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Social Security Bill

Volume 479: debated on Monday 21 July 1986

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3 p.m.

My Lords, I have it in command from Her Majesty the Queen to acquaint the House that Her Majesty, having been informed of the purport of the Social Security Bill, has consented to place her prerogative and interests, so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.

Bill read a third time.

Clause 2 [ Appropriate schemes]:

The Parliamentary Under-Secretary of State, Department of Health and Social Security
(Baroness Trumpington)

moved Amendment No. 1:

Page 4, line 12, at end insert ("under section 41 of the Solicitors (Scotland) Act 1980").

The noble Baroness said: My Lords, I beg to move Amendment No. 1, and at the same time I should like to speak to Amendments Nos. 3 and 14. Perhaps I should tell your Lordships that there is a printing mistake in Amendment No. 14. Where it says,

"of income support of family credit"

it should read,

"of income support or family credit".

These amendments are required to adapt the Bill to existing Scottish legislation. I beg to move.

On Question, amendment agreed to.

(".—(l)The Social Security Pensions Act 1975 shall be amended as follows.

(2) In Section 28 the following subsection shall be inserted after subsection (6)—

  • "(6A) The Secretary of State may at any time lay before each House—
  • (a)a report by the Government Actuary on the additional contracted-out percentages appropriate to schemes the average age of whose members exceeds by a specified amount that assumed for the purposes of determining the contracted-out percentages appropriate in all other cases, and
  • (b)the draft of an order providing for such additional contracted-out percentages to apply in any case where this is requested and the request is supported by such evidence as may be prescribed,
  • and if the draft is approved by resolution of each House the Secretary of State shall make the order in the form of the draft").

The noble Lord said: My Lords, I beg to move Amendment No. 2. As the House is aware, the Bill provides that an employee may choose to switch from being contracted into the state earnings-related pension scheme or from being a member of a contracted-out occupational scheme to a personal pension scheme. That personal pension scheme would itself be contracted out. The employer and the employee would pay contracted-in rate national insurance contributions and the Department of Health and Social Security would return to the provider of the personal pension scheme an amount equivalent to the rebate given in the case of contracted-out occupational schemes. Thus the minimum contribution which this rebate constitutes is flat rate and takes no account of age.

The personal pension schemes are money purchase schemes in that the ultimate benefit is not defined but the contribution to be made by the employer and the employee is defined. The benefit is the product, whatever it may be, of such contribution. The older an employed person, the more expensive it is to provide a pension. A different annual contribution is necessary at each stage of entering the scheme to provide the same amount of pension.

Furthermore, pensions relating to increments of earnings due to inflation, wage negotiations or promotion become progressively more expensive to fund for a given amount of pension as the employee gets older. But, as we saw, the minimum contribution paid by the Departmemt of Health and Social Security in order to contract out is flat rate. That flat rate contribution paid annually for a young person will provide that person at retirement with more pension than it will a person who enters the personal pension scheme 20 years later shall we say, and the cost to the young person will increase in respect of increments of earnings due to inflation, wage negotiation or promotion.

Thus, it will be attractive to the young person to switch to a personal pension scheme but it will become less attractive as that person gets older. Those involved with occupational pension schemes have been greatly concerned that the consequence of a flat-rate minimum contribution may well be to induce an unduly high proportion of young people to switch from defined benefit occupational schemes to personal pension schemes. If they do so, it is likely that at a later date they may want to move back into the state earnings-related pension scheme when they find that the minimum contributions will not keep up their pensions in line with increased earnings in the personal pension scheme.

This of course would frustrate the Government's aim. Secondly, where younger employees have been induced to leave defined benefit schemes, those schemes will become progressively more expensive to the employers as the average age increases. Employers may well wish to seek to cut their rise in cost by contracting in to SERPS, again frustrating the Government's intention: or there may be a substitution of money purchase occupational schemes for defined benefit schemes, which I do not consider to be a desirable outcome.

In a contracted-out defined benefit scheme, the varying value of the flat-rate rebate has its effect on the cost of the employer averaged between all his employees and not on individual benefits. If many younger members leave the scheme, they deprive the scheme of their favourable rebates and so make the rebate inadequate for the remaining group of members. Those fears have been expressed by bodies such as the Confederation of British Industry, the National Association of Pension Funds and the Nationalised Industries Pensions Group.

