(c) crown copyright
Catalogue Reference:CAB/129/122
Image Reference:0045
3 3 D O C U M E N T I S T H E P R O P E R T Y O F H E R BRITANNIC M A J E S T Y ' 3 G O V E R N M E N T )
C , ( 6 5 ) 145
5th N o v e m b e r ,
COPY NO.
g g
1965
CABINET
EARNINGS-RELATED SHORT-TERM
BENEFITS
M e m o r a n d u m b y t h e M i n i s t e r of P e n s i o n s a n d N a t i o n a l
Insurance
In J u l y I w a s invited by the C a b i n e t (C. 0 . ( 6 5 ) 4 3 r d C o n c l u s i o n s ,
M i n u t e 4 ) t c o p e n d i s c u s s i o n s w i t h t h e T r a d e s U n i o n C o n g r e s s ( T . U . C . ),
t h e C o n f e d e r a t i o n of B r i t i s h I n d u s t r i e s ( C . B . I . ) a n d o t h e r i n t e r e s t e d
b o d i e s o n m y p r o p o s a l s f o r a s c h e m e of e a r n i n g s - r e l a t e d s h o r t - t e r m
b e n e f i t s , a s s e t out i n m e m o r a n d u m C . ( 6 5 ) 1 1 2 .
These discussions
h a v e n o w b e e n t a k e n a s f a r a s p o s s i b l e w i t h i n t h e l i m i t s of c o n f i d e n t i a l i t y
and t i m e available.
They w e r e conducted either d i r e c t l y with the
o r g a n i s a t i o n s c o n c e r n e d o r t h r o u g h t h e m a c h i n e r y of t h e O f f i c i a l
C o m m i t t e e o n O c c u p a t i o n a l P e n s i o n s ( O . G. O . X- . ) w h i c h w a s u s e d t o
c o n s u l t a w i d e r a n g e of e m p l o y e r s i n t h e p u b l i c s e c t o r , i n c l u d i n g t h e
nationalised i n d u s t r i e s and local authority a s s o c i a t i o n s , with a p a r t i c u l a r
i n t e r e s t i n t h e p r o p o s e d m o d i f i c a t i o n of t h e a r r a n g e m e n t s f o r c o n t r a c t i n g
o u t of p a r t of t h e S t a t e p e n s i o n s c h e m e .
I n o w r e p o r t t h e o u t c o m e of
these consultations.
7
2.
Appendix I to this m e m o r a n d u m s u m m a r i s e s the observations
m a d e on t h e p r o p o s e d s c h e m e .
V h i l e s o m e f e a t u r e s of i t h a v e b e e n
c r i t i c i s e d , t h e g e n e r a l t e n o r of m y d i s c u s s i o n s a n d of t h e c o m m e n t s
r e c e i v e d h a s c o n f i r m e d m e in the belief t h a t the p r o p o s e d s c h e m e r e p r e s e n t s
a r e a l i s t i c a s s e s s m e n t of w h a t w e c a n r e a s o n a b l y h o p e t o a c h i e v e b y t h e
a u t u m n of n e x t y e a r a s a n i n t e r i m m e a s u r e i n a d v a n c e of t h e r e s u l t of t h e
g e n e r a l r e v i e w of s o c i a l s e c u r i t y b e n e f i t s .
I n t h e l i g h t of e x p e r i e n c e of
t h e o p e r a t i o n of t h e s c h e m e r e f i n e m e n t s w i l l n o d o u b t b e p o s s i b l e w h e n
c l a i m a n t s , e m p l o y e r s a n d t h e s t a f f of t h e D e p a r t m e n t s c o n c e r n e d h a v e
b e c o m e u s e d to the new t e c h n i q u e s r e q u i r e d and o u r r e s o u r c e s a r e
i n c r e a s e d b y t h e a v a i l a b i l i t y of a u t o m a t i c d a t a p r o c e s s i n g e q u i p m e n t .
3.
A s r e g a r d s t h e p r o p o s e d c h a n g e in t h e c o n t r a c t i n g - o u t a r r a n g e m e n t s
t h e r e a c t i o n of t h o s e c o n s u l t e d h a s , of c o u r s e , v a r i e d .
S o m e of t h e
b o d i e s c o n c e r n e d w e l c o m e i t , a f e w d i s l i k e i t ; b u t t h e a t t i t u d e of t h e
m a j o r i t y c a n b e s u m m e d u p a s o n e of r e l u c t a n t a c q u i e s c e n c e .
