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Mr. Green: My hon. Friend is right. The underlying point is that businesses and the people who run them know, by and large, where they should be investing. History tells us that, when politicians and civil servants, however well intentioned, try to interfere in the investment policies of individual businesses, they always get it wrong and make businesses worse off in the long term.
There is another part to the argument. Many of my hon. Friends have shown that the tax change is damaging to industry, but more important is the effect that it will have on pensioners. Does it help any pensioner? No. Does it damage many pensioners? Yes. Certain classes of pensioner, particularly vulnerable and future pensioners, will be particularly hit.
Another fig leaf that the Government produced when they introduced the clause was that many pension funds were in surplus, so it did not matter. That betrays a morality which, in itself, is extremely questionable. When Mr. Maxwell decided that surplus pension funds were suitable to be raided for his own purposes, many people rightly found that morally unacceptable. I fail to see the distinction between that and the Government deciding that surplus pension funds are there to be raided. Moreover, while some pension funds are in surplus, many are not, and they will need to find the extra money to increase the pensions available to future generations of pensioners or pay out lower pensions.
Some classes of business that are important for future job creation, such as small firms, will be particularly hard hit by the measure. In addition, underlying businesses will
be affected. Many of them may well take a responsible long-term view about how they should treat their employees. They might say that their employees should not be disadvantaged by the Government's rather immoral one-off raid on pension funds. If, as a result, they decide to increase the contribution from the underlying business to the pension fund, the net effect will be that, again, investment and dividend payments are reduced. The firm concerned will be forced to do things with its capital that it would not otherwise do and the overall net wealth of the economy will, in the long term, be reduced.
Mr. Gibb:
Is my hon. Friend aware of another consequence of trying to confiscate surpluses from the nation's pension funds, which is that many vulnerable pensioners receive a discretionary increase from those pension funds in the payment of their pensions because those pension funds are in surplus, but once those surpluses are eliminated there will be far less scope for such discretionary increases to the more vulnerable pensioners in Britain?
Mr. Green:
My hon. Friend makes a good point. A point that I would develop from that is that whether any individual pensioner is particularly hard hit will be arbitrary. It will probably be no consequence of any action taken by the individual pensioner whether he is with a pension fund that is in surplus or in deficit, or whether that pension fund is associated with an underlying company that is or is not able to make up the deficit or is in a position to pay discretionary payments. Because of the arbitrary imposition of the tax, pensioners or future pensioners will suddenly find themselves severely disadvantaged.
Another point that I want to draw to the attention of the House is the long-term nature of savings for pensions. For most people involved, this hit will come halfway through the process of saving for their pension in old age. Because this measure changes the terms they thought they were saving under, it is effectively retrospective legislation. People may have been saving for 15 or 20 years under a certain set of rules. This measure changes those rules, dating back to the time when a person started to save for a pension. I hope that all hon. Members will agree that retrospective financial legislation is a bad thing.
Mr. Clifton-Brown:
My hon. Friend toucheson an important point. Is not the measure a total misrepresentation, particularly to pensioners who are drawing nearer to retirement who have built up their expectations of their standard of living on a certain pension who will now be denied that level of benefit? They have no time left in their working life to make up the shortfall.
Mr. Green:
That is an extremely good point, and it illustrates the amount of extra uncertainty that is injected into the system. The hon. Member for North Tayside (Mr. Swinney) referred to the fact that, from his experience in the pension industry, the worst that can happen for those running the industry and, more important, for those looking forward to receiving a pension, is an increase in uncertainty. Uncertainty is precisely what this tax increase introduces into the system.
Another effect of the measure is flatly contradictory to much of the rhetoric that we hear from the Government Front Bench, particularly the reforms favoured by the
Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field). He believes that there should be greater personal responsibility for savings and he wants the welfare state to move more towards the application of personal savings.
What is proposed shows the enormous gap between rhetoric and reality in the Government. We hear a lot of rhetoric about an increase in personal responsibility and modernising the welfare state, but a couple of weeks after taking power the Government introduced an emergency Budget that marches strongly in the opposite direction. The Government have failed to come up with any rationale in terms of their own rhetoric on welfare for taking this action.
