Pension plan: Life offices' contracting-out talks

The life offices, which underwrite most of Britain's occupational pension schemes, yesterday revealed that they will be going for the maximum level of “contracting-out” possible when they meet Government officials soon to discuss the proposed new social security policy.

Under the Government's plan, everybody paying into the scheme will receive a pension of at least 36⅔ per cent. of their average weekly earnings over a life-time, and the lowest paid workers—those getting £11 a week, or half the national average—will get 60 per cent.

Unsuitable element

The higher rate paid to low-wage earners is recognised by the assurance companies as an element of redistribution in the pension formula, and as an unsuitable element for contracting-out.

Members of the Life Offices' Association and the Associated Scottish Life Offices explained yesterday that this 36⅔ per cent. minimum pension would eventually accrue over a working life-time—say the 45 years from 20 to 65.

This, the two organisations will argue in their talks with the Government, represents a rate of four-fifths per cent. each year—and, for practical purposes, it is the highest level at which abatement, or contracting-out as it is otherwise called, can be fixed. And it is the one the companies will be going for.

Abatement at this level means that for every £100 earned while a contributor is contracted-out, the pension he eventually receives from the State will be reduced by 16s a year.

If the contributor remained contracted-out throughout his 45 years working lifetime, these abatements would build up to four-fifths per cent. each year of his 45 years' earnings—or 36 per cent. of his actual weekly average earnings, the level fixed for State pensions for higher paid workers. But these company pensions would not be adjusted after retirement as average wages or prices increased.

Low-paid worker

His employer would be responsible for this 36 per cent. pension under the life offices' suggestion, and the State's responsibility would be confined to the “redistributive” element—helping the low-paid worker—and to any increase in pension entitlement arising out of the movement of the earnings index.

The additional pension cost of both of these elements, falling on the State, would be met out of contribution increases affecting those who contracted-out and those who did not.

Discussions will start soon between the life offices, other interested parties, and the Government on the level of contracting-out which will be allowed. Until these are completed the assurance companies are naturally reluctant to reveal the lowest level which they believe is commercially feasible.

Nevertheless, they are already emphasising that unless they are allowed to contract-out up to a reasonably high level, company pension schemes would become pointless and be wound up, with a consequent adverse effect on the pattern of savings they generate and on the whole economy.

The life offices maintain that the White Paper itself implies that the level of contracting-out must be fixed in cash terms, as they themselves suggest.

They claim that this is the only possible solution since there is no commercial cost for a pension which rises with the wage index— “nor could an employer be expected to undertake such an open-ended and legally binding liability.”

The life offices also believe that the Government will set one level at which companies will be allowed to contract out—otherwise the procedure would become too complicated, they argue.

Although Mr. Richard Crossman, Secretary for Social Services, suggested yesterday that he would be surprised if the life offices did not “come out with a completely hostile criticism” of the Government's new pensions plan, this was not the case.

Mr. G. V. Bayley, chairman of the Life Offices Association, went out of his way, in fact, to congratulate the Government on getting a lot of things right in its proposals.

“There are so many admirable principles that can be advanced, it is hardly surprising that some of them conflict,” Mr. Bayley said.

“The White Paper has steered a pretty good path through the jungle. The level of benefits seems reasonable and leaves scope for expansion in the occupational schemes”

“Hostile criticism”

Mr. Crossman made his forecast of “hostile criticism” —by employers as well as the life offices—during a Press conference in Liverpool.

But he emphasised that he was not concerned with early criticism of the scheme. The important thing, he maintained, was to get the proposals widely advertised and debated.

The scheme's success relied on the big companies and the life offices giving support, Mr. Crossman said. He expected that some large companies, such as those in the motor industry, would contract-out but he hoped for a percentage of the maximum he had set out.

Mr. Crossman expects about four months of intensive negotiation to take place if the Bill is to go through Parliament in the 1969–70 session and the scheme is to start on schedule in April, 1972.

He does not foresee any massive increase in the number of civil servants needed to cope with the new pensions plan, as computers will be used after the first year.

Heavy imposition

Mrs. Margaret Thatcher, Conservative “shadow” Minister of Transport and a former Parliamentary Secretary to the Ministry of Pensions and National Insurance, yesterday accused the Government of “passing the buck” to employers in order to finance a large part of its proposed new State pension scheme.

The cost of the scheme would be a heavy imposition on some companies, particularly those in the service industries which were already seriously hit by Selective Employment Tax, she said.

It would be distressing, Mrs. Thatcher maintained, if the State scheme led to a reduction in the already large number of private occupational pension schemes which offered better terms.