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Mr. Clifton-Brown: My hon. Friend is absolutely right. The current national insurance tax system is our biggest tax-free distributive system. During a working lifetime, a person on average earnings makes £95,000-worthof national insurance employers' and employees' contributions, whereas he receives a state pension value of about £25,000. Does my hon. Friend agree that that is an extremely negative return?
Mr. Jenkin: Obviously it is a negative return for someone in the circumstances described by my hon. Friend. Moreover, if we hypothecate an aggregate amount
of national insurance income that is invested in the basic state pension and then eventually collected by pensioners, we find that the return is almost negative. That is because the national insurance system is not a funded scheme: national insurance is not invested in anything.
The appeal of the basic pension plus scheme is that it preserves the redistributive nature of the basic state pension, while replacing the unreliable promises of politicians, who are generally long gone by the time that those promises must be redeemed, with personal ownership of capital in proper investments. It is extraordinary--well, not extraordinary; in fact, entirely predictable--that the gut reaction of a party that opposed the sale of council houses, and at one stage thought that property ownership was evil, is to oppose our proposals.
I agree with my hon. Friend the Member for Harrow, West that Labour Members will eventually realise that this is a major reform that will be irreversible, and that letting the cat out of the bag and discussing it will in itself create a momentum that, even if the Labour party became the Government, it would have difficulty in stopping.
What we are achieving is not an extension of compulsion, which is what the stakeholder pensions proposed by the Labour party are about. They are based on the Australian model.
Mr. Jenkin:
I refer to the model from Singapore, adjusted by Australia. We are substituting a compulsory savings scheme for taxation, and turning a confiscation into the building up of an asset. That is something that no one can take away.
What the Government must get right, however, is the nature of the vehicle through which people will be saving, and the simplicity of the regulatory regime that will oversee the providers of the new pensions. As I said in an intervention on my right hon. Friend the Member for South Norfolk (Mr. MacGregor), we do not need to go into all these insured products. It is a hangover from the way in which the insurance industry developed the pensions industry over 150 years that insurance plays such a huge part in personal pensions.
There is no difference between the risk to the man in the street posed by a personal equity plan provided by a major financial institution and the risk posed by a life assurance policy. The only difference is that the man in the street generally understands what a PEP or a TESSA--a tax-exempt special savings account--means, while he does not understand what a life assurance policy means.
Another of the lessons that we brought back from Chile was that the simplicity of the product hugely increases the attraction of the whole scheme for the individual. Why do life assurance policies require so much selling? Because they are not easily understood. PEPs and TESSAs have not required nearly so much selling, simply because they are easily understood.
It is important for us to create a separate product regime, a separate tax regime and a separate regulatory regime, so that we can keep things simple and insulate the new pensions system from the huge complication of the tax and regulatory regime that currently surrounds pensions. Few people realise, for example, that there are several different tax regimes even for occupational
pensions. It depends when they were set up or closed, or when people joined or left them. The system is very complicated, and that example refers to only a tiny proportion of it. Half the people are being taxed on what they put in and half on what they take out. The tax system limits what some people can put into their pensions, while others are limited in terms of what they can take out. It is an extraordinarily Byzantine structure.
The commencement of a completely new system, basic pension plus, gives us the opportunity to establish a completely fresh regime. New people entering the scheme need never become entangled in the mess of the present regime that has been created over hundreds of years.
A threat may be presented to the successful occupational schemes, but the great disadvantage of final salary occupational schemes is that it is difficult, even for actuaries, to decide a person's worth at any one time. One of the sources of the misselling misunderstandings is that it is almost impossible to give a fair assessment of an individual's rights in a final salary scheme because its terms, its uprating policy or its contributions may change. All sorts of alterations can make a huge difference to a person's rights, because the schemes are based upon final salary.
I agree with the hon. Member for Birkenhead that we are at the start of a much better savings structure for families. Members of a family should be able to talk about different schemes, and limits are not important. People should be allowed to pay as much as they want into a scheme, and by the time we have got rid of capital gains tax and inheritance tax, the distinction between being in a pension scheme and not being in one will be reduced. Instead of buying grandchildren premium bonds or lottery tickets, it would be marvellous if at Christmas granny's £5 could go into the child's pension scheme, which could have been established on the day the child was born.
I shall now deal with incentives and costs. Any funded scheme will cost more in absolute terms than the state scheme. Under our state scheme, quarterly statements of how much has been put in and how much the fund is worth are not required to be sent to clients. No investment uplift is provided on each quarterly return. Of course it is cheaper to collect tax than to provide an investment service. The issue is what that should cost. The Chilean lesson is instructive. Even with some problems, the Chilean costs as a percentage of the managed funds are competitive by any standard.
Mr. John Denham (Southampton, Itchen):
We have had a thoughtful debate and I should like to continue in that mode. However, I will first deal with a contribution which did not meet that standard--that of the hon. Member for Harrow, West (Mr. Hughes). The hon. Gentleman knows that there is no way in which the basic state pension will be cut by a Labour Government.
Mr. Robert G. Hughes:
There is no need for the hon. Gentleman to get nasty just because he cannot answer the point, which is very simple. I am not making those allegations: his colleague the hon. Member for Peckham (Ms Harman) is. I did not write the letter in which she says:
Mr. Denham:
The Tory campaign throughout this country to frighten elderly voters into believing that their pension will be cut or that people will not be able to retire on the full basic state pension is disgraceful. If hon. Members cannot understand a simple letter, that is their problem, not mine.
The other claim, put forward as though it were fact--that Labour will put investment funds into the hands of trade union barons or, alternatively, into a Singapore-style fund--also exists entirely in the imagination of Conservative Members. I am under no illusion that merely pointing out the truth to them will change what they say, but it is useful to put it on the record.
Mr. Heald:
What was the hon. Member for Islington, South and Finsbury (Mr. Smith) doing in Australia telling the BBC that he admired the Australian industry wide scheme and that he wanted it to be a template for Britain, with central or industry wide funds? He said that those funds would most likely be invested in a mix of the markets and job-creating schemes and would be administered jointly by employers and trade unions.
Mr. Denham:
My hon. Friend was doing what any sensible person would do in that job--learning from international experience, as we have done. He has been abroad and we have studied the schemes in many different countries to find out not how one picks up a model from another part of a world, but how to develop a system that will apply and work in Britain.
"We would seek the advice of the Government Actuary, but we anticipate that those who retire early would receive a lower level of basic state pension."
The Government Actuary has been consulted and we know that the figure is £20. If that is wrong, instead of insulting me and my hon. Friends, why does the hon. Gentleman not simply tell us why it is wrong?
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