Wednesday, 9 March 2011.
My Lords, before the Minister moves that the first statutory instrument be considered, could I remind noble Lords that, in the case of each statutory instrument, the Motion before the Committee will be that the Committee do consider the statutory instrument in question. I should perhaps make it clear that the Motions to approve the statutory instruments will be moved in the Chamber in the usual way. If there is a Division in the House, the Committee will adjourn for 10 minutes.
Mesothelioma Lump Sum Payments (Conditions and Amounts) (Amendment) Regulations 2011
Considered in Grand Committee
My Lords, I start with the formalities. It is a requirement that I confirm to the Committee that these provisions are compatible with the European Convention on Human Rights. I am happy to so confirm.
I am pleased to introduce two sets of regulations, increasing by 3.1 per cent the lump sum amounts paid under the Pneumoconiosis etc (Workers’ Compensation) Act 1979 and the mesothelioma scheme set up by the Child Maintenance and Other Payments Act 2008. These new amounts will be paid to those who first satisfy all the conditions of entitlement on or after 1 April 2011.
The increases in the amounts paid under these two schemes are not part of the process that increases the benefit rates across the whole range of social security benefits. As a result, there is no statutory obligation to increase the rates paid under these schemes. However, previous Ministers have made a commitment to annually increase the rate of payment benefit alongside the general increases applying to all social security benefits. I am very pleased to make the same commitment.
At this point I must briefly refer back to the increases made to the payments under these two schemes in 2010. As a result of the economic downturn, the retail prices index in September 2009—the date at which the rates for the following year are fixed—was negative for the first time in 50 years. Notwithstanding that negative figure, the rates were increased in 2010 by 1.5 per cent. It was planned that this increase would then be set against the amount of the increase in 2011—in other words, the planned increase for this year would be reduced from 3.1 per cent to 1.6 per cent. I am pleased to report that this reduction in the increase for this year will not be made. It is proposed instead to increase the rates under these two schemes by the full 3.1 per cent. I am sure that noble Lords will endorse this approach. I would also add that, as the retail prices index at September 2010 was 4.6 per cent, not seeking to offset the 1.5 per cent interim payment now means that people will not lose out from the change to using the 3.1 per cent CPI figure as the measure of inflation to increase the rates of payment in 2011-12. The figures happen to be the same.
Noble Lords will be aware of the background to these Acts but it might help if I briefly recap. A person who is injured or contracts an industrial disease as a result of their work may sue the employer for damages. However, some diseases can take a long time to develop and may not be diagnosed until many years after the exposure to the agent that caused the illness. This is particularly so for asbestos-related diseases such as mesothelioma.
The understanding of diseases linked to exposure to asbestos continues to expand. It is now recognised that it may be up to 40 years between the original exposure and the linked disease, which is longer than first thought. Because of that long latency period, the employer responsible may no longer exist and it may be very difficult for that person to obtain compensation. The Pneumoconiosis etc. (Workers’ Compensation) Act 1979 was introduced to help such people by paying lump sum compensation to sufferers of certain dust-related diseases, or their dependants, if they are unable to pursue civil action. The 1979 Act covers a number of respiratory diseases, many of which are directly related to asbestos exposure. The scheme also covers a number of non-asbestos-related diseases such as coal-workers’ pneumoconiosis.
Noble Lords will need no reminding that all of the terrible diseases covered by this scheme are a heavy legacy of our industrial past. Although people who develop mesothelioma through their employment have had access to lump sum payments through the 1979 Act for some time, there was previously no provision for people who developed mesothelioma outside the workplace. This weakness in the provision of compensation was remedied by the introduction of the mesothelioma scheme in 2008. This scheme provides, for the first time, lump sum payments for mesothelioma sufferers who have been exposed to asbestos outside the workplace.
As a result of these regulations, from April 2011 the amount payable to a person under both the 1979 Act and the 2008 mesothelioma scheme will, for a person suffering from mesothelioma, increase to £59,896 for a 50 year-old and £36,422 for one aged 60 at the date of diagnosis. As these two figures show, the amount of money paid as a lump sum varies depending on the age at which they are diagnosed. The highest amounts are paid for those diagnosed at an early age and for those with higher levels of disability.
All payments made in respect of mesothelioma are paid at the full 100 per cent rate appropriate to the age at diagnosis. Your Lordships will not be surprised to learn that about three-quarters of payments made under the 1979 Act are in respect of mesothelioma—a particularly unpleasant and fatal disease, caused almost exclusively by exposure to asbestos. Those diagnosed with mesothelioma usually have a short life expectancy, generally of between 12 and 18 months. It is common that the sufferer is severely disabled soon after diagnosis.
I am saddened to report that the number of deaths from mesothelioma in Great Britain continues to rise. In 1968, 153 people died from it; by contrast, more than 2,000 people a year are currently dying from the disease. I have a further great regret in stating that we will not reach the peak in the number of deaths from mesothelioma until around 2015. The latest estimates are that between 2006 and 2020, 30,000 people in the UK will die of the disease. Put another way, one out of every 100 men born between 1940 and 1950 will die from mesothelioma. These are chilling figures.
The rise in the number of deaths is reflected in the continued rise in the number of payments made under these schemes. In the year 2008-09, a total of 2,351 payments were made under the 1979 Act; the following year, there were 2,625 payments; and for the full year from April 2010 to March 2011, we expect to make about 2,900 payments.
It may also help if I briefly give you some figures to illustrate the important role fulfilled by the two schemes in providing financial support. In the three years from April 2008 to December 2010, 7,088 payments were made under the 1979 Act, amounting to over £95 million. In the time since the 2008 scheme was introduced in October 2008, about 1,200 payments have been made at a cost of just under £20 million.
These regulations increase the levels of support through the government compensation schemes; and noble Lords will, I am sure, agree that while no amount of money will ever compensate individuals and families for the suffering and loss caused by mesothelioma, those who are suffering rightly deserve some form of monetary compensation, and it is essential that sufferers receive compensation before it is too late. I commend the uprating of the payment scales to noble Lords and ask approval to implement them. I beg to move.
My Lords, I thank the noble Lord, Lord Freud, for introducing these orders in a very sympathetic way. As we have heard, one of the orders increases the amount of compensation paid to sufferers of mesothelioma under the scheme legislated for in 2008, and the other uprates payments made under the Pneumoconiosis etc (Workers’ Compensation) Act 1979. My noble friend Lord Jones has spoken passionately about the scheme in the past and was involved in it from the start. I am sure that we will hear from him further this afternoon.
It is noted that in both cases the uprating is by reference to CPI, at 3.1 per cent. Given the Minister’s reference to what uprating by RPI—minus 1.5 per cent—would have done this year, we are in the same place on that issue. Nevertheless, had it been uprated by RPI at the top end of the scale, there would be something like an additional £1,000 of compensation. However, within the context of our overall position on the change to CPI, we can and do support both of these orders.
