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Mr. Bernard Jenkin (Colchester, North): My right hon. Friend's remarks are fundamental. We need to refocus our minds on the nature of savings for retirement. The debate has been hijacked by the insurance industry by an historical accident. There is no tax relief unless
there is some form of insured vehicle. We need to do away with saving with insurance because now there can be virtually no difference in the risk between, for example, a good unit trust personal equity plan and an insured life policy.
Mr. MacGregor: My hon. Friend makes an interesting point, which I shall take up in a different context. If we wish to encourage--as we Conservatives do--families to build up resources for themselves that they can pass on to their children, there is another element to be considered. I hope that that will be reflected in the consultation on basic pension plus.
It has been made clear in basic pension plus that an individual will be able to invest additional money of his or her own in the new investment account. It is argued that one of the strengths of the scheme is that it will give everyone a fund to which he or she can add additional savings. The issue was elaborated on in response to the question whether it will still be possible to take out a personal pension. The answer read:
I move on to groups who will not be affected by basic pension plus because they are too old, starting from 25-year-olds plus or whatever the age is-- in other words, the issues of future pensions policy for the next 40 years for those not covered by basic pension plus.
We know that the whole occupational and personal pensions movement, which we as a Government have so strongly encouraged, has made a major contribution to the fact that pensioners now retire in a much more comfortable situation on average than was previously the case, and that there has been a 60 per cent. increase in real terms in their income during the period of the Conservative Government. However, in the next 20 to 30 years--in fact, almost immediately--we shall face two different challenges, the first of which is that of changing life patterns. People will change careers more often, for which personal pensions are clearly well attuned. Men and women--not just women bringing up families--will move in and out of work, by choice, at various periods during what would have been regarded in the past as their working life.
The second issue is that defined benefit schemes are declining, as a proportion of occupational pension schemes, in favour of money purchase schemes. I have predicted for some time that that would happen, but it is happening increasingly, particularly in companies with big occupational pension funds, which now say that all new employees will have a money purchase scheme. That pattern will develop not just because of pressures on companies but because it suits more correctly the career patterns and the movement in employment of future
employees. However, it is likely that money purchase schemes will not provide the same benefits as occupational pension schemes have where, traditionally, people were fortunate enough to be in one occupation or company for most of their working life.
That leads me to a number of conclusions, but I shall mention only one or two today. The first is the need to continue to persuade people--particularly young people--of the importance of investing for their pensions at an early age. Most hon. Members will recognise that anybody who waits until he or she is 35 will have a much bigger challenge in providing enough for their retirement.
Mr. Frank Field:
If the right hon. Gentleman is serious about getting people to save for their retirement, why do they have to wait until they start work before they start pension savings? Why cannot parents, godparents, aunts, uncles, and so on make contributions to such accounts? They need not be substantial, but it would start a saving habit.
Mr. MacGregor:
Not for the first time, I agree with the hon. Gentleman. I am glad of his suggestion, because my next point is that we need to continue to encourage the investment of personal pensions and occupational schemes by means of up-front tax incentives. There is no up-front tax incentive for basic pension plus, but it will continue for voluntary occupational pension schemes. We need up-front tax incentives to encourage people to make provision for themselves. That is what was so worrying about the failure of the hon. Member for Peckham to answer the question, because that is what we need to continue to do.
Mr. Stephen:
If there is not to be an up-front tax incentive, people will be making provision out of taxed income throughout their lives. Some people will not live long enough to enjoy their pensions and the fund that they have built up will have to be passed on--in many cases to somebody other than the surviving spouse. In those circumstances, is it not particularly important that more progress is made on eliminating inheritance tax, which is an iniquitous tax because it is a charge on resources that have already borne tax during life?
Mr. MacGregor:
That is a separate argument from the one that I am trying to pursue. Therefore, I shall not go down the route of inheritance tax.
In the short time that I have studied basic pension plus, I have been persuaded that the skilful element in it is the change in the tax regime to overcome the double funding point. Although I accept it for that reason, it is important to have up-front tax incentives for occupational and personal pension schemes, because given the disincentive to so many people to start long-term savings while bringing up a family or whatever, such an incentive is needed to encourage them to do so. Changing the tax regime for those people along the same lines as basic pension plus would not work because the fact that they will get a tax-free pension at the end of their lifetime is no big deal when they are aged 25. The difference is that those schemes are voluntary and therefore people need encouragement, whereas basic pension plus will be compulsory.
Given people's life styles and the fact that they will be moving in and out of work--the hon. Member for Birkenhead pressed me on this point--it is important that
we break the link between pension arrangements and net relevant earnings. Of course a ceiling is needed, as there is with net relevant earnings, but there can be many situations in which the top-up can come for occupational pension contributions and personal pensions outwith earnings. It could be inheritance, a windfall, grandparents, investment income--a whole range of things. People might want to save very thoroughly for their pension and therefore eschew current spending and put any savings that they currently have into their pension.
