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Miss Hoey: Look at the time.

Mr. Davies: I am afraid that I have every intention of finishing my speech.

Pension funds that could not meet their liabilities could either increase their contributions or cut their benefits. In the past few years, they have chosen the sensible way of substantially cutting their benefits. If there is any problem, it is less of a problem than it was a few years ago when, curiously, we heard nothing from the Euro-sceptics on the matter.

I cannot sit down without raising the most fundamental point about pensions, which was not raised either in our debate this morning or in the Select Committee's report: any pensions scheme, whether funded or not, involves a wager on the future. If one funds a pensions scheme, one accumulates financial assets or claims, equities, bonds and so forth. If the issuers of those bonds or the firms in which one holds an interest through the equity do not perform and generate a return and cannot service their debt or pay dividends, it does not matter how much the scheme is funded or what the actuarial surplus is, because the real resources will not be there in the future to meet the expectations of the pensioners.

Both pay-as-you-go and funding involve a wager on the future. The only reason known to economics for preferring funding is, so the theory goes, that it will involve an increase in the savings ratio, because of the money that is set aside from current income against future liabilities, and that that will provide the possibility for greater investment, which will enhance the economy's capacity to generate more resources, so output and the wherewithal to meet the real resource claims of pensioners will be increased.

That is a fine argument, and I happen to accept it, but it is based on certain assumptions about the return on investment and the efficiency of markets. Most importantly, it is based on the assumption that the compulsory savings levied from the population in enforced pension contributions--which I believe are a good idea--will involve an additional savings effort out of current income and will not simply displace savings that would otherwise have been made elsewhere. If savings are simply displaced, there will be no increase in the aggregate savings ratio as a result of funding pensions.

All the countries that we have been talking about--most notably, France, Germany, Belgium and Italy--have much higher savings ratios than we do at present, even though they have a lesser element of funding in their pensions. Therefore, considering the real economic backing for future pensions, one could legitimately draw the conclusion that the unfunded pensioners in those countries are better assured of getting a real return from their pensions than the funded pensioners in this country, where the savings ratio is, sadly, a great deal less.

I am sorry, and quite surprised, to have had to remind the House of a few elementary economic principles. I had to do so not because I am sure that hon. Members are genuinely ignorant of such matters or have set out in bad faith to exclude material facts and arguments from their presentation of the case this morning--I would never accuse any colleague of doing that--but because of the strong emotions, which I respect and entirely sympathise with, that are generated by the prospects of monetary

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union and those, I fear, have the capacity to distort the judgment of even the most intelligent, well-informed and well-intentioned people.

10.48 am

Mr. John Denham (Southampton, Itchen): There is insufficient time to respond in detail to the arguments that have been made, so I shall make only a few brief points. My hon. Friend the Member for Birkenhead (Mr. Field), the Chairman of the Select Committee on Social Security, said that there had been a number of misconceptions about his report, but the debate has made it clear that many issues are involved.

The debate is in part about United Kingdom pensions policy, in part about European pensions policy, in part about monetary union, in part about the alleged conspiracy of perfidious foreigners to steal our pension funds, tax our citizens and do numerous other unspeakable things in the name of the European Union, and in part about funded and unfunded schemes.

It would be wrong to draw the conclusion from the report that the United Kingdom is in a strong position overall on pensions. It is true that our unfunded liabilities for pay-as-you-go pensions are less and that that gives us advantages. It is equally clear that our citizens cannot, in general, look forward to high standards of pensions, and not necessarily to standards comparable with those of other European countries. In cutting the state pay-as-you-go element, the Government have failed to ensure that people can build up adequate funded schemes.

The hon. Member for Stamford and Spalding (Mr. Davies) was right to say that all pension schemes are pay-as-you-go at the moment of delivery, whether the payments are made from funded schemes or from taxation. In the United Kingdom, the cost of future pensions will be reduced by the simple expedient of giving people inadequate pensions, and not through any other means. I and my party advocate moving towards funded pensions.

Paragraph 12 of the Social Security Select Committee report suggests that changing demographic structures will require

"a substantial increase in national resources devoted to the pension system, unless further cuts were made in pension benefit levels and entitlement."

However, that applies to a funded system equally as well as to an unfunded one. An aging population means that a funded system must enable people to have a greater call on the resources of a future society. It would be a mistake to believe that we have resolved that problem.

The European elements of the report are important. The crux of the Select Committee's argument is that, in some way, the British taxpayer will end up paying for unfunded pension liabilities. It is clear that many European countries will have to make some adjustment because of demographic changes. Countries may have to raise taxes and contributions, cut benefits and raise retirement ages; they may have to introduce, over time, new elements into the funding of their schemes; they may have to use a combination of all those measures. Many hon. Members have contended that none of those options is possible, that it is impossible for our partner countries in the European Union to adjust to demographic changes, and that the UK will inevitably end up bearing the consequences. I do not share the Select Committee's pessimism.

