§ 3.22 p.m.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)
My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
Moved, That the House do now resolve itself into Committee.—(Lord Henley.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The CHAIRMAN OF COMMITTEES in the Chair.]
§ Clause 1 [Pension schemes: payments by Secretary of State under Part I of Social Security Act 1986]:
§ Baroness Turner of Camden moved Amendment No. 1:
Page 1, line 16, at end insert—
("( ) After subsection (1) of that section, there shall be inserted—
(1A) Subsection (1) above shall apply to members of Contracted-out Salary-related Schemes and Contracted-out Money Purchase Schemes.".").
§ The noble Baroness said: Ideally, we do not want the proposed 1 per cent. incentive designed to encourage people to stay outside SERPS. Clearly, the provision is intended to encourage people to opt for private personal pensions when they may not always be to their advantage.
§ That is not to say that there is no place for personal private pensions. Clearly, there are people for whom it is a good idea, and we would not want it to be thought that we want to discourage personal thrift. Nor is our support for SERPS based on pure ideology, as the Minister claimed at Second Reading. We really believe that SERPS as originally envisaged offered the best opportunity for poorly paid people to retire on a pension which bore some relation to their pre-retirement earnings. It was particularly helpful in the case of women with a non-continuous work pattern and for manual workers, many of whom have relatively higher earnings at younger ages.
§ Yet one of the first things the Government did when they began their pensions review was to abolish the provision that pensions would be based on the best 20 years earnings revalued. Then the accrual rate was worsened, making SERPS less attractive. It is as well to remember that the pensions legislation of the mid-1970s which introduced SERPS was based on an all-party agreement, including that of the party now in Government. However, all this Government's incentives have been based on support for individual pension provision rather than collective provision. It is not only SERPS—and here I come to the main point of my amendment. The Government's attitude has been less supportive of collective occupational pensions provision than it has of individual provision. And yet, despite Maxwell, salary related occupational pensions schemes are still the best way of providing for most employees in retirement.
§ Of course, there have been difficulties. We await with interest the recommendations of the Goode Committee. But why have the Government provided this new incentive only for personal private pensions? There is very real concern that employers may not consider it worth their while any more to offer good occupational schemes. Unemployment is rife. The pressure to retain good employees is no longer so strong. There is some evidence that employers have already been turning away from final salary schemes because of the increasingly complicated legislative framework. It would appear that there is now similar anxiety about COMPS—contracted out money purchase schemes—yet the Government in 1988 appeared to be encouraging them.
It is clear that the Bill is being seen by many in the pensions industry as further evidence of the Government's support for personal pensions as against collective provision. It seems to me that the Bill is sending out entirely the wrong signals to the pensions industry. This week Post, the insurance magazine, quotes one of the providers of pensions, Mr. Alasdair Buchanan, group marketing manager at Scottish Widows, as saying:
that is, the Bill—
reflects the Government's whole philosophy of favouring the personal element… Companies will increasingly have to ask themselves whether it is worth their while setting up pension arrangements for their staff".
Surely that would be an extremely retrogressive development.
§ Employees do not always realise that in order to provide good pensions, particularly salary related pensions, employers have to pay a great deal more per employee into the scheme than the employees pay themselves. That is particularly true of schemes funded on a "balance of cost" basis and especially true in times of high inflation. For these reasons collective pension provision normally offers employees a very good deal indeed, particularly where there is membership participation with employee trustees. It therefore seems very unfair to give personal private pensions preferential treatment.
§ These anxieties have already been expressed by the Occupational Pension Schemes Joint Working Group. The group, which also includes organisations concerned with the provision of personal pensions, has urged strongly that there should be equity of treatment. Unfortunately, it does not seem to have persuaded the Government, although the Secretary of State has indicated that the present Bill contains temporary arrangements only and that he will be reconsidering the structure of the rebate, including all contracted out arrangements for COMPS and salary related schemes in due course. If that is so, why not do it now? Why cause one section of the pensions industry to feel discriminated against; and why give this extra incentive only to PPPs? I hate to use that overworked phrase "a level playing field" but that is certainly what we shall not have if the Bill goes through unamended.
