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Standing Committee Debates

Draft Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2006

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Ninth Standing Committee
on Delegated Legislation

The Committee consisted of the following Members:


†Hugh Bayley

Alexander, Danny (Inverness, Nairn, Badenoch and Strathspey) (LD)
†Bailey, Mr. Adrian (West Bromwich, West)
†Balls, Ed (Normanton) (Lab)
Battle, John (Leeds, West) (Lab)
†Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
†Boswell, Mr. Tim (Daventry) (Con)
Dunne, Mr. Philip (Ludlow) (Con)
†Eagle, Angela (Wallasey) (Lab)
†Heppell, Mr. John (Vice-Chamberlain of Her Majesty’s Household)
Herbert, Nick (Arundel and South Downs) (Con)
†Laws, Mr. David (Yeovil) (LD)
†Lucas, Ian (Wrexham) (Lab)
Penrose, John (Weston-super-Mare) (Con)
†Singh, Mr. Marsha (Bradford, West) (Lab)
†Snelgrove, Anne (South Swindon) (Lab)
†Timms, Mr. Stephen (Minister for Pensions Reform)
†Watkinson, Angela (Upminster) (Con)
Geoffrey Farrar, Committee Clerk
† attended the Committee

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Thursday 23 March 2006

[Mr. Hugh Bayley in the Chair]

Draft Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2006

8.55 am

The Minister for Pensions Reform (Mr. Stephen Timms): I beg to move,

    That the Committee has considered the draft Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2006.

I warmly welcome you to the Chair, Mr. Bayley. You will be more familiar with the terrain than most because of your previous ministerial responsibilities.

The draft order sets out the proposed rates of contracted-out rebates, to apply from April next year. Before I set out what those rates will be, I shall explain what the rebates are. When somebody contracts out of the state second pension, the state has a reduced future liability—it pays less pension in the future. In return, the state provides a rebate on that person’s national insurance contributions.

How the rebate is delivered depends on the type of pension scheme. In occupational schemes, both employees and employers pay lower national insurance contributions on earnings between the lower and upper earnings limits. If the scheme is a money purchase occupational scheme, the reduction is smaller but the scheme also receives an end-of-year payment, calculated by the ages of the workers in it, from Her Majesty’s Revenue and Customs. Personal pension scheme members receive the whole rebate as an end-of-year payment, and the amount is again age-related.

The Secretary of State has a statutory duty to review the contracted-out rebates at least every five years. Rates can be reviewed more often if necessary. To assist the Secretary of State in the review, the Government Actuary is required to report to him on the level of rebate rates. The last full review of the level of rebates was in 2001 for rebates taking effect from April 2002. The statutory requirement was that reviewed rates needed to be in place by April 2007, and that they should be announced with at least 12 months’ notice—that is, by the end of this month, hence this Committee sitting.

The present review began last year. The Government Actuary issued a consultation paper in September 2005 on the actuarial assumptions he proposed to adopt for his report to the Secretary of State. He gave the responses to that consultation careful consideration before drawing up his final report. The Government Actuary’s advice to the Secretary of State has been taken into account in the proposals before the Committee.

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The proposals in the Government Actuary’s report reflect his view of the factors affecting the cost of providing benefits of equivalent actuarial value to the state pension forgone as a result of contracting out of the state second pension. Those include, for example, the continued low levels of real interest rates, expectations of continued improvement in pensioner longevity and the expenses of private pension provision. The Government Actuary’s and Secretary of State’s reports were laid before the House, with the draft order, on 1 March.

The Government Actuary’s recommendations, if accepted in full, would result in a significant increase in the overall cost of rebates from April 2007. We thought carefully about whether that would be the right thing to do. As the Committee knows, the Government are working toward a long-term settlement on pension reform, and we are considering the Pensions Commission’s recommendations, including far-reaching recommendations on the future of contracting out. In order not to pre-empt those decisions, which I hope will be made on the basis of as broad a consensus as possible, we concluded that we should take a cost-neutral approach and that a big increase in expenditure on rebate rates would not be appropriate at this time. We have had to weigh up the recommendations of the Government Actuary and the need to consider the future of pension policy. That is the balance that lies behind the proposals before the Committee today.

