Select Committee on Social Security Minutes of Evidence

Examination of witnesses (Questions 300 - 319)



  300. Let us suppose, therefore, that Parliament and the Government decide not to change the contributions at all and the contributions run at the existing level rather than being reduced as there is, as you say, some scope, so we do not change the contributions. What will happen to the Fund and the surplus in the Fund?
  (Mr Daykin) In principle the Fund will go on increasing. If nothing is done to adjust either the benefits or the contributions and the circumstances turn out to be something in line with what we are projecting within the range of our alternative assumptions then the Fund will grow quite large.

  301. Is it a difficult problem to be specific about how large it will grow given certain assumptions?
  (Mr Daykin) No. In fact, for the sort of reviews we do for some other countries, including our offshore parts of the British Isles, we regularly report on the projected size of the Fund. I just presented a report in the Isle of Man a couple of weeks ago where they do have the same contributions and the same benefits as in the UK and the Fund is building up quite fast. In our report we look at how the Fund will build up, what size it will be and what they might do with that. I think in the UK the assumption has always been that the Fund will not be allowed to build up to a large amount and that either contributions or benefits will be adjusted to keep them in balance.

  302. Despite that assumption, it will be quite possible and relatively simple to predict precisely what the consequences would be?
  (Mr Daykin) Not to predict precisely but to make some projections of where it might be going to on some assumptions about the rate of return on the fund.

  303. You have answered this question very straightforwardly which is surprising as I thought we would have some difficulty with it because Frank Field said that he asked this question and was told that the answer could only be provided at a disproportionate cost.
  (Mr Daykin) It would require a whole lot of calculations that are not necessarily being done at the moment. I am saying it is quite possible to do them if it was going to be useful information.

Mr Dismore

  304. In the answers to the questions that I was asking about that I got the impression that over the long term it would all balance out.
  (Mr Daykin) That is on the assumption that the contributions are adjusted to meet the criterion which we have set in the past of keeping the fund balanced.

  305. The inference I had was that the adjustments would be relatively minor compared to present levels of contribution. Was that the wrong impression?
  (Mr Daykin) Comparatively minor over the next 20 or 30 years, although we could move to a position where, say, one per cent of the 20 per cent contribution rate was redundant in the sense of meeting the immediate out go, which would lead to quite a considerable building up in the fund. Once you get past 20/30 then it would start to grow quite rapidly because the contribution rates would be much too high to meet the benefit costs.
  (Mr Young) I think we need to realise that there is an enormous number of assumptions about what the future will be like underlying all these estimates and whilst the central assumptions show that the contribution rate could fall, it is only by about 1.5 per cent over 30 years. It would not take enormous changes in the future in mortality, in fertility levels, in economic circumstances, in the difference between earnings and prices to produce different results. There is some sensitivity analysis which gives an indication, but I like to think of the contribution rate being broadly stable in future rather than thinking that there is emerging here a certainty of a pot of gold. Maybe our best estimate is that there would be, but we have got to be careful not to assume that that will definitely happen.

Dr Naysmith

  306. Are all of these assumptions taking into account the current Tax Credits Act and also the changes that are proposed in the Welfare Reform Bill? Presumably they will have an effect on the benefits. Will they increase or decrease benefit expenditure?
  (Mr Lewis) The quinquennial review was done before these Acts were in place, but they will be taken on board in due course.

  307. Surely you have got some estimate of them now.
  (Mr Lewis) There have been estimates in various PQs and the financial memorandum. In the context of the National Insurance Fund as a whole, even though the changes to the individual benefits might be significant in themselves for that benefit they are not tremendously significant overall. The vast majority of the outgo in the fund is basic pensions and SERPS, so you can make some quite large changes to some of the other benefits without having a massive effect on the Funds. It is certainly true that if widows' benefit and incapacity benefit are cut the contribution rate needed in future will fall slightly, but you are not talking about significant amounts in relation to the actual contribution rates needed to balance the fund.
  (Mr Daykin) We anticipate more significant changes as a result of the proposals in the Green Paper to change SERPS and maybe introduce a second state pension (S2P) and therefore we expect that there will be a Government Actuary's financial memorandum accompanying the Bill which introduces those proposals in the next session.

  308. What sort of effects will the planned reduction of SERPS for widows have which is due from April 2000? Presumably you have taken that into account.
  (Mr Lewis) In the draft that we have started to put together of the effects on the new Bill of introducing S2P what we aim to do is to start from the figures in the last quinquennial review which were prepared before the Welfare Reform Bill and to move forward to show what the effect of the Welfare Reform Bill will be and to get to a baseline of current legislation and then from there to show the effects of S2P. We do have some preliminary estimates of some of these, but the thing has been going backwards and forwards and it is not entirely clear what the precise changes will be as yet. We have done some preliminary estimates on this.

  309. This is legislation that predates that, is it not?
  (Mr Lewis) I assume you are talking about the widows in the Welfare Reform Bill or are you talking about SERPS?

  310. We are talking about SERPS.
  (Mr Daykin) The cost of that has already been built in from our estimates in 1986 when these changes were introduced and we have published estimates through a Parliamentary Question of the effect of changes which have been suggested as a result of the Welfare Reform Bill. The impact of making the changes to widows' benefit which was provided for back in the mid-1980s has been built into our estimates ever since then.

