11.3 p.m.
The Secretary of State for Education and Science (Mrs. Margaret Thatcher)
The hon. Member for Rotherham (Mr. O'Malley) was kind enough to congratulate my hon. Friend the Member for Wokingham (Mr. van Straubenzee) on his very well deserved promotion to Minister of State for Northern Ireland. I certainly join in that congratulation but could wish that that promotion had come 24 hours later, because then my hon. Friend might have been doing the job I am now doing.
I also welcome my hon. Friend the Member for Chelmsford (Mr. St. John-Stevas), who will in future be doing the job I am now doing. But on a particularly technical subject, having, like the hon. Member for Rotherham, spent some time on national insurance, I thought it perhaps right that I should take on the task tonight. I will do my best to answer as many as possible of the questions which have been raised.
Let me clear up one matter at the very outset. I thought that the hon. Member for Acton (Mr. Spearing) rather implied that I had refused to see the working party. I have done no such thing—and [column 770]I am glad to see the hon. Member indicate that he does not think I did. I am only too happy to see members of the Working party. I had hoped to arrange to do so before any debate took place on the regulations. In the event that was not possible, but I shall be seeing them later on.
We are really discussing the report of a working party, set up in April, 1970, consisting of representatives of teachers, their employers and representatives of the Scottish Office and my Department. By a large majority the teachers accepted the recommendations. The exceptions were the National Association of Schoolmasters and the Scottish Schoolmasters Association, who dissented, as they were perfectly entitled to do if they wished. The hon. Member for Rotherham suggested that pressure had been put on the teachers as a result of which they had agreed. With all due respect, I have never known teachers to agree to anything because of pressure from the Department if they fundamentally disagreed with it. I think they agreed because on the whole the package is a good one, and it is that total package that I have accepted.
The hon. Gentleman did a good deal of selective quoting. I should like to quote a passage towards the beginning of the working party's report; we must have been working from different documents. Paragraph 5 on page 2, dealing with preliminary considerations which were accepted by the working party says:
“First, the Pensions (Increase) Act 1971 has already ensured that the teachers' schemes will broadly protect the value of pensions after award against increases in prices.
That is the first point I wish to get across; all the increases for teachers' pensions after they have retired are borne not by the fund but by the Exchequer. The Government Actuary has calculated that that is equal to an extra 2.2 per cent. contribution. I am glad that the working party recognised that at the outset. [column 771]It was agreed that the application of the Act to teachers pensions constituted a major improvement in the schemes (an improvement enhanced by the announcement in December 1971 that reviews would be annual and not biennial), and that this improvement would add appreciably to the cost of providing pensions increase, which is at present borne by the Exchequer.”
Mr. R. C. Mitchell
Will the right hon. Lady read the next sentence?
Mrs. Thatcher
Yes. It says:
“However, there was a difference of opinion between the official side of the working party and the teachers' side on the method of taking this extra cost into account, the official side contending that it could not be disregarded in considering the finances of the schemes and teachers' contributions, and the teachers' side arguing that since it arose from an item of general Government policy and was applicable to all public service pensions it should be so disregarded.”
That guarantee does not necessarily apply to all funds. On the whole, it applies only to notional funds. I cannot think of one big actual fund to which that provision applies. It arose from the Government's general guarantee as a notional fund, a guarantee that does not apply where there are big actual funds.
Mr. Jennings
What my right hon. Friend says may be true, but her argument about vocational pensions and annual reviews and so on is entirely applicable to all public service pensions, including teachers and all public service employees, under the public service pensions Acts.
Mrs. Thatcher
But the pension schemes of many public service employees have notional funds and not actual funds. The local government fund is an actual fund and that provision does not apply to local government employees. It may be argued that local government employees are public service employees, but the provision does not apply to them in that way.
