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

My Lords, we are getting somewhere. This is the second time this week that I have had an acknowledgment from the Bench opposite that it is not £5 billion. I am very glad for that concession. The move was accompanied by reductions in the corporation tax rate. Regarding the other comment she made about financial assistance scheme, she will know that my right honourable friend the Prime Minister has said that we will expedite the review we were going to undertake as part of the next spending round review in relation to the FAS mechanism and payments. We will certainly do that. The noble Baroness attacked this Government for being mean-spirited. I refer her to the decision that her government made to apply a cap on age-related percentages for the 1997–98 to 2001–02 review period to curtail public expenditure costs. A degree of consistency on that matter would be extremely welcome. I was interested in the quote of the noble Lord, Lord Oakeshott, from the ABI about the complexity of the contracting-out system. It is worth reminding noble Lords of the extract from the Pensions Commission report on that. It said that its preferred option for reform of the state system has implications for the contracting-out rebate. Since it recommends building on the two-tier system, rebates will continue to be paid. But, it says that the contracted-out, contracting-in choice has added complexity to the UK pensions system. It is poorly understood. Its application to personal pensions helped to generate the pension mis-selling problems of the 1990s. It then went on to make the recommendations that noble Lords have referred to. In the light of those very strong criticisms and recommendations from the Pensions Commission, I do not think that it is unreasonable for the Government to say that it would be inappropriate to make substantive decisions in relation to the rebate until we have had an opportunity to come to firm conclusions on the Pensions Commission’s report. That is the essential rationale for why we have brought this order forward today. Noble Lords have asked me to define what is meant by ““spring””. The noble Lord, Lord Hunt, says that outside it is spring. My daffodils at home in Birmingham are very slow to come out this year. I am not sure that I would describe Birmingham as yet being in blooming spring. I am not prepared to give a definite date to noble Lords. We have said that we want to come to a firm view in the spring period, so it is clear that the Government are very determined to reach a conclusion. Friendly discussions are taking place in government between the relevant departments at this moment. On the question of advice, the noble Lord, Lord Hunt, is right about the older age group and contracting back in. Of course, that is a matter for individuals to decide in the light of the advice that they receive. I know that the Association of Independent Financial Advisers has produced a fact sheet setting out the pros and cons of contracting-out through a personal pension. Individuals will be able to obtain information from independent financial advisers that will allow them to make informed choices. We are also liaising with the FSA on customer information that it provides on contracting out. I understand that the FSA is intending to revise the fact sheet towards the end of this year and will then of course take into account the 2007 rebate changes. The noble Baroness, Lady Noakes, asked me about the ABI’s suggestion about the equity risk premium. I can tell her that the Government Actuary took account of those representations and made adjustments to his assumptions where he deemed that appropriate. Although the ABI may not be satisfied with the outcome, I am satisfied that the matter that it raised was drawn to the attention of the Government Actuary. I turn to the points raised by the noble Lord, Lord Hunt. I am grateful to him for giving me notice of those questions. His question about the present fiscal circumstances relates to our duty to ensure that expenditure reflects current economic conditions, not just in setting contracting-out rebate rates but in all areas where public money is concerned. That is a matter of good housekeeping. That must be set alongside the basic premise, which is that the Pensions Commission has set out a complete range of proposals for pension reform in this country. We are earnestly considering them at present. It would not be responsible or in the public interest for us to have made anything other than the decision that we have made, in the light of the discussions that are coming to a point of conclusion, I hope, in the very near future. Of course the question of what impact that has on various forms of pension, about which the noble Lord, Lord Hunt, also asked me, was uppermost in our thinking when we considered the various options before deciding on a cost-neutral approach. That in no way signals that we are no longer committed to encouraging private pension provision. Indeed, the very reason for setting up the Pensions Commission was to encourage such provision. The decision to have a cost-neutral approach was not taken lightly. It needs to be borne in mind that it was not an option to leave the rebate legislation as it was. We are legally bound to review the rebate rates from April 2007. It is also worth pointing out that the order before your Lordships allows us to increase rebate rates for defined benefit schemes from 5.1 per cent to 5.3 per cent. Although that falls some way short of what the Government Actuary recommended, none the less, it is an increase. For defined contribution schemes, it has always been the case that those contracted out into personal pensions at or above the age at which the cap bites would, other things being equal, be better off contracted in. As I said earlier, I accept that that will depend on personal circumstances and the advice that individuals receive. On the question of whether the forthcoming conclusions on the Pensions Commission report require a further review of rebates, if it is decided that any or all of the recommendations in the White Paper are to go forward, they would clearly lead to a significant change in the structure of the state second pension. Consequently, because rebates are intended to provide benefits that broadly reflect the state pension that has been given up, any significant change to the structure of the benefit given would have an impact on those rebate rates. Although the rebates set out in the order can apply for five years to 2012, I can make it clear that they can be changed before the end of that period. It is in recognition of this possibility that my right honourable friend the Secretary of State said that an early review of rebate rates is an option. On the point about the Secretary of State not exercising his powers to review rebate rates earlier than the standard five-yearly reviews, this option has been exercised in the past. In 1999, the Government responded to the concerns of parts of the pensions industry by increasing rebates for those with contracted-out personal pensions. There have also been other occasions, necessitated by changes in associated legislation. Given that the procedure involved in reviewing rebate rates needs to take place approximately two years before any change can be made, clearly this option must be exercised fairly early in any five-year period, but again, only if there is clear justification for doing so. At least I hope that I have shown the noble Lord that it is possible in the light of the decisions that we will eventually take. I thank noble Lords for their contributions. On Question, Motion agreed to.