In Committee, I moved an amendment which sought to deal with the problem by making the minimum contributions age related. That amendment was defeated and of course I accept that the minimum contributions will not in fact be age related. But the noble Baroness, Lady Trumpington, acknowledged that flat-rate minimum contributions will make personal pensions attractive for the younger person. She argued that nevertheless significant numbers of young people would not be encouraged to switch from an occupational scheme to a personal pension scheme. She said that that would be because employers would not have any obligation to contribute any more than the minimum to personal pension schemes and those switching would have to be prepared to forgo the balance of the employer's contribution. In addition, they would have no statutory right of return to the occupational scheme once they had opted out.

I agree that those are restraining factors, but how powerful they would be we simply do not know. We know that there is inducement to the younger person to switch and we know that there are certain restraining factors, but we do not know whether large numbers in fact would switch.

This amendment is designed to meet that situation. The idea for it comes from the Nationalised Industries Pensions Group. First, the Secretary of State could lay before each House at any time a report from the Government Actuary on the additional contracted-out percentages appropriate where the average age of schemes was in excess of the normal. He could also lay before each House a draft of an order for those additional contracted-out percentages to be applied in any cases where that was requested and supported by the required evidence. In other words, a higher rebate would be paid where the average age of a scheme had risen significantly. That would enable those schemes that were receiving the additional rebate to continue on a contracted-out basis.

Those are long-term powers which would only be used if the confidence of the noble Baroness in the Government should prove misplaced and the fears expressed by so much expert opinion should prove justified. I very much hope that the noble Baroness will accept this amendment, and I beg to move.

My Lords, I shall say only that my noble friends and I completely support this amendment which has been so ably moved by the noble Lord, Lord Banks.

My Lords, we had a very full debate in Committee about whether age relation should be introduced into the structure of national insurance rebates and DHSS contributions for people who contract out of SERPS. At the end of that debate, your Lordships' views were sounded and the voting showed a clear majority in favour of the flat-rate system which the Government, after very careful consideration, have decided to adopt.

I do not therefore want to take up a great deal of your Lordships' time by going over all the pros and cons of this matter again. There are of course things to be said in favour of age-relation. The noble Lord has explained some of them today. But there are also grave difficulties with that approach. The administrative complexities it opens up are horrific to contemplate: and there are two things to be said about the dire consequences which the proponents of age-relation claim will follow from a flat-rate system.

We are very sceptical indeed whether these dire consequences will materialise. Actuarial predictions, like economic predictions, have a way of being confounded by the behaviour of human beings, who do not all carry pocket calculators and actuarial tables around with them. People are influenced by many factors, not least inertia and caution, in making decisions which profoundly affect their financial affairs. We simply do not believe that a flat-rate system of rebates and contributions is going to tempt significant numbers of young people, who would otherwise not be tempted, to opt out of their established contracted-out occupational schemes, particularly now that the 2 per cent. incentive addition will not be available to them. Those who claim that this is a real threat are discounting not only human nature, but also the employer contributions which people will normally relinquish in making this decision and the fact that they may have no right to return to the employer's scheme when they are older.

The noble Lord suggests that younger people who take contracted-out personal pensions will contract back into SERPS when they are older, effectively opting to the financial detriment of the state. Again, although we understand the thinking behind those arguments, we are not convinced that it will be a large enough problem in practice to warrant upsetting the simple structure of rebates and payments which we propose in the Bill. It is a problem that we can look at if and when it actually arises. The contracting-out terms are not set in concrete. The government of the day can always adjust them more or less radically in the light of the circumstances of the day.

Furthermore, let us suppose that these dire consequences materialise, as the more pessimistic forecasters tell us they will. As I said in Committee, the government of the day will always be free to alter the future terms of contracting-out to set things on an even keel again. The flat-rate structure of rebates and payments is a move to make pensions more simple and comprehensible to the people whose lives they affect and for that reason alone deserves a proper trial and the support and encouragement of your Lordships. It is very often the simple things that work in the face of all the complicated objections that are piled upon them. I hope that the noble Lord will withdraw his amendment.

My Lords, I should like to make it clear that I was not in any way challenging the fact that we were to have a flat-rate system. As the noble Baroness said, we discussed that at an earlier stage of the Bill, and I am not seeking to re-open the question. I am sure that it would not be proper for me to do so. But I am saying that some people who have great experience of pension schemes and are operating them all the time—for instance, the CBI, the National Association of Pension Funds and the nationalised industries pension group—believe that there could be a move of younger people out of occupational pension schemes, which could have a destabilising effect.