The first of the proposals to apply from 2007 is in respect of salary-related occupational schemes. At present, if an individual is contracted out of the state second pension, the employer and employee pay national insurance contributions that are reduced in total by 5.1 per cent. of earnings between the lower and upper earnings limit. That will be increased under the proposals to 5.3 per cent. We are increasing the rebate, but not as much as the Government Actuary recommended. It is proposed that all of the increase in the flat-rate rebate for salary-related occupational schemes will go to employers, in recognition of the benefits provided by such schemes.

For personal pensions and money purchase occupational schemes, we accept the Government Actuary’s recommendations on increases in the age-related rebates, but we have decided to reduce the cap from its present level of 10.5 per cent. to 7.4 per cent. The cap was introduced by the previous Government to restrain the cost to public finances. In 2007–08, reducing the cap to 7.4 per cent. will affect those aged 44 and over in personal pension schemes, and those aged 48 and over in money purchase occupational schemes.

For personal pension schemes, those over the age at which the cap bites are likely, other things being equal, to be better off not contracting out of the state scheme. That will depend on each individual’s personal circumstances and expectations about the future, and it will be up to them to weigh up whether to contract in or out after taking into account information received from their scheme and, if appropriate, from their adviser.

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To achieve a cost-neutral approach, which is appropriate for the reasons that I set out, we have struck a balance. The proposed package offers an increase in rebate rates for salary-related occupational schemes without setting too low a cap for money purchase schemes.

It is a legal requirement that the rebate rates are reviewed at least every five years. Therefore, the timing of this review is fixed—it is five years since the last review set the rates from 2002—but rebate rates can be reviewed again whenever we think that it would be appropriate to do so. A decision on timing will be taken once the way forward on pension reform is clear, but it would be perfectly possible, following the pensions White Paper, to set revised rebate rates from April 2008.

Let me say a little more about the context of pension reform. Contracting out is one of the most complex areas of pension policy. The Pensions Commission recognised that when it said that, were it to create a pension system from scratch today, it would not include contracting out. It recommended removing that option for defined contribution schemes, and phasing it out for defined benefit schemes by 2030. As the commission itself said, its recommendations require a great deal of discussion.

National pensions day last Saturday was a great success. More than 1,000 people in six satellite-linked locations around the country debated the issues and expressed their views. We are planning a White Paper on pensions which will set out our proposals, including on contracting out. We have set five key tests that our package of reform must meet. The new framework must promote personal responsibility, and it must be fair, affordable, simple and sustainable.

For today, though, we have taken the pragmatic view that a significant increase in expenditure on contracted out rebates would not be appropriate at a time when longer-term pension reform issues are still being considered. I am satisfied that the order is compatible with the European convention on human rights, and I commend it to the Committee.

9.4 am

Mr. Tim Boswell (Daventry) (Con): I begin by welcoming you to the Chair, Mr. Bayley. I do not think that I have sat under your tutelage before, and it is comforting and reassuring to me and, I am sure, to others on the Opposition Benches and those on the Government Benches that we have an expert in our midst—and, of course, another expert in the shape of the Minister himself, who explained an extremely complex set of provisions with characteristic clarity and economy of language.

Lest there be any doubt, I confess that I do not claim to be an expert in this area. I had some Front Bench responsibility for such matters some years ago—I nearly said, “in the good old days”, when, unlike now, occupational pensions were still extant and flourishing—but I am substituting for a colleague on the principle of “just in time”, having been chosen for the panel at 8.38 am this morning. Nevertheless, whether or not I am an expert, I can reflect one or two
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concerns that are substantive and, to some extent, systemic in relation to the Government’s approach to pension policy.

The Minister said, rightly, that the order is technical, and I have no interest in a debate on the minutiae of the small print, in the literal sense of that phrase. Were I an actuary—a fantasy that I do not often entertain—I might well have gone through every last word so see if I could find the misprint. One is always conscious, with such detailed provisions and their different cells of figures, that there may be problems when there is a misprint. I am not claiming that there is one but I hope that the Minister will repair matters if one is discovered.