In
p r a c t i c a l l y a l l q u a r t e r s t h e r e i s a r e c o g n i t i o n of t h e i n e v i t a b i l i t y of s u c h
a c h a n g e v / i t h i n t h e n e x t f e w y e a r s a n d a n a c c e p t a n c e of t h e r e a s o n i n g
which h a s led m e to c o n c l u d e that it should be m a d e n o w .
There is
u n d e r s t a n d a b l e c o n c e r n p a r t i c u l a r l y in t h e p u b l i c s e c t o r w i t h t h e
i m p l i c a t i o n s of t h e n e w ^ a r r a n g e m e n t s f o r s o m e p e n s i o n s c h e m e s a n d
r e l a t e d c o n d i t i o n s of s e r v i c e . T h e e f f e c t of a n y c h a n g e i n t h e n a t i o n a l
i n s u r a n c e s c h e m e o n c o n d i t i o n s of e m p l o y m e n t i s , h o w e v e r , a m a t t e r f o r
normal employer/employee negotiations.
In t h i s c o n n e c t i o n it h a s b e e n
strongly u r g e d upon m e that concurrently with the p r o p o s e d changes in
-1­
national i n s u r a n c e a r r a n g e m e n t s the G o v e r n m e n t , a s e m p l o y e r , ought
t o i n i t i a t e n e g o t i a t i o n s v/ith p u b l i c s e c t o r e m p l o y e e s on t h e l o n g - t e r m
relationship between their occupational p r o v i s i o n and the State s c h e m e .
It i s c l e a r t h a t s u c h n e g o t i a t i o n s will b e n e c e s s a r y a n d t h e y a r e b o u n d
to be both legthy and c o n t r o v e r s i a l .
The f l a t - r a t e abatement plan
i t s e l f if g e n e r a l l y a c c e p t e d n o t o n l y a s a s e n s i b l e w a y of b r i n g i n g
c o n t r a c t e d - o u t e m p l o y e e s i n t o t h e s c o p e of t h e g r a d u a t e d s y s t e m of
contributions which will finance the new e a r n i n g s - r e l a t e d benefits but
a l s o a s a m e a n s of r e m o v i n g a n o b s t a c l e t o t h e d e v e l o p m e n t of l o n g e r ­
t e r m plans in the pension field.
4.
While I m u s t e m p h a s i s e that f l a t - r a t e a b a t e m e n t is the only
p r a c t i c a b l e m e t h o d I h a v e found both for dealing with our i m m e d i a t e
benefit p r o p o s a l s and f o r m a k i n g r o o m for future d e v e l o p m e n t s , I do
not put it f o r w a r d a s j u s t a t e c h n i c a l d e v i c e .
I s e e it a s a n e s s e n t i a l
f i r s t step tov/ards our l o n g - t e r m plans for a d y n a m i c e a r n i n g s - r e l a t e d
p e n s i o n s c h e m e a n d i t a l s o h a s i m m e d i a t e m e r i t s of i t s o w n .
It w o u l d
p r o v i d e e v e r y w o r k e r w i t h t h e c o v e r of t h e g r a d u a t e d s c h e m e f o r
w i d o w h o o d ; it w o u l d r e l i e v e t h e l o w e r - p a i d c o n t r a c t e d - o u t w o r k e r of a
q u i t e u n j u s t c o n t r i b u t i o n b u r d e n ; and it w o u l d s e c u r e a f a i r e r
contribution f r o m the h i g h e r - p a i d contracted-out w o r k e r who is at
p r e s e n t paying l e s s than h e ought.
The proposed change is explained
in m o r e d e t a i l i n A p p e n d i x II.
5.
W i t h t h e i n c l u s i o n of e a r n i n g s - r e l a t e d w i d o w ' s a l l o w a n c e w h i c h
w a s r e c e n t l y a g r e e d b y C a b i n e t ( C , C. (65) 5 5 t h C o n c l u s i o n s , M i n u t e 3),
t h e c o s t of m y p r o p o s a l s w o u l d b e a b o u t £ 5 9 m i l l i o n a y e a r .
6.
If w e a r e t o b r i n g e a r n i n g s - r e l a t e d s h o r t - t e r m b e n e f i t s i n t o
p a y m e n t i n t h e a u t u m n of 1 9 6 6 t h e B i l l t o g i v e e f f e c t t o t h e s e p r o p o s a l s
m u s t be p r e s e n t e d i m m e d i a t e l y after the C h r i s t m a s R e c e s s and p a s s e d
b y t h e e n d of M a r c h .
T h i s i s a v e r y tight t i m e t a b l e and it i s now u r g e n t
that we finalise our v i e w s .
