THURSDAY 9 NOVEMBER 2000

SIR MICHAEL PARTRIDGE KCB

  480. We are seeing next week some witnesses from New Zealand.
  (Sir Michael Partridge) Oh, yes.

  481. One of the things that I thought about when we were asking questions on performance was they have a system of contracts between the equivalent to Permanent Secretaries and the Commission.
  (Sir Michael Partridge) That is right.

  482. Do you think there should be some such arrangement in this country where the Permanent Secretary, particularly, is put on some very tight performance arrangement?
  (Sir Michael Partridge) In a sense there is one already but not a lot of it is written down. The personal targets are and the personal pay is. I think you could do that. I am not myself in favour of these sorts of things, partly because you have to allow for the Departmental Accounting Officer role, where he actually works to Parliament, not to his Secretary of State, and that is right, it is one of the strengths of the British constitution, I hope that is never changed. He exercises a great discipline, backed by the Treasury. Secondly, I think once you get into that sort of thing, and one sees this in industry, when you get contracts, people reach for lawyers. When I said about the Prisons Agency not working, one of the mistakes they consulted us about was that they did not keep a policy unit in the Home Office to be responsible for the Prison Service. When things went wrong, who could the Secretary of State and Permanent Secretary turn to for advice but the Head of the Prison Service? He was consulting his lawyers about the contract. That is no good. You cannot proceed on that sort of basis, so I would be very wary about getting into that sort of thing. This is what happens in business. If you try and sack the chief executive, the next person you hear from is his lawyer. I would not like to see the relationship—I lecture on this, as I say, with Peter Lilley—turn into that sort of relationship, it has got to be a joint team to run the Department.

  Chairman: Parliamentary accountability is something I think Jim Cousins is going to touch on.

  483. Sir Michael, can I just ask you—
  (Sir Michael Partridge) Nice to see you again.

  484. Indeed. I hope we will not have a near death experience on this occasion.
  (Sir Michael Partridge) No. We were nearly attacked by a wart hog in Zimbabwe once on a parliamentary visit after my retirement.

  485. Being attacked by a wart hog, I suppose, is part of both political life and life as a civil servant.
  (Sir Michael Partridge) Mr Cousins told your colleagues afterwards that I had acted like a typical Permanent Secretary saying "Stand still and do nothing and it will go away". That was not the advice he wanted to hear, he wanted something a bit more positive, but it worked.

  486. Let us not go too far into that. Could I just ask you about a question of substance because in some of your remarks this morning you seem to me to be expressing considerable anxieties about the future of National Insurance and about the withering away of flat rates.
  (Sir Michael Partridge) Earnings-related benefits as well.

  487. In fact, you have always been one of the great advocates of targeting.
  (Sir Michael Partridge) Yes.

  488. This comes through in the report I have read with interest, to which you have made reference already this morning.
  (Sir Michael Partridge) Yes.

