New pensions for old MONEY

NICHOLAS DAVENPORT

Knowing something of the actuarial complica- tions of group pension schemes, I was amazed to find how easily one could read Mr Cross- man's White Paper on National Superannua- tion and Social Insurance. His new department of Health and Social Insurance is to be con- gratulated on its English as well as on its common sense. It starts by explaining why the present flat-rate scheme of national insurance plus the modest graduated-to-earnings scheme failed to provide adequate incomes on retire- ment. A supplementary allowance from the National Assistance Board had to help support some two million old-age pensioners. Yet the cost of it all has steadily mounted and will go on mounting as the proportion of the population over pension age rises from 15.4 per cent to 16.2 per cent by 1980. As at 31 December 1967 the flat-rate pensions were costing £1,500 million a year and all other flat- rate benefits £660 million. In addition, the means-tested supplementary benefits were cost- ing £385 million. As the flat-rate contributions from employers and workers provided £1,450 million and the graduated contributions and interest £360 million, the Chancellor had to find out of taxation £350 million for national insurance in addition to the £385 million for the cost of the national assistance benefits. The old machinery of collection had become much too cumbersome. The flat-rate contribu- tions were collected through the stamped card system and the earnings-related payments through the PAYE system-44 per cent on earnings between £9 and £18 a week for gradu- ated pensions and 1 per cent on earnings be- tween £9 and £30 a week for short-term sickness, unemployment and widowhood bene- fits. All this—thank Heaven—will be abolished, including the stamped cards. What a relief for businessmen! Instead, all employees coming within the PAYE system will pay a single con- tribution of 61 per cent of their earnings up to a ceiling calculated at about one and a half times national average earnings. On April 1968 earnings this ceiling would be £1,700 a year, equivalent to about £33 a week (in the 1920s the national average was about £3 a week). Last year only about 7 per cent of the twenty- two million employees covered by PAYE were earning £1,700 a year or more. Beyond that limit these richer workers would not pay any- thing. The remaining 93 per cent would have paid the new contribution of 64 per cent on the whole of their earnings. The 64 per cent deduction from wages will be compulsory for married women and widows who go out to work on the same basis as for men. Will they all grudge these extra contributions?

The White Paper gives a useful table show- ing how the new contributions compare with the old:

Weekly contributions Weekly earnings Old New Change £11

17/10 14/10

-3/-

£161 23/- 22/3 -9d £22 (national average) 24/8 29/8

+5/-

£27f _ 25/3 37/1 +11/10 £33 25/5 44/7 +19/2 It will be seen that the increase in the contri- butions is heavy for the richer worker—nearly £1 more at the £33 level—and less onerous for the poor.

To minimise the likely grudge, Mr Cross- man has first of all wisely decided to divide

the deductions from wages into two-41 per cent for pensions (including widowhood bene- fits and death grants) and 2 per cent for social insurance (sickness, injuries, unemployment). This should—we hope—convince the worker that he is merely deferring the spending of 41 per cent of his current wages until he retires. There will, in fact, be two funds—a National Superannuation Fund and a Social Insurance Fund—and contributions paid into one will not be diverted into the other. To make the worker feel that he is not being swindled but cosseted into accumulating post-work credits he will be reminded that his employer is paying as much as he does. All employers will pay 61 per cent of their total PAYE pay- roll with no earnings ceiling. The only difference will be that 44 per cent will go to National Superannuation, 2 per cent will be for social insurance and I per cent for the Redundancy Fund, replacing the employers' present flat-rate contribution to that fund.

Mr Crossman has other surprises to offer to sweeten the workers' pill. His new scheme is 'dynamic.' First, when a worker retires, his earnings in each year will be revalued accord- ing to a 'pension formula' in line with the changes in the level of national average earn- ings. Secondly, the revaluations for pensions and other benefits, which will be carried out every two years, will compensate the contribu- tor for any rise in price levels since the previous increase„ In other words, the new scheme is to be made inflation-proof. The welfare state has, indeed, been hoisted to the heights of More's Utopia. It would have been impossible before the invention of the computer.

This marvellous new scheme might be ex- pected to impinge on the private occupational pension schemes, of which there are now about 65,000 covering about twelve million workers (that is, half of all employed people and two thirds of all employed men). These could not possibly emulate the Crossman dynamism. But the minister does not want to upset them, partly because they can be tailor-made to suit indi- vidual industries, partly because, being funded, they generate genuine savings which are essen- tial for the non-inflationary finance of the national investment. In 1967, for example. the surplus of their contribution and interest in- come over benefits and expenses was £810 million. This saving accounted for two fifths of all net personal savings. The Govern- ment scheme, being pay-as-you-go, does not generate savings except to a modest extent in its initial stages. So the minister is propos- ing to allow partial contracting out. This means that there will be a deduction from the con- tributions made by the employer and by the employee to match a reduction from the per- sonal retirement pension which the contracted- out employee would otherwise receive under the state scheme in return for a guarantee that the occupational scheme would give him at least the pension deducted. The formula linking the deduction from contributions to the deduction from pension will be negotiated between the minister and the occupational scheme managers. It (vill be based on the principle that the deduc- tion from contributions must represent the commercial cost of providing the undynamised pension given up. The deduction will, I under- stand, take the form of a percentage of reckonable earnings. This, although it sounds complicated, will be easily computed by the employer when he comes to make his deduc- tion from wages under PAYE. The minister hopes that occupational pension schemes will be able to develop further with this contract- ing-out concession.

There is one provision in the White Paper which the life offices are not unwilling to concede. It concerns transferability. It is the Government's intention to bring in legislation to ensure that every member of an occupa- tional pension scheme who has satisfied certain minimum qualifying conditions shall have the right, when moving jobs, to have his accrued pension preserved for him until he reaches re- tiring age. But he will have the option to withdraw his own contributions in cash if he prefers to do so. These provisions are essen- tial to allow for the mobility of labour which the reconstruction of British industry requires.

The new scheme is scheduled to start in April 1972. It will be twenty years before the contributors are drawing out their full pension of approximately half-pay (rather more than half for the poorer worker and rather under half for the richer), dynatnised and in- flation-proofed. It will not involve the Treasury in paying a higher proportion of the cost than it does today—about 19 per cent. It is thus financed mainly by contributions. As it is based on the pay-as-you-go principle, which means that each generation of contributors pays for the pensions of the preceding generation, it does not involve funding or generate new savings but, as the initial contributions are fixed to allow for an increase in expenditure some years ahead, they do initially generate a surplus. The immediate effect of contracting out is to shorten the initial period during which the in- come of the superannuation fund exceeds its outgo and therefore to require the contribution rates to be increased earlier-but in the longer run lower pensions will be paid out from the fund as an offset. It seems to be an ideal case for partnership between state and private enter- prise. As a firm believer in the mixed economy I welcome it.