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Lord Lucas moved Amendment No. 3:

Page 2, line 14, leave out ("1st April 1995 (as the case may be)") and insert ("in the case of lists compiled on 1st April 1995 or 1st April 1996, from 1st April 1995").

On Question, amendment agreed to.

Clause 1, as amended, agreed to.

Remaining clauses agreed to.

House resumed: Bill reported with amendments.

Social Security (Reduced Rates of Class 1 Contributions) (Salary Related Contracted-out Schemes) Order 1996

6.25 p.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish) rose to move, That the draft order laid before the House on 13th March be approved [14th Report from the Joint Committee].

The noble Lord said: My Lords, in moving the order, I shall speak to the other two orders on the Order Paper.

When SERPS was introduced in 1978, the government of the time recognised that some employers already provided good quality pension schemes--good quality meaning offering defined benefits based on salary, as indeed did SERPS. Those that could show they offered benefits as good as those in SERPS--the guaranteed minimum pension or GMP test--were rewarded for continuing to do so by giving employers and employees in such schemes the right to pay a reduced rate of national insurance contributions. Thus the contracted-out rebate was born.

If I may continue the history lesson for a little longer, the present Government saw the potential further to encourage pension provision by the private sector through allowing money purchase schemes run by employers to contract out and by giving employees with no occupational pension the opportunity to provide for themselves through appropriate personal pensions. The rebate given as an incentive to these schemes from 1988 opened up new options for individuals and employers at the same time as averting a major public spending crisis

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in the next century, when the burden of pay-as-you-go funding for SERPS was set to fall on a much smaller working age population.

We have continued to take initiatives to strengthen private sector pension provision, and the Pensions Act 1995 was a major exercise in improving the security of pension schemes. We also took the opportunity to make the system of contracting out more attractive.

This brings me to the recent past. The complexity of administration of GMPs for contracted-out salary related schemes, the implications of the Barber case and the unsuitability of the flat rate rebate for money purchase arrangements led us to overhaul the contracting-out arrangements.

We responded to complaints of complexity by breaking the current links between state and private second tier provision. For salary related schemes, we introduced a new test of overall scheme quality that threw off the tortuous complexities of the GMP system; and we designed a system of age-related rebates for those contracting out on a money purchase basis specifically tailored to meet the needs of this type of pension provision.

This brings me to the orders that are on the table before us today. My right honourable friend the Secretary of State has a statutory duty to review the contracting-out terms at least every five years. In this case we have reviewed after four in order to implement the Pensions Act reforms from 6th April 1997.

The current rebate was set in 1993. At that time the uncertainties surrounding the Barber case led us to consider the value of GMP accruals over the following three years only; we subsequently allowed that rebate to continue until reviewed under the provisions of the Pensions Act 1995.

The independent Government Actuary issued a consultation document in August last year. He took account of the responses to that document in preparing his report to the Secretary of State. The Secretary of State has taken account of his advice in preparing his own proposals, which were laid before the House together with the three orders and the Government Actuary's report on 13th March.

This setting of the rebate is a technical actuarial matter, but I shall do my best to unravel some of the mysteries that lie behind these orders in my explanation. I will take the contracted-out salary related (COSR) rebate order first, and then the other two orders, each of which have similar considerations.

The current rebate is based on the cost to salary related schemes of providing a guaranteed minimum pension and at the last review was set at 4.8 per cent. Of this 1.8 per cent. goes to employees and 3 per cent. to the employer.

The new rebate is calculated on a different basis--the cost of providing benefits of an actuarial value equivalent to the SERPS given up. This makes the COSR rebate higher than it would have been if reviewed again under the previous system, as it must reflect the greater liabilities now undertaken by schemes which contract out--for example, inflation proofing.

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The Government Actuary took account of these and other reforms to the contracting-out system from 1997 along with the changes in SERPS provision and up-to-date actuarial assumptions. He reached the conclusion that the appropriate rebate for COSR schemes would be 4.6 per cent. from April 1997. My right honourable friend Peter Lilley considered his advice and decided to set the rebate at that level. We propose that 1.6 per cent. should go to the employee; as now 3 per cent. will go to the employer.