§ I realise that the amendment which I have tabled may well be technically flawed, but I believe it is important that the principle is debated and the issues clearly understood. If we can gain acceptance of that, then at Report there will be an opportunity for the House to debate a technically less flawed amendment. I beg to move.
§ 3.30 p.m.
§ Lord Henley
The subject of this amendment has been raised several times during the passage of this Bill both at Second Reading in your Lordships' House and in another place. Its effect would be to extend the 1 per cent. additional rebate for personal pension holders aged 30 or over to members of both contracted-out salary-related occupational pension schemes (COSRS) and contracted-out money purchase occupational pension schemes (COMPS). I am not entirely clear whether the intention is to extend the additional rebate to members of all COSR schemes or just to those schemes contracting out since the provisions of the Social Security Act 1986 came into force. This is quite an important point, so I shall come to it later on. It would make an enormous difference to the cost of the provision as to whether it extended to those pre or post the 1986 Act.
It will come as no surprise to the Committee if I remind Members that I cannot accept the amendment 1370 in relation to both COSRS and COMPS, although for different reasons. Perhaps I may start with COSRS. As the Committee will be aware, the COSR scheme is to contract out of the State Earnings Related Pension Scheme (SERPS). Perhaps I may say in response to the noble Baroness, and repeat what I said in response to her noble friend at Second Reading, that the Government have no ideological objection to SERPS. We have always made that quite clear and I did so at Second Reading. Our reforms to SERPS in the mid-1980s were designed to ensure that there was a pension structure in the next century which is affordable to our children and grandchildren, who will be having to pay for it at a time when, due to demographic changes, there will be very many more pensioners in receipt of pensions in relation to the number of people in the workforce.
As the Committee will be aware, for a COSR scheme to contract out of SERPS it must undertake to provide a guaranteed minimum pension in place of SERPS. The Government Actuary, when recommending the new level of the contracted-out rebate to come into effect from April 1993, took full account, as was his duty, of the costs to COSR schemes of providing guaranteed minimum pensions. His recommendation was that 4.77 per cent. was the appropriate level for the rebate and the then Secretary of State accepted that figure subject to a rounding, quite rightly, to 4.8 per cent. The Committee will therefore appreciate that, as COSR schemes have been perfectly reasonably compensated, nothing would be gained by giving them the 1 per cent. addition.
For COMPS—that is the money purchase schemes —the reasons are different but no less valid. Obviously, I must first accept that there are similarities between personal pensions and COMPS, in that they are both money purchase arrangements. However, there are also significant differences and, bearing in mind that the 1 per cent. addition is to meet an immediate need, we felt that it would not be appropriate to extend this temporary measure—again, I must stress that this is a temporary measure, a point to which I shall come later on—to COMPS.
Perhaps I may outline some of the differences. COMPS are set up voluntarily by employers to meet the needs of the employer's workforce. Personal pensions are a direct arrangement between the individual and a pensions provider; the employer generally is not involved. With a COMPS scheme, the employer is liable to make payments into the scheme but with a personal pension he has no such liability. The level of charge is generally lower for COMPS than for personal pensions because a PP is tailored to the individual's requirements while a COMP meets a more general need and reflects the more general economies of scale.
COMP scheme members have payments made into their funds on a regular basis, generally monthly, as earnings are received, whereas personal pension holders, as the noble Baroness will know, have the minimum contributions paid to their provider by the department after the end of the tax year. That allows the department to use the employer's normal end-of-year returns. There is therefore no additional 1371 burden on business. This later payment to the provider does obviously affect the rate at which the investment grows. The earlier payment of the money into COMPS gives a valuable advantage to COMPS which I believe the Government Actuary would estimate to be something like one-half per cent.
Finally—as I said earlier—the amendment would create an additional annual cost of about £60 million if extended to both COSRS and COMPS set up since the provisions of the Social Security Act 1986 came into force. Obviously, if it were extended to all COSR schemes, the figure would go up by a further £800 million. I believe that neither figure can be justified in the present circumstances.