The scheme brings some relief to sufferers of certain industrial-related diseases. They are all terrible diseases. As the noble Lord said, they are a dire legacy of our industrial past. We have heard that the number of deaths from mesothelioma continues to rise and is still a few years away from its peak, which we were told will be in 2015. I was going to ask the Minister whether he could give us an update on the number of payments made to date in the current year under the 1979 and 2008 Act arrangements, with an estimate for both for next year. I think that he may have given us that, so I will look at the record. If it does not fully cover that query, perhaps he will drop me a line, unless he has the figures available today.
The resources for the 2008 Act payments were to be found from compensation recovery from civil claims related to the 1979 and 2008 Act schemes. Will the Minister give us an update on the current level of successful claims and the compensation recoverable? What amounts are estimated to be due to be received in the current year and next year? He will recall that last year we were able to announce an alignment of the 2008 Act scheme payments with those of the 1979 Act for sufferers of mesothelioma and their dependants. This was about a year earlier than we had originally expected. It would appear that this parity which has been obtained is to continue, and we welcome that.
However, we also took steps last year to reduce the gap between awards to sufferers and awards to dependants. Seemingly no further progress has been made in this regard with the current year's uprating. We should recognise the terrible effect that these diseases can have on families who have to cope with the effects of pain and suffering on their loved ones. Differential payments between sufferers and dependants can put pressure on the former at the most difficult time in their lives. What are the current Government's intentions in this matter? Is it still their intention to narrow or to close the gap, and when is further progress likely to be made?
These orders deal with statutory compensation schemes paid for in part by compensation recovery. The schemes are there to the extent that individuals cannot achieve civil compensation either from a former employer or their insurer. I should like to pursue two points. The first relates to the Court of Appeal decision in October last year which determined that liability for compensation for mesothelioma arose when the symptoms were suffered and not when the exposure to asbestos arose—I think that an appeal in respect of this is in progress—turning on its head prior understanding and practice and creating great consternation among sufferers and support groups. Can we please hear about the assessment which has been made about the implications of the judgment, in particular about the prospects for compensation recovery?
The second point relates to the prospects of individuals claiming against a former employer or their insurer which depend on the ability to trace employers' liability insurance policies. When in government, we launched, together with the insurance industry, a voluntary code of practice for the tracing of policies. That had some success but fell short of what was required, especially for business written after 1999, hence the proposals to establish an employers’ liability tracing office to manage an electronic database. Can we have an update on progress on that project, please? The Minister will also be aware that we consulted on the establishment of an employer liability insurance bureau. That would act as a fund of last resort in cases where all other efforts to trace an employer or insurer failed. Are the Government still looking to take that forward?
I look forward to hearing what the Minister has to say in response to those points. Of course, I stress that we support each of these regulations.
My Lords, I support the regulations, and I thank the Minister for his considerate and detailed exposition. I certainly welcome all that he said. However, it was daunting to hear of the number of deaths; those details are very sobering. We are all glad that there is compensation—that persons can receive payments of between £12,040 and £77,506. Surely we are all glad that lump sums of between £7,524 and £40,335 can be paid to dependants, and that the Secretary of State of the day can put his signature to these regulations.
This is a dreadful disease. When a diagnosis is made and the facts imparted to the patient, death is usually never far away. It is very good that British Governments can come forward with such compensatory schemes. The regulations are the printed details as referred to in the Explanatory Memorandum. However, they cannot describe adequately the humanity of these desperate cases, or the ignorance which existed then, or the bewilderment, the suffering or the familial anxieties. Surely the departmental staff teams can take some credit, at the very least, for presenting these regulations.
I very much appreciate that the 2008 scheme is wholly funded from compensation recovery, whereas the 1979 Act and 2008 scheme payments are recovered from any subsequent civil damages paid in respect of the same disease. I also understand that consultation is not necessary, because there is no change in policy and no scope to change the outcome, and that these increases are at the rate of inflation as measured by the consumer prices index, in line with other social security benefit rates which are increased under the existing statutory provisions. With regard to regulating small businesses, can the Minister say why the legislation does not apply? Can he, for the record, spell that out?
Finally, there is a history to these regulations. I recollect, first, Mr Harold Walker, the Member of Parliament for Doncaster. He and I served in the Wilson and Callaghan Administrations in the 1970s. Mr Walker was the Minister of State in the Ministry of Employment, as I think it was then called. In that decade the department was very busy and pressured—the old smokestacks fell; the Upper Clyde shipyard was occupied; Rolls-Royce was bankrupted, and then nationalised by the then Mr John Davies MP; the OPEC nations quadrupled the price of oil; and then there came forth a great inflation and many industrial and labour disputes. That was the context whence came the concept that led to these regulations. However, the plight of the workforce in the coal and quarrying fields made it necessary to address these diseases. The menace of asbestos was also demanding compensation.
Harold Walker MP subsequently became Chairman of Ways and Means, then Lord Walker in your Lordships’ House. In his Commons role, he assessed how our departments—the departments for employment and for Wales, in which I served—might jointly address the challenge of those diseases and the demands of families and of sufferers. What should be done in that context of high inflation, industrial labour disputes and all manner of impediments to statecraft, if I may put it like that? There were Ministers looking at these specific problems who wanted very much to address the challenge of these lung diseases.
Mr Walker told me of a tragedy. He had previously been a craftsman and a shop-floor union leader. At a location at Hebden Bridge, he had met workers who had innocently had constant contact with the deadliest of asbestos, which is the blue. Those poor men had literally waded in the blue stuff and kicked it about. They had played snowballs with blue asbestos, throwing the deadly stuff at each other. At that time in our industrial society, nobody had warned them, nobody had briefed them and nobody had considered them. That was taking place across the nation. Now, with the benefit of hindsight, those poor men at Hebden Bridge had frequently gone all the way.
There was no health and safety at work Act. At the time of those great confrontations in British society, as measured in the House of Commons and in disputes throughout the nation, there was a need for consideration about how to make work safer. It was the then Minister, Mr Michael Foot, who brought forward health and safety at work measures. He also brought forward an employment Act. I believe that those measures helped to protect men and women at work. I think that those Administrations who brought them forth and enabled the workforce of Britain to benefit deserve great credit. I would like to put on record that Ministers sought to address these problems brought about by asbestos. I welcome the Minister’s exposition and the team that backs him in enhancing and widening these regulations.
My Lords, first, I welcome the Minister’s statement this afternoon in respect of these regulations. I thank him for the manner in which he delivered them, the understanding with which he delivered them and, more importantly, the way in which he has supported what has been for many people an almost lifelong campaign to ensure that we bring some retribution for the damage caused to so many members of our society by diseases at work. For me, pneumoconiosis is almost a household name. It became the natural word that would roll off your tongue, especially recently. Visiting constituents and seeing men sitting in the corner of their homes with an oxygen bottle alongside them, the last vestige of their survival as individuals, was a frightening and disgraceful comment upon the nature of our industrial landscape of many years ago. For many of us, it is ingrained within us to see the way those people have been dealt with in such a cruel way by these diseases.
