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

rose to move, That the draft order laid before the House on 1 March be approved [20th Report from the Joint Committee]. The noble Lord said: My Lords, the draft order sets out the proposed rates of contracted-out rebates that will apply from April 2007. Before I set out what those rates will be and say why we have decided on our particular approach, it may be helpful to the House if I explained what the rebates are and how the process to review them works. When someone contracts out of the state additional pension—the state second pension—the state has a reduced liability and pays less pension in the future. In return, the state pays a rebate. The rebate is delivered through a reduction in national insurance contributions and/or an end-of-year age-related payment to an individual’s pension scheme. The Secretary of State has a statutory duty to review the contracting-out rebates at least every five years. This means that rates can be reviewed more often than that if appropriate. To assist the Secretary of State in his review, the Government Actuary is required to report to him on the level of rebate rates. The last full review of the level of rebates was in 2001, for rebates from April 2002. The present review began last year. The Government Actuary issued a consultation paper in September 2005 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 House. The proposals in the Government Actuary’s report reflect his view of the factors affecting the cost of providing benefits of equivalent actuarial value to the state pension forgone as a result of contracting out. These include, for example, the continued low levels of real interest rates, expectations of continued improvement in pensioner longevity and the expenses of private pension provision. The Government Actuary’s report and the report by the Secretary of State were laid before the House together with the draft order on 1 March. The Government Actuary’s recommendations, if accepted, would result in a significant increase in the cost of rebates from April 2007. We have thought carefully about whether this would be the right thing to do. We are currently in the process of reaching a long-term settlement on pension reform and are considering the Pensions Commission recommendations—I will say more about that in a moment. While we are considering the future of pension policy, it is responsible—and we have decided—to take a cost-neutral approach. A significant increase in expenditure on rebate rates would not be appropriate at this time. We have had to weigh up the recommendations of the Government Actuary and the need to consider the future of pension policy. So, our proposals, to apply from 2007, are as follows. On salary-related occupational schemes, if an individual is contracted out of the state second pension, the employer and employee currently pay national insurance contributions that are reduced in total by 5.1 per cent of earnings between the lower and upper earnings limit. That will be increased to 5.3 per cent. All of the increase in the flat-rate rebate for salary-related occupational schemes is to go to employers, in recognition of the benefits provided by those schemes. For personal pensions and money purchase occupational schemes, we are accepting the Government Actuary’s recommendations on increases in the age-related rebates. However, we have decided to reduce the cap from its present level of 10.5 per cent to 7.4 per cent. The cap was introduced in 1997 by the last government to restrain cost on public finances. Reducing the cap to 7.4 per cent will affect those aged 44 and over in personal pension schemes and those aged 48 and over in money purchase occupational schemes. In personal pension schemes, those aged above the level at which the cap bites are likely, other things being equal, to be better off not contracting out of the state scheme. However, in practice, that will of course depend on personal circumstances and expectations about the future. It will be up to individuals to weigh up whether to contract in or out, after taking into account information received from their scheme and, if appropriate, their adviser. To achieve a cost-neutral approach, we have had to strike a balance between different types of scheme, and I believe that we have achieved the right balance. The proposed package offers an increase in rebate rates for salary-related occupational schemes without setting too low a cap for money purchase schemes. I emphasise that it is a legal requirement that the rebate rates are reviewed at least every five years. Therefore, the timing of this review is fixed—it is five years since the last review set rates from 2002. The rebate rates can be reviewed again whenever we think it appropriate. A decision on timing will be taken once the way forward on pension reform is clear, but the policy on contracting is an important part of wider pension reform. As noble Lords will know, we set up the Pensions Commission in 2002 to examine the UK private pension system and the issue of long-term savings. Adair Turner and his colleagues published the second of their reports at the end of last year, making recommendations about the future shape of pensions. Contracting out is one of the most complex areas of pension policy, as the Pensions Commission recognised when it said that, were it to create a pension system from scratch today, it would not include contracting out. The commission made a number of recommendations in relation to contracting out, in particular that the contracting-out option for defined contribution schemes should be removed and that it should be phased out for defined benefit schemes by 2030. We have welcomed the Pensions Commission’s second report as an excellent contribution to the ongoing debate. Our work reaches an important stage this spring, when we will bring forward a pensions White Paper setting out the Government’s proposals for long-term pension reform. I have no doubt that noble Lords will question me about this, but the decision that we have taken in relation to rebates has to be set fully and squarely in the context of our current deliberations on the Pensions Commission recommendations. I am satisfied that the order is compatible with the European Convention on Human Rights, and I commend it to the House. I beg to move. Moved, That the draft order laid before the House on 1 March be approved [20th Report from the Joint Committee].—(Lord Hunt of Kings Heath.)