The amendment would not come into operation at all if the noble Baroness is correct in saying that there would not be such an exodus. She may be correct. We cannot say; we do not know. I cannot see why the Government find it so difficult to accept the amendment, since the provision would come into operation only if they are wrong, and they are confident that they are not. But the point has been made, and I hope that a careful note will be taken of it. There are great anxieties on the point, but, nevertheless, I seek leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 17 [ General power to modify statutory provisions]:

3.15 p.m.

(" (aa) the Sheriffs' Pensions (Scotland) Act 1961;").

The noble Baroness said: My Lords, I have spoken to this amendment. I beg to move.

On Question, amendment agreed to.

Clause 18 [ Additional pensions]:

(d) is a parent, working part-time who is in receipt of child benefit,").

The noble Lord said: My Lords, the reasons for asking for women who are working part-time and who are in receipt of child benefit to be given the option of having those years excluded are as follows. In the Bill we have excluded those who would be working full-time but who are not working because they are taking care of their babies. However, it so happens that many more women are working part-time while looking after dependent children. It seems to me that it is unfair that they should not be given the exclusion that women who are not working because they are looking after their children are given.

Having responsibilities protection, as the Bill envisages it, though vital, will not have quite the significant impact on mothers as was assumed. What has been found is that the median time before returning to work for women with dependent children has fallen from 7.7 years to 3.4 years.

Married women account for about three-quarters of all part-time employment. Women who have dependent children are much more likely to be working part-time than full-time, and are the majority of such workers. A recent Department of Employment survey of women's employment found that over twice as many women returned to part-time than to full-time work after childbirth; 52 per cent. compared with 21 per cent. The same survey also concluded that the:

"increase in women's participation in recent years is due mainly to increased participation among women in their 30s and 40s and is largely in part-time work rather than full-time".

Although mothers are more economically active now. it is in part-time rather than in full-time work. A 1980 survey on women and employment showed, too, a substantial downward occupational mobility over women's family formation period, mainly on return to work after first birth. That has obvious implications for their earning capacity in their years of part-time work.

In general terms also we know that women earn less than men when we compare full-time earnings, and significantly less when in part-time work. The average gross weekly earnings for full-time employees on the 1985 figures given by the Department of Employment are £192.40 for men and £138.80 for women, although over a third of women earned less than £100 weekly. The important point for my purpose is that the average gross weekly wage for women in part-time work was £37.80 for manual and £41 for non-manual work. The figures also showed that 46 per cent. of part-time women workers were in semi-skilled personnel service and unskilled manual work, as compared with only 22 per cent. of full-time women workers.

Therefore, part-time women workers are also less likely than part-time men workers or full-time workers to be able to improve their second pension by moving out of SERPS and into a more favourably based occupational scheme. They are very much less likely to be able to do that, so for them the pension has to be SERPS. They do not have much choice. The majority of women spend some of their potential working life out of the job market while engaged in full-time child care. That is taken care of in the Bill. A more significant number of years are spent in part-time work by women with dependent children. They spend many more years doing that than out of the job market altogether. We want that time to be ignored in the same way that the other time is being ignored. That is a far better way to deal with the matter. I hope that the Government will see the wisdom of doing that and will accept the amendment. I beg to move.

My Lords, this amendment seeks to extend to parents who are working part time, and are entitled to child benefit, the special protection of SERPS rights which we have undertaken to provide for parents who stay at home to look after their children under age 16, and also for disabled people and those who stay at home to look after them.

We do not deny that the abolition of the 20 best years rule will adversely affect some people who retire next century. Our priority all along has been to protect the position of those who will be hardest hit. That is why we have concentrated on protecting those who are unable to work for long periods because they stay at home to bring up children or to care for a disabled person, or who do some work but have low earnings which are below the lower earnings limit for national insurance contributions.

We are very well aware that in some circumstances a person who stays at home to look after a child could be better off in pension terms than someone who qualifies for child benefit but returns to work on a part-time basis, and earns above the lower earnings limit. But I have to say that some of the examples which have been quoted are based on untypical earnings levels and produce somewhat exaggerated results. In fact, something like half of female part-time workers earn below the lower earnings limit, so provided they qualify for child benefit for a child under 16 they would qualify automatically for protection of their SERPS rights. It is right that they should be afforded that protection. So far as women earning higher amounts (most of whom will eventually return to full-time work) are concerned, it does not seem unreasonable that they could be expected to make greater personal provision for their retirement than women with no earnings.

