to the House for the fact that I shall not be attending the Committee stage of the Bill because I shall be delivering a lecture at the University of St. Andrews. However, I am sure that others on these Benches will contribute vigorously to any debate that may arise.
§ 3.47 p.m.
§ Lord Boyd-Carpenter
My Lords, although my name does not appear on the list of speakers, I hope that your Lordships will allow me to say a few words on the Bill since it is a subject with which, as some of your Lordships may recall, I have been connected for a great many years. I find it extremely interesting that the Exchequer contribution to the National Insurance Fund is to be revived. In the days when I was 828 responsible for the national insurance scheme, there was a standard Exchequer contribution which was one of the three elements for financing the fund. The other two were the individual contributions of the employers and the employed. There was a great deal to be said for that system.
I am inclined to share the doubts of the noble Earl, Lord Russell, as to whether it was sensible, six or seven years ago, to abolish the Exchequer contribution. There is a good deal of force in the point which he very well made to the effect that when trade is good, when contributions are flowing in well, then is the time to build up the fund. It is a pity not to enable it to be built up with the aid of at any rate a modest Exchequer contribution. I very much hope that when my noble friend comes to reply, he will not slam the door on the continuation of an Exchequer contribution for a good many years.
I appreciate, because I know that my noble friend operates under, let us say, certain sanctions or pressures from his right honourable friends, that he will not be able to give any commitment to that effect. But there is a difference between slamming the door on a concept and appearing at least quietly to acquiesce in it. My noble friend is extremely good at that particularly adroit exercise, which I hope he will continue to follow.
I am sure that in the present situation the Bill is right to maintain the fund with the aid of an Exchequer contribution. I shall not follow the noble Baroness, Lady Hollis, in her general attack on the whole economic policy of the Government which, she claims, is responsible for the situation and makes it necessary to revive the Exchequer contribution. It seems to me a rather unnecessary exercise in normal economic and financial controversy. Perhaps she has not had much chance lately to indulge herself in that way and is seizing in a very human manner the opportunity which she feels this Bill gives her. I do not consider it very relevant. Frankly, I much prefer the line taken by the noble Earl, Lord Russell, in discussing the two points: the 1 per cent. improvement for the over-30s and the matter to which I have been referring, namely, the Exchequer contribution.
Before I sit down I would like to make one small drafting point. Clause 5(1) says:This Act may be cited as the Social Security Act 1992".As it is not yet law, I do not see how it can be so cited.
§ 3.52 p.m.
§ Lord Henley
My Lords, I take note of my noble friend's remarks about Clause 5(1) regarding the possible Title of the Bill. No doubt my noble friend, or I, on his behalf, may amend it at a later stage in the Bill. I welcome the general support from my noble friend and my noble kinsman for the substance of the Bill. We shall miss the presence of my noble kinsman Lord Russell at Committee stage, just as we shall all regret not being present at his lecture in St. Andrews. Perhaps he will send us a copy of what he has to say, just as he will no doubt be reading in Hansard what we have to say.
829 My noble kinsman too complained, I believe, that the Long Title of the Bill is somewhat too narrow and did not allow him or the noble Baroness scope to amend the Bill as they might wish to do on wider aspects of social security. I note his point, but it is, I am advised, essentially the contents of the Bill which determine the range of amendments which can be offered; the Long Title merely describes what the Bill contains.
I now turn briefly to the question of the 1 per cent. addition and our personal pensions initiative that has now been continuing since the 1986 Act and its coming into force in 1988. I do not accept the allegation of the noble Baroness that these have been at the expense of occupational schemes. There is simply no evidence of that. As I said in my opening remarks, the number of members of occupational schemes has been static for some years and continues to be static, while we have seen the growth of an extra 5 million personal pensions since 1988. Nor do I accept the noble Baroness's arguments that we are ideologically opposed to SERPS in every form. We merely wish to make sure that we have something affordable for the people, the taxpayers and the national insurance contributors over the next years when demographic changes will certainly have altered the overall cost in terms of the balance between those paying and those receiving such pensions.
