Social Security (Amendment No. 3) (Jersey) Regulations 201-: Draft

Information about the publication of Ministerial Decisions

A formal published “Ministerial Decision” is required as a record of the decision of a Minister (or an Assistant Minister where they have delegated authority) as they exercise their responsibilities and powers.

Ministers are elected by the States Assembly and have legal responsibilities and powers as “corporation sole” under the States of Jersey Law 2005 by virtue of their office and in their areas of responsibility, including entering into agreements, and under any legislation conferring on them powers.

An accurate record of “Ministerial Decisions” is vital to effective governance, including:

demonstrating that good governance, and clear lines of accountability and authority, are in place around decisions-making – including the reasons and basis on which a decision is made, and the action required to implement a decision
providing a record of decisions and actions that will be available for examination by States Members, and Panels and Committees of the States Assembly; the public, organisations, and the media; and as a historical record and point of reference for the conduct of public affairs

Ministers are individually accountable to the States Assembly, including for the actions of the departments and agencies which discharge their responsibilities.

The Freedom of Information Law (Jersey) Law 2011 is used as a guide when determining what information is be published. While there is a presumption toward publication to support of transparency and accountability, detailed information may not be published if, for example, it would constitute a breach of data protection, or disclosure would prejudice commercial interest.

A decision made 21 September 2012:

Decision Reference: MD-S-2012-0077
Decision Summary Title :	DS – Draft Social Security (Amendment of Law No.3) (Jersey) Regulations 201-		Date of Decision Summary:	21 September 2012
Decision Summary Author:	Policy and Strategy Director		Decision Summary: Public or Exempt?	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:	N/A
Written Report Title :	WR – Draft Social Security (Amendment of Law No.3) (Jersey) Regulations 201-		Date of Written Report:	21 September 2012
Written Report Author:	Policy and Strategy Director		Written Report : Public or Exempt?	Public
Subject: Draft Social Security (Amendment of Law No.3) (Jersey) Regulations 201-
Decision(s): The Minister decided to lodge ‘au Greffe’ the Draft Social Security (Amendment of Law No.3) (Jersey) Regulations 201-
Reason(s) for Decision: The amendment updates the calculation used within the Social Security Law to determine the value of the States Grant in respect of supplementation. The updated calculation has been used to determine the departmental cash limits set out in the Medium Term Financial Plan to be debated by the States Assembly on 6 November and separate subordinate legislation is required to approve the changes to the method of calculation.
Resource Implications: There are no manpower considerations. The proposed calculation will result in a reduction in the value of the States Grant in 2014 and 2015, compared to the previous estimated values. The impact of this is a corresponding reduction in the overall value of the Social Security Fund over the same period. The proposed calculations providing certain values for the States Grant for 2013-2015 have been included in the Social Security Department cash limits for 2013-2015 in the Medium Term Financial Plan. In future MTFPs, the revised calculation may result in a higher or lower value of States Grant compared to the current calculation, depending on the relationship between the earnings index in the base year and the earnings indices in other years. If the proposed calculation is used consistently over a long period, the long-term impact on the Social Security Fund will not be significant.
Action required: Policy and Strategy Director to request the Greffier of the States to lodge ‘au Greffe’ the draft legislation and to request a States debate on the sitting commencing 6 November 2012.
Signature:		Position: Minister
Date Signed:		Date of Decision (If different from Date Signed):

Social Security (Amendment No. 3) (Jersey) Regulations 201-: Draft

Revision to calculation of States Grant in respect of Supplementation

Introduction

In July 2011, the States Assembly approved P.110/2011 - Social Security (Amendment of Law No.1) (Jersey) Regulations 201-. This made a number of changes to the Social Security Law, including a new method of calculating the value of the States Grant in respect of supplementation.

The calculation was introduced to ensure that at the time of a business plan debate in September, when expenditure approvals are agreed, the value of the States Grant for the following financial year would be known with certainty.

Since that calculation was proposed and adopted by the States Assembly, ~~the States has also approved~~ ~~P97/2011~~ the Public Finances (Amendment No.3)(Jersey) Law 201- has come into force including a new financial planning cycle based on a Medium Term Financial Plan (MTFP). This planning cycle is set out in Article 7 of the Public Finances Law 2005. Each Plan starts at the beginning of the second full year after an ordinary election and ends at the end of the first full year following the next ordinary election. The first Plan covers the three year period 2013 – 2015.

Whereas the current calculation for the States Grant removes the uncertainty in the first year of a Medium Term Financial Plan cycle, it does nothing to address the possible variation in the value of the Grant in the second and subsequent years where the total States expenditures limits will be fixed.

This further amendment aligns that calculation with the timing of the Medium Term Financial Plan to ensure that the value of the States Grant is known for each year of a Medium Term Financial Plan, at the time that the Plan is debated by the States Assembly.

The proposed calculation is the basis for the budgets for the States Grant, as part of the Social Security Department cash limit, within the 2013 – 2015 MTFP. Further calculations will be required in line with each new MTFP period.

Background

Contributors who have earnings above the lower earnings limit of £796 per month but below the standard earnings limit of £3,778 during a month normally receive a full contribution record for that month, although the value of contribution made is below than that required for a full contribution record. The process of making up the shortfall in contribution is known as supplementation, and it ensures that lower earners are able to receive full pension and benefit rights.