I t h e r e f o r e i n v i t e t h e C a b i n e t ' s a p p r o v a l of
a n i n t e r i m s c h e m e of e a r n i n g s - r e l a t e d s h o r t - t e r m b e n e f i t s , a c c o m p a n i e d
b y c h a n g e s in c o n t r i b u t i o n s a n d c o n t r a c t i n g - o u t a r r a n g e m e n t s , on t h e
b a s i s of t h e p r o p o s a l s s e t o u t i n C . ( 6 5 ) 1 1 2 .
M.H.
M i n i s t r y of P e n s i o n s a n d N a t i o n a l I n s u r a n c e ,
4th N o v e m b e r ,
1965
-2­
W.G.2.
II
& "d , J
Summary of Comments made on the proposed scheme
*
& " Earnings-related short-tern benefits 1.
For convenience, the oonnents are listed and discussed by reference
to the summary of the proposed scheme set out in paragraph 2 of C,(65) 112.
Scope of the scheme 2.
The C.B.I. accepted my proposal for earnings-related unemployment
benefit, v/hich they recognised v/as desirable on economic grounds. They were
opposed to extra social expenditure on sickness benefit, v/hich would
increase industrial costs and create a' bad impression abroad,
I pointed
out that to make better provision for the unemployed than for the sick
would produce socially undesirable results and grave administrative
anomalies and would attract the strongest criticism.
The C.B.I, seemed
impressed by these considerations, and did not press their objections at
the end of my meeting with them.
(The T.U.C. are, of course, insistent
that sickness benefit must be covered.)
Scale of benefit 3.
The T.U.C. regard the proposed scale (one-third of average weekly
earnings between £9 and £30) as inadequate for lower wage-earners,
particularly those with family responsibilities. They pointed out that at
the lower end of the scale the new benefits would be insufficient, in
themselves, to remove the need for national assistance supplementation. I
pointed out to the T.U.C. that the low-wage earner with family responsi­
bilities is inadequately provided for whether he is at work or not. (it is
estimated that there are far more people in work who are receiving a total
income below the national assistance standard than there are affected by
!
the wage-stop'.) This problem cannot be solved until we can do something
for such families whether the head of the household is in work or not,
G
*g.? by radical changes in provision for children through family allowances.
The arguments are set out more fully in paragraphs 6 to 10 of 0.(65) 112.
The benefit ceiling 4.
The T.U.C. thought the dangers of over-compensation could, be overlooked­
or deliberately disregarded - in an interim scheme and urged me to
reconsider the proposal to have a benefit ceiling at all. On the other
hand, the C.B.I. (and the National Coal Board) argued very strongly that
the proposed ceiling of 85 per cent of gross earnings v/as too high and
would discourage people from seeking or returning to work. They objocted
in particular to the proposed (paragraph 20 of C.(65) 112) that, in injury
"*
Summary o f
C o m m e n t s made o n t h e p r o p o s e d
A - Earnings-related
1.
For convenience,
to the
oonnents are
listed
the
a c c e p t e d my p r o p o s a l
for
extra social
expenditure
industrial
out t h a t
t o make b e t t e r p r o v i s i o n f o r
costs
and c r e a t e
and would a t t r a c t
t h e e n d o f my m e e t i n g w i t h t h e m .
sickness benefit
3.
of
must be
abroad.
and grave
are,
b e t w e e n £9 a n d £30)
particularly
would
I
pointed
for the
sick
The C . B . I ,
of
seemed
objections
course,
at
insistent
covered.)
themselves,
as inadequate f o r
s c a l e t h e new b e n e f i t s
t o remove t h e need f o r n a t i o n a l
out to the T.U.C. t h a t
bilities
is
(one-third
lower
those with family r e s p o n s i b i l i t i e s .
t h e l o w e r end of t h e
the low-wage
there are
^age-stop'.)
for
such families
average
weekly
wage-earners,
would be i n s u f f i c i e n t ,
assistance
supplementation.
earner with
family
standard than there
a
o u t more f u l l y
total
by
i n work o r
not,
allowances.
6 t o 10 o f 0.(65) 112,
celling
The T . U . C . t h o u g h t
or d e l i b e r a t e l y
C.B.I.
the dangers
of over-compensation
d i s r e g a r d e d - i n an i n t e r i m
reconsider the proposal
hand, the
in paragraphs
is
something
*S** h y r a d i c a l c h a n g e s i n p r o v i s i o n f o r c h i l d r e n t h r o u g h f a m i l y
The b e n e f i t
(it
are affected
T h i s p r o b l e m c a n n o t b e s o l v e d u n t i l we c a n do
The a r g u m e n t s a r e s e t
I
responsi­
a t work or n o t .
whether the head of t h e household i s
at
in
f a r m o r e p e o p l e i n w o r k who a r e r e c e i v i n g
income bolow t h e n a t i o n a l a s s i s t a n c e
the
of
They p o i n t e d o u t t h a t
i n a d e q u a t e l y p r o v i d e d f o r w h e t h e r he i s
estimated that
4.
were
administrative
criticism.