Currently some 10 million people are members of salary-related schemes and these form a key element of pension provision in the UK. We remain committed to the widest possible choice of pension provision and believe our proposals will ensure a sound basis for their continuing operation and development.

I turn now to the proposed age-related rebates for those who contract out into appropriate personal pensions and contracted-out money purchase schemes. Those who contract out of SERPS at present in either of these two ways receive the same flat rate rebate as those in salary-related schemes, except that those aged 30 or over with a personal pension receive an additional 1 per cent. A flat-rate rebate does not suit the needs of older people with personal pensions, as the initial investment has to be higher to match the state pension forgone the nearer a person gets to retirement. This extra amount recognises the need for the rebate to be higher for such people.

We have said for some time that age-related rebates are the next logical step. The orders before us relating to COMPS (contracted out money purpose schemes) and personal pensions set out for each the respective age-related rebates for each the next five years, starting in April 1997. The COMPS rebates will range in the first year from 3.1 per cent. of relevant earnings for the youngest members to a maximum of 9 per cent. They will be available partly as a flat-rate 3.1 per cent. deduction from national insurance contributions; this deduction will be split, with 1.6 per cent. for employees and 1.5 per cent. going to the employer. Any additional age-related payment up to the total ceiling of 9 per cent. will be paid directly to the scheme by the Department of Social Security at the end of the tax year.

The rebates for personal pensions will, as at present, be paid directly to the member's scheme at the end of each tax year. The rates will vary in the first instance from 3.4 per cent. for the youngest members to a maximum of 9 per cent. We have capped both types of age-related rebate at 9 per cent. rather than allow rebates at much higher levels for older scheme members during the early years of the scheme. But we have nevertheless ensured that the great majority of those already with appropriate personal pensions should be best advised to remain with them both now and in the future. By imposing a 9 per cent. cap we have been mindful of restraining the cost to the taxpayer of all this too.

We have also sought value for money in deciding on the level of expenses and charges of pension providers to be used in calculating these age-related rebates. Necessary and reasonable charges and expenses of providers and the correct amount to be invested on

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behalf of the member are both crucial in calculating appropriate levels of rebate. In deciding this we have taken the Government Actuary's advice on what were the charges of the more efficient providers. This again reflects our aim to be fair to pension holders, pension providers and taxpayers alike.

I firmly maintain that we have in these orders successfully achieved those intentions in setting the age-related rebates at a level that should ensure that those who have contracted out through money purchase or personal pension schemes will find it worth their while to continue to do so.

I hope I have been able to shed sufficient light on these three orders to show your Lordships why we are confident that these measures will help us to meet our commitment to maintaining and, where possible, increasing levels of contracting out, without unduly burdening the public purse. The cost to the taxpayer in the first year of the new rebate will be £7.7 billion in terms of revenue forgone by the National Insurance Fund. However, by 2020 we expect annual savings to the National Insurance Fund in SERPS expenditure to outweigh the annual revenue then forgone on the rebate. By 2030 we anticipate savings nearly double the costs and by 2050 savings some three times greater than costs. That represents a major burden which we have lifted from future generations.

Thanks to the success of our policies up until now, over three-quarters of employees have already opted out of SERPS into non-state schemes of one kind or another, where their money is invested to pay for their pensions when they retire. In the meantime the money strengthens the economy by injecting long-term savings. The total value of investment in British pension funds is nearly £600 billion. As your Lordships have heard me say before, that is not just more than any other country in Europe but more than all the other member states put together. The OECD suggests that the UK may be able to repay its national debt and start to accumulate assets by 2030, leaving us better placed than almost any other country to meet the challenges of global competition in the next century.

Our proposals build on these undoubted strengths. Continuing to make available as wide a choice as possible of contracting-out routes, they are based firmly on the continuing partnership between the state and the private sector. Giving maximum scope for individuals to provide for their future, they meet the needs of taxpayers present and future. Our proposals underpin the almost uniquely strong position of the UK in meeting the challenges of the 21st century. I commend the orders to the House. I beg to move.

Moved, That the draft order laid before the House on 13th March be approved [14th Report from the Joint Committee].--(Lord Mackay of Ardbrecknish.)

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