As the Minister pointed out, we have not yet seen the peak of these diseases because, while the industrial heritage may have moved away, the diseases are still firmly implanted within the bodies of those people working within those industries. I welcome the fact that these regulations are being dealt with today and that the Minister has chosen—there is no obligation on the Government to bring forward these regulations—to follow the current practice of uprating on a yearly basis.
There are a number of short questions that I would like to place before the Minister. The first concerns dependants, who have been referred to earlier. Will my noble friend tell us the effect on the gap as a result of the changes we are seeing today? With more and more of these sufferers dying as we reach the peak, the dependants will be becoming more and more dependent upon the payments that are made to them. I wonder whether we have some feel for the direction of travel on that gap at this time. Is there any prospect in future of dealing much more with the dependants? For very tragic reasons, that is where we are going to be ending up with this disease.
My second question concerns the issue of tracking down the employment and the vestiges of the employers. Does the Minister have any knowledge of the split between those who have worked for public sector bodies—in the area where I reside the National Coal Board was probably the biggest problem—and the private sector employers around the country in both the coal and asbestos areas of industry?
No matter how often we come forward with compensation schemes and how much work is done on this matter, and although the changes that have been brought about bring comfort to people, nothing can alter the fact that many in our society have died, and are dying, as a result of industrially related diseases. It is pleasing to note that we have moved on so far in understanding such diseases and what happens in the workplace, and in protecting people. Let us hope that we do not have to introduce any other scheme of this nature in the future.
My Lords, the whole Committee appreciates the tone and sensitivity of the Minister’s remarks, as well as the good message he has conveyed. In areas such as these, it is incumbent on any Government to err on the side of generosity and to show a certain breadth of spirit—and not, as it were, to retreat into the small print or the least that they can get away with—even in difficult times. That is easy to say because, obviously, the scale of the overall outlay, and the fact that some of it is potentially recoverable, is rather small in comparison with other matters we have debated in this place. Nevertheless, it is the right approach when these diseases are as unpleasant as they are unspellable and, other than by a Welshman—I say to my noble friend Lord German—unpronounceable. They are extremely unpleasant and should not be treated lightly.
I have had some experience as a Front-Bench spokesperson across the wider aspects of the Department for Work and Pensions, where we held an annual debate on the uprating. The issues have not substantially changed—although they are, perhaps, in clearer perspective than they were—and one should be at least aware of the possibility of relating them to either a constituency or personal experience. A late kinsman of my wife was a pneumoconiosis sufferer, not through coalmining but through his work in the flour-milling industry. His lungs filled up and he died prematurely. I am sure that many people, particularly those from heavy industrial constituencies, could say that. The person I knew who was a mesothelioma sufferer was a former Member of this House. I shall say no more about that, but it is interesting that these diseases can affect people who are beyond the heavy industrial profile.
As to the substance of the regulations, I think we are doing the right thing for the reasons I have given. However, in addition to the points to which the Minister is going to respond, can he give some indication of the emerging actuarial build-up? He has already told us that the peak, sadly, has not been reached, but obviously that is subject to re-evaluation in the light of the claims experience. There will be difficult judgments to be made as to whether it is accelerating and people are presenting claims earlier or whether there is a wider aetiology of claims than was previously thought—that is, whether it is going to be more expensive or, more importantly, more extensive in terms of the number of people who are suffering. I get the impression from the figures and the nature of the debate that the picture is one of broad stability, but it would be useful to have that assurance.
It would also be useful if the Minister could say whether the way in which the system is now set up—particularly under the Health and Safety Executive—will ensure that we do not make similar commitments in relation to other long-term diseases as a result of carelessness.
My second point has already been made by other noble Lords but it is worth a moment. We all feel very strongly that there is a need for good record-keeping and a clearing house method of allocating the liabilities to insurers and employers, as appropriate, to ensure that they do not escape. I should like to make two points about that. First, that should be equally in the interests of good employers and good insurers as otherwise, because if there is an elaborate game of pass the parcel and one is the only one left standing because all the others have cleared off or ceased to exist, that is a very unfortunate position and may be disproportionate. As the noble Lord, Lord McKenzie, indicated, there are some fraught issues about the moment of onset and who is liable.
I draw the Committee’s attention to my concern that this is a somewhat wider issue—we have seen it in relation to motor insurance and the Motor Insurers’ Bureau. However, in relation to the whole field, including the pensions field, I think that many people across the private sector feel—as we have also debated—that the record-keeping has perhaps not been as good as it might have been. People may have little entitlements of which they have no continuing knowledge. There might be others who should have obligations that have somehow been lost with the passage of industrial change. That is understandable over a 40-year period. One has only to look at Andrew Marr’s recent series, “Britain from the Air”, to see how everything is different from what it was two generations ago. Nevertheless, the people, their needs and their need for support remain. It is a serious issue and I am sure that the Minister will want to attend to it.
For the moment, I think that we are content, with a measure of real consensus on this, to reflect on the situation that people and their families find themselves in, and on the need to be as generous as we reasonably and possibly can in dealing with and meeting their immediate needs and their family problems.
My Lords, this has been a debate in which I think we are all in exactly the same place. It is a very difficult area, as we all know. I shall try to deal with the issues that have arisen as well as I can.
With the consent of the noble Lord, Lord McKenzie, I think that we might just park CPI/RPI in this context. We will have another chance to look at it today, another on Monday and another on Tuesday. I shall say a few words on it later, but it is one of those things that, in this context, might feel slightly uncomfortable. I am very relieved that the figures are such that we do not need that debate.
The noble Lord, Lord McKenzie, asked for some figures on payments and so forth. I can give him some up-to-date figures. The payments made in 2009-10 amounted to £42.3 million. In 2008-09—I am sorry that I am going down the years—the payments amounted to £37 million. In the current year, up to January, in combination, they amounted to £38.8 million.
Yes; it is a combination of both Acts.
The recoveries picture is also improving. In 2008-09, it was £5.3 million; in the following year, 2009-10, it was £16.1 million—which, as a percentage, is 38 per cent; and in the year to January 2011, it was £12.4 million. We are estimating, next year, to get recoveries of £20.7 million. So recoveries are currently running at roughly one-third of the payments.
Both the noble Lords, Lord McKenzie and Lord German, were interested in the relationship between the sufferers’ and the dependants’ rate. As they both mentioned, historically, that has been lower. The gap was closed by £5,000 and because of the age factor in many cases, the dependants’ rate can be the same as the sufferers’ rate, and that might not be a particularly valid argument in people’s eyes. At the moment, all I am empowered to say is that raising those levels by CPI is what we have decided we can do. Currently, we are not looking at any acceleration of that gap.
