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6.21 pm
Mr. Geraint Davies (Croydon, Central): The Opposition motion is a rambling mish-mash of ideas, cobbled together by the fag end of the previous Government. It is couched in the language of guilt and betrayal, to scare the British public into supposing that they are at risk.
In reality, the aim of the Budget was to confront the country's endemic legacy of economic problems. That legacy consists of gross under-investment in physical and human capital, increasing debt costs--the annual cost of paying our debts is now £25 billion a year more than the cost of schools--and emerging overheating in an economy that is disabled by under-capacity and under-investment.
The Budget was designed to confront those problems head-on, and it did, by reducing corporation tax, reducing tax on small business and investing in the skills stock of UK plc, so that we would be strong again to fight and win in the global economy.
The Leader of the Opposition has said more than once that there is no such thing as a free lunch--although we know that there is free champagne in the Conservative leadership contest--but he does not realise that the Budget means growth and higher profitability for British industry and a simultaneously faster reduction in the country's debt. That must mean UK plc moving into balance much more quickly, and that must mean that the returns and values of pension funds appreciate more quickly.
It was no surprise, therefore, that, on the day after the Budget, the stock market rose 80 points. Since we were elected, there has been an upward cycle of share values, which has helped pension funds.
The shadow Chancellor, who has now left the Chamber, seemed to imply that growth did not matter, and the next moment he started talking about pension holidays, which is proof that, if industry grows because the Government provide the right environment for growth, that will compensate for the reductions in tax concessions that are given for dividends. The conditions that we have created will help pension values.
It has again been asserted--incidentally, it was asserted by the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell)--that pension values simply rely on dividend flows. That is obviously not the case; I have previously described that idea as a quaint, eccentric actuarial practice. Real pension values also depend on overall equity growth and projections of that growth.
We find that to be so elsewhere on the globe, and in the case of other financial products, such as unit trusts. Actuaries and the Department of Social Security need to think carefully--especially with respect to minimum fund requirements--about the definition that we now use, which we very much need to revisit.
I want to bring to the Floor the issue of the level of dividends as a share of operating surpluses in Britain compared with that of our major trading competitors. In Britain, that share is much higher than in the United States of America, Japan or Germany, suggesting that there is an opportunity for reinvestment from retained profit to increase research and development, and to increase long-term profitability to a more globally competitive level. That is implicit in the thinking of the Budget.
We must consider the Budget in the context of the new culture of stability that was introduced by the delegation to the Bank of England of responsibility for setting interest rates--a change which, overnight, reduced the long-term borrowing costs of British industry by changing long-term interest rates. That change reduced costs and this change increases returns, so collectively we see an increase in the expected return and profitability of British industry. That means jobs and prosperity for Britain.
Mr. John Greenway (Ryedale):
It was obvious to all hon. Members who were in the House before the general election that, whoever won, the House would find itself debating pensions fairly soon. I doubt, however, that any of us anticipated that we would be doing so in circumstances such as those that we are in tonight--the robbery of about £5 billion a year from our pension funds by the proposal on advance corporation tax in the Budget.
Listening to some of the earlier exchanges about the proposals for basic pensions plus made by the previous Government--which, I seem to recall, were favourably received by the current Minister for Welfare Reform and by the Prime Minister--I was reminded that, before the general election, it was understood on both sides of the House that there was a need for long-term reform, to encourage more people to provide for themselves for their retirement. That recognition appears to have flown out of the window in the present Government's proposals.
I remind the House of my many interests in insurance and financial services. I have worked in the insurance industry since 1970. I am a director of what is now a very successful insurance brokerage, which also includes an independent financial services company, both based in North Yorkshire. I am an adviser to the Institute of Insurance Brokers, and have been throughout its 10-year history.
As the Under-Secretary of State for Social Security, the hon. Member for Southampton, Itchen (Mr. Denham), knows, in the past seven years we have had a thriving insurance and financial services group, in which we have considered in a non-partisan way some of the issues that we are debating tonight. I have one other curious interest, in that I am, and have been for six years, an elected member of the Insurance Brokers Registration Council. We are regulators. We are the authorised bodies for insurance brokers. In that role, I have hands-on experience of why the problem of the misselling of personal pensions is taking so long to resolve.
In view of these interests of mine, hon. Members are bound to wonder whether any of them might influence what I have to say. But in fact the Budget was not bad for the company of which I am a director: the lower corporation tax and the 50 per cent. on capital allowances benefited our company. The removal of the ACT credit from pension funds will inevitably mean more new business for companies like mine--so the measure is beneficial from that point of view. The real issue, however, as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) said, is the fact that we are robbing the future for tax revenue today, which is a gross mistake.
The pensions transfer review is complex. It has been said this evening that the former Government did nothing about it, which is not true. The Economic Secretary, to be sure, has injected some urgency into the review, and that is good. Very few people in insurance or financial services fail to recognise the need for the review to be completed. I remember saying at the Chartered Insurance Institute's conference in Aberdeen, held in 1995, that insurance and the financial services industry cannot expect to regain the trust of the public until this matter is resolved. There is no shortage of willingness to resolve it, but certain problems remain.
