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Mr. Graham Stringer (Manchester, Blackley): Would my hon. Friend be surprised to learn that I was told by the chairman of one of Britain's leading manufacturers that he spent his time trying to hide from the City the amount of research and development that was carried out in that company? If the City had known about the large percentage of potential pension funds being spent in that way, it would have put pressure on him to reduce his company's research and development.
Mr. Davies: Unfortunately, I am not surprised to hear that. My hon. Friend's example is characteristic of the disgraceful activity throughout United Kingdom industry. Before I ran my own business and was in a multinational business, I found that there was an increasing propensity to have short-term financial returns. There was no longer an annual return, because every quarter the marketing and advertising spends, which were strategic investments, had to be cut to hit the City's requirements, its hunger for dividends. As hon. Members have said, such actions were carried out at the expense of long-term strategic investment.
Who is best equipped to make long-term strategic investment in research and development? Is it the people who create profits for companies in the first place, the managers and directors who invest their time, life, skills and energy fighting in competitive markets and delivering returns, or is it the City, which behaves in an accountancy fashion and just wants to drain the lifeblood from British industry?
It is obvious that a balance must be struck between dividends and research and development and reinvestment. The distorting effect of the subsidy has led to inadequate performance by many pension funds, and has allowed massive bonuses and the starvation of companies that want to invest and succeed. The balance is not right for our long-term economic prospects and, therefore for the economic well-being of pensions and pension funds.
The new Government bring with them a new culture to support the one that I have mentioned, which relates to investment, innovation and long-term thinking. It supports company directors and managers who want to succeed and does not simply respond sheepishly to the voice of the City.
In an earlier debate, Opposition Members spoke about the subsidies to private health care. People quoted industry sources which were subsequently shown to be inaccurate by reference to the Inland Revenue. In its own interests, the voice of the pension fund industry is prone to exaggerate the results of the Government's changes. We all know that the predictions about the impact on pension fund values derive purely from a calculation that is based on dividend flows which, in actuarial terms, do not stand up to scrutiny, because they will be unable to account for the likely capital growth of pension funds.
Mr. Gibb:
How does the hon. Gentleman think the capital values of companies are calculated if not from their income flows?
Mr. Davies:
It is now acknowledged by consultants in the industry that one has to give some idea of companies' future values in terms of stock market value and the like. That is not ascertained simply from the dividend flow. There have, on average, been large increases in stock value since the Labour party came to power, and those will continue if the Government create an environment, in terms of the Bank of England, research and development and corporation tax, in which we can expect rapid growth of investment and profitability in UK plc.
Future values should be factored in. Basically, the word on the street is that they will now have to be. The hon. Gentleman can use his somewhat simplistic arithmetic in this debate, but in a year or so, that will be inadequate and those changes will be made. Time will tell, but that is clearly the industry's view.
The simple fact is that, again, a small scatter of the Opposition have been cobbled together to talk about the short-term impact, warning that there will be victims, as if there were an election next week and they were still trying to pull themselves together. They are unable to confront the fact that the new Government, unlike the previous one during their 18 years of office, have a long-term policy that will deliver economic and social benefits for pensioners, other people and future generations.
Mr. Brooke:
I am pleased to follow the hon. Member for Croydon, Central (Mr. Davies). To his credit, he has
I spoke on this subject during the Budget debate. Yesterday, the Paymaster General rebuked us for not raising different points from those that we had made during the Budget debate, on Second Reading or, in the context of this debate, in the pensions debate. Plenty of hon. Friends wish to make new points, so I will confine mine, whether new or old, to three.
Before I do, may I say that it was a pleasure to welcome the right hon. Member for Llanelli (Mr. Davies), who I am sorry has now left the Chamber, to the debate? It is one of the signs of the new Government's overweening confidence that they thought that they could manage without the right hon. Gentleman, who was a distinguished Treasury Minister when Labour was in power before 1979.
First, the Government have given us remarkably little justification for their confidence that, if the payment of dividends is made less attractive, investment will be more likely. In one respect, I am in the Government's debt, as the subject is not one with which I have had to get to grips since I was a postgraduate student at Harvard business school 40 years ago. The baldness of the Government's confidence that their measures will have a particular long-term effect has driven me back this month to the academic literature, even if a fair amount of the latter comes from those modern seats of earning, the business schools.
I have also studied the 1994 Select Committee on Trade and Industry report on the competitiveness of UK manufacturing and industry. Interestingly, there were many fewer and much briefer recommendations in the chapter on the City and industry than in some of the other chapters, but it will not surprise the Committee if I recount that there were charges of short-termism, to which the hon. Member for Croydon, Central referred.
The Procrustean circumstances of the abbreviated and accelerated procedures in the Bill have still allowed me to read "Short-termism on Trial" by Professor Paul Marsh of the London business school, which was published by the Institutional Fund Managers Association, which is regularly quoted in the Select Committee's report, but which effectively finds the City not guilty of the charge as made.
I fear that, due to the accelerated procedures on the Bill, I have not been able to get hold of Mr. David Miles's "Testing for Short-Termism in the UK Stock Market", published in 1992 as Bank of England working paper series No. 4. I am sorry for that failure, but I blame the Government's business managers more than me. It is an omission, because, in paragraph 174 of the Select Committee's report, the argument over whether share prices properly reflected the value of long-term investment is primarily underpinned by Mr. Miles's study. I have already confessed that I have not had the opportunity to read it, but I have been advised that the working paper does not comprehensively underpin the conclusion that the Select Committee drew from it.
Interestingly, one immediate consequence of the Government's actions has been to drive funds out of manufacturing equities and into property, as the hon. Member for Dudley, North (Mr. Cranston) conceded.
I hope that the Economic Secretary will say why the Government are so confident about the effects of their measure. In particular, if the Government are wrong, the national price will be heavy.
My anxieties are compounded by the relative unfamiliarity of Ministers with their briefing under pressure. The words of the Financial Secretary have been quoted by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) and others during the debate. My suspicion is that the Financial Secretary did not expand on the simple words she used because she would have got herself into deeper and unfamiliar water.
Even the Economic Secretary startled me when she was being cross-examined by Mr. James Naughtie on the "Today" programme on the subject of personal pensions in the context of this clause. She suddenly threw in the fact that pension funds were in surplus--which had nothing to do with the immediate price of eggs, in answer to the question asked by Mr. Naughtie.
Mrs. Liddell:
I am surprised at the right hon. Gentleman's ungraciousness. I have always listened closely to his speeches. The point that I made specifically to Mr. Naughtie related to occupational pension schemes, which are a critical part of the mix in resolving pensions misselling. That is why I was discussing funds in surplus and the ability to rectify pensions misselling. I cannot believe that the right hon. Gentleman is comfortable in his soul with the way that the previous Conservative Government, in which he served, behaved on pensions misselling.
Mr. Brooke:
The Economic Secretary is entitled to come back on such points, but the fact remains that she was deciding the agenda with Mr. Naughtie. She switched the argument to a subject on which she felt she was on safer ground--she was not responding to the question that he specifically asked her. [Interruption.] We can readily examine the transcript.
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