  489. You are one of the great advocates of targeting. Why, therefore, do you seem to be withdrawing your endorsement from the heavily targeted policies where the Treasury now seems to be leading us?
  (Sir Michael Partridge) We are getting on to policy now but I have no objection to this. I think that targeting is fine but I would target by groups and individuals, this is how it is best done, not by means-testing. There is an element, there is a role for means-testing because the bottom 20 to 30 per cent will never be able to save or pay enough for a pension. Partly that ought to be done by a redistributive formula from the richest ones, but I am a great believer in the principle of National Insurance because I think it gives people rights and they feel secure. I think the other thing it does is to ensure you are then able to build up a system whereby the people can contract out and have occupational or personal pensions on the basis of the State Earnings Related Scheme as a benchmark—a minimum benchmark—against which you judge it. I think one of the great unsung successes, which I am very proud of over the last 40 years, has been the fact that we have managed to shift something like over half, probably two-thirds, of the actual burden of pensions on to people and their employers. I am now worried on certain accounts that if the State Earnings Related Scheme goes you will not have a benchmark, and the fact that compulsion has gone and in personal pensions you do not have employer's contributions. So I think we are heading for a situation where people will be clearly not saving enough for their old age and you will have a huge, if you are not careful, means-tested scheme in 20 or so years' time because people will just not put enough money away. I think you must have compulsion and you must have a reasonable state scheme for the bottom 30 or 40 per cent. Now the Government has put forward proposals for this, for people up to £20,000 a year. I think if you read the small print very carefully, one would not be quite so sanguine about it because they are going to turn into flat-rate schemes and they are not going to be increased with earnings as the income guarantee is. So the Minimum Income Guarantee level will rise and I think what will turn into another flat-rate pension will dwindle in value, that is what I meant, the earnings-related remnant will turn into a flat rate and will diminish. I think you will have a lot of people on means-tested benefits and you will not have such a big occupational and personal sector as soon as employers see that (a) it is not compulsory and (b) they do not have to contribute. So I am worried about the general drift. I am not alone in this. I think Lady Castle and some people on the Conservative side would share those views. I think one of the problems politically at the moment is that a lot of Conservative former Ministers would dearly like to do this themselves, so it has not really been opposed. They believe in the Treasury policy of means-tested targeting by means testing.

  490. Exactly. Now you describe it as a Treasury policy.
  (Sir Michael Partridge) It has been, all through 40 years.

  491. All through 40 years. Now do you see the present situation as being, if you like, a final triumph of the Treasury over the principle of National Insurance?
  (Sir Michael Partridge) No, because I think these things go in cycles and I think the cycle will come back, but at the moment it is certainly going that way. I think they have largely taken over by stealth—

  492. By stealth?
  (Sir Michael Partridge) Yes, they have largely taken over this policy by stealth and I think they have always been opposed to these large State Earnings Related Schemes. I have seen it bit-by-bit through the four or five reforms I have done. I think they have seized their chance now because the tide has turned for the leaders of both parties to do this and to concentrate resources. This is where a lot of the savings are coming from, this surplus is coming from, at the moment. It does have very damaging effects, means testing. The higher you push it up the scale, the more damaging it is on the ability of people to save and on incentives to work. I think those have been very under-estimated, apart from the fact that it is charity, back to the Poor Law.

  493. You say this has been achieved by stealth. Now could you just explain what, in fact, you mean by that? Can you give us examples of the steps of the implementation of this stealthy policy and how Parliament perhaps could have been more effective in detecting that and challenging it?
  (Sir Michael Partridge) Yes. The first thing I think is National Insurance contributions are earnings-related, so it is a buoyant system, and it is insulated from Treasury revenues. Therefore, you have got the money to have an earnings-related scheme. The whole point of Mrs Castle's reform was to have an earnings-related benefit structure funded by earnings-related contributions and the whole thing would be buoyant and move up together. Where it started to go wrong was that the pension increases after retirement were the better of prices or earnings. Earnings itself could have been afforded but it had a ratchet effect because in some years, if you remember, in the late 1970s, prices went up 30 per cent, earnings only went up about four, pensions went up 30. So the pensioners got the better of both worlds and the cost was ratcheting up too fast. That was abolished by the Conservative Government. I think it would have been abolished by the Labour Government too if they had got back. The ratchet effect was wrong but the principle of earnings-related increases was not. It is perfectly affordable. Now the steps which have happened are the basic pension has tended to only go up by prices, with occasional greater increases like we have just had now. The abolition of SERPS was a very great step. The Conservatives had nibbled away at various provisions of SERPS which were arguably too generous, like the widow inheriting 100 per cent of her husband's pension and things like that, but now they have abolished SERPS, that is the second step. They have kept the basic pension down with prices by and large. The basic pension was about half, now it is about 16 per cent. They have abolished SERPS and what they are putting in its place, as I say, is a pension which is only really for the lower paid and it is stated in the White Paper to turn into a flat rate pension within ten years. That is only geared to price increases, not earnings increases. So you will have a bigger and bigger surplus in the fund and you will have only flat-rate benefits and the Treasury will be able to use this. What they are doing, the third thing, is to push up the Minimum Income Guarantee, which is the old National Assistance level, by earnings and faster than the pension rate. It was always slightly higher than the pension rate, it is now a lot higher than the pension rate. One of our big objectives in pension reform was to try to build people's pensions so that they got about the Minimum Income Guarantee level and floated themselves off means-tested benefits, which are hugely expensive in staff—they save a lot of money in global expenditure—and, as I say, are very damaging to incentives to save and to incentives to work.