The noble Baroness also claimed that giving the 1 per cent. addition only to those in personal pensions would encourage people to take out personal pensions. I again remind both the Committee and the noble Baroness that the 1 per cent. additional rebate is purely a short-term measure pending the review of the structure on which we shall shortly be embarking. We have undertaken, as part of that review—my right honourable friend repeated that in another place—to look at an age-related structure both for COSRS and COMPS as well as for personal pensions.
I cannot believe that it would be in the interests of any scheme or individual to change the basis of their pension provision just because the 1 per cent. addition is not being applied to COSRS and COMPS. Similar suggestions were made at the time of personal pensions that it would take a lot of people out of perfectly good occupational schemes, whether they were COSRS or COMPS. That did not happen then. We saw a dramatic growth in the number of people taking out personal pensions—there are now about 5 million people with personal pensions—without any fall-off in the number of people in perfectly well run company schemes which were contracted out.
We believe that this 1 per cent. addition is important to provide stability for personal pensions in the coming years. We also believe that it would be an unnecessary and unjustified short-term view for people to move from perfectly good COSR or COMPS into PPs purely for that 1 per cent. addition, given the commitment that both I and my right honourable friend have made that we will look at age-related structures for both COSRS and COMPS as well as for personal pensions. I therefore ask the noble Baroness whether she feels able to withdraw this amendment.
§ Baroness Turner of Camden
I thank the Minister for his explanation. I am not entirely satisfied with it. As I said when I introduced the amendment, I accepted that it was not perfect. I confirm that if it were applied I would not wish that to be done pre-1986. I do not believe that that would be sensible. Nevertheless, I believe that the case for treating all pension schemes on a similar basis is a very strong one. The Minister quotes expert opinion to the contrary, but there does seem to be a very strong view in the industry that the additional 1 per cent. rebate 1372 will have the effect of persuading some people who may be in COMPS, or perhaps even in COSRS, to want to come out and have a personal private pension.
Perhaps I may quote another expert writing in the Post magazine this week:'Those who have COMPS may well switch to a personal pension', said John Woolnough, pensions development manager at Sun Life".There is real concern that the provision of the incentive in this one-sided way will have the effect of encouraging people to come out of quite good occupational schemes. The problem is that many people who are in occupational schemes do not realise —perhaps this may be the fault of such schemes to some extent—that the employer often pays quite a lot to provide them with a reasonable pension on retirement and that their best interests are served by staying in their occupational schemes. Nevertheless, I do not intend to press the amendment this afternoon.
I was very anxious to put the arguments on record in favour of equal treatment to all pension schemes. I shall await with interest the results of the review which the Minister says that it is the Government's intention to undertake. He has said that this is a purely temporary measure; but if it is only a temporary measure, that seems to me to be an argument for treating everybody the same. Since the Minister does not appear to be willing to accept that argument, however, and I do not intend to press the matter to a vote this afternoon, it seems that I have no alternative but to beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 1 agreed to.
§ Clause 2 [Payments into National Insurance Fund out of money provided by Parliament.]
§ On Question, Whether Clause 2 shall stand part of the Bill?
§ Baroness Hollis of Heigham
We propose that Clause 2 should not stand part of the Bill. Clause 2 provides for Exchequer deficit funding to the National Insurance Fund to a maximum of 20 per cent. next year and 17 per cent. in subsequent years. Clearly, the fund will be in deficit; clearly, the National Insurance Fund must balance and, clearly, the only source of additional revenue is central government. So, on those grounds we do not oppose what the Government are suggesting in narrow terms. However, we wish to hold up the passage of the clause because we want to raise again two arguments that we trailed on Second Reading, when we felt that the Minister's response was not entirely satisfactory. The narrow reason for our objection to the clause is that we doubt whether the Treasury contribution sums will be appropriate given the latest unemployment figures—in other words, that the Government are boxing themselves in too tightly. Secondly, we want to raise a wider question about the nature of the National Insurance Fund as such.
