Retirement Pensions (Hansard, 17 January 1979)

§ Mr. Orme:

The letter dated 9th November 1978 which I received from my hon. Friend and my reply to him on 30th November 1978 are reproduced below.

Pensions and other long-term benefits were increased in November 1978 by 11.4 per cent. These rates represented the highest ever levels in real terms and raised their purchasing power by more than 3 per cent. The Department of Employment's monthly index of average earnings—new series—published on 17th January shows that between November 1977 and November 1978 earnings increased by 13.2 per cent. Over the same period prices, as measured by the General Index of Retail Prices, rose by 8.1 per cent. compared with the increase in short-term benefits of 7.1 per cent.

The Social Security Act 1975 requires the Secretary of State for Social Services to review the level of benefits each year to see whether they have retained their value and, if they have not, to increase them at least to such extent as he thinks necessary to restore their value". Short-term benefits, such as sickness or unemployment benefit, must be increased in line with prices: pensions and other long-term benefits must be raised in line with earnings or prices, whichever is more favourable to beneficiaries. For the purpose of determining, at the time of the review, the extent to which benefits have to be increased, a forecast is made of the earnings and prices rises which will occur up to the date when the new benefit rates are to come into force. The forecasts made at that time were that earnings 772W would increase by 11.4 per cent. and prices by 7.1 per cent. between November 1977 and November 1978.

Under this system it must sometimes happen that the forecasts turn out to be too high or too low and the courts have held that it does not represent a failure of the Secretary of State's statutory duty if the forecast he uses for the purpose of uprating, though the best available at the time, turns out not to be entirely accurate. There is therefore no statutory requirement to make good the shortfall in last November's uprating, but the Government will neverthless take this shortfall into account, together with the general fiscal and monetary prospects, when the time comes to decide the new rates of benefit that will take effect from next November.

Following are the letters:

"Dear Stan,

Retirement Pension Increases

Following your answer to me on Monday 6th November, I would be grateful if you will let me know what HMG propose to do if in January when, the earnings figures for November are available, they show an increase above 12 per cent. year on year.

I look forward to hearing from you.

Yours Jeff"

"Dear Jeff,

Thank you for your letter of 9th November about the retirement pension increases.

There is no set action which the Government is statutorily bound to take if in January it should be found that the earnings figures for November 1978 show an increase since November 1977 higher than was allowed for in this year's up-rating of retirement pensions. What we do is bound to depend on the situation which emerges. There are sure to be demands that the Government should immediately make good any deficiency, and I do not want to imply that the Government should never take steps of this kind, because there might at some time be a situation where a large sum of money was at issue and hardship would arise. However, two things are worth bearing in mind.

One is that an error of 1 per cent. in the forecast would mean in the case of a person who had been receiving the single rate of pension of £17.50 a shortfall of 17½p. The other is that this year the up-rating has been by reference to the movement in earnings, not just prices. The increase was of 11.4 per cent., which is substantially above the figure which is likely to emerge as the increase in prices over the year November 1977 to November 1978. This represents a positive improvement in the standard of living and not just keeping up with the cost of living. And a third point to throw in for good measure is that no corrective action is taken when a forecast has been too generous—indeed the new benefit rate provides a higher 773W base as the starting point for calculating the next up-rating.

We have in the past had more than one up-rating in one year, for example in 1975 when inflation was severe enough to warrant two in the same year. But in the years since, Government policies have brought about considerable improvements in our economic circumstances and one up-rating a year should now be sufficient. By the time the extent of any shortfall is known we should be very close to embarking on a consideration of the size of next year's up-rating. We shall then need to consider the latest information about the movements of earnings and prices, and any shortfall in 1978 would be among the matters to be taken into account as well.

Yours,

Stanley Orme.