We are certainly proud of our record on safeguarding the interests of pensioners during the years while this Conservative Government have been in office. Through our policies we have seen the growth of a wide variety of choice in pension provision, in personal and occupational schemes as well as the state scheme. Their success is shown in the 34 per cent. real growth in the value of pensioners' average net income since 1979. That is an average increase of roughly 3 per cent. a year over and above inflation compared with the record under the last Labour Government of a mere 3 per cent. during the entire five years that they were in office.
I must also stress that the 1 per cent. addition for the over-30s in personal pensions is not a final measure. It is merely designed to ensure that the majority of current personal pension holders continue to find it worthwhile to maintain their pensions in the interim. We intend to consider proposals for a new age-related rebate structure which is expected to be implemented in April 1996. As I stressed in my opening remarks, and also as my right honourable friend has announced, we will be consulting all interested parties about this very important issue in due course.
I should like to turn now to the National Insurance Fund and the provision which we have debated for a Treasury grant to be made available. This is a quite separate issue from that of personal pensions, though they are linked in some ways, as the noble Baroness attempted to show. She complained that the 1986 Act was largely an ideological attack on SERPS, that the success of that personal pensions initiative had largely contributed to a deficit, and that any deficit in the fund 830 would be solely the result of money, as I believe the noble Baroness would put it, squandered on the personal pensions initiative.
§ Baroness Hollis of Heigham
My Lords, I did not say "solely". I emphasised that there were three reasons for the deficit: the falling contributions; the increasing number of claimants; and the carry-on deficit due to the cost of the rebates.
§ Lord Henley
I withdraw the word "solely" but I think the noble Baroness put very large emphasis on the success of the personal pensions initiative, which I would argue the noble Baroness is ideologically opposed to, as opposed to the claims that we are ideologically opposed to SERPS.
I accept that the cost of rebates and incentives is a factor in the level of the fund. However, the recent reports by the Government Actuary have suggested that the main factor has been the state of the economy. Increasing unemployment has meant fewer employees and thus a reduction in contribution income. On the other side, the cost of unemployment benefit has increased considerably. More people are becoming unemployed who have good work, and therefore good national insurance records and who therefore qualify for unemployment benefit. But I do not accept that some £6 billion, as has been alleged, has been squandered on personal pensions. As we have said repeatedly, the personal pensions initiative has been an enormous success. It is about time that the party opposite admitted that. As I have said before, some 5 million people, mainly young people, have taken them out and as a result are now taking some personal interest in their own pensions arrangements rather than simply inertly relying on the state, as I am sure the noble Baroness would prefer.
I accept what the noble Baroness said about the National Audit Office report, and that that was true. But that is only part of the picture. Unlike the party opposite, whose sole desire is to make quite unachievable promises in terms of what it is offering on SERPS in the vague hope that something will turn up, we wish to create a sustainable pensions structure for the next century, when, as the noble Baroness will realise, the demographic pressures will be much greater. That is what the creation of personal pensions and the reforms to SERPS of the mid-1980s was all about. Together, the reforms to SERPS and the creation of personal pensions will by the year 2010 reduce the cost of SERPS by some £3 billion a year at 1993 prices, rising to some £20 billion a year by the year 2035. That is a pretty good deal.
I do not accept the description of the noble Baroness that the previous 2 per cent. incentive was a bribe. The noble Baroness suggested that the incentive would be paid to those taking out appropriate personal pensions for the years to 1993; that it was a bribe and bad value for money. I believe it is reasonable to provide an incentive to launch a new approach to pensions, just as the previous Labour Government did when they launched changes during 1974–75. As I tried to argue, the Government are attempting to build a sound and sustainable pensions policy for the next century.