It would not be helpful to concentrate on minutiae, although before you become alarmed, Mr. Bayley, I think it would be equally inappropriate for the Committee to discuss the whole future of pensions policy. I am pleased to have your nod on that, because it was not my intention.

The Minister has spoken about the past, and about the formal policy background to the measure, and has also looked forward to the future, with the Pensions Commission report and the Government’s consideration of it. In view of that, and national pensions day, it is appropriate to say a word or two about the shoulders of the proposal, because the way in which the Government have approached such a highly technical matter is symptomatic of some or our concerns on formulation of wider policies.

It would be wrong not to recognise my concern about the turn of events since 2001 when the equivalent order was last laid. After that time I fleetingly had some responsibility for pensions policy, and I called it the good old days. Since then, and only since then, there has been a loss of some five sixths of final salary pension schemes—five sixths of final salary schemes that have ever closed have done so since that date.

Going slightly further back—and here there will be an issue over apportionment of “blame”, if blame be appropriate—it is a matter of record that more than 60,000 occupational pensions schemes have closed since 1997. There is a major problem—an acknowledged problem—with the industry, and indeed that is the whole context of the Pensions Commission report.

The Chairman: Order. I should remind the hon. Gentleman of the promise he gave that the debate will be on the order before us, not on wider pensions policy.

Mr. Boswell: Indeed, Mr. Bayley. You anticipated the exact moment of inflection in my remarks, because I was going to say that if one examines the number of people in occupational pensions schemes who are wholly or partly contracted out from the national insurance scheme—the subject of the order—then since 2000–01, there has been an inexorable decline each year. Between 2002–03 and 2003–04, there was a decline from 11.68 million to 11.06 million. When the Minister talks about a cost-neutral solution I assume that the basis of his calculation is that the rebates—
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even if being increased, in percentage terms, under his proposals—will be payable on a smaller number of occupational pensions schemes participants, so that the net cost will be roughly zero. I appreciate that it is not a precise science, but he may wish to explain the point to the Committee in his response.

There is a real tension in the policy, because it is obviously in the interests of a Chancellor to save money in the short term by paying a level of rebate that is lower than that recommended by the Government actuary. That will build up additional liabilities for a future Chancellor in terms of the obligation to pay state pensions at a later date.

We cannot have this debate without considering briefly at the Government’s response last week to the ombudsman’s findings on failed occupational pension schemes. The Government’s response to the order has been exactly in tandem with that to the ombudsman’s report last week. They have disagreed with an official report and somehow made it clear that although the agreement is apparently substantive, the motivation is cash and what can or cannot be afforded.

I want to turn specifically to the order and our concerns about it. The background is the Government Actuary’s report, which I have look through, that there should be—I emphasise this—an increase in the national insurance rebate to 5.8 per cent. to take account of a number of factors to which the Minister referred, notably life expectancy but also yields on investments and so on. One must always be careful when one may be cross-checked by an actuary and I did the figures twice, but I estimate that it is a 13.7 per cent. increase on the rebate as recommended to 5.8 per cent., compared with the existing 5.1 per cent. The Government are conceding a 5.3 per cent. rebate, which amounts to a 3.9 per cent. increase.

That will have some interesting consequences. First, the Minister will be aware that the estimate of the joint working party on occupational pensions which responded to the Government Actuary’s consultation was that the rebate should rise to 8 per cent. I am not going to get into a bidding race, but it is worth at least recording that professional people came to that much more dramatic conclusion for an increase in the rebate.

Equally, Mercer, which is well known to many members of the Committee, estimated that the Government’s decision to go for cost neutrality against the Government Actuary’s recommendation would cost occupational pension schemes the equivalent of £900 million a year for the next five years. That is a substantial sum, but is dwarfed by the Chancellor’s annual raid on pension funds to the extent of £5 billion, although I suspect that you would not want me to do down that road, Mr. Bayley. In all seriousness, the difficulties faced by occupational pensions schemes, including reductions in their membership, may be convenient for the Minister in cutting the short-term costs of rebates, but will build up substantial problems, as he knows, for the future. Any additional difficulties he puts in their way, including not responding to the objective analysis of
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the Government Actuary, are likely to make their position worse. That is something they could do without at the present time and is the last thing they want.