On the first point, about the appropriateness of the figures as specified in the Bill—I stress that they are specified in the Bill; it is not being done by statutory regulation —the Bill proposes a Treasury deficit grant to be drawn on of up to 20 per cent. next year and 17 per cent. in subsequent years. Let us remind ourselves 1373 of the assumptions on which the Government Actuary recommended those two figures. I turn first to the levels of unemployment. When the Government Actuary recommended those sums, it was estimated that unemployment would be at 2.74 million this year. However, as of 21st January, the figure is already 2,983,339—that is, 200,000 higher. The Government Actuary expected unemployment next year to be 2.8 million, but all the forecasts now suggest that it will be over 3 million by 18th February and probably 3.25 million by the end of next year. That is reinforced by the headlines in, for example, yesterday's Evening Standard which stated that London is losing jobs at the rate of 400 a day.
In other words, and to put it very simply, unemployment is already exceeding the expected figure for next year. As a result, each additional 100,000 people unemployed by which the Government Actuary has under-calculated will cost the National Insurance Fund £250 million a year in lost contributions and increased benefits. That suggests, looking simply at the unemployment figures, that the estimated deficit will have been under-calculated by something of the order of £1 billion by this time next year.
The second assumption of the Government Actuary which formed the basis of the Bill relates to inflation and wages. Obviously, it is welcome that inflation is falling, but the Government Actuary's figures were based on annual wage increases of 5 per cent. in this and subsequent years. However, we know that public sector employees' wage increases are being pegged to 1.5 per cent. We know that many employers are offering nil increases or are even negotiating to reduce wage levels in the current round. Again, the Government Actuary indicates that for every 1 per cent. that earnings growth falls below his estimate of 5 per cent., there will be a net fall in contributions to the National Insurance Fund of £300 million. Again, if the Government Actuary's figures are out by 3 per cent., as seems extremely likely, that will worsen the fund by another £1 billion over and beyond the £1 billion that is associated with the rising unemployment. Therefore, quite realistically, it already looks as though the figures are out of date by about £2 billion.
However, there are balances. The Government Actuary said that it was advisable to maintain a minimum—not an average, but a minimum—balance of two months' expenditure. It is already clear and we already know—the Minister effectively conceded this on Second Reading—that that balance will be heavily eroded. Ministers accepted in another place that they would be drawing very close to the 20 per cent. cap figure for deficit funding specified in the Bill. It is estimated already that, even on the most favourable assumptions, we will be drawing 19.6 per cent. If unemployment continues as experts expect, and if wage rises diminish as experts expect, I suggest that the figure of 20 per cent. will be exceeded and that the balances will be eroded.
Referring back to some of the comments made by the noble Lord, Lord Boyd-Carpenter, on Second Reading, surely it is better for the Government to make whatever annual contribution may be necessary 1374 each and every year to balance the fund rather than to specify a maximum deficit contribution in advance when the figures are so fragile to changing information on assumptions about unemployment and wage rises.
The problem is intensified because the cap is so tight that, should it require amendment, primary legislation would again be required—in my view, quite unnecessarily taking up the time of your Lordships' House. If we agree that there should no longer be a fixed contribution, as was the case before 1988, why now put in a fixed sum to draw on for deficit funding, irrespective of the out-turn of how many claimants and how many contributors? It cannot be sensible.
The second consideration is a wider one. We all accept—certainly on this side of the Committee—that the fund has to be fully funded, with contributions from the consolidated funds—in other words, from the Exchequer, or in other words, from the taxpayer. It has to be fully funded so we call it a fund, but why? Surely—I merely put this as a question—the concept of a National Insurance Fund is increasingly anachronistic. By virtue of the Government's deficit funding, we are accepting that it is not a ring-fenced fund, as it was before 1988, in which surpluses in one year offset deficits in others. Essentially, it is a pay-as-you-go arrangement in drag, in which current workers finance former workers' contributions and in which the national insurance contribution is now essentially a tax rather than a pension contribution. As my party has argued in the past, we should consider whether it could be consolidated into general taxation.
In other words, the National Insurance Fund is increasingly a fiction as these subventions make clear. Why not, therefore, reconsider this clause, both for the narrower considerations that the calculations on which it is based are already outdated, and for the wider considerations that if we are talking about deficit funding, we are talking about a pay-as-you-go scheme and we should call things what they are? I oppose Clause 2 standing part of the Bill.