I should perhaps emphasise that the department is currently engaging very actively with customer groups to try to ensure that claims are made before death. That maximises the rate at which payments are made at the sufferers’ rate rather than the dependants’ rate.
The noble Lord, Lord Jones, brought a historical perspective to the subject. One of the horrific things about mesothelioma is that a single fibre can trigger the disease; he talked about snowballs made with blue asbestos. That is almost overkill, but as we see, and as the noble Lord, Lord Boswell, pointed out, people can also get this disease without knowing where they have got it from. It could be contracted from air conditioning even when they had not been in work. I suspect it is the most dangerous thing that we have.
There were other questions on the regulations for small businesses. In practice, the regulations ensure that anyone suffering from mesothelioma can get compensation, so there is not a problem with employment.
On the matter of public versus private bodies, raised by my noble friend Lord German, I do not have the figures. We are trying to improve the tracing, but I shall write to interested Peers with that figure when I get it.
The noble Lord, Lord Boswell, asked about the profile of suffering. We expect it to peak in 2015 but, thereafter, we are expecting a gradual decline in the numbers. From earlier estimates, we might see a slight pushing back of the rates but the shape of the curve has not changed dramatically.
The most difficult questions, slightly wider than these regulations, concern what we do with the tracing and with the bureau. The ABI’s ELTO database will begin to operate from this April, which is a positive step.
The court case, as the noble Lord, Lord McKenzie, pointed out, is a real issue. The Court of Appeal handed down its judgment in October and said that insurance policies should be interpreted on actual policy wordings. That has thrown an important level of uncertainty into what we do about tracing and the bureau because if we do not know what the actual wording was, it creates an extra problem. The judgment has been appealed to the Supreme Court and for obvious reasons it is quite difficult to do anything absolute until we know where we are.
This area is part of my portfolio of responsibility; I am taking very seriously the idea of an insurance bureau or something to find out how we can get compensation for people for whom the records are no longer there. I know there has been a relatively long gap since the public consultation that closed in May 2010. I assure the Committee that I have been in very active talks with various interested parties. I am pursuing some strategies, and hope to be able to achieve an appropriate outcome and bring the proposals forward to the House in due course. Sometimes it is better to get a result than to do things in a hurry. That is what is happening here. I can only give a personal assurance that I am taking this very seriously.
I think I have dealt with virtually all the questions. There is just the public-private split to deal with. The Government recognise that these two schemes perform a very important role and that it is vital that the value of these payments is maintained. I am pleased to confirm the Government’s commitment to review the level of these payments on an annual basis and, where necessary, to increase the payment. I am sure that noble Lords are in full agreement with these sentiments. Indeed, they have expressed that. I therefore commend the uprating of the payment scales and ask for approval to implement them.
Pneumoconiosis etc. (Workers’ Compensation) (Payment of Claims) (Amendment) Regulations 2011
Considered in Grand Committee
Occupational Pension Schemes (Levy Ceiling) Order 2011
Considered in Grand Committee
My Lords, I shall speak also to the Pension Protection Fund (Pension Compensation Cap) Order 2011 and the Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011; and I shall first give a relatively short account of what the Occupational Pension Schemes (Levy Ceiling) Order 2011 and the Pension Protection Fund (Pension Compensation Cap) Order 2011 do. Many noble Lords will be familiar with these orders, which have appeared annually and been the subject of amicable debate in Grand Committee on a number of occasions.
I turn first to the Occupational Pension Schemes (Levy Ceiling) Order 2011. Your Lordships will be aware that the compensation provided by the Pension Protection Fund is in part funded by the pension protection levy, which is paid by those schemes eligible for the protection provided by that fund. The pension protection levy is the responsibility of the board of the Pension Protection Fund. However, the Pensions Act 2004 provides a levy ceiling that restricts the amount that the board may raise through the pension protection levy in any year.
The levy ceiling for the financial year beginning 1 April 2010 is £871,183,684. This order provides for an increase in the ceiling for the financial year beginning 1 April 2011. The Pensions Act 2004 requires that the increase must be in line with increases in the general level of earnings in Great Britain, in this case using the rate published by the Office for National Statistics for the 12-month period to 31 July 2010. The order therefore increases the levy ceiling by 2.4 per cent, bringing it to £892,092,092 for the financial year beginning 1 April 2011. This does not mean that the pension protection levy will increase to that figure. The board of the Pension Protection Fund has already determined that, for the period covered, it estimates it will collect a pension protection levy of £600 million.
I turn to the Pension Protection Fund (Pension Compensation Cap) Order 2011. The pension compensation paid to people who are below their normal pension age at the date their scheme is assessed for entry to the Pension Protection Fund is subject to a cap. The compensation cap for the financial year beginning 1 April 2010 is £33,054.09. However, people below their normal pension age are paid pension compensation at the 90 per cent rate. This means that the compensation payments for people below normal pension age shall not exceed £29,748.68, which is the 90 per cent figure.
The Pension Protection Fund order provides for an increase in the compensation cap for the financial year beginning next April. Again, the Pensions Act 2004 requires that the increase must be in line with increases in the general level of earnings in Great Britain, in this case using the rate published by the Office for National Statistics for the financial year ending March 2010. The order therefore increases the compensation cap by 0.5 per cent to £33,219.36 for the next financial year, which means that, with the cap in operation, the compensation payment for people below normal pension age shall not exceed £29,897.42. The new cap will apply to people who first become entitled to pension compensation on or before the coming 1 April.
I should point out that when the more sharp-eyed or sharp-eared of your Lordships spot the difference between the 2.4 per cent and the 0.5 per cent, that simply reflects what happened to the relevant earnings index in those three months. It just so happened, but clearly, over the period, there will be catch-ups and so on.
On that specific point, perhaps it might be convenient to ask my noble friend whether he can confirm what I thought I heard him say—that both those figures, although they differ from each other, are derived from calculations made by the Office for National Statistics?
Yes, they are Office for National Statistics figures. I think that it is the average weekly earnings figure, which is the new figure that is updated from the annual earnings index—no, it is the general level of earnings.
I turn now to the Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011. Many noble Lords will be familiar with FAS; indeed, the noble Lord, Lord McKenzie of Luton, has in the past brought a number of sets of regulations on the scheme to this House and presented them most eloquently, despite the material. I hope that noble Lords will listen to me with the same patience that they extended to the noble Lord, Lord McKenzie.