We need to break that link if we are to ensure that adequate provision is made. That is why we should move towards something like a provision for retirement account that incorporates not only earnings but other income contributions. To keep it more tax neutral, I should have been perfectly happy to see the incentives for tax-exempt special savings accounts and personal equity plans withdrawn because they do not have the long-term nature that a provision for retirement account would have and which we need.
My last point relates to the European Union. It is widely acknowledged--I was glad to hear that the seminar that the hon. Member for Birkenhead and his Select Committee organised with European contributors recognise this too--that the United Kingdom is far ahead of nearly all our other European competitors in this context. The only country that might be a little ahead of us is the Netherlands. Other members of the European Union have massive, unfunded state pension liabilities. They have not taken the action that we have taken and which basic pension plus proposes, and their state liabilities would take them miles beyond the Maastricht criteria in terms of debt and so on.
It is always argued that under the treaty of Rome other member states do not have to contribute to the public expenditure provisions of other member states and therefore countries like the United Kingdom are protected from having to contribute to the massive unfunded state liabilities of Germany, France, Italy and elsewhere. If a single currency were to be introduced--I am a strong pro-European but a great cynic in regard to a single currency and will oppose it in the next Parliament--with the increasing movement towards single fiscal and expenditure policies, we would face a very serious issue in relation to the funding of those liabilities. I hope that that point will be addressed in the debates on the single currency in the months ahead.
Mr. Archy Kirkwood (Roxburgh and Berwickshire):
It is a great pleasure to follow the right hon. Member for South Norfolk (Mr. MacGregor). His knowledge and experience were ably demonstrated in his speech, and we will all rush out now to order copies of his pamphlet. No doubt it will repay careful study.
This has been a good debate. Like the hon. Member for Birkenhead (Mr. Field), I think that the Secretary of State judged the tone rather inaccurately at the beginning. In my experience, Adjournment debates often give people a chance to listen carefully to what we are saying to each other and to learn from what is said. What other people can bring to bear in these debates is very important and informs our views about how we can make progress in this very important subject.
I was a bit scared when I first saw these proposals, because they are so very far reaching. The only party political thing that I will say in the next 10 minutes is that I wondered why they were being introduced in this way and at this time. There was much suspicion, which has not yet been totally assuaged, that the Government were desperate for something to say and so introduced these plans almost overnight. It is important to me that I get some reassurance about that in the Minister's winding-up speech. The last thing that we should do is to rush precipitately into making these changes. If we get them wrong, the consequences could be terrible.
I support hon. Members who have said that we cannot go into a general election campaign talking only about the year 2030. It is right that we should consider the development of pensions provision and pensions reform in the middle to longer term, but we must be fair to the pensioners who are struggling to make ends meet today and make proper provision for them now before we start to provide for the middle to longer term.
Through my casework and from other experience I have lots of evidence that many of today's pensioners feel betrayed and let down. Previous Governments of both parties have made promises, but many pensioners' perception is that the "cradle to the grave" provision has casually been withdrawn: whether that is true or not, it is how they perceive it. The basic state pension was always considered to be a settled right available through national contributions to the state pension plan that has existed for many years. People are concerned that it will now be withdrawn without proper consideration.
In these debates, the Government always refer to the fact that the average income of pensioners has improved, and so it has. It has improved dramatically, and we know why. Occupational pensions have improved, which is good. If I have any criticism of the Government, it is that they always deny and run away from the fact that not everyone has enjoyed those average increases in the past five to 10 years. We must consider the problems facing current pensioners before we do anything else.
The right hon. Member for Sutton Coldfield(Sir N. Fowler) made an interesting speech. He rightly came to the conclusion that a much better system of information is required for future provision of private pensions, so that people know what is facing them and can make informed choices.
Information should also be available to the one third of pensioners--about 1 million of them--who are currently eligible for income-related benefits but do not claim all the money to which they are entitled. About £1.2 billion of benefits does not get into the purses and wallets of current pensioners. Those people miss out on council tax benefit, income support, housing benefit and, when the weather is severe, as it usually is in Scotland during the winter, they also miss out on cold weather payments. Individually, they may be missing only small sums, perhaps £1 or £2 a week. Other pensioners may be determined not to claim income-related benefits because of the stigma attached to them, and I understand that.
Much more could be done to inform the 1 million pensioners who are missing out because of a lack of information, and because the process of claiming benefit is too difficult. If we do nothing else in this debate, we should at least recognise that that problem should be dealt
with as a matter of urgency. That would be a positive approach, and would deliver extra benefits to which people already have a legal entitlement.
I come across pensioners in my constituency who are struggling. They are over 75 or 85, usually single and the majority of them are women. Some of them face dire circumstances. Come the election, I anticipate that the Liberal Democrat manifesto will refer to a top-up pension for pensioners on income support premiums. We want to target provision in a way that is affordable through public expenditure, so as to give extra help to pensioners who are entitled to extra consideration, which is more than they are getting at the moment.
