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Mr. Michael Clapham (Barnsley, West and Penistone): The right hon. Gentleman will be aware that two years ago, Coopers and Lybrand carried out a study which concluded that 2.4 million people on low incomes
had been misled, and that their contracting out of SERPS would not pay for the administration costs of the personal pension schemes that they had entered. Therefore, what he has just said is not quite correct.
Mr. Lilley: I am sure that the hon. Gentleman will agree that the misselling of pensions in the past by the private sector is no justification for the misselling of pensions in the future by the public sector. Measures that reduce the return to pensions, relative to costs, cannot be an improvement.
The fact is that we have built up a huge flow of investment. As a result, we have accumulated about £650 billion of investment to pay for present and future pensions. That is not just more than any other country in Europe; it is more than all the other EC countries put together have bothered to save and invest for their future pension liabilities. Above all, it has been Conservative Government policies, encouraging savings and investment, which have put Britain in that strong position.
Kali Mountford (Colne Valley):
A constituent of mine did exactly as you suggest, but lost nearly £7,000 of his savings. He used to be a Tory voter, but he was so disappointed by what happened with his personal pension plan that he reverted to the Labour party, thank goodness. What would you say to my constituent, who has lost such a massive sum investing in the very way that you describe?
Mr. Deputy Speaker (Sir Alan Haselhurst):
Order. The only "you" in the Chamber at the moment is me, not the right hon. Member for Hitchin and Harpenden (Mr. Lilley).
Mr. Lilley:
I should be quite happy for you to answer that question, Mr. Deputy Speaker. Still, I shall do my best. I would advise the hon. Lady to ensure that her constituent takes up his grievance with the regulators, who have given an assurance that no one will lose, and everyone will be compensated for misselling.
Sir Nicholas Lyell (North-East Bedfordshire):
Is it not correct that the changes to advance corporation tax made by the Government in the Budget will remove, from a 30-year-old man building up a savings pension fund, not the £7,000 that the hon. Lady's constituent lost, but about £50,000 over his lifetime of work?
Mr. Lilley:
My right hon. and learned Friend is correct. I hope that the hon. Lady will write to her constituent to point out the damage being done to all such people by the actions of Labour Ministers. Meanwhile, I am sure that she will join us in the Lobby tonight.
Mr. John Butterfill (Bournemouth, West):
Is it not also true that the changes that the Government propose to make to ACT have been viewed by independent observers as making it more difficult to complete the pensions review and as delaying the payment of compensation to those entitled to it?
Mr. Lilley:
That is also correct.
As I said, the great achievement of building up this huge volume of pension funds, which enjoyed bipartisan support in the past, was primarily due to Conservative Government policies. To be fair to the Labour party, Baroness Castle's reforms also played a part. As far as I am aware, no Labour Government before this one ever tried to penalise or discourage saving in pension funds. Therefore, the Budget changes represent a breach with that bipartisan consensus. The Budget targets pension funds for many billions of pounds a year, which will reduce investment, penalise long-term savers and permanently subject pensioners to double taxation on the income that they put into the funds.
We should not penalise pensions provision. We need more pensions provision and savings, not less, which is why earlier this year the Conservative Government announced plans to build on our success by ensuring that, in future, every young person entering the labour force would have his or her own pension plan, funded by rebates from the national insurance system, to provide decent, secure, guaranteed funded pensions.
Basic pension plus involved the Conservative Government putting billions of pounds into pension funds; the Labour Government's Budget involves taking billions of pounds out of pension funds. The Labour party calculated that the accumulated value of the rebates that we proposed over 44 years--that is a long period--would total some £150 billion. On the same basis, it proposes over that period to take £230 billion out of pension funds and use it for other purposes, which only Labour Governments can devise.
There is a consensus that we should encourage more long-term saving. It is sad that, for short-term political reasons, the Government have decided permanently to discourage and penalise private pension provision, and it is no surprise that the National Association of Pension Funds described the Budget as the biggest attack on funded pension provision since the war.
Mr. Ivor Caplin (Hove):
The right hon. Gentleman has not yet responded to the question about the misselling of pensions. Ten years have elapsed since personal pensions were first sold, yet fewer than 12,000 people, including my constituents, have been compensated and more than 500,000 remain uncompensated. What did the right hon. Gentleman do about the misselling of pensions when he was Secretary of State for Social Security?
Mr. Lilley:
Like other hon. Members, the hon. Gentleman raises an important point. I intend to come to it in the order that I choose; I shall respond directly to his point.
Mr. Dale Campbell-Savours (Workington):
Will the right hon. Gentleman give way on basic pensions?
Mr. Lilley:
I shall give way to another supporter of my pension scheme, along with the Minister for Welfare Reform.