(The T.U.C.
They
benefit
earnings
C
which
and did not press t h e i r
The T . U . C . r e g a r d t h e p r o p o s e d s c a l e
pointed
112.
unemployment
t h e unemployed than
the strongest
impressed by those c o n s i d e r a t i o n s ,
Scale
reference
on e c o n o m i c g r o u n d s .
a" b a d i m p r e s s i o n
would produce s o c i a l l y u n d e s i r a b l e r e s u l t s
that
and d i s c u s s e d by
on s i c k n e s s b e n e f i t ,
increase
anomalies
V "
benefits
earnings-related
which t h e y r e c o g n i s e d was d e s i r a b l e
opposed t o
iii
scheme
The C . B . I .
benefit,
s
scheme-
o u t i n p a r a g r a p h 2 o f C.(65)
summary of t h e p r o p o s e d scheme s e t
Scope o f
2.
the
short-term
&
to have a b e n e f i t
(and t h e National
the proposed ceiling
of
of
ceiling
gross
at
all.
(paragraph
-3­
On t h e
other
argued very strongly
e a r n i n g s was t o o h i g h
would d i s c o u r a g e people from seeking o r r e t u r n i n g t o work.
in particular to the proposal
overlooked­
s c h e m e a n d u r g e d me t o
Coal Board)
85 p e r c e n t
could be
They
that
and
objocted
20 o f 0.(65) 112) t h a t , i n
injury
A "\ 1*1
.S C
e
benefit cases, the existing 5 5 / - differential between the rates of injury­
benefit and sickness benefit should be paid on top of the benefit ceiling. I impressed upon the T.U.C. the importance in an earnings-related scheme of keeping the maximum rate of benefit below the level of take-home pay (subject to zKJtaining the normal preference for those who are injured at
work).
The proposed benefit ceiling seems a reasonable compromise between the conflicting views of the two sides of industry. Reference period for reckonable earnings 5,
The proposal to use gross earnings in the previous tax year was strongly supported by the C.B.I, who assured me that employers would be very ready to co-operate in making the scheme work on this basis, (Such co-operation will be vital to the success of the scheme.) The T.U.C. accept that there Is no better practical alternative for a scheme to start next year but they hope it will be possible eventually to adopt a more flexible reference period. No allowance for interruption of earnings in tho reference period 6.
The T,U,C. were disappointed hy this feature of the proposed scheme
and argued that benefit should be based on earnings during actual weeks of
work, i.e , by dividing the tax-year earnings not by fifty but by the number
4
of weeks of work,
I explained that this would impose a greatly increased
administrative burden which I could not undertake at the start of the new­
scheme, and that there were in any case objections of,principle to what the
T.U.C. had in mind. The additional cost of paying benefit in respect of
notional earnings on which no contributions had been paid would have to be
met by a general increase in contribution rates and this would mean that
lower-paid workers in steady employment would be subsidising higher benefits
for higher-paid workers. I pointed out, however, that automatic data
processing might eventually enable us to moke some allowance for periods of
interruption of employment during, the reference period and the T.U.C. seemed
partly satisfied by my assurance that this would be carefully considered
once the new scheme was established.
Duration of earnings-related supplement
7,
The C.B.I. would prefer three months' earnings-related supplement, but
are prepared to accept six months as the absolute maximum. The T.U.C. still
feel that the supplement should be payable for a year (as proposed in
New Frontiers) but did not press their view at all strongly. In the context
of the proposal (paragraph 1 5 of C,(65) 112) to rationalise the duration of
flat-rate unemployment benefit by providing a standard maximum duration of
twelve months for every Claimant (instead of the present system of from
seven to nineteen months depending on a claimant's previous insurance record)
the T.U.C. asked about the position of the long-tern unemployed and put forward their view that unemployment benefit, like sickness benefit, should be of unlimited duration. I explained that the question of provision for the long-term sick and unemployed was being looked at as part of the general, national insurance review, and that the present interim scheme would not prejudice the ultimate decision on the structure of benefit for long-term interruption of employment. Waiting days 8.
The T.U.C. thought that the proposed twelve-day waiting-day period for
earnings-related supplements was too long and argued that, if it was
necessary for administrative reasons, the supplement should be paid
retrospectively once the spell of sickness or unemployment had lasted for
twelve days. I explained the reasons for the twelve-day waiting period
(which were set out in paragraphs 16 to 17 of C.(65) 112) and pointed out
that to make retrospective payments whore interruption of employment had
lasted for twelve days would provide a substantial and highly undesirable
financial incentive for many claimants to delay their return to work.