The hon. Member for Birkenhead rightly refers to the importance of trust, and to the bond of trust that should be established between the pensioner population and Governments. A recent example of a breach of that trust was the Government's handling of war pensions. Some terrible cases will result from the change to the rules on hearing loss. Many people with a serious hearing loss will no longer receive a war pension. There have been arguments about that. The people who really lose out are those who just fail to meet the criterion of a loss of 50 decibels. I do not believe that there was any case for changing the rules.
If the Government are so certain that what they are doing is right, they should listen to the Royal British Legion and the Royal National Institute for the Deaf. They both want a full scientific and medical review of the entitlement of war pensioners. Such issues chip away at the trust between pensioners and Governments.
We should not exaggerate the need for precipitate action. We are not in such a bad position as some other nations. I was interested in the final comment of the right hon. Member for South Norfolk. I know that his European credentials are--I nearly said as good as mine. If he believes that there is a problem with unfunded pensions, I am willing to reconsider the matter. Some other European countries may require to deal with the problem urgently, but there is no immediate panic for us to do so.
A graph in the recent edition of The Economist shows percentage pension costs in relation to gross national product. The trend demonstrates that there is no great problem in Britain in the middle term. Indeed, the graph is headed, "No problem for Britain". We should not be complacent, but we do have a little time to sort out some of these problems. It is a frightening thought that, if basic pension plus were implemented, Britain would be the only country outside Latin America with a pension system entirely privately funded. We must be a bit careful about getting from where we are now to where we want to be.
I do not deny that the proposals have some merit, and we shall examine them in greater detail. But how can we be certain that the basic pension plus scheme will lead to an increase in savings? The Government seem to argue in their documentation that, by personalising pensions, the habit of saving will be encouraged. However, the fear is that the tax changes that are part of the plan could discourage savings. The basic rate taxpayer would get, roughly speaking, £24 from the Exchequer for every £76 contributed. Pension contributions would come out of taxed income, but pension payments would not be taxed. Someone aged 20 or 30 may be tempted to boost
his pension contributions by tax relief available to him today, but it is much harder to persuade a 20-year-old--my children are not yet 20--or any young person getting into the system that tax relief in 2030 is an attractive prospect. That is a problem.
I am also concerned about the impact of the tax changes. By switching the tax system, we could--I put it no higher than that--be directing tax relief at people who are at the richer end of the pension income group. People might retire better off, while managing to pay almost no tax. That is one of my key worries, not just in this context but generally. I am worried about the way in which the position appears to be skewed to the benefit of those with more rather than those with less.
My third concern relates to the way in which private pension schemes might behave under the new regime. We have had interesting exchanges today about past pension misselling, and I understand all that; but how can we be certain that the administrative charges for basic pension plus can be driven below the 20 per cent. of contributions that is typical of some existing personal pension schemes? If they do not fall by enough, will the Government be able to find ways of driving those high costs down?
A further difficulty is that the Government are creating what I understand economists call "moral hazard" in the introduction of a minimum pension guarantee. How will the Government discourage investment managers from making riskier investments than they would otherwise make, safe in the knowledge that the Government will bail them out? The technical note accompanying the basic pension plus pack states that the Government will discuss with the pensions industry any appropriate restrictions to guard against exploitation of the Government guarantee. Moreover, we are told that legislation might have to be introduced to require scheme managers to publish, and to be responsible for adhering to, a statement based on prudent investment principles. Investors would be expected to disregard the existence of the Government guarantee in investment decisions.
Drafting such legislation, let alone enforcing it--trying to prove in court that someone has acted improperly in making an investment decision--would be a difficult if not impossible task. I understand that I am going into the small print, but, in the case of some of these schemes, the devil is in the detail.
Finally, I am worried about the stance that the National Association of Pension Funds has taken. Like everyone else, I am determined to encourage the future development of proper occupational schemes with a "final salary" element. Such schemes are invaluable. They have served the nation well in the past and have stood the test of time, and I do not wish to do anything--certainly not under these basic pension plus provisions--that would strike at the heart of those schemes. The Government will have to deal with the issue. If the objections of the National Association of Pension Funds were sustained, my view of what the Government's scheme means in the long term would be prejudiced.
The Government have a duty to try to persuade people like my hon. Friends and myself that the scheme will not lead to retirement incomes becoming inordinately vulnerable to the vagaries of financial markets. I am thinking of the whole issue of money purchase, and the risks involved. The stock market can go up or down. We have seen the background papers, and we know some
of the Government's working assumptions, and I am certain that it will have to be studied further before final conclusions can be made; but I believe that there is a real risk that the Government's plans will lead to more inequality in pension incomes.
"You will be able to add your own savings to the new personal accounts or indeed a separate account with a different pension provider."
Will the additional savings that will be added to the account have to come from net relevant earnings as at present for any contribution to the pensions? I hope not. That is important when account is taken of the life styles and life patterns that we shall all have in work and generally. I hope that it will be possible for additional savings not to be related directly to earnings. Those are my two questions about basic pension plus.
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