Mr. Campbell-Savours:
I want to comment on that very point. Conservatives in my constituency blame the former Secretary of State personally for the disaster of
Mr. Lilley:
I am happy to say that, although we suffered a big swing against us generally throughout the country, there was almost no swing against us among pensioners, except possibly in the hon. Gentleman's constituency. I advise him to ask his constituents whether they would prefer a state pension based simply on the promise of future payment from future tax revenues by a Labour Government, not backed by investment funds, or a basic pension guaranteed by the Government and backed by investment funds. I know which I prefer, and which any sensible person would prefer.
In any circumstances, a massive new tax charge on pension funds would be deplorable, but from a party that gave the electorate a clear pledge that it would not raise taxes, it is a betrayal of trust. Before the election, the then Leader of the Opposition told Birmingham business men:
I shall first examine the direct impact of the Government's changes. Secondly, I shall consider the arguments deployed by the Government to defend their claim that the measure will not affect pensioners. In the process of that I shall deal with the issue of misselling, which hon. Members have raised, and finally I shall examine the lack of consultation about those far-reaching changes, which is a scandal.
The Government hope to raise the very large sums that they propose to extract from the change in advance corporation tax credits without too much political pain, because the money is to be extracted at one remove from the ultimate losers, and the system is so complex that scarcely anyone understands what is happening.
Dr. George Turner (North-West Norfolk):
It is too complicated.
Mr. Lilley:
We are discussing the Government's measures, and I am inclined to agree with the hon. Gentleman.
In the course of my professional life I have had to study the ACT system in some detail over many years, and on at least three occasions I have understood it, but it is difficult to sustain that understanding for any length of time.
For the first time, a Government propose to tax the income generated from long-term savings. In effect the Government are imposing income tax on pensioners' dividends, which they previously enjoyed free of basic- rate tax. Previous Governments of both complexions have thought it right to encourage and reward long-term savers
by ensuring that they paid tax once and once only on the income that they saved, and exempting at least from the basic rate of tax any investment income generated by that long-term saving.
My right hon. Friend the then Chancellor, Norman Lamont, adhered to that rule when he reduced the relief from the old standard rate of 25p in the pound to the new target rate of 20p in the pound. By abolishing that relief entirely--by reducing the credit from 20 to zero--the Government are in effect imposing tax at the standard rate of 20 per cent. on income generated by long-term savings.
That is a clear breach of Labour's promise not to increase the rate of tax on anyone's income, because it falls on the dividend income accruing to pensioners. People do not immediately see it that way, because that income is building up in their pension funds and PEPs.
The changes that have been made affect 10 million to 20 million people. In due course, the consequence of that tax burden will filter through to them in the form of higher contributions or lower pensions. Anyone whose pension fund was previously generating dividends worth £100 in a given period will now get only £80. People will have to increase their investment by 25 per cent. to get the same net income.
The effect on the value of the final pension is not quite as ferocious, because some of the final pension that people receive from their fund is repayment of their premiums, some of the growth might be capital gains and some of their investments might not be made in equities.
Taking those factors into account, the Association of Consulting Actuaries calculates that a 30-year-old person who was previously investing £100 a month will now need to invest £112 a month to achieve the same final pension as was previously expected. He or she will suffer a 12 per cent. penalty as a result of the Budget.
To most people it is self-evident that, if the Government extract several billion pounds a year from pension funds, those funds will sooner or later have to find several billion pounds a year more from their contributors or pay out smaller benefits. If the Government are £5 billion a year better off, it follows that the funds must be £5 billion a year worse off.
Astonishingly enough, the Government's response to that charge is complete denial. They claim that pension funds, pensioners and investments will not be harmed by the change. It was embarrassing enough watching the Chief Secretary to the Treasury on "Newsnight" being skewered by Kirsty Wark. He seemed unprepared for her simple question--how can the pension funds invest as much as before, if they have to pay £5 billion extra to the Government? However, the subsequent comments by the Financial Secretary to the Treasury in the House made the Chief Secretary look perfectly reasonable and thoroughly on top of his brief. She made the amazing claim:
"We have no plans to increase tax at all."
The then shadow Chancellor said on television on 8 April:
"We've got no public spending commitments that require extra taxes."
The Government then come along and raise £5 billion a year--over and above the windfall tax--by imposing 17 new tax increases, by far the biggest of which falls on pension funds. That is a betrayal of trust on a scale that the Government ought to find deplorable.
"The measure is good for pensions and pensioners, not bad for them . . . People should understand that our tax reforms will benefit pension funds."--[Official Report, 3 July 1997; Vol. 297, c. 507.]
Anyone who believes that must also believe that water flows uphill--or, if one argues hard enough, that it will change direction and flow vertically. I challenge any Government Member to defend the Financial Secretary's statement that the reforms will benefit pension funds.
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