The scheme provides financial help to members of qualified pension schemes who face significant losses because their schemes wind up underfunded. It is mainly funded by the taxpayer. It has never been intended that FAS should replicate what might have been provided to members had their schemes wound up fully funded. Payments made by FAS have their value protected against price inflation through revaluation before payment begins and indexation after payment begins on rights accrued after 1997. This reflects the broader legislative position. The changes being made to the FAS revaluation and indexation rules by these draft regulations are a consequence of a wider decision. Noble Lords will know that the Government intend to use the consumer prices index—the CPI—as their general measure of inflation for a range of payments. These include state pensions, statutory minimum increases for private sector occupational pensions and increases to pension compensation payments made by the Pension Protection Fund.
Much has been said about the move to the CPI since we announced our intentions. We are moving to using the CPI as we believe it is a more appropriate index, although we acknowledge that no index is perfect. Without going into the kind of elaborate detail that I think we may be going into in the next few days, let me summarise why it is the most appropriate index.
The key difference between the RPI and the CPI is what is known as the “formula effect”. Put simply, the CPI is calculated in such a way that it takes account effectively of consumers switching to substitute goods when prices rise. That consumers behave in this way is a cornerstone of economic theory, and it has been borne out by empirical research. Let me be clear that we are not talking about switching from rump steak to lamb shoulder, for example, but from rump steak that has seen a sharp increase in price to rump steak that has seen a lower one. The substitution effect is nothing more than that.
This methodology is uncontroversial, and once we accept it as preferable to the RPI’s, which the Institute for Fiscal Studies and the Royal Statistical Society do, we have accounted for 60 per cent—two-thirds—of the historical gap between the CPI and the RPI and already the CPI becomes the more suitable index. We will have the opportunity to talk about this in great detail, although I will do so now if noble Lords want.
There is another aspect of difference which is the much lower level of housing costs in the CPI than in the RPI. In the last years, mortgage interest’s effect on the RPI has caused it to fluctuate wildly. It has ranged from being dragged down by 2.76 percentage points to being pushed up by 1.51 percentage points. It is clearly a significant factor. But as noble Lords are aware, only 7 per cent of pensioners have a mortgage and many of those—the poorer ones in particular—are supported in their housing through the support for mortgage interest. So the exclusion of mortgage interest and the impact it can have on inflation seems the right course to take.
That is the current position between CPI and RPI, but noble Lords will welcome the Office for National Statistics’ work on the exclusion of owner-occupied housing costs from the CPI. This may address some of the housing costs issues in years to come. The DWP and the Government as a whole will monitor this development very closely. Unless there is a whole range of questions on this, I shall not go on about it here and now. I shall close this section by saying that irrespective of whether the RPI would result in higher increases, if it does so, that may simply be—and we would argue that it is—because it is overstating inflation as people actually experience it. That means that the CPI is the right measure of inflation.
Let us turn to the draft regulations before us. The regulations specifically change the inflation measure specified in the FAS regulations from the RPI to the general level of prices so that accrued pensions will be valued by reference to the RPI for periods before 31 March this year, subject to the cap, and can be revalued by reference to the CPI after that date, again subject to the cap. Indexation on rights accrued after 1997 applied on 31 January 2012 can be based on increases in the CPI, subject to the 2.5 per cent cap. The CPI can be used for the annual increase to the FAS cap that will be made in April 2011.
Noble Lords may be wondering why the draft regulations specify the general level of prices instead of the CPI. There are a number of different indices used to measure inflation, and we do not want to have to amend these regulations if the CPI index changes its name, for instance, with a change in how it treats housing, or if there is a more appropriate index at a future date. Therefore, we have adopted the more general term used for occupational pension legislation. I hope that noble Lords will agree that this is a sensible precaution. However, I can confirm that it is our present intention to use the CPI. Should a more appropriate index be identified in the future then we will, of course, consult on any planned changes.
In conclusion, these draft FAS regulations will ensure that FAS payments are protected against inflation in a reasonable way and in a more appropriate manner. In my view, all of the regulations before the Committee are compatible with the European Convention on Human Rights. I commend them to the Committee.
My Lords, I thank the Minister for his eloquence in introducing these orders. If I am not mistaken, the first two will no longer be subject to the affirmative procedure as a result of provisions in the Pensions Bill, so perhaps we must make the most of this occasion. Together with the levy ceiling earning percentage increase order, they set the compensation cap, as we have heard, limiting the amount of compensation payable by the PPF and the levy ceiling which controls the maximum amount of levy the PPF can charge pension schemes. As we heard, the levy ceiling for the year commencing 1 April 2011 is £892 million, which is comfortably above the proposed levy for that year, which the Minister told us is £600 million. In respect of that levy, I do not know whether the Minister is able to give us a split between the risk-based and scheme-based components. Could he take the opportunity to say something about collection rates and how we are doing in terms of collecting what we think is due?
The increase in the general level of earnings for the period 1 August 2009 to 31 July 2010 is 2.4 per cent. On the current compensation cap, the maximum level of compensation which is payable before applying the 90 per cent requirement is increased by 0.5 per cent to £33,219. In this case, the uprating is still by earnings but by reference to a different period.
We have no problem with these two orders, although, not surprisingly, they prompt wider questions. First, it is right to reflect on the importance of the PPF and how, alongside the Pensions Regulator, it has played an important role in ensuring some stability in a turbulent period for defined benefit schemes. It has ensured that something like 55,000 individuals already receive, or can expect to receive, a decent income in retirement which, because of the insolvency of their employers, they might otherwise not have achieved. From my experience, it is a highly professional organisation. According to the website, some 212 schemes are in the PPF at the moment and, as at January 2011, almost £236 million has been paid in compensation, with the oldest recipient being 105 and the youngest four.
Things seem to be in a far from steady state, with 10 schemes just transferred into the PPF and 409 schemes and 200,000 members in the assessment stage. Perhaps I can ask the Minister about the time taken for assessment. Clearly in some cases the assessment has not been completed within two years, although in the Pensions Bill we are considering removing the requirement for the assessment period to last for a minimum of 12 months. I accept that there is no inherent inconsistency between those two positions—we support that—but what are the barriers to speeding up the assessment process?
Given the levy ceiling we are discussing, perhaps we could get an update on the PPF’s exposure to the universe of eligible schemes. It would appear that before taking account of the RPI/CPI changes, the number of schemes in deficit and the aggregate deficit has declined over the past year. It is presumed, therefore, that the headway created by the levy ceiling is something with which the Minister is wholly content. In the past, the ability of the PPF to fund the consequences of a big influx of schemes was often called into question. I think that we responded robustly then and I imagine that the Minister is in a position to do at least that this afternoon, given the change in the background to those schemes. Can he say how many compensation payments are currently limited by the cap? I tried to get my mind round this issue—I am not sure that I have completely—but, going forward, what will be the relationship between the level of the cap and what would have been provided for by underlying schemes and the PPF arrangement? If the cap gets uprated by earnings, but compensation amounts going forward are uprated generally by earnings, because that is the nature of defined benefit schemes, and partly by reference to the CPI, is there potentially a divergence of the cap from underlying compensation which thereby would weaken its purpose?