The IBRC authorises roughly 1,200 firms' financial services regulation. We have identified about 200 cases, involving 80 of those firms, which hinge on the opt-out and non-joiner part of the problem. As the hon. Member for Southampton, Itchen (Mr. Denham) knows, that is critical. Very few of these cases have been settled, but we have set as a target for their settlement the end of 1997. We believe that about half the cases will result in compensation.
We have also identified about 2,800 cases involving pension transfers. A great many of them are not a problem, although I suspect that there may be some over-optimism in that regard. We have identified, furthermore, about 11,500 non-priority cases which are not yet part of the review and which still await a decision about when the industry should consider them. If the IBRC, covering 1,200 insurance firms--each one of which has a large general insurance business; this is not the main part of their business--has so many cases, we can only guess at the scale of the problem throughout the rest of the industry.
The Government would therefore be wise to defer a decision on when the non-priority cases should be reviewed until the first phase, the priority cases, is out of the way.
Why is it taking so long to complete and settle the reviews? Gathering the information is a slow and complex business. It was not until the autumn of last year that the software was produced to allow a loss assessment to be done in a standardised form. It would be a hugely complex task to do case by case. It should also be remembered, as against the allegations that the previous Government did nothing, that the Securities and Investments Board simplified the information that had to be asked for only as recently as January of this year.
I have seen a letter on file from one occupational scheme that we are reviewing, answering the request for information using the latest, simplified form recommended by the SIB, as follows:
The next huge problem concerns the feeding in of the removal of tax relief on dividend income to the calculation of what it will cost to go back into an
occupational scheme, and of the likely value of the personal pension policy that was sold instead. If such an equation has to be drawn up, any prospect of resolving the problem of misselling at an early date will go out of the window. Any such idea is bound to hit the buffers.
If an occupational scheme does decide to recalculate what it will require for a person to rejoin it, it will in effect have a blank cheque: it can require whatever it wants before someone can rejoin. Yet existing members will still be subject to the same regime, governed by the tax credit removal on ACT; so current members will be worse off. It is expected throughout the industry that many occupational schemes will ask for more--but why should they?
The Government ought to send a strong message to the industry that no allowance should be made for the tax change in any of the reviews. We should not move the goal posts because of that tax change. The calculations should be carried out as if the tax change were neutral; otherwise, the pensions transfer problem will not be solved as quickly as we would like.
The scenario I have described would be a double whammy when it came to compensation costs. Some people might ask why an increase in compensation costs is a cause for worry. I can tell the House three reasons for that. First: who will pay? Perhaps the money will come from professional indemnity insurance or the resources of the firms concerned, if they are still in business--many of them are. But the value of the policy benefits to many policyholders in mutual companies will fall as a result of compensation payments--an issue with which the House has yet to come to terms.
I long for the day when a non-executive director of one of the mutual life offices says, "I have had enough of this. People who did no wrong are having their benefits curtailed so as to pay for compensation to people who may have been missold personal pensions but who were at least a party to that transaction." Ultimately, the problem will have to be tackled.
My second reason is a question of equity. Any assessment of the advice that preceded the misselling of pensions can surely be made only in the light of what were thought at the time to be the likely consequences of such advice.
It may be argued that advisers should have paid attention to possible tax changes, such as the one under debate this evening--although there was certainly no clear warning of it. We have to make a firm judgment at some point as to the knowledge on which such advice was based. If we do not set the cut-off date for such knowledge at the time a policy was sold or the time someone was advised to leave or not to join a scheme, then we should at least settle for the time when the SIB review was announced.
Without such a cut-off, who knows what changes to tax laws or benefits the next couple of years may hold? We shall find that, every time a change is made--it will be a long-drawn-out process for several years--we shall have to rehash the matter.
A precedent has already been set of which the Minister may be aware. Some independent advisers have asked the SIB and the PIA whether, in calculating compensation, they can take into account the fact that the company with which the personal pension policy was arranged produces windfall shares for members. Some, such as the Norwich
Union, have, and there are strong rumours about what might happen to others like the National Provident Institution and Friends Provident.
The PIA has come down firmly and said that under no circumstances should those additional benefits be taken into account. If we apply the logic of that argument, we should say that the ACT tax credit change should influence neither the calculation of the cost of returning to an occupational scheme nor the value of the pension policy that was sold. The comparison between the two is how the required compensation is calculated.
"You will have to learn to wait."
I urge the Government to get on the backs of the financial services and pension providers, and to chivvy along the occupational schemes. Unless they provide what are often simple scheme details, we cannot calculate precisely what the losses may be. They must be encouraged to get on with the job. The country is entitled to expect progress, and progress is precisely what the great majority of people in the industry want.
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