§ 3.45 p.m.
§ Lord Henley
The noble Baroness invites me into a fairly wide and general discussion on the whole concept of contributory benefits and the National Insurance Fund. If we accept her arguments that the National Insurance Fund is anachronistic and a mere fiction, I think we are drawn on to the whole question of whether benefits should be contributory or otherwise. I understand that her own party is now considering these things in its commission on whatever it is called and is looking—
§ Baroness Hollis of Heigham
The Commission on Social Justice. I realise that those words are unfamiliar to the Minister.
§ Lord Henley
It is examining everything in great detail as to whether all benefits should be means-tested or whatever. At this stage, I am somewhat confused about what and how far it can examine these matters 1375 because we seem to hear different statements from different members of the Front Bench of the noble Baroness's party opposite. Anyway, I do not intend to follow her into the more general discussions on the National Insurance Fund and the general contributory principle other than to say that I believe in the contributory principle. I do not believe that the fund is anachronistic. I believe that it is still a National Insurance Fund taking contributions from the contributors, who then receive the appropriate contributory benefits according to what they have paid.
Perhaps I may turn back to the first point of the noble Baroness's amendment and the question that she raised. Put very simply, her point was that at 20 per cent. it would not be enough and that in the following years at 17 per cent. it would still not be enough because it is based on the wrong assumptions. Perhaps I may first turn to the assumptions that it is based on, how those are arrived at and why the Government Actuary sticks to them.
When planning for the future it is obviously necessary, as the noble Baroness will appreciate, to make assumptions as to how events might turn out and no one can ever guarantee 100 per cent. that they will be right. Obviously, there will always be scope for debate about the levels of unemployment and earnings which will occur, but when planning government finances I believe that it would make no sense to employ other than a consistent set of assumptions at any one time. That is why the Government Actuary used the assumptions on which the public expenditure plans are based, as published with the Chancellor's Autumn Statement.
I appreciate that the noble Baroness might argue that this would have the effect of lowering the amount of Treasury grant potentially available to my right honourable friend because the estimate of benefit expenditure on which the grant is based would be unduly low or, for that matter, the assumptions on unemployment were wrong. But we have constructed the grant in this way so that the maximum available will be more than within the calls upon the fund. It does not have to be a precise and exact science and we do not think that small variations in estimates will upset the rationale of the grant.
Having said that the Government Actuary must stick to the general assumptions as used by the Government, were the assumptions that he used about rises in unemployment unrealistic would we end up with a reduced balance in the fund by, say, April of 1994? Obviously, I can appreciate the concern of the noble Baroness. The Committee will be aware from the Government Actuary's report that my right honourable friend will need to draw at the maximum, or jolly near the maximum, for 1993–94 as a catching-up exercise. We shall carry forward a reduced balance in April this year, so we shall need to recover that ground to get back to the level that the Government Actuary thinks we should be at, as well as providing finances to meet a projected shortfall between income from national insurance contributions and expenditure on benefits.
1376 The actual fund balance may be less than currently projected. It may, for that matter, be more because events might turn out very differently from the forecasts based on the working assumptions. That is why we plan for the level of balance that we do—to provide us with a substantial safety margin. There is also a substantial safety margin built into the maximum level of Treasury grant that my right honourable friend can seek from 1994–95 onwards. At this stage we are not expecting that anything like 17 per cent. would be needed each year to keep the fund in balance, but if events turn out differently there will be the option, as there is in this year, of using the grant to recover lost ground.
I should also remind the Committee, as I believe I reminded the noble Baroness on Second Reading, that the grant is not intended to guarantee the fund's solvency in all circumstances. There must remain the existing measures for adjusting the various levels, rates and thresholds in the national insurance contribution system and it would be a matter for judgment at the time which measures are most appropriate for keeping the fund in balance. I do not accept that the suggestion made by the noble Baroness that the cap is too tight is valid. There are other means of adjusting the balance in the fund and my right honourable friend will preserve those means.
I must say that I found it very interesting for once to hear the noble Baroness suggesting that we should take yet further secondary powers so that we did not have to come back to this House seeking further primary powers. At least I believe that that was what she was suggesting. We are satisfied that the primary powers that we are seeking for the maximum grant of 20 per cent. this year and 17 per cent. in future years will be sufficient.