I would like the Minister to tell the Committee clearly—more clearly than in his introduction—the basis on which the Government rejected the Government Actuary’s advice. The Government’s response is consistent with what the Minister said this morning—I am not arguing that it was not—and states:

    “in the present fiscal circumstances and given the current consideration of pensions policy outlined in the second paragraph to this report, I do not believe it would be appropriate to accept”

the Government Actuary’s

    “recommendation. I have therefore decided to increase the reduction in the rate of National Insurance contributions to 5.3 per cent.”.

The Government goes on to say that that will be concentrated on the employer, secondary, contribution rather than the employee—a fact that he did not refer to.

The Minister must explain why that decision was taken. Was it for cost reasons, or because the whole of pensions policy is, to put it bluntly, in the air, and Ministers did not want to commit themselves, or encourage individuals to commit themselves, to additional pension obligations that might have to be unscrambled in the future? I leave that as a neutral comment on what will happen in the light of the Government’s deliberations on pensions.

If the Government really wanted to freeze the status quo, one would think that they might have stayed at 5.1 per cent., but they seem to have produced some formulation to do with the overall cost, which I think must be netted against the number of participants. The Minister has not made that clear yet. He should tell the Committee what the savings to the Exchequer will be in the short term, and what the build-up of longer-term contingent liabilities to the national insurance fund will be. This factor, to which I have already referred, is the essence of my concern.

This is a point of substance, because this issue is important to the conduct of existing occupational pension funds, many of which will view the Government’s deliberations with a degree of scepticism, not an anticipation of immediate change. I do not know how long the process of pension reform will take, but it is quite possible that another quinquennium could pass before the whole thing is concluded. To freeze matters on the apparently specious grounds that “We might make a change in the future,” is not a sufficient argument.

Angela Eagle (Wallasey) (Lab): I am listening carefully to the hon. Gentleman’s argument. Would his party’s policy be to grant in full the increase that the actuary wanted on the national insurance contribution rebate for contracted-out schemes?

Mr. Boswell: That is, of course, not a decision that I would take, and I do not have the decision on it. It is for the Government to say why they have rejected the advice. I invite them, through the Committee, as a matter of scrutiny, to say why that advice was rejected.

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All this is about a pattern. The Government are happy to hide behind official advice when it suits them and they want to take a particular decision, but they are equally happy to reject official advice when it does not suit them. I readily agree that that is the prerogative of Government. To use an old phrase, Ministers decide and advisors advise. Ministers are accountable for what they do, and are obliged to explain their reasons to the Committee. I do not like the Minister putting up specious or incomplete explanations to cover what is a blatant attempt to save cash at the long-term cost to the Exchequer and the short-term disbenefit of the occupational pensions industry and its participants.

May I use an analogy? This might be the most inappropriate analogy that I could possibly use in relation to this Minister, and is probably much more appropriate to me. As a child, I was a fan of the Billy Bunter books—I gather that my hon. Friend the Member for Upminster (Angela Watkinson) is also a fan—and it seems to me that what we have heard from the Minister is simply an argument that will be familiar to any reader of those books, which goes along the lines, “I didn’t steal the postal order, and anyway I didn’t use it to buy a cake, and when I bought the cake, it really wasn’t very nice you know.” At the moment, it is no more plausible than that. Ministers owe it to the Committee to be a little clearer as to their motives for rejecting official advice.

9.19 am

Mr. David Laws (Yeovil) (LD): I, too, welcome you to the Chair, Mr. Bayley, and I thank the Minister for his opening comments. I also congratulate the hon. Member for Daventry (Mr. Boswell) on standing in as Conservative spokesman on this issue at such short notice.

It is good to have an opportunity to touch on the pensions debate so soon after a Budget that had very little to say about pensions and shortly after the Government’s rejection of another independent judgment on pensions—that is, the ombudsman’s report on occupational pensions. The Government seem to be getting into a habit of rejecting independent views and assessments of the issue of pensions, as the hon. Member for Daventry said.