I wish to make it clear that from the beginning it has been a nationally funded scheme. The arrangement is that contributions from teachers and their employers are paid into the Exchequer and benefits are paid by the Exchequer. An account of income and expenditure is maintained and the balances are deemed to attract interest. Thus the scheme is run as though it is a funded scheme and it is notionally funded. The balances were made at the beginning to attract a fixed rate of interest of 3½ per cent. That was thought to be a better method in those days to protect the scheme from capital depreciation, and in the 1930s it did protect the scheme from capital depreciation. [column 772]
By the time we came to 1956 the fund was in actuarial deficit. Rapidly increasing salaries had increased the cost of benefits to a point at which the credits, standing in the account fell short by £274 million of the total of £536 million needed to balance the scheme's actuarial liability. As those who are teachers know, there was a settlement made in 1956 which was really a three-part settlement. First, the new entrants' rate of contributions was put up. The new entrants' rate is the rate determined actuarially to be sufficient to support the stated level of benefits if paid throughout his career in respect of someone newly entering the scheme. That rate at that time was increased to 12 per cent.
At the same time the employers undertook to meet deficiencies which would arise in future and in addition there are the post-retirement increases. The deficiency payment has risen considerably. It is now equivalent to contributions of 2.5 per cent. and with the improvements would be equivalent to contributions of 3.15 per cent.
Before going on to that I should point out that since 1956 there have been new arrangements about the rate of interest. The rate of interest since 1956 has been much higher than 3½ per cent. It has been calculated since 1956, on new money entering the account since deemed to have been invested in long-term Government securities, and therefore the rate of interest credited to the scheme has varied from 4.9 per cent.—mostly above that—to the 1970–71 rate of 9.4 per cent.
Mr. Montgomery
So it should be.
Mrs. Thatcher
So it should be and so it is. It is quite misleading to think that the rate has been 3½ per cent.
Mr. O'Malley
Would the right hon. Lady care to comment on the estimate made by the actuary employed by the teachers' side of the working party that, had there been funding during the period in question, the deficiency payment of 3.3 per cent. required today would not be needed and would be much reduced—reduced by 2 per cent? Are those figures accepted or rejected by the Department?
Mrs. Thatcher
I cannot say whether the precise figures would be accepted. We would accept that had the whole [column 773]scheme been funded and had it been spread in investments precisely to the indices by which the £2,000 million has been calculated, which is not necessarily a correct assumption, it would have given greater payments than have been given now and the deficiency payments would be reduced. The deficiency payments are paid wholly by the local authorities and not the teachers so it would not therefore have affected the contributions which the teachers have to pay towards this scheme.
The crucial point in this kind of scheme is that it is affected by a Government guarantee to pay the benefits in all circumstances. The value to the teachers of such a guarantee will vary from time to time. When income is exceeding expenditure as it will when the teaching force is growing fast, any system will be buoyant although, as experience shows, not necessarily actuarially solvent.
The present rate of growth of the teacher force can hardly be maintained indefinitely and the expectation must be that in time the number of pensioned teachers will grow relative to the number of contributing teachers in the service and expenditure will consequently come to exceed income. At that point the guarantee will ensure that the Government will pay the benefits.
Some of the other schemes have been mentioned. The nationalised industries and the Post Office have actually-funded schemes and a similar arrangement is intended for the proposed State reserve scheme. In all these cases there is no Government guarantee and no direct contributions from general taxation.
It is alleged that having a notional fund has been damaging to the teachers' interests. A number of hon. Members have pointed out that local government services pay a lesser contribution of 6 per cent. There are some local government services which pay a higher contribution. The police services pay 7 per cent. Fire services also pay 6¾ per cent.—[Hon. Members: “They retire earlier.” ] I agree. On the whole, local government employees retire later than teachers; that is to say, they pay their contributions for a longer period and draw their benefits for a shorter period. That is one of the factors affecting the contributions that they have to pay. [column 774]National Health Service workers also pay 6¾ per cent. So that figure of 6¾ per cent. is not necessarily an unusual one.
