First Standing Committee on Delegated Legislation
Tuesday 20 March 2001
[Mr. Eddie O'Hara in the Chair]
Draft Social Security (Reduced Rates of Class 1 Contributions) (Salary Related Contracted-out Schemes) Order 2001
4.30 pm
The Minister of State, Department of Social Security (Mr. Jeff Rooker): I beg to move,
That the Committee has considered the draft Social Security (Reduced Rates of Class 1 Contributions) (Salary Related Contracted-out Schemes) Order 2001.
The Chairman: With this it will be convenient to consider the draft Social Security (Minimum Contributions to Appropriate Personal Pension Schemes) Order 2001 and the draft Social Security (Reduced Rates of Class 1 Contributions, and Rebates) (Money Purchase Contracted-out Schemes) Order 2001.
Mr. Rooker: I am delighted to see you in the Chair, Mr. O'Hara.
The orders are fairly simple and straightforward, but there are a few technicalities that I need to explain. Without wishing to wind anyone up, these orders are about the Government subsidising the private sector pension industry. They are about rebates from national insurance and I shall set out the figures in due course.
The Secretary of State for Social Security has a statutory duty to review the contracting-out terms at least every five years. When someone contracts out of a second-tier pension scheme provided by the state, the state has a reduced liability and will have to pay less pension in the future. In return, the state pays a rebate, either as a reduction in the amount of national insurance contributions to be paid in occupational schemes, or it makes a payment direct to a money purchase scheme of a proportion of the national insurance contributions that have been paid.
The last full review of rebates was in 1996 for rebates payable from April 1997. Members of the Committee will realise that we work a year in advance in the pension industry. When we chop and change these provisions, the industry needs good time to make the necessary changes. There was an interim review of the contracting-out terms for money purchase schemes in 1998, which changed the level of rebate for the last three years of the current five-year period.
The present review began last August, when the independent Government Actuary issued a consultation paper and responses were considered. The Government Actuary reported to the Secretary of State and his advice was taken into account in these proposals. The reports of the Government Actuary and the Secretary of State were laid before the House with the three draft orders on 1 March.
There have been changes in pensions since the last full review in 1996. At that time, many people were heading for poverty in retirement, even though they had worked for most of their lives. We cannot change that in an instant, as I have made abundantly clear when dealing with the legislation that has been passed in the past few years. We have focused on turning the situation around. As part of our strategy, we are committed 100 per cent. to supporting occupational schemes, which have been a great success in this country since the war. Not everyone has access to an occupational pension scheme. We are introducing stakeholder pensions from April this year, which are a low-cost flexible means of saving into a privately funded scheme.
The shape of such schemes will vary according to the wishes of the employer. They are not required to run them, but need only give access to them. They are not required to pay into them, but can do so if they wish. They are not liable for the performance of the scheme. As long as they employ five or more people, they must give access to a regulated stakeholder pension scheme. All things being equal, that assumes that they do not already have group personal pension or occupational pension schemes.
We have reformed the state earnings related pension scheme with the introduction of the second state pension, which will start accruing from April 2002. It is designed to give more help to the low paid, carers and people who have had to deal with disability in their working lives. There is no doubt that there will be substantial numbers of gainers from that change. Four million carers and people with long-term disabilities will gain, as will 14 million other people, over and above what they would have had from SERPS had we not introduced the state second pension.
The level of rebate will be based on the benefit given up by contracting out the state second pension to a private scheme. For low and moderate earners—I will give the figures in a moment—the amount given up will vary according to whether a person is in an occupational or personal pension scheme. The three orders take that into account. For those with a personal pension, the age-related rebates reflect the enhanced accrual rates in the state second pension, with earnings divided into three bands. The order for minimum contributions to appropriate personal pension plans therefore looks different from previous similar orders. The accrual rates for the state second pension are not the same as those for SERPS.
Moderate earners—those earning between £9,500 and £21,600 in 1999-earnings terms—will receive all the extra help available from the state second pension, through enhanced rebates. Low earners—those earning between the lower earnings limit and £9,500 in 1999-earnings terms—will get part of the increased help through an enhanced rebate on the level of their actual earnings. They will also receive a state scheme top-up to reflect the low earner's boost in the state second pension.
As was the case when we were debating the state second pension, if we had some visuals, we could explain how the low-earners boost works. However, hon. Members who have read the consultation paper can see that it is there for those earning less than £9,500 in 1999-earnings terms.
The rebate regime for occupational pensions is different because it reflects the industry's desire not to have to change its systems. The proposed rebate in the two orders for occupational pension schemes is based on the cost of providing benefits equivalent to what they would have been had SERPS continued.
Those who will, under this scheme, receive less than they would have done from the state second pension—all low and moderate earners—will get a state scheme top-up. In other words, the state second pension is much better than SERPS for low earners. The combination of enhanced rebates and top-ups means that there will be no hard choices for people about whether to stay in, or join, a private pension scheme. That is in line with our long-term aim of increasing funded pension provision.