We are aiming for a simple and workable scheme. Past lessons have shown that the quest for completely even-handed treatment has resulted—as I am sure your Lordships would agree—in an impossibly complicated social security system. A system which in effect compared the earnings in each child caring year with the average earnings in other years to see whether the person would be better off or worse off would be extremely complicated to administer and to explain to pensioners and prospective pensioners. It is most important that we keep the arrangements as simple as possible so that people can understand what they are entitled to.

The noble Lord, Lord Pitt, said that women part-time workers' average earnings are £37·80. That is below the national insurance contribution lower earnings limit, and those women would have their SERPS rights protected.

I want to stress that the powers in Clause 18 of the Bill are already wide enough to allow part-time workers to be protected if a future administration were to decide that there was an adequate case for doing so. There is plenty of time to sort this out because the measures for protection of SERPS rights will not need to be applied until the end of the century. I should also add that if it were ever decided to extend the protection, DHSS records are held in such a way that qualifying cases would be able to be identified. We have taken steps to protect those who will be hardest hit by the abolition of the 20 best years rule, but for the reasons I have explained we do not see a case for going further than that.

I hope that what I have said will have persuaded the noble Lord, Lord Pitt, to withdraw his amendment.

My Lords, I support the amendment in the name of my noble friend. It seems that the Minister does not understand some of the implications for women who undertake part-time work. There are all kinds of reasons why a woman may want to continue with employment even though her children are small. One is that she may want to retain an interest in employment so that she does not lose touch with her job or profession. She may want to move into full-time employment later.

The new provision of SERPS puts such women at a disadvantage. The Minister has said that women who do not return to part-time work and who remain at home with their children could be in a better financial position with regard to their pensions than women who return to part-time work. That provision is a disincentive to women who wish to return to work if they have children. That is discrimination against women and puts them into a difficult position. I have said in the House on a number of occasions that women do not only suffer an immediate financial loss when they work part time; they often lose promotion prospects and pension entitlement.

The Bill underlines that loss of pension entitlement. If my noble friend's amendment were accepted, it would encourage women to continue with their employment or career part time, knowing that at least their pension entitlement would be based not on the average of their earnings when their children were small but that of the years when they were earning full time.

My Lord, with the leave of the House, I think I mentioned most of the arguments that the noble Baroness has quoted. However, I am sure that your Lordships would agree that it would be wrong to treat people in part-time work more favourably than those with the same level of average earnings derived from a lifetime of full-time work. That would be the effect if the amendment were carried. I think that I dealt with the other arguments during my original reply.

My Lords, the Minister has failed to recognise that a woman is working part time and yet spending the rest of her time looking after a child. I cannot understand why the Government do not appreciate what they are doing. The woman is now left with a choice of staying at home full time and not entering the labour market or taking jobs with such short hours that she does not go beyond the limit which would allow for her pension to be taken care of. I cannot believe that any government seriously want that. The Government seem to want that. I cannot believe that your Lordships want that. I shall divide the House.

3.28 p.m.

On Question, Whether the said amendment (No. 4) shall be agreed to?

Their Lordships divided: Contents, 78; Not-Contents, 128.