We have given very serious consideration to this matter, and I want now to return to the point made by the hon. Member for Acton about the 14.2 per cent. actuarial calculation for new entrants to the teachers' scheme. This calculation, which as far as I know is not disputed by anyone, is fully agreed not to be based upon notional funding. It is based upon actual funding, and the principle upon which it is based is that the Government Actuary is also responsible for a number of actual funds which he uses for this calculation, and he also has regard to the performance of the general indices of financial performance like the Financial Times actuary's index. So the 14.2 per cent. does not depend upon its being a notional fund. It would have been the same had it been an actual fund. Therefore the teachers do not suffer any damage in that respect because the scheme is a notional one. We then come to the kind of split that we have of the 14.2 per cent.
Before coming to that, however, there is one further point. The corresponding figure on a similar basis for local government funds is 12.3 per cent. The actuarial contribution for new entrants to local government would be 12.3 per cent. Of course, it takes into account their benefits, their length of service, retirement age, etc., but their 6 per cent. is about the same proportion of 12.3 per cent. as the teachers' 6.75 per cent. is of the 14.2 per cent. One could argue that the proportion to the teachers of the total is slightly more favourable than is the proportion to employees of local government in relation to what the employers pay.
I have referred to some other schemes. There are a number of points in detail, but I am afraid that they involve rather a lot of figures. May I go back now to the point of apportionment of contributions between employers and employees? A number of hon. Members have given a great deal of attention to it.
The figures that I use are again those of the Government Actuary in the report of the working party, because they cannot be disputed for accuracy and for giving the precise picture of the cost [column 775]of the teachers' superannuation schemes in terms of the Government Actuary's analyses of costs.
The opportionment agreed by the working party is that teachers should pay 6.75 per cent. and that employers should pay the balance of 7.45 per cent. Immediately the employers are paying more than the employees. Throughout the working party, the local authorities insisted on roughly equal contributions, so that even on the 14.2 per cent. which again is on an actual fund basis they are paying the higher amount—a contribution of 7.45 per cent. But this is not the end of the employers' contribution. They also have to pay a further 2.5 per cent. for the deficiencies of the scheme. That brings their contribution up higher and, in addition, as a result of the application of the improvements, they will have to pay a further 0.65 per cent. That means the teachers are paying 6.75 per cent. and their employers, the local authorities, are paying 7.45 per cent. plus 3.15 per cent. coming up to 10.6 per cent. In addition, the Exchequer pays 2.2 per cent. for post-retirement inflation.
The total cost of the scheme in terms of percentage contributions on salary is 19.55 per cent. of which the teachers are meeting 6.75 per cent. I am sorry there are so many figures but I hope that what I have said puts the matter into better perspective.
Mr. Peter Rost (Derbyshire, South-East)
Would not my right hon. Friend agree that the fact that the contributions by the State and by the local authorities is substantially higher than that paid by the teachers merely confirms the case put by hon. Members on both sides of the House that the scheme ought to be funded, and that if it were funded properly this liability would not accrue to the taxpayers?
Mrs. Thatcher
I think that if the scheme had been funded at the outset things would have been very different now. They would also have been very different in the 1930s as well. One cannot have the roundabouts and leave the swings. Nor can one ignore the actuarial calculations. In this House we have seen what happens to insurance companies which look only at income and not at [column 776]the liabilities they are building up as a result of the contributions and premiums which have been paid.
I think most of us would agree that had the schemes been funded at the outset the position just now, when we have a comparatively small number of pensioners to a large number of teachers—an increasingly young teaching force—the position would have been better than it is. But we would not necessarily say that it would be better if we had a very much larger retired force compared with the number of those who are teaching and who are training to come into the profession. Because those who are coming into teaching now will be drawing pensions as late as the year 2030, one has to take a long view of these schemes although, as we know, they are modified every few years.