The order concerning the financial assistance scheme puts into effect, as we have heard, the RPI/CPI switch for revaluation, indexation and annual increases in the maximum cap. The Minister will be aware that we have concerns about the switch to CPI, certainly as currently constructed, as an appropriate measure of inflation. Doubtless we will have a substantive debate on that in Committee next week and on subsequent occasions.
I share the Minister’s view that no index is perfect and I was interested in his example about the formula effect and switching. When he referred to it in the Chamber he spoke about moving from one kind of biscuit to another. I am comforted to know that we can go from one jammy dodger to another and we will be okay. It was good to hear about the work going on in the ONS.
As we have heard, FAS, unlike PPF, is funded by government—net of assets taken in, of course—and a reduction in costs can make a contribution to deficit reduction. We could, in principle, support this for a period, but there is a dearth of information about how much is involved and no impact assessment has been provided. Perhaps the Minister can help on that
I am aware that the final settlement for FAS arose from a tortuous process involving, among other things, legal action in the UK and in Europe. I presume that there is nothing in the CPI/RPI switch which could be said to negate that settlement. Perhaps the Minister can confirm that. I welcome the proposals dealt with in the Explanatory Notes to consolidate the FAS regulations.
For both FAS and PPF, before entry into the appropriate scheme there would have been a judgment of what an individual could have obtained in the market and whether FAS and PPF would provide a better outcome. This judgment, presumably, would have been made on the basis that FAS and PPF payments would be uprated by RPI. If this is not the case, is there the prospect that individuals will be worse off in retrospect because of the decisions made? What analysis have the Government made of this situation? If it is not to hand, perhaps the Minister will write to me.
Let me make one further point on the PPF levy. It appears that there is to be a new levy framework introduced in 2013. What can the Minister tell the Committee about this and what are the ramifications, if any, for the levy ceiling? I look forward to his responses in due course.
I support these regulations and I have only limited points to make on them. The role of the Pension Protection Fund is very important—all credit to the previous Government for introducing it—and we want to make sure that it is maintained and sustained. Obviously in the current environment the investment levels on the stock market have helped some of these schemes, but can the Minister give the Committee his view on how the economic situation is impinging on companies, particularly those on the borders of insolvency, and the pressures that that is likely to place on the fund over the next couple of years as we move, we hope, towards economic recovery?
I accept that we will be discussing the CPI issue in the coming week but I make the point that none of these indices is perfect; they measure inflation for all consumers on different bases. The Minister will perhaps answer this point more fully next week, but is any further research being done on the CPI to ensure that, as we are now moving towards using it more fully across a number of measures which affect pensioners particularly, we can make the index more representative of pensioners’ expenditure and fairer in the long term? I support the regulations.
My Lords, I, too, am very pleased to support these regulations. The purpose of my intervention on my noble friend, for whose reply I was grateful, was to confirm that there was a principled basis for the slightly different, heterogeneous nature of the figures set, in that they all have their root in the ONS and are related to the principles of the particular component parts of these three orders or, to put it the other way round, that Ministers were not setting the rules in order to suit themselves or with the intention of saving money. Of course I accept that assurance.
I should make it clear to the Minister, if it is not already self-evident, that partly because it came in the lacuna between my Front Bench service and today, I would not claim to be very ready to sit an exam on the pension protection scheme and am less familiar with it. In relation to the cap, which if it is raised is relieving as a measure, is there an impact on a significant number of individuals or on just a handful? I would be interested in that. The Minister knows that I am now, for the first time, a pension trustee.
There is another point that he might like to say a bit about. There is concern, certainly debate, across the sector about the balance between the scheme levy and the risk-based levy and how that is to be conceived. That forms two categories. First, will he report to us on where we are on it? Secondly, given that he is, in a sense, setting limits under which the levy should be set rather than the level of the levy itself, which he said is the responsibility of the scheme, is it the case that he will stand back and allow that balance to be struck by the professionals? Does he have a view and what is the state of play on that?
My Lords, again I thank noble Lords for taking such an active part in the debate and, as ever, looking at these issues in real detail. I will aim to answer as many of the questions as I can before I resort to the expedient of the letter.
The noble Lord, Lord McKenzie, is completely right about this being our last opportunity—last unforced opportunity, if you like—to do this under the affirmative procedure, so we should—and we are—taking advantage of that opportunity. He asked about the spilt between risk-based and scheme-based. Eighty per cent of the quantum is designed to be risk-based. That varies slightly, but the figures have held pretty firm over the years so, without going through endless figures, if we look at the £600 million for 2011-12, which I referred to at the outset, the risk-based element is estimated to be £480 million and the scheme-based element is £120 million.
The noble Lord, Lord McKenzie, and my noble friend Lord Boswell asked about the impact of raising the cap and about how many people are affected by it. As at January 2011, 92 scheme members receiving compensation were affected by the cap. The noble Lord, Lord McKenzie, asked about time in assessment. The real driver in that is legal action, which can take many years. As he saw, that is connected to the change in the Pension Bill. The problem we have is that resolving some of these issues can take a lot of time. On top of that, assessment is often delayed by poor scheme data and uncertainty about what the scheme rules are. It is not people being dilatory; there are genuine problems.
My team has just informed me that, in opening, I made a mistake. I said that the newer cap applies to people entitled to compensation before 2011 and I should have said after 2011. I am sure noble Lords knew what I meant. I apologise to the Committee.
The noble Lord, Lord McKenzie, asked whether the cap was overrated if it was linked to earnings. That is not the case because, to take an example, the comparator is the position of a 50 year-old at the insolvency of the employer. We want someone whose employer goes bust this year to be capped at the same relative level as someone whose employer went bust, for example, in 2005.
The calculation of the levy formula is something for the board of the Pension Protection Fund. The proposals concern the distribution of the levy between schemes and not the overall quantum. Will individuals be worse off due to the switch from RPI to CPI? The current market conditions mean that the cost of providing RPI or CPI are equal, but we have to recognise that there may be a divergence in future and we shall review that over the summer in the light of emerging evidence.
The noble Lord, Lord Stoneham, asked about indices. Without going into a full-blown techie analysis, the question was about whether we can make CPI a better fit with pensioner inflation. The ONS is working to include owner-occupied housing costs in its statistical programme. It is a very active programme. Rather than using mortgage costs, according to its research, the likely outcome—I may be jumping the odd hurdle to reach that conclusion, but bear with me—would be to take the cost of an average house and see how that moves up and down. I cannot see that happening much before two years, but an active process is taking place and the ONS will work very closely with European statistical organisations because it would need to be a general move.