This would not only place an intolerable strain on the scheme but would
greatly inorease its cost.
B - Changes in contracting-out and the flat-rate abatement plan 9.
Consultations on the proposals for changes in contracting-out and the flat-rate abatement plan have taken place with the four following interests: the actuarial profession and the Life Offices and other representatives of Pensions Funds and of private insurance interests; employers as represented by the C.B.I; employed persons through the medium of the T.U.C.;
and Government Departments and other public bodies in their capacity as employers. Actuaries 10.
The Institute of Actuaries and their Scottish colleagues, the Faculty
of Actuaries, sent me a detailed memorandum. They referred to previous
documents which they issued when the present graduated pension scheme was
being prepared, in whioh they argued that the present form of contracting­
out would work satisfactorily only for so long' as the scope of the scheme
was limited. They say that the new proposals go a long way to meet this
objection to the present arrangements. Their memorandum is distinctly
favourable to my proposals.
-5­
Representatives of insured and other pension schemes 11.
Representatives of the Life Offices and, generally speaking, of other
organisations interested, in occupational pensions in the private sector
regard my proposals with favour, as they have practical experience of the
drawbacks of the present system of contracting-out and recognise that it
cannot be adapted even to relatively minor future changes in the State
scheme. They s e e the proposals as a firm and lasting basis on which State
and occupational pensions can operate side by side. Their main concern
about flat-rate abatement is that the contribution reduction offered to
contraotod-out employers should not be so small that they may be tempted
to wind up, or cut back, their occupational schemes rather than continue
to contract out. Tho figures on which I have been working (see
Appendix II, paragraph 6) would, I think, be accepted by responsible
opinion in the pension world as a reasonable settlement.
C.B.I. 12. The C.B.I. accept the need for change and have told mo that they
do not
wish to oppose my proposals.
T.U.C. 13.
The T.U.C. were concerned that tho time available for consultation did
not allow then adequately to test the fooling of their affiliated bodies,
and consequently consider that they must reserve their position on the
f
Government s proposals. In general, however, they accept the arguments which
have led us to propose flat-rate abatement, although they are concerned
that this should not load to the establishment of many different categories
of pensioner with entitlement calculated in separate ways.
It was clearly
not possible for me to assure them that the level of abatement proposed to
operate from next year would never be varied, but the T.U.C. regard it as a
point in the scheme's favour that I was able to toll them that we did not
intend that the abatement would bo adjusted automatic ally when changes were
made in other features of national insurance, and that indeed this was one
of the objectives of the scheme.
14.
The T ^ C V s principal reservation is that flat-rate abatement, while a
reasonable provision for employees in private occupational schemes, cannot
be applied in the public sector without considerable disadvantage to the
employees concerned. The problem here is that, whereas the terms of
employment alloy/ an occupational pension and a flat-irate national insurance
pension to be drawn together (in some cases with a modification of the
occupational pension of up to 26/- a week), occupational pensions have
normally been adjusted to take account of the whole of any graduated national
insurance benefit earned. Thus a change in national insurance which meant
-6­
that contracted-out employees began to contribute towards graduated benefit, while losing a part of their flat-rate entitlement, would be doubly disadvantageous to civil servants and others in similar employments. The T.U.C, agree that a long-term solution must be found in re-negotiating the provisions for the adjustment of occupational pension, rather than in tailoring national insurance to the special circumstances of public sector employees, but in the meantime they are prepared to give their full support to representations by the unions whicl
for public service employees and similar bodies against a worsening of their terms of service. Local Authorities 15.
The reactions of local authority associations are a little mixed. In
general, they have concentrated attention not so much on my proposals, which they do not oppose, as on the methods by which they might adapt their own arrangements to then. No doubt they have in nind that, as at present less than half of their employees are contracted-out, they have room for manoeuvre in extending contracting-out and the net financial effect, for employers and the majority of employees, could well bo advantageous. Pjthgr public sector employers
16. The replies received from Government departments and public bodies through the consultation machinery of the O.C.O.P. have similarly conf centrated on the anomalous results of applying flat-rate abatement to the type of occupational pension provision which at present exists for their employees. Some employing departments make the point that their staff ­
whose total present contribution liability of l6/l a week will in many cases increase (and in those cases the amount of the increase will be any­
thing up to a further A/ll a week) - will not stand to gain anything from the proposals, because they will not be able to qualify for the new earnings­
related benefits, since they already receive full pay during six months' sickness, and unemployment is not a likely contingency for then. Hence they say that, fron their point of view, it would be desirable for the present scheme to continue with as few changes as possible until the Government's long-term review is conplete. But most of the replies accept that graduated national insurance liability has to be extended to the contracted­
out, and that the flat-rate abatenent scheme seems a sensible way of doing this; their concern is at the effect which, under present arrangements, the Government's proposals would have on their own employees' present conditions of service. But, of course, these are matters which can only be settled by employer-employee negotiations in the light of firm Government decisions on the national arrangenents. -7­
f
ft
A
D-:Ul
17.