  494. I am conscious of the fact that we are talking about this on a day when it is tempting to go further into this, but perhaps we should resist the temptation. How has this, as you perceive it, Treasury victory over the National Insurance principle been achieved? Why is it that the Department of Social Security, and of course its Ministers, has been, as you might see it, ineffective in defending the National Insurance principle?
  (Sir Michael Partridge) I think it is partly the fact that a lot of the policy has been driven by the Treasury, which I was saying earlier, which I think is wrong, and partly the fact that in the early years of this Government, like in the last years of the old one, there was an overriding need to make sure that the economy did stay under control. We had brought Social Security under control by 1992 but that depended on a series of cuts which were coming in and those cuts were going to run out in about the year 2000. You have to keep cutting Social Security because it tends to keep going up. You have to keep having measures of finding out where the money is not most needed and cut it back. I think all those factors came together for the Treasury to drive to say "let us put money into means-tested increases, not a general pension. Let us keep the basic rate of pension down" and their biggest thing was to say "let us abolish SERPS because that is the big driver of costs in Social Security over the next 20 or 30 years".

  495. That is my point. If the Department of Social Security has been an ineffective defender of the principle of National Insurance because of Treasury power, how could Parliament have been a better defender of the National Insurance principle?
  (Sir Michael Partridge) I do not think the DSS has been an ineffective defender, I think Ministers there were equally persuaded that these were the right sorts of policies and, if they believed that, it was not up to the Department or the Ministers to say "no, you have got it all wrong". I happen to think that the National Insurance principle was not given sufficient weight. That is something I did when I was there and I retired in 1995. I do not think since then there have been as many people persuaded as I—I may be wrong—of the value of that in where you are heading. I do not think they were inadequate defenders, I think they actually believe in these new policies. They discount the fears that I have and they think it is a better way to proceed. That is their prerogative, they are the Ministers and politically these things move in cycles. As I say, I am happy to believe that the pendulum will swing back.

  496. So you see, in a sense, Ministers as being the crucial element in the intellectual occupation of the DSS?
  (Sir Michael Partridge) Yes. Ministers run policy. It is not civil servants, or it should not be, who are running policy. It is up to Ministers to decide what the policies are and the civil servants advise them on how best to achieve them.

  497. Tell me, if we go further down the road of integrating tax and benefits—
  (Sir Michael Partridge) Which is a good aim in many ways.

  498. Which is a good aim in many ways. How can we distinguish the different components of strategy, evaluation and the means of delivery if, in effect, they have all been combined?
  (Sir Michael Partridge) I do not quite follow what you are driving at.

  499. How can we—suppose somebody wanted to—defend the National Insurance principle if tax and benefits have been integrated and the Treasury, in effect, is running the tax side of that policy? How can you maintain that distinction?
  (Sir Michael Partridge) You can still do that. We integrated tax and Social Security when we reviewed child tax allowances and Child Benefit and came up with the Child Benefit scheme in the 1970s under Mrs Castle. Child Benefit policy was still run by the DSS but it was seen as the outcome of what was a wider look at whether we could have tax credits across the whole field. Tax credits tend to apply to benefits other than pensions, sickness and unemployment, and we have gone quite a long way in that, we have privatised.