One of the most interesting things is that the CPI has been adopted as the main measure, certainly for comparative purposes in Europe. The Americans took the decision to go down this route because of the geometric approach, which basically gets elasticities closer to one, which reflects substitution, as opposed to any elasticities closer to nought, which do not show much substitution, and that is seen in the arithmetic mean used mainly in the RPI. In the CPI, interestingly, about 70 per cent is done geometrically. The other 30 per cent of goods, which are hard to substitute—oil, for instance—are left at that low-elasticity arithmetic mean. We will have more of that next week.
The noble Lord, Lord McKenzie, asked whether the implications of this switch to CPI mean that some FAS members would find that the total value of their protection from the UK Government is reduced to a level that the European Court of Justice indicated would be below the minimum lawful percentage for protection. Perhaps I slightly overinterpret the question, but we have looked at that closely and we believe that the Government continue to meet their obligations under Article 8 of the European insolvency directive.
I think that I hesitate to answer that on the Floor. Is that sensible? Yes, my team is nodding, not vigorously, but gently. We should write the noble Lord a letter on that matter.
The last real question was on the impact assessment on FAS costs. The overall change to CPI for FAS purposes is estimated to deliver around a 10 per cent reduction in assistance costs over the lifetime of the FAS, which has been projected at about 90 years. Clearly, the impact on individuals will depend on the characteristics of the member, such as age and period of service.
On the economic situation, I think I have some data on what has been happening to the overall level of surplus in the PPF. I was asked about that and I know that I have those figures. It would be easier for me to tell the Committee than to write, but if I do not have them in a microsecond I will write. I cannot put my hand on them but the question raised was: where is the overall level of surplus, by schemes, and how many of them are in deficit and how many in surplus? I wanted to look at the overall risk levels but I cannot put my hand straight on that. If we could deal with that issue of economic conditions and the place that the market got to, that would also address the question from the noble Lord, Lord Stoneham. I am irritated with myself for not having it absolutely to hand.
As your Lordships know, the Government recognise the difficulties experienced by those who lost their pensions through no fault of their own.
I am grateful for the full reply that the Minister has given us on a range of questions but I wanted to make sure that we had covered this point or that he was going to respond to it. Looking at the PPF before a judgment is made, for example, as I understand it before somebody enters the PPF you look and see what the market would have produced. If the market would have produced something which was at or above the PPF levels, that is what would happen. Presumably when those judgments were made, they were made on the assumption that PPF levels would be uprated by RPI—obviously, that is not going to happen, at least for a period—with the expectation that indexation would be lower than RPI. Is there the prospect that that means—at least with the benefit of hindsight, and it may not matter that it is hindsight—that judgments were made that might have been made differently? In some instances, the market would have been able to do better than the PPF on a CPI basis.
The answer is that currently CPI is the same as RPI in terms of current annuity pricing. Clearly that may or may not be the case in the future. At the current time, that does not make a difference. The Pension Protection Fund and the Financial Assistance Scheme will continue to provide help to people whose pension schemes fail them. These regulations will enable the continued delivery of that help in a manner that is fair and equitable to both scheme members and the taxpayer. I commend these draft regulations to the Committee.
Pension Protection Fund (Pension Compensation Cap) Order 2011
Considered in Grand Committee
Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011
Considered in Grand Committee
Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011
Considered in Grand Committee
That the Grand Committee do report to the House that it has considered the Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011.
Relevant document: 16th Report from the Joint Committee on Statutory Instruments.
My Lords, the draft order sets out the proposed contracted-out rebate rates that will apply from April 2012. Before I go into the detail of what those rates will be and why we have decided on our particular approach, I think it would assist the House if I were to explain what the rebates are and how the process to review them works.
Under the contracting-out arrangements, individuals may contract out through membership of a contracted-out salary related or money purchase occupational pension scheme or through an appropriate personal pension. Employees forego all or part of their state second pension entitlement and in return pay reduced rate national insurance contributions and/or receive an age-related rebate paid to their scheme after the end of the tax year. Employers with contracted-out occupational schemes also pay reduced national insurance. These reductions and payments are known as the contracting-out rebate.
The Pensions Act 1993 requires the Secretary of State to review the level of the contracted-out rebates at least every five years after giving due consideration to a report by the Government Actuary recommending what the level of the rebate rates should be. The legislation requires that there should be a full tax year between parliamentary approval of the rebate order and its coming into force. The last full review of the level of rebates was in 2006 for rebates from April 2007.
The present review began last year. The Government Actuary issued a consultation paper in August 2010 on the actuarial assumptions that he proposed to adopt for his report to the Secretary of State. The Government Actuary gave the responses to that consultation careful consideration before drawing up his final report. His advice to the Secretary of State has been taken into account in the proposals before the Committee. 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 foregone as a result of contracting out. These include, for example, increasing longevity; rates of investment returns; increases in earnings and prices; the future change in the indexation of the state additional pension by the consumer prices index; and future changes to state pension age.
The Government Actuary’s report and the report by the Secretary of State were laid before the House, together with the order, on 3 February. In this order, rebate percentages have been provided for members of both salary-related and defined contribution schemes. This is in spite of the Government’s plans to abolish contracting out on a defined contribution basis on 6 April 2012. This is because the requirement to review defined contribution rebate rates under Sections 42B and 45A of the Pension Schemes Act 1993 will not be repealed until the enabling legislation for abolition—primarily Section 15(1) of the Pensions Act 2007—comes into force. So, rebate rates for members of defined contribution schemes have been provided but, because these figures are not expected to be used, they have been provided for only one tax year.
Therefore the focus of today’s speech will be on the reduction in national insurance contributions which should apply to those contracted out on a defined benefit or salary-related basis. Unlike his previous reports, the Government Actuary has, with this report, provided three alternative approaches for valuing the costs of the benefits foregone by contracted-out workers in salary-related schemes: a best estimate basis; a typical funding basis; and a gilts basis. In deciding which of these alternative approaches should be adopted, we have considered that the reduction in national insurance contributions is provided at considerable cost to the taxpayer and that, therefore, the Government have a duty to ensure that the rebate is set at a level which is fair to all. Taking this into account, we believe that adopting the Government Actuary’s best estimate basis is the correct approach.
Furthermore, we believe that the assumptions upon which the Government Actuary has based his best estimate basis are justifiable. That basis provides for two different rates which may be adopted by the Secretary of State: one which takes into account the existing arrangements for state pension age; and one which takes into account the proposed changes the Government will legislate for, which will see the state pension age rise to 66 from April 2020. We have decided that the proposed rise in state pension age to 66 needs to be reflected in the revised rebate rate. This will mean a reduction in the rate of national insurance contributions from April 2012 from 5.3 per cent to 4.8 per cent of relevant earnings. If, however, it becomes apparent that the proposed state pension age changes will not take place, we will consider conducting a further review of rebate rates before the end of a further five-year period, the time by which we must review rebate rates again.