At the meeting at which the proposals were discussed the O.C.O.P.
recommended that consideration should be given as a matter of urgency to
establishing a type of pension provision in the public sector which was
compatible with the extension of the earnings-related State pension scheme.
One solution envisaged was "integration", whereby the Civil Service and
other public bodies would contract in to the national scheme, and the
occupational pension would serve to "top-up" the eraployeeb eventual full
State benefit to a pre-arranged level. It seems clear that working out
and agreeing the details of any new arrangements (which would not of course
be a matter for me, but for the Government as employer) will be a lengthy
and controversial business, particularly perhaps for the Civil Service and
the police; and I have been warned that resentment may well arise from
the fact that the need for new arrangements will spring from the establish­
ment of a scheme of sickness and unemployment benefit which is itself
unlikely to benefit public sector employees. Prom the point of view of
timing, however, the flat-rate abatement scheme will also take some while
to have any appreciable effect:
the graduated benefit earned and the flat­
rate pension foregone under the scheme by a contracted-out employee will
each amount to only two or three shillings a week by the end of 1968. This
means that time will be available for occupational provision in the public
sector to be put on to a revised basis before the anomalies caused, by the
flat-rate abatement scheme become too glaring or too burdensome in that
sector.
Cost 18,
It is the intension that the change to flat-rate abatement should be self-balancing - that is, that the extra contribution income which will arise from extending graduated contribution liability to the contracted-out should be used to finance a general reduction in flat-rate contributions in so far as the finances of the National Insurance Fund permit. -8­
F ft 9
tj
"jr
h)
APPEj^IX II THE PRESEIFJ COFi?MCTPT&-OUT..SYSgICIl AHD E E PROPOSED SYSTEM OF FLAT-RATE J ABATEMENT The present system
1*
Under existing arrangements an employer with an adequate occupational
pension scheme can contract his employees out of the graduated part of the national insurance scheme.
Employer and employee do not pay graduated contributions and the employee does not earn graduated pension.
But
because the graduated contribution includes an element to support flat-rate benefits, they pay in place of this element a larger flat-rate contribution than others. The need for change
2,
There are two separate reasons for wishing to change the existing
arrangements.
First the new earnings-related short-term benefits must be
matched by a contribution similarly related to earnings.
(Otherwise the
lower paid would be subsidising the benefits of the higher paid).
Workers
contracted out for pension cannot be excluded from the new short-term
benefits and must therefore start to pa;/ graduated contributions.
It is
administratively scarcely practicable to collect two different graduated
contributions for different categories of worker counting differently for
benefits.
3.
Secondly, quite apart from the introduction of earnings-related short­
term benefits, there are strong arguments for changing the present contracting­
out arrangements which involve the following inequities:­
(a) Most occupational schemes do not make provision for an employee's widow.
Thus when an employee is contracted out he loses the cover for his widow provided under the gra.dua.ted pension scheme (when herself retired, she receives half the graduated pension her husband had earned) without any guarantee and usually with no prospect of alternative provision for her. (b) The graduated pension now being earned is fixed in the legislation in money terms.
It will not be possible to up-rate the graduated pension already earned without doing an injustice to those who have been contracted out.
The guaranteed occupational pension on the strength of which their employers were able to take them out of the graduated scheme cannot be increased by Government action. ( c )
The h i g h e r f l a t - r a t e
c o n t r i b u t i o n p a i d by those c o n t r a c t e d out b e a r s
h a r s h l y on t h e l o w e r - p a i d employee a n d i s o v e r - g e n e r o u s t o t h e
higher-paid.
I n t h e e x t r e m e c a s e t h e c o n t r a c t e d - o u t man e a r n i n g
£9 a week i s p a y i n g 2 s . 5&. more b y way of n a t i o n a l
insurance
c o n t r i b u t i o n t h a n i f h e were n o t c o n t r a c t e d o u t b u t g e t s no more
national insurance pension i n r e t u r n .
is contributory,
f o r him i s
( d )
If his occupational
as i t u s u a l l y I s , t h e t o t a l c o n t r i b u t i o n burden
excessive.