Our party takes the view of the adviser for the National Association of Pension Funds, who recently said:

    “The pensions system would be a lot easier to understand without contracting out. But, so long as contracting out exists, the rebates must be set at a level which adequately compensates pension schemes for the costs and risks they are taking off the Government’s hands.”

The NAPF adviser went on to say:

    “Instead, the new rebates have been set without taking into account how recent changes such as the introduction of the Pension Protection Fund have increased the cost of benefit provision and transferred risks from the Government to employers.”

It is striking that, in the order that we are debating, the Government seem to have specifically rejected the Government Actuary’s Department’s independent
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advice about the level at which the rebate should be fixed. Recently, the Secretary of State, in giving an explanation for that, said that,

    “in the present fiscal circumstances and given the current consideration of pensions policy”,

he would reject the Government Actuary’s Department advice, which was to raise the rebate level from 5.1 per cent. to 5.8 per cent. The Minister used a similar argument today, saying that the Government would not accept the advice of the Government Actuary’s Department so as not to pre-empt the Government’s decisions the about pension reform.

We need to look a little more closely at the two explanations given. The first explanation given by the Secretary of State related to current fiscal circumstances. That seems to imply that there is some budgetary constraint that means that the Government cannot afford to increase the rebate to the level recommended. That raises fairly fundamental issues: should the Government ignore the independent advice of Government Actuary’s Department simply because they think that there is an affordability problem?

The decision also seems in sharp contrast to what the Chancellor of the Exchequer told us yesterday in his Budget statement, when he boasted that the public finances were in a superb state. I think he said that he could afford to cut taxes if he wanted to, but he decided to use the money in some other areas instead. There was no indication at all that “present fiscal circumstances”, as the Secretary of State described them, meant that the Government would not be able to afford the suggested change.

Perhaps the Minister could clarify what the precise costs would be of fully implementing the Government Actuary’s Department’s proposals. Perhaps he could explain whether the current fiscal circumstances have been a barrier to implementing the Government Actuary’s Department’s recommendations, or whether the Secretary of State was wrong to suggest that current fiscal circumstances were an impediment to implementing the changes.

The second reason given for not implementing the changes was that we are in the middle of a great pensions debate. The Minister referred to the consultations going on at the moment. We heard about the very exciting-sounding satellite-linked locations, and about the five tests that the Government will introduce before they make a decision on pensions policy. That, of course, is directly relevant because the Government are saying that they will not implement the changes because pensions reform is just around the corner.

The hon. Member for Normanton (Ed Balls) is here today; he will remember the last time that the Government drafted five tests. It was back in 1997 or 1998, and they related to policy on the euro. We were supposed to be almost ready to join the euro. I remember my predecessor as Member for Yeovil saying, in 1997 or 1998, that the Government had crossed the rubicon; they were almost there, and making a decision on that issue was just around the
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corner. The five economic tests had been clearly set out. A decade on, we are no closer to getting a decision out of the Government on that issue.

The Chairman: Order. I should perhaps point out that, although previous speakers have strayed fairly wide, the hon. Gentleman is now straying way beyond the subject under discussion. It would be for the convenience of the entire Committee if we were to stick to the subject of the order itself.

Mr. Laws: I am coming back to it immediately, but this matter is relevant. The Government are saying that they cannot possibly implement these changes to the rebates now because a decision on pensions reform is right around the corner. Even if I do not return to subject of the euro again—following your instructions, Mr. Bayley—I think there is a serious issue in respect of whether there is any prospect of pensions reform immediately around the corner. All the signs this week—the reports that there have been meetings between the Prime Minister, the Chancellor, and the Secretary of State for Work and Pensions that have not come up with any resolution about the direction of pensions policy, and the suggestion that the Chancellor wanted to include measures in the Budget of only yesterday that would have pre-empted and contradicted Lord Turner’s report on pensions—suggest that we are far away from achieving a consensus on pensions policy. Even if the Prime Minister, the Minister for Pensions Reform and the Secretary of State are committed to the Turner report, there is no suggestion at all that the Chancellor of the Exchequer is. However, there is every suggestion that he will play a very important role in determining the outcome of the debate.

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