We propose broadly to maintain the division of the reduction in the level of employee and employer contributions. This will mean that the level in the reduction of employee contributions will be reduced from 1.6 percentage points to 1.4 percentage points, and the reduction in employer contributions will be reduced from 3.6 percentage points to 3.4 percentage points. For personal pensions and money purchase occupational schemes, we have again accepted the Government Actuary’s proposed rates of reduction in national insurance contributions and age-related payments which should apply but for the plans to abolish contracting out for defined contribution schemes in April 2012. This will mean that the flat rate element for contracted-out money purchase schemes will decrease to 2.4 per cent of relevant earnings for members of contracted-out money purchase schemes. This will be split between employees at 1.4 per cent and employers at 1 per cent. We have also decided to maintain the level of the age-related rebate cap. This will stay at 7.4 per cent.
As I mentioned earlier, these rates have been provided simply to meet an ongoing statutory requirement that will not lapse until contracting out for defined contribution schemes is abolished. I am satisfied that the order is compatible with the European Convention on Human Rights. I commend it to the Committee. I beg to move.
My Lords, I again thank the Minister for his full explanation of this order, which sets out the revised national insurance rebates for contracted-out pension schemes. As we have heard, the figures are provided for contracted-out money purchase schemes and appropriate personal pensions, although the planned abolition of contracting out on a defined contribution basis from 6 April 2012 means that these will never come into effect.
Again, as we have heard, these changes are based on a report by the Government Actuary which, in contrast to previous reports, sets out three alternative valuation approaches. The Government, of course, have adopted the basis which provides the lowest level of rebate—4.8 per cent—and taken account of the changes in state pension age provided for in the Pensions Bill. I noted that the Minister hinted that should those changes not proceed, there would be a review of the 4.8 per cent figure. The rate is below the 5.3 per cent rate adopted for the five-year period to 2012.
The Explanatory Notes make it clear that the annual savings to the Exchequer from reducing the rebate is about £600 million. I am trying to understand what the other side of that saving is. Is it that the cost is greater on employers and employees; and/or is it that the cost of providing the relevant benefits is reduced? What is the other side of the saving that the Government make?
The note also states that a full impact assessment has not been published because it will have no new impact on the private sector. How does this differ from public sector employees and employers, where it is confirmed that there will be a small increase in national insurance contributions by each? I do not fully understand how it can have an impact on the public sector but not on the private sector.
More fundamentally, can the Minister expand on the rationale for adopting the best estimate approach? Paragraph 6.4 of the actuary’s report states that this basis of valuation means that the rebate,
“is expected to be sufficient, half the time, to cover the cost of providing benefits equivalent to the state second pension forgone”.
What about the other half? On what basis were the other valuation approaches rejected? To the extent that the best estimate falls short, where are the costs and risks being borne? It will be interesting to have data on what the difference will be for someone on median earnings and at or above the UAP.
The Government Actuary’s report is a complicated document and I am not sure that I have absorbed all of it. I hope the Minister and his team will be able to help us out on those particular inquiries.
My Lords, I thank, in particular, the noble Lord, Lord McKenzie, for his interest in this and the noble Lord, Lord Stoneham, for making that point. To summarise, this sets out the level of contracted-out rebate rates that will apply to employers and employees within defined benefit contracted-out occupational pension schemes from April 2012. As I said earlier, while we have provided rates for defined contribution schemes, that is purely to meet the statutory requirement. As I said before, we are looking at a reduction for contracted-out defined benefit schemes from 5.3 per cent to 4.8 per cent.
As I understand it, the central question that the noble Lord, Lord McKenzie, put was about why we have picked that one rather than the funding basis or the gilts basis. I shall go a little into the concepts behind the three different approaches. Each approach is designed to provide the employer with a different level of guarantee about it being sufficient to cover the cost of the additional state pension foregone. Taking into account the considerable cost to the taxpayer of providing the reduction in national insurance contributions, the Secretary of State decided that adopting the best estimate approach was the most reasonable. When you think about it, the point about it working half the time is really saying that we have reached the point of indifference between whether you provide a pension scheme or do not do so and rely on the state. There is a rationale there. The other approaches in practice provide a much more powerful bias towards contracting out.
The noble Lord’s supplementary question was about defined benefit schemes. The risk is now essentially being run by the schemes. Different schemes will, of course, have different contributions rates for employers and employees, so there is no simple answer. The core answer is that moving to the point where, on balance, there is a point of indifference between whether you go in or out means that it is a neutral decision.
On the question about public versus private, for public sector schemes there is no extra cost to the employer as the Government are the employer so there is a degree of funds being recycled. Both public and private sector employees will see a slight reduction in take-home pay as a result.
Perhaps I can clarify that. The note to the order, which I cannot now put my hands on, refers just to the public sector in that regard. It puzzled me because I understand that these rebates operate between the LEL and the upper accrual point, which is fixed in cash terms, in order to move towards a flat-rating of the state second pension, so I would have thought that there would potentially be a loss to all contracted-out employees. Therefore, I do not understand the distinction that is made in the Explanatory Memorandum between public and private sector.
I am looking at the Explanatory Memorandum to the Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order that we are discussing. The impact paragraph states:
“There is no new impact of the changes to the contracted-out rebate rate. However, the reduction in the rebate rate will lead to a small increase in the National Insurance contributions of public sector employers and employees. The value of the increase will depend on individual employee earnings”.
The impact is common across both the public and private sectors. The noble Lord asks about the impact assessment. I imagine that that is a reference to where the obligation to have an impact assessment is, rather than to the differential impact. By definition, we are saying that it does not have a new impact on the private sector and civil society organisations. By reference, that would also apply to the public sector.
I am happy for the noble Lord to write to me on that. It is confusing. It specifically identifies public sector employees and employers as taking a hit. Paragraph 10.2 suggests no new impact on the private sector. That did not make sense to me.
It is easy to see that confusion. I shall write to the noble Lord, but I am comfortable in stating that it is a reference to where the obligation to have an impact assessment is, not to who is getting the impact. That is the reason for the difference. However, I shall write to the noble Lord to lay that out very clearly. I am very impressed that anyone has got to note 10.2. I think I have dealt with all the outstanding issues.
Yes, I can confirm that, obviously. There is an argument there: it is a rather complicated sum, not just the sum of what has gone in and out in terms of all of the factors. To the extent that there is an extra cost, it is partly because it has become more expensive to get pensions for one reason or another. Some of that reflects the marketplace and what it costs to purchase annuities outside the Government’s scheme. Rather like me, the noble Lord will, I suspect, have gone through this understanding some, but not all, of the bits in it. However, that is the process, so the saving becomes a cost for employers and employees, given how we have split it.
I have one main item on which to write formally to noble Lords but, with that, I hope that I have dealt satisfactorily with the issues. As everyone in this Room will realise, they are highly technical. I commend the draft order to the Committee.
Committee adjourned at 5.41 pm.