I want to say something more about the funding aspect. It is not possible just to pay the total amount equal to the notional funding. The effect would be quite disastrous upon the Exchequer and, therefore, upon the economy and everyone else. In addition, a number of other schemes would want a similar arrangement made for them. The most practicable arrangement would be to start one's funding now with some contributions going towards a fund and not towards the payment of benefits from the Exchequer or the notional fundings. The problem again would be that that arrangement would have to apply to a number of other funds. It would mean in effect that there would be no contribution towards outgoings; we would have to meet those outgoings from the Exchequer while contributions were going to a fund. It is my advice that if we did this for all schemes which are at present notionally funded and started to convert them into actual funding, the cost would be very great, depending upon the rate at which it was done. It would come to hundreds of millions of pounds a year.
I want now to deal with the question of widows' benefits. That particular family benefit fund is under the control of a board of managers. It cannot be transferred without the consent of the board. On the whole, I think that 50 per cent. for a widow is in line with good private sector schemes and good public schemes as well. The Exchequer, from [column 777]1st April this year, has assumed the liabilities on the basis that it would, of course also be assuming the assets. I hope we can come to some reasonable agreement about this. Most people would not wish the improvements to be held up.
The working party's report will give rise to four Statutory Instruments. Tonight's is the first. The improved benefits are already in payment, and if the Opposition were to be successful tonight in defeating the regulations no future payments of improved benefits would be made.
Mr. O'Malley
Do not be silly.
Mrs. Thatcher
I am sorry but they would not. Let me make it quite clear. If these regulations were annulled there would be no question of going back again to 1st April, 1972, because the whole question would be open again, and the hon. Gentleman knows it.
I will sum up the complex points I have been making. The existing notional fund arrangement gives to teachers the Government's guarantee that they will continue to receive the level of benefits appropriate to a public service occupational pension scheme of this type. It is common ground that these benefits are now being greatly improved. A valuable degree of inflation-proofing is provided by the Pensions (Increase) Acts.
The scheme requires from the teachers a contribution in line with the employees' contributions in comparable schemes and covers only about 40 per cent. or two-fifths of the total cost of the scheme, whether it be actually or notionally funded. For this purpose I am taking the figure most favourable to the teachers of 16.4 per cent., which is the new entrant contribution of 14.2 per cent. plus the Exchequer contribution of 2.2 per cent., leaving aside the deficiency contribution. The remainder falls on either the Exchequer or the employer, the latter bearing by way of supplementary contributions payments needed to bring the investment income up to the necessary levels. On the whole, this is not a bad deal.
I have tried to deal with the possibility of a change to a real fund. This is [column 778]hardly practicable or, at any rate, practicable only over so long a time-scale that at the very best any advantages there might be to teachers would be very long deferred. More important, the scheme would then lose the Government guarantee, including the pensions increase cover. The potential benefits of a funded scheme could hardly be expected to exceed the value of the guarantee of a favourable level of benefits and a reasonable inflation-proofing, backed by the whole financing power of the State.
I ask the House to reject the Prayer. The regulations which I have placed before the House are the first of a series of such Statutory Instruments designed to give effect to a package which will produce great improvements in the teachers' superannuation scheme benefits for England and Wales. There is, of course, a similar package for Scotland. The packages have been accepted by all the teachers' associations except the National Association of Schoolmasters and the Scottish Schoolmasters' Association.
If the House accepts the Prayer and annuls the first set of regulations, it will be depriving the teachers of a considerable measure of improvement in the terms of their superannuation which the vast majority of them clearly desire. The past payments we have made would stand—there would be no attempt to claw them back—but future payments under the scheme would have to fall and negotiations would have to start again from scratch. Any further agreement would have to operate from a date subsequent to 1st April, 1972. If the regulations are annulled we shall have to start all over again—and we started this working party in April, 1970.
It has taken two and a half years to get an agreed package, and if the hon. Gentleman puts that in issue he must understand that it will take a very long time to get agreement. He will not face the reality of the action he is asking the House to take. I cannot believe that more than a minority of teachers, having regard to the position of those now retiring, would wish to see this result, and I therefore ask the House to reject the Prayer.
[column 779]Question put:——
The House divided: Ayes 178, Noes 183.