831 The personal pension addition of 1 per cent. will not be a major element of the National Insurance Fund's commitments. The 1 per cent. will cost only £165 million in 1994–95. The vast majority of expenditure, as the noble Baroness is aware, is on retirement pensions and it is largely due to the world recession that income from national insurance contributions is not keeping pace with the increase in expenditure. In that respect I do not need to remind the House that my right honourable friend proposed to raise benefit levels as usual in his uprating Statement last November.
Both the noble Baroness and my noble kinsman asked what would happen should unemployment be higher than was assumed and earnings lower, and whether the 20 per cent. Treasury grant would be sufficient to maintain the balance in the fund at 17 per cent. throughout the year. The noble Baroness suggested that the assumptions adopted in regard to unemployment and earnings may prove to have been optimistic and in such an event the balance in the fund may during 1993–94 fall below the Government Actuary's recommended level of two months' benefit expenditure.
That is not a cause for concern. The Government Actuary recommends planning for a balance in the fund of two months' benefit expenditure, for the reasons about which your Lordships expressed anxiety—that is, that outturn will prove different from the forecast. It is not a balance to be maintained at all costs and at all times. It is simply a cushion of finance sufficient against variations in the demands on the fund; thus the balance in the fund may well be less than two months' benefit expenditure by the time we reach April 1994. Equally, it may be more. However, one thing is certain; it will not under any reasonably conceivable set of circumstances be exhausted.
I should perhaps repeat again what I said in opening the debate, that whatever happens the House will recognise that the grant cannot be expected to guarantee the fund's solvency in all circumstances. The existing measures available to adjust the various rates, thresholds and limits in the contribution system must remain available. It will be for consideration at the appropriate time which measures are the most appropriate to keep the fund in balance. This Bill is just one of them.
My noble kinsman, quite rightly, referred the House to clause 5(3) of the Bill and demanded to know why retrospective legislation is necessary. It has been a long established principle that the National Insurance Fund should be responsible for any administrative expenses incurred in meeting its commitments. Provision for the reimbursement of expenses incurred in administering the contracted-out rebate for occupational schemes is included in the Social Security Pensions Act 1975. A similar provision for personal pensions introduced in the Social Security Act 1986 should have been included in the legislation at the time; it was not. That was quite simply an oversight.
The Consolidated Fund has been reimbursed from the National Insurance Fund in accordance with standard practice since the provisions of the 1986 Act 832 came into force. Now the Government are quite rightly taking advantage of the first appropriate opportunity to correct the legislative position. No additional costs have arisen as a result of the provision, which simply covers an accounting adjustment between the National Insurance Fund and the Consolidated Fund.
In seeking to balance the books in the National Insurance Fund, my right honourable friend does not seek to reduce expenditure, nor to introduce measures which take more out of individual contributors' pockets in the form of national insurance contributions. Instead we are seeking the availability of a contribution to the National Insurance Fund from the Consolidated Fund. I accept and give my noble kinsman his due that I can certainly remember the amendment that he moved and the speech he made at Second Reading of the 1989 Act. I believe that was his first appearance on the Front Bench as social security spokesman as it was certainly my own first such experience.
I accept also that there are analogies with the old Treasury supplement. But I do not accept that it was the same as what we are now introducing. It was a rigid and outdated mechanism which did not sit well with the scheme of earnings-related contributions that we have today. I do not accept the point made by my noble friend Lord Boyd-Carpenter and by the noble Earl that it would be appropriate to have the rigid Treasury supplement contributing in the good years so as to boost the fund to cover the bad years. I do not accept that it would be appropriate to boost the fund higher than is needed to maintain benefit expenditure with a balance against all contingencies. We believe that our approach in introducing the new grant from the Consolidated Fund is a better way to pursue those matters. Nor is there anything wrong in principle with the contribution from the state. It was a cornerstone of Beveridge that it should not be taken unnecessarily. The grant that we propose is both flexible and in keeping with the needs of the day.
I commend the Bill to your Lordships' House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.