I therefore hope that the noble Baroness will feel able to withdraw her opposition to the clause, which I have to say I was somewhat puzzled to hear her voice as that was the one part of the Bill that she generally welcomed on Second Reading. It was the first part of the Bill that her party seemed to be opposing. Now that the noble Baroness has explained herself and has listened to my explanation, I hope that she will feel able to withdraw her opposition.
§ Baroness Hollis of Heigham
I have to say that I remain singularly unpersuaded by the Minister's exposition of the figures. He accepts that his right honourable friend the Secretary of State in the other place has said that, even on the Government's Actuary figures they will be drawing down 19.6 per cent. of the 20 per cent. figure. In so far as those figures are already being outpaced, it is clear that the 20 per cent. cap will be too tight. However, far be it from me to try to save the Government the need perhaps to return with primary legislation to amend a Bill that could have been amended at this stage. With the leave of the House, I shall withdraw my opposition to the clause.
§ Clause 2 agreed to.
§ Remaining clauses agreed to.
§ House resumed: Bill reported without amendment.
§ Then Standing Order No. 44 having been dispensed with (pursuant to Resolution of 20th January): Report received.1377
§ 3.57 p.m.
§ Lord Henley
My Lords, I beg to move that the Bill be now read a third time. If I may, I would like to say a couple of words before we finally pass the Bill. On Second Reading my noble friend Lord Boyd-Carpenter raised an interesting drafting point about Clause 5 which, since we have gone past Clause 5, I wonder whether we can deal with now.
My noble friend was concerned that, as drafted, legislation not yet enacted would be cited as the Social Security Act of 1992 when we are now already in 1993. I have done a little research into this matter. I understand that Clause 5(1) was drafted so that the year mentioned in the short title was the year in which the Bill was introduced. I believe that this is not unusual and it is a matter for the style of drafting of individual parliamentary draftsmen. I note that the Asylum Bill is drafted as the Asylum Act of 1993 whereas this piece of legislation is described as the Social Security Act of 1992. It is the custom in such cases for this to be changed to the appropriate year by the House authorities as a matter of routine during the process of printing. A similar change will also be needed to Clause 2(9). In the circumstances, it is not necessary for the House formally to amend the Bill in this respect, but nevertheless I congratulate my noble friend and thank him for bringing this to my attention and certainly for widening my education.
§ Lord Boyd-Carpenter
My Lords, I am much obliged to my noble friend the Minister for dealing with the small drafting point that I raised at an earlier stage. As I understand it, the Bill will be cited as the Act of 1993.
§ Lord Henley
My Lords, my noble friend is absolutely correct. We both, and possibly the rest of the House, have probably learnt a great deal about the styles of individual draftsmen, but it does seem to be a matter for their own individual styles.
In moving that the Bill be now read a third time, perhaps I may offer my thanks to the Benches opposite and the usual channels for enabling us to proceed to Third Reading so speedily. When shortly we come to consider my right honourable friend's proposals for national insurance contributions and benefits which will apply from April, the House may now debate them, confident that it has done all it can to ensure that the necessary financial conditions are in place.
Obviously on this occasion I do not propose to go over the Bill's provisions again in detail. However, I think that it is fair to say that, despite some debate about how far it addresses the issues facing us, there is broad agreement across the House that the measures are right, even if we sometimes differ on the extent to which they will suffice. In any event, this will not be the last time that the House debates the issues. Whenever my right honourable friend and the Treasury determine that a grant is needed, an order to that effect will be brought before the House. In due course the House will no doubt be called upon to debate proposals arising from the wider review of the contracted-out rebate, the 1 per cent. additional rebate 1378 in the Bill being, as I stressed, an interim measure. As ever, I shall look forward to those occasions. I commend the Bill to your Lordships.
§ On Question, Bill read a third time.
§ Lord Henley
My Lords, I beg to move that the Bill do now pass.
Moved, That the Bill do now pass.—(Lord Henley.)
§ On Question, Bill passed.