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Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011

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.