Mr. Steve Webb (Northavon): Will the Minister flesh out his last point? He seems to be saying that when an occupational scheme is contracted out, its members will get a rebate equivalent to what the SERPS entitlement would have been, but where there is a shortfall between that and the state second pension entitlement, there will be a state scheme top-up. That sounds very bureaucratic, with lots of fairly small sums for lots of low earners. Can he give us some idea of the sums and the numbers of workers involved? Is all the effort worth it, or might there be a simpler way of proceeding?
Mr. Rooker: I cannot give the hon. Gentleman an answer off the top of my head and if I remain unable to do so today, I will write to him. He made a fair point. We have designed the system so that decisions that have to be made are not difficult. Workers will not have to weigh up whether they will be worse off jumping one way or the other.
I freely admit that there will always be hard choices for those on the margin. Someone might be £500, or even £1,000, above or below the figure of £9,500 that I used—obviously, the figure would be different today, as that is in 1999-terms. Such people may not know whether they are always going to be in the low-paid category and, therefore, have a hard choice to make. However, people will not have to be worried about losing out, or jumping the wrong way.
The orders contain significant increases in rebate levels for all forms of contracting out. In other words, there is more Government money for the private sector. The Government Actuary has advised a rebate increase to take account, principally, of the reduction in the yield on pre-retirement and post-retirement investments, and of increased life expectancy. As I remember, when the Government Actuary re-examined the issue, it was found that life expectancy had increased by two years over a 10-year period, which is a substantial change over the long-term period of a person's pensionable life. That subject came up in our debates on the minimum funding requirement proposals.
Other factors that the Government took into account were the changing nature of the membership of contracted-out salary-related schemes, the increased average age of members and the fact that there are more female members. We desperately need to get more women into decent pension schemes. In the past, there has been an outrageous gender gap in terms of women missing out on pension schemes.
In addition, we have decided to raise the cap on the age-related rebate on money purchase schemes. I shall turn to the detailed figures in a moment. The cap was introduced in 1997 by the previous Government, essentially to restrain the cost to public finances and to discourage those who may not have sufficient time to benefit from a funded pension arrangement. Those reasons remain valid. The cap is 9 per cent. at present. Keeping it at that level would mean that those who will be about 50 when the orders come into effect, and who are currently contracted out, would have had to weigh up whether they would be better off contracting back into the state scheme for the final part of their working life.
Our proposal to increase the cap to 10.5 per cent. means that all those who are contracted out at present can continue to be. The effect of the changes on the cost of the rebate—that is, from the Government to the private sector—is an increase of £1.4 billion in the first year, rising to an extra £2.2 billion by the end of the five-year period in terms of revenue foregone. Those are sizeable increases.
Looking more closely at the rebate for contracted-out salary-related pension schemes, the current total flat-rate reduction in national insurance contributions is 4.6 per cent. of earnings between the lower and the upper earnings limit. The proposed increased rate is 5.1 per cent. At first sight, that looks like an increase of 0.5 per cent. That is not so—it is much higher than that, because the rebate is based on the value of the state benefit given up. As I said, for occupational pension schemes it continues to be assessed against what SERPS would have been if it had continued. The previous Government progressively reduced the value of SERPS for everyone reaching state pension age in the current decade and beyond. For example, last April, when we were discussing the Child Support, Pensions and Social Security Bill, lower accrual rates were introduced in respect of SERPS, which had been legislated for a dozen or more years beforehand. We concentrated on inherited SERPS, but many other changes were coming into force.
If there had been no change in the Government Actuary's assumptions, and no increase in the cap on age-related rebates, the level of the flat-rate rebates would have fallen from 4.6 per cent. to 4 per cent., because the value of SERPS benefit given up would also have fallen for those reaching the state pension age some time in the future. Therefore, the real increase is from 4 per cent. to 5.1 per cent—an increase of more than a quarter in the level of the rebate for salary-related schemes. The whole of the increase in the flat-rate rebate for occupational pension schemes is to go to employers in recognition of the benefits provided by those schemes. They carry the risk in any case, as anyone who has ever argued about surpluses understands.
The increases take the total cost of rebates from the national insurance fund to £10.3 billion in the first year. The actual broad-brush income to the national insurance fund is about £50 billion a year. It would be £10 billion more were it not for the rebates. We are making that amount of state contribution to occupational and personal pension provision because we think that it is a good idea and a successful operation. It represents a substantial amount of revenue foregone. We estimate that at the end of the five-year period, the total of £10.3 billion will rise to £12.8 billion. Obviously, some people wish that the Government Actuary had gone further. Nobody has ever come to my Department saying, ``Will you pay us less?'' Some people take a pessimistic view of future yields and investments. However, the rebates and sizeable increase proposed are a substantial current cost. They reduce the state's future liability to pay unfunded pensions, but they must be paid for now because of the nature of the national insurance system.
The Government have a duty to balance the needs of current and future pensioners. We have committed a further £8.5 billion to help today's pensioners and we propose to increase the amount to build up funds for future pensioners by an extra £9.9 billion over five years from 2002. We remain committed to encouraging private pension provision, as we have made clear in legislative changes and other comments.
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