  311. What you are saying is that the cost of postponing implementation of the SERPS for five years or for whatever period would not be very significant, are you not?
  (Mr Lewis) I was thinking you were talking about the Welfare Reform Bill changes to widows' benefit. I misunderstood you.

  312. So it would be a significant effect?
  (Mr Lewis) In the first year if they were to defer the 50 per cent inheritance it would cost about £60 million and that is a sort of half-year effect. In the next year it is probably going to go up to £150 million and it will grow slowly thereafter. In the end it will get to quite large sums of money, but we have not yet sat down and worked out what the effect from the contribution rates to the fund would be partly because we have not yet found precisely what the policy will be on this issue.

  313. From everything you have said it sounds as if it will not be a tremendously marked effect. You were talking about the fund building up and worrying about what we are going to do about having too big a fund.
  (Mr Lewis) The fund has got a balance at the moment. All the quinquennial review approach does is work out the contribution rates to balance the expenditure. The contribution rates that are there will mean if we were to pay those the fund will not build up because the benefit expenditure equals the income. If you kept up with the current contribution rates, which are slightly higher than the ones we require, the fund would build up slowly. We do not know what would happen about those contribution rates, but there will certainly be a cost depending on what the Government chooses to do about the SERPS inheritance, when they do it and how they do it. Assuming that cost comes out in the National Insurance fund, which one might expect, then we would have to reflect that in the projections as and when we know what the policy is. At the moment we have not done any projections on what the contribution rate might be under different policy objectives.
  (Mr Daykin) It is fair to say it would be relatively marginal because the cost of widows' benefit is quite small compared to the cost of retirement pension. In the current year we are talking about £1 billion for widows' benefit and something like £37 billion for retirement pension. So changing the widows benefit is not going to swing the total contribution rate.

  314. That was the impression I had gained from what you were saying in answer to a number of other questions. It is nice to have that confirmed. There was a Pre-Budget statement by the Chancellor yesterday. Is there anything in it that makes any significant alterations to the fund? Is there anything that you would say we had better have a look at because of what he said yesterday?
  (Mr Daykin) I had hoped that had there been something then we would probably have been advised beforehand on the consequences.

  315. That is an interesting point. That was my next question. To what extent does the Treasury consult you about changes in the Budget before they are announced?
  (Mr Daykin) Of course there are issues as the Treasury are autonomous in terms of what they do before the Budget, but generally speaking I think if they were going to make some significant changes to the contribution structure then they would be coming to us to get advice because we have the best facilities for modelling what the impact would be. As regards yesterday's statement, the benefit increase that was announced was essentially what we had been working on and in line with the general policy up to now of increasing in line with prices. It still is not certain whether the fuel allowance will come out of the fund or not. If it does it is still relatively insignificant in terms of the balance.

  316. Quite a lot of people in evidence to this Committee have been giving us the impression that there is not really much difference between National Insurance contributions and taxation. Clearly there are all sorts of technical details. Is that a sensible way to look at it? When we talk about having a fund, most people think there is a fund accumulating giving a benefit to the individual who is paying in and here we have got rather a different sort of fund that sort of accumulates to a certain extent but is really funded by current taxpayers to pay out for people later on. Is there a real philosophical difference or is it just a matter of nomenclature?
  (Mr Daykin) I think there is a philosophical difference. Personally, I think it is quite an important distinction in terms of people's entitlement and their feeling that it is something that they have made a contribution towards even if there is no direct link between their contribution and what benefit they get. There is still a linkage there which helps people to feel that they can take the benefits with honour, which I think is quite different from the situation where you have benefits which are provided out of the state budget which often tend to be treated in some other way. However, having said that, I think the level of public understanding of these issues is probably not great and therefore people may easily mistake National Insurance contributions for a form of tax and the importance of it may be lost on many people.

  Dr Naysmith: Thank you.


  317. In paragraph 1.18, page 13, are you saying that you decided to upgrade state pensions relating to earnings rather than prices? You make it quite clear that the contributions would need to be increased. If I am reading this paragraph right you are saying that working people would still be relatively better off even if they were paying higher contributions. I cannot quite cope with that. Could you explain to me why that is the case?
  (Mr Daykin) I think this is just looking at the overall improvement of the real standard of living which we anticipate taking place. If we assume over the period of these projections that earnings are increasing on average by 1.5 per cent a year more than prices the real standard of living will be increasing quite substantially over that period.

  318. That is a compound increase, is it?
  (Mr Daykin) It is a compound effect, yes and making a change to the percentage of that salary or earnings which is taken away from them for contributions at the sort of levels that we are talking about would not be enough to significantly eat into that compound growth of real earnings over the period.

  319. So even with an earnings link the people who are not working would still be relatively disadvantaged over a period of time?
  (Mr Daykin) No, that is not the point. The point is that those who are working and contributing would still be a lot better off than they are today even if we were deducting contributions to enable the earnings link to be maintained. What is affordable in the sense of what people would be willing to pay is in a sense an open question and it is very much a political rather than a technical question. The sort of percentages that we are talking about here even with the earnings uprating are still modest compared to what some other Continental countries pay, but then they have a very different structure of retirement provision.

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