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First, I am not convinced that adjustment to change is impossible in other European countries. It is undoubtedly difficult, but I do not believe that it is impossible. The level of sustainable payments into pension systems varies enormously in Europe, according to different histories, political choices and cultural patterns. Levels of contribution that seem unsustainable to us have historically been sustained for many years in other European countries without great difficulty. Adjustment to change, although by no means easy, is not impossible.

Secondly, I am not convinced that there are not safeguards in the Maastricht treaty and in the current economic and monetary union negotiations, especially the stability pact, to prevent the burden of an unwillingness to change in Europe being passed to the United Kingdom. Thirdly, it is a bit rich for some representatives of such a fiscally imprudent Government, who have doubled public debt in the six years since the Prime Minister came into office, to lecture other European countries on their alleged fiscal imprudence. That does not sit well with the factual record of the past six years.

Finally, and this point is recognised in the Select Committee report, although buried in it, there is the mistaken assumption that isolation from monetary union isolates us from the consequences of integrated monetary markets in Europe and of the actions of other European countries. That is an illusion. It is the integration of markets that may bring across knock-on effects, not the monetary union process itself.

This debate has been an hors d'oeuvre to the two-day debate that starts this afternoon. The Select Committee has done us a favour in raising the issue but, as hon. Members will have gathered, I do not entirely share the pessimism of its conclusions.

10.53 am

The Parliamentary Under-Secretary of State for Social Security (Mr. Oliver Heald): The Select Committee's report is more than an appetiser; it is an important contribution to the debate about unfunded pension liabilities in the European Union. We have had a good debate, which was opened with his customary panache by the hon. Member for Birkenhead (Mr. Field). There were thought-provoking speeches by my hon. Friends the Members for Dover (Mr. Shaw) and for Stamford and Spalding (Mr. Davies), and excellent interventions from my hon. Friends the Members for North Tayside (Mr. Walker), for Lancaster (Dame E. Kellett-Bowman), and for Coventry, South-West (Mr. Butcher). The hon. Members for Inverness, Nairn and Lochaber (Sir R. Johnston) and for Southampton, Itchen (Mr. Denham) also spoke.

The issue of huge and increasing pension liabilities, especially unfunded or pay-as-you-go liabilities, is serious. In the 1940s, when the retirement age for men in Britain was fixed at 65, life expectancy for men was 63; today it is 74 and set to rise to 78 by 2030. The population over state pension age is set to rise from 10 million to 14 million in 2030. Those changes are mirrored, to a greater or lesser extent, across Europe.

In 1979, the Government had to consider the long-term sustainability of the British system and decided to develop a strategy which was affordable, yet met the expectations

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of people in retirement. The key to that has been encouraging individuals to make greater provision for themselves by introducing greater flexibility and choice for those choosing a pension. We allowed people to contract out of the state earnings-related pension scheme in different ways. We introduced personal pensions and have made a series of changes in the Pensions Act 1995. The effect has been that two thirds of employees have opted out of SERPS; more than 20 million people have rights in occupational schemes and more than 5 million hold appropriate personal pensions.

We also took steps, as has been mentioned, to make pensions more affordable. Taken together, those steps have defused the effect of the demographic time bomb in Britain. The result is that we have £600 billion invested in private pension funds on behalf of present and future British pensioners. That is not only more than in any other European Union country but more than in all the other member states put together. That means that we can face the future without imposing a huge tax burden on our economy and that our economy is strengthened by an immense injection of savings and more investment. That point was well made by my hon. Friend the Member for Dover.

The Organisation for Economic Co-operation and Development report, which was mentioned by my hon. Friend the Member for Dover, estimated that the net present value of the liabilities of unfunded pension schemes in France is 98 per cent. of GDP; 113 per cent. in Italy; and 139 per cent. in Germany. In Britain, it is only 19 per cent. My hon. Friend also mentioned the International Monetary Fund report, which suggests that countries such as Germany and France would either have to raise social security tax collections or reduce pension liabilities by about 3.5 per cent. of GDP a year--a huge task. We are better placed than our European partners. Although I acknowledge, as my hon. Friend the Member for Stamford and Spalding said, that our European partners are beginning to heed our example and that several countries, such as France, Italy Portugal and Spain, are beginning to encourage private pensions to supplement pay-as-you-go, much more needs to be done.

There have been suggestions in this debate and elsewhere that in the event of our joining economic and monetary union, the UK might have to pay for other member states' pensions, directly or indirectly, through higher interest rates or higher inflation. There is no question of the Government agreeing to pay other countries' unfunded pensions. We have no intention of using the assets that we have so carefully built up over many years to bail out other countries that have been slower to recognise what will happen and take the necessary action. There will be no common pensions policy under this Government, but I cannot give the same assurance if, heaven forbid, the Labour party were to come to power. The Labour leader has said that he would go along with whatever was pressed by other member states to avoid ever being isolated in Europe. The Select Committee may be right to say that we would face such pressures. The importance of avoiding any extension of majority voting and of maintaining our veto is immense.

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