The p r e s e n t r e q u i r e m e n t t h a t even t h o s e w i t h low e a r n i n g s
if
scheme
should
c o n t r a c t e d o u t b e a s s u r e d an o c c u p a t i o n a l p e n s i o n a t t h e
rate
a p p r o p r i a t e t o e a r n i n g s of £ 1 8 , can d i s t o r t an o c c u p a t i o n a l
a n d impose on i t
scheme
an e x c e s s i v e c h a r g e when young w o r k e r s l e a v e
the
e m p l o y e r and a r e b r o u g h t b a c k i n t o t h e g r a d u a t e d scheme a s i f
they
had been e a r n i n g £18 a week.
4.
T h e s e f l a w s i n t h e p r e s e n t a r r a n g e m e n t s a l l f l o w from t h e a t t e m p t
match u n l i k e p r o v i s i o n s f o r t h o s e c o n t r a c t e d i n a n d t h o s e c o n t r a c t e d
to
out.
F o r t h e f o r m e r t h e l a w p r o v i d e s a p e n s i o n and a c o n t r i b u t i o n v a r y i n g w i t h
earnings, pension r i g h t s capable
changed nonej
provisions
of a d j u s t m e n t b y P a r l i a m e n t i n l i n e
v a l u e s a n d p r o v i s i o n f o r widows;
with
f o r t h e l a t t e r none of
these
apply.
j
5.
I f we w e r e p r e p a r e d t o s u p p o r t t h e s e i n e q u i t i e s i t v/ould n o d o u b t be
possible for the present arrangements, unsatisfactory
as t h e y a r e , t o
continue
a s l o n g a s no o t h e r c h a n g e s a r e made i n t h e n a t i o n a l i n s u r a n c e s c h e m e .
t h e y could s c a r c e l y remain t o l e r a b l e i f
on t h e o c c a s i o n of a f u t u r e
But
general
i n c r e a s e of b e n e f i t r a t e s i t were d e s i r e d t o e x p a n d t h e s p a n o f
earnings
a t t r a c t i n g graduated contributions.
contributions
If for instance graduated
were c o l l e c t e d on e a r n i n g s from £ ? up t o £ 2 4 t h e amount p a y a b l e b y t h e
c o n t r a c t e d - i n employee w o u l d v a r y ( a c c o r d i n g t o e a r n i n g s ) from n o t h i n g up
t o 1 2 s . 9 d . ( i n 1 961 i t w e n t o n l y a s f a r a s 5 s . 1 d . ) a n d t h i s w i d e r a n g e of
c o n t r i b u t i o n v/ould s t i l l h a v e t o bo m a t c h e d b y a. f l a t - r a t e
the contracted-out.
contribution
for
The maximum amount of g r a d u a t e d r e t i r e m e n t p e n s i o n
for
widows ( o r i g i n a l l y 2 1 s . ) w o u l d become 5 2 s . 6 d . b u t v/ould s t i l l i l l o g i c a l l y b e
d e n i e d t o t h e widows of men c o n t r a c t e d o u t .
The o c c u p a t i o n a l p e n s i o n t o b e
g u a r a n t e e d f o r t h o s e c o n t r a c t e d o u t v/ould b e a t t h e r a t e of £5 5 s . f o r a
working l i f e
( o r i g i n a l l y £ 2 2 s . ) a n d t h e l o w e r - p a i d w o r k e r would h a v e t o p a y
c o n t r i b u t i o n s a t a l e v e l g e a r e d t o p r o v i d i n g f o r him and h i s w i f e
(State plus occupational)
earnings.
o f £11 1 5 s . - i n some c a s e s a b o v e h i s
;
-10­
pension
current
*
CONFIDENTIAL
503
(c) The higher flat-rate contribution paid by those contracted out bears
harshly on the lower-paid employee and is over-generous to the
higher-paid.
In the extreme case the contracted-out man earning
£ 9 a week is paying 2 s . 5 d . more by way of national insurance
contribution than if he were not contracted out but gets no more
national insurance pension in return.
If his occupational scheme
is contributory, as it usually is, the total contribution burden
for him is excessive.
(d) The present requirement that even those with low earnings should if contracted out be assured an occupational pension at the rate appropriate to earnings of £18, can distort an occupational scheme and impose on it an excessive charge when young workers leave tho employer and are brought back into the graduated scheme as if they had been earning £18 a week. I+,
These flaws in the present arrangements all flow from the attempt to
match unlike provisions for those contracted in and those contracted out.
For the former the law provides a pension and a contribution varying with
earnings, pension rights capable of adjustment by Parliament in line with
changed money values and provision for widows; for the latter none of these
provisions apply.
5.