Until 2011 the exact value of supplementation of lower earners’ contributions was calculated to determine the value of the annual payment made by the States to the Social Security Fund (the States Grant), to meet the cost of the supplementation process. This cost could vary considerably depending on the state of the economy, wage levels and the distribution of wages within the local labour market. In 2011, the method of calculating the States Grant was amended to set a fixed cost that was known in advance of the year itself, removing this uncertainty in the setting of States expenditure.

Following the move to a calculated amount in individual years the value of the Grant may be above or below the actual cost of supplementation in that year. However, in the long-term these differences cancel out and there is minimal impact on the Fund itself.

The introduction of contributions above the standard earnings limit in 2012 now provides additional income into the Social Security Fund which will be used to meet part of the cost of supplementation and so reduce the cost to be met by the States Grant.

Medium Term Financial Plan

The States has recently moved from a one-year financial plan to a three-year financial planning cycle - the Medium Term Financial Plan (MTFP). The MTFP process requires that the States agree cash limits for each department across a three-year period, rather than a one-year period and this has led to a review of the calculation of the States Grant.

Proposal

This proposal is based upon the same calculation currently used for one year, but extends it to allow the calculation to remain in place during the whole length of an MTFP. This ensures that changes in the economy or the workforce during the duration of the MTFP will not affect the cost of the States Grant to the taxpayer. As with the current system, in some periods the calculation will act to provide a higher value of Grant to the Fund and in other periods it will provide a lower value. As the Social Security Fund is designed to operate over many decades, these temporary fluctuations have only a small impact on the long-term value of the Fund.

The revised calculation will set the same value for the States Grant in the first year of each MTFP as the current calculation. In the second and subsequent years, the value of the States Grant will be adjusted from the previous year using the change in the earnings index in the base year, which is set as the year two years before the beginning of the MTFP period.

The base year is set as two years before the start of the MTFP to ensure that each of the variables used in the calculation is available at the time at which the MTFP is lodged. In particular, the earnings index is only calculated once a year, based on data collected in respect of June with the results published towards the end of August. Full details of the calculation are provided in the Appendix.

Under the current electoral cycle the MTFP will last for three years. Elections will next be held in 2014, and the second MTFP will start in 2016. The value of the States Grant for the MTFP starting in 2016 will be based on the actual values of supplementation, contributions above the standard earnings limit and the change in the earnings index in 2014.

Financial and manpower considerations

There are no manpower considerations. The proposed calculation will result in a reduction in the value of the States Grant in 2014 and 2015, compared to the previous estimated values. The impact of this is a corresponding reduction in the overall value of the Social Security Fund over the same period.

The proposed calculations providing certain values for the States Grant for 2013-2015 have been included in the Social Security Department cash limits for 2013-2015 in the Medium Term Financial Plan.

In future MTFPs, the revised calculation may result in a higher or lower value of States Grant compared to the current calculation, depending on the relationship between the earnings index in the base year and the earnings indices in other years. If the proposed calculation is used consistently over a long period, the long-term impact on the Social Security Fund will not be significant.

Appendix

The current calculation is based on three values:

A - the actual cost of supplementation in the base year
B - the actual value of contributions received above the standard earnings limit in the base year
C - the rise or fall in the earnings index in the base year.

The current calculation sets the value of the States Grant as:

(A - B) x (1+C)2 and the base year is the year that is two years before the year of the States Grant.

The new calculation will be exactly the same as the existing calculation for the first year of a Medium Term Financial Plan:

States Grant = (A-B) x (1+C)2 with A, B and C referring to the year two years before the Medium Term Financial Plan started.

In the second and subsequent years of a Medium Term Financial Plan, rather than resetting A, B and C, the value of the States Grant will be calculated based on the States Grant in the previous year of the MTFP, increased by the factor (1+ C).

The factor (1+ C) represents the growth in the economy from year to year, as measured by the earnings index. The change in this index is also used to adjust the various earnings levels that are used to determine the level of contributions payable.

In the first year of an MTFP, the factor (1+ C)2 is used to represent the increase in contributions from the base year, 2 years ago, to the current year. The change in the earnings index for the base year is then used again in each year of the MTFP to adjust the States Grant.

The Finance Law refers to the length of the MTFP in terms of the interval between elections, and the proposed formula allows for this, as the values are reset in the first year of a new MTFP and then the same updating factor is applied to the value of the States Grant in each subsequent year of the MTFP. This formula would work with an MTFP lasting for three or four years, for example.

In terms of the actual MTFP now under consideration, the following values will be used:

In 2013, the value of the States Grant will be based on:

A - £66,072,114, the actual cost of supplementation in 2011 (the year 2 years before 2013, which is the first year of the MTFP)
B - £6,900,000 (as the new contribution rate was only introduced in 2012, the existing legislation provides for a fixed value for B for 2013, and the revised formula will need to refer to the same fixed value for this MTFP.)
C - 2.5% - the rise in the earnings index in 2011.

Giving a value of £62,167,702 for 2013.

In 2014, the value of the States Grant will be:

£62,167,702 x (1+2.5%) = £63,721,895

In 2015, the value of the States Grant will be:

£63,721,895 x (1+2.5%) = £65,314,942