DIVISION NO. 1

CONTENTS

Addington, L.Kennet, L.
Airedale, L.Leatherland, L.
Amherst, E.Listowel, E.
Ardwick, L.Llewelyn-Davies of Hastoe, B.
Attlee, E.Lloyd of Kilgerran, L
Banks, L.Lockwood, B. [Teller]
Blease, L.Lovell-Davis, L.
Blyton, L.McNair, L.
Briginshaw, L.Mishcon, L.
Brockway, L.Molloy, L.
Bruce of Donington, L.Morton of Shuna, L.
Burton of Coventry, B.Mulley, L.
Caradon, L.Nicol, B.
Carmichael of Kelvingrove, L.Oram, L.
David, B.Paget of Northampton, L.
Davies, L.Phillips, B.
Davies of Penrhys, L.Pitt of Hampstead, L. [Teller]
Dean of Beswick, L.Ponsonby of Shulbrede, L.
Denington, B.Rochester, L.
Diamond, L.Sainsbury, L.
Donaldson of Kingsbridge, L.Seear, B.
Elwyn-Jones, L.Shepherd, L.
Ennals, L.Silkin of Dulwich, L.
Ewart-Biggs, B.Stallard, L.
Ezra, L.Stedman, B.
Fisher of Rednal, B.Stewart of Fulham, L.
Gallacher, L.Stoddart of Swindon, L.
Graham of Edmonton, L.Strabolgi, L.
Grimond, L.Strauss, L.
Hampton, L.Taylor of Blackburn, L.
Hatch of Lusby, L.Taylor of Gryfe, L.
Hayter, L.Taylor of Mansfield, L.
Hooson, L.Tordoff, L.
Hughes, L.Underhill, L.
Hunt, L.Wallace of Coslany, L.
Jeger, B.Wedderburn of Charlton, L.
Jenkins of Putney, L.Wells-Pestell, L.
Kaldor, L.Wigoder, L.
Kearton, L.Williams of Elvel, L.

NOT-CONTENTS

Abercorn, D.Boardman, L.
Ailesbury, M.Boyd-Carpenter, L.
Alexander of Tunis, E.Brabazon of Tara, L.
Auckland, L.Brocket, L.
Bauer, L.Brougham and Vaux, L.
Belhaven and Stenton, L.Bruce-Gardyne, L.
Beloff, L.Butterworth, L.
Belstead, L.Byron, L.
Birdwood, L.Caithness, E.
Blake, L.Cameron of Lochbroom, L.
Blyth, L.Campbell of Alloway, L.
Carnegy of Lour, B.Macleod of Borve, B.
Carnock, L.Margadale, L.
Chelmer, L.Maude of Stratford-upon-
Colville of Culross, V.Avon, L.
Constantine of Stanmore, L.Merrivale, L.
Cowley, E.Mersey, V.
Cullen of Ashbourne, L.Milverton, L.
Davidson, V.Monk Bretton, L.
De Freyne, L.Montgomery of Alamein, V.
Denham, L. [Teller]Morris, L.
Denning, L.Mowbray and Stourton, L.
Digby, L.Munster, E.
Drumalbyn, L.Murton of Lindisfarne, L.
Dudley, B.Newall, L.
Ebbisham, L.Nugent of Guildford, L.
Effingham, E.Pender, L.
Ellenborough, L.Penrhyn, L.
Elles, B.Peyton of Yeovil, L.
Elliot of Harwood, B.Plummer of St.
Elliott of Morpeth, L.Marylebone, L.
Elton, L.Portland, D.
Fraser of Kilmorack, L.Reay, L.
Gainford, L.Reigate, L.
Gardner of Parkes, B.Reilly, L.
Glanusk, L.Richardson, L.
Glenarthur, L.Romney, E.
Gray of Contin, L.St. Davids, V.
Gridley, L.Saint Oswald, L.
Grimthorpe, L.Salisbury, M.
Hailsham of SaintSaltoun of Abernethy, Ly.
Marylebone, L.Sandford, L.
Halsbury, E.Selkirk, E.
Hanson, L.Sempill, Ly.
Harmar-Nicholls, L.Shannon, E.
Henderson of Brompton, L.Sharpies, B.
Hesketh, L.Skelmersdale, L.
Hives, L.Somers, L.
Home of the Hirsel, L.Stodart of Leaston, L.
Hood, V.Strathspey, L.
Hooper, B.Sudeley, L.
Hylton-Foster, B.Swinton, E. [Teller]
Jessel, L.Terrington, L.
Kimball, L.Teviot, L.
Kimberley, E.Tranmire, L.
Kinloss, Ly.Trumpington, B.
Kinnaird, L.Tweedsmuir, L.
Kitchener, E.Vaux of Harrowden, L.
Lane-Fox, B.Vickers, B.
Lauderdale, E.Vivian, L.
Layton, L.Waldegrave, E.
Lindsey and Abingdon, E.Whitelaw, V.
Long, V.Wynford, L.
Lucas of Chilworth, L.Young, B.
Lyell, L.Zouche of Haryngworth, L.
McFadzean, L.

Resolved in the negative, and amendment disagreed to accordingly.

My Lords, I understand that the Statement has now been cleared, so I shall not call Amendment No. 5 for the time being.