If we were prepared to support these inequities it would no doubt be
possible for the present arrangements, unsatisfactory as they are, to continue
as long as no other changes are made in the national insurance scheme.
But
they could scarcely remain tolerable if on the occasion of a future general
increase of benefit rates it were desired to expand the span of earnings
attracting graduated contributions.
If for instance graduated contributions
were collected on earnings from £9 up to £ 2 4 the amount payable by the
contracted-in employee would vary (according to earnings) from nothing up
to 1 2 s . 9 d . (in 1961 it went only as far as 5 s . id.) and this wide range of
contribution would still have to be matched by a. flat-rate contribution for
the contracted-out.
The maximum amount of graduated retirement pension for
widows (originally 2 1 s . ) would become 5 2 s . 6 d . but would still Illogically be
denied to the widows of men contracted out.
The occupational pension to be
guaranteed for those contracted out would be at the rate of £ 5 5 s . for a
working life (originally £ 2 2 s . ) and the lower-paid worker would have to pay
contributions at a level geared to providing for him and his wife pension
(State plus occupational) of £11 1 5 s . - In some cases above his current
earnings.
.
-10­
0 ;j
6.
d
The proposed scheme of flat-rate abatement is designed to fulfil the primary purpose of contracting out, that is to avoid undesirable overlap between national insurance and occupational provision, while getting rid of the objectional elements of the present arrangements.
Its main features would be:­
(a) The contracted-out would pay the same graduated contributions and qualify for the same earnings-related short-term benefits and the same graduated pensions, including graduated retirement pension for widows, as the contracted-in. (b) The employer would be able to contract out his employees on the
same conditions as at present.
The level of pension to be
guaranteed under the occupational scheme would also be the same
as it is now.
For a. man this is about 1 s . hd. a week for each
year of contracted-out employment,
(c) The contracted-out employee would have his national insurance pension abated b;* a fixed amount in respect of each year during which he was contracted out.
(This amount would, I propose, be Is. a week for a man - rather less than the amount guaranteed under the occupational scheme). (d) In recognition of the reduced commitment of the National Insurance
Fund and the commitment assumed by the employer, the contracted­
out man and his employer would each pay a flat-rate contribution
lower (l am proposing by 2 s . 3d. a week) than those for contracted­
in employees.
The figures in sub-paragraphs (c) and (d) above have not yob been approved
by the Treasury.
Advantages of the change 7.
The basic advantage of my proposal is that instead of trying to equate, as does the scheme we inherited, a fixed amount of pension which the employer is required, to provide with a variable amount of State pension which the worker forgoes, we should be balancing like with like; the employer would still be required to provide a fixed amount of pension for each year of contracted-out employment, but this would be in substitution for a fixed amount of State pension forgone.
The immediate consequence would be to remove for the future the inequities listed in paragraph 3 above. Additionally the small but necessarily universal graduated contribution for the new short-term benefits would be easily collected along with the bigger graduated pension contribution now also universal in its application. -11­
CONFIDENTIAL
-
ggg
Reasons for making the change now 3.
As we are anxious to introduce the new short-term "benefits in the shortest possible time it is tempting to concentrate on that task and to postpone changes in the contracting-out provisions.
are over-riding.
The objections to this First, to collect for the contracted-out only the small graduated contribution for the new benefits but for others the combined pension and short-term benefit contribution would introduce very formidable difficulties both for my Department and for employers.
Secondly, once the machinery existed for collecting graduated contributions for the contracted
out it would be wrong not to use it to get rid of existing inequities, listed in paragraph 3 above.
Lastly, if a change became inevitable, as sooner or later it must, a benefit incres.se Bill, necessarily rushed through against time, is not a suitable vehicle for structural changes which Parliament must be allowed adequate time to discuss and employers to operate. -1 ?.­
NOTE
T h e a t t a c h e d m e m o r a n d u m b y t h e C h a n c e l l o r of
t h e E x c h e q u e r ( C . ( 6 5 ) l-i-6) i s f o r d i s c u s s i o n a t t h e m e e t i n g
of t h e C a b i n e t a r r a n g e d f o r T h u r s d a y , 11th N o v e m b e r , a t
10. 00 a. m .
T h e c o n t e n t s of t h e m e m o r a n d u m a r e of a
particularly confidential character.
M i n i s t e r s will no
d o u b t e n s u r e t h a t it i s t r e a t e d a c c o r d i n g l y .
The m e m o r a n d u m should be returned, under
after the m e e t i n g to;
Mr,
V . C, B u d g e n , Cabinet Section, I l o o m 140, C a b i n e t O f f i c e , S W. 1.
t
C a b i n e t O f f i c e , S. W . l .
9th N o v e m b e r ,
1965
SECRET cover,