Companies will be badly affected by this measure, particularly small companies and companies that take the honourable route of trying to subsidise their own pension funds. Existing pensioners will be worse off, and future pensioners will be more uncertain about the life that they will be able to live in their old age. This is a thoroughly bad clause which at the very least needs amending.
Mr. Tim Loughton (East Worthing and Shoreham):
As a new boy, I might be forgiven for feeling rather frustrated. For 26 hours, members of the Finance Bill Standing Committee went through the Bill clause by clause. My hon. Friends may have felt during those 26 hours that we had strayed on to the set of "The Woodentops", such was the level of debate not forthcoming from the Government Benches.
I was almost encouraged that some of those mutes appeared to have found their voices today. Alas, the one who did find his voice--the hon. Member for Dudley, North (Mr. Cranston)--appears swiftly to have disappeared. I can only hope that the reason for his disappearance is the former of two probabilities--the first, that he has gone to the Library to check some of his facts, which have been found to be sorely lacking or, secondly, that his pager has summoned him to Mandelson towers, whither he has hurried hotfoot, quickly shoving a copy of the Order Paper down the back of his trousers to mitigate the consequences of speaking out of turn.
Particularly galling is the fact that the hon. Member for Dudley, North, the only one to venture any opinions on the matter, has completely and utterly--either by choice or out of ignorance--misunderstood and ignored what we spent much of those 26 hours upstairs debating in fine detail. For his benefit, in case he reads Hansard tomorrow, and those few of his colleagues who have bothered to turn up, I want to go through, step by step, the serious implications of these clauses to a deep stratum of companies, pension funds and individuals.
Last week, I drew on the example of a large FTSE company, one of the largest employers in my constituency, SmithKline Beecham. Despite being a large
multinational company, typically its pension fund was only about 93 per cent. covered at its last actuarial valuation. We know that, from an actuarial valuation basis, if the ACT credits are lost, the fund will be severely less fully funded than it currently is, but what are the options for the trustees of a pension fund such as that of SmithKline Beecham?
First, it can have a much less well funded pension fund and in due course be hauled up under the minimum funding requirements. Secondly, it could choose, if it is feeling generous towards its pension holders, to stump up the difference and underwrite the shortfall that will be exacerbated by the Government's moves. The cash injection required to do that will amount to approximately 7.5 per cent. of last year's pre-tax profits. That is not a good way to go about maximising funds for investment, something about which we heard so much from the hon. Member for Dudley, North.
What will this mean for SmithKline Beecham? To enhance shareholder value, it will probably have to launch a share buy-back programme, for which it will have to borrow money when interest rates are rising. That does not leave a great deal of extra money for investment, which is so important. It will have less money to pay out in dividends--which Labour Members apparently so resent. It will have less money for research and development, which is also important. Labour Members refuse to contemplate introducing a tax credit against research and development expenditure, as operates with varying degrees of success in France and the United States. It will have less money for expansion. I cannot envisage any way in which the Bill will increase the opportunities for that company to improve on its already enormous research and development expenditure.
The problem will be compounded by any tightening of the minimum funding requirements that the Government may introduce. Although that may not apply to SmithKline Beecham, there are less scrupulous smaller companies with pension funds that may put pressure on their actuaries so that there is a less stringent requirement to top up the pension fund, which may then mask the real nature of those funds. Less scrupulous pension fund managers may switch their pensioners out of defined benefit schemes into money purchase options, which are then open to the vagaries of the stock market and the underlying investments in the schemes.
The proposals will have especially harmful effectson many large, previously nationalised--or still nationalised--companies, all of which operate in Labour-held constituencies. As I have said, the old National Coal Board pension fund is worth a whopping £20 billion and looks after 500,000 former miners. It does not attract new funds, but it still has a great deal to pay out from a diminishing pot of money. The same goes, to a lesser extent, for the Post Office, with a £12 billion fund and 350,000 employees and former employees; for the steel industry; and for many formerly large engineering companies. The pension funds of all those companies will suffer.
Let us consider the impact on dividend payouts. SmithKline Beecham had a 15.9p full-year dividend last year. What options are open to it now? It could pay a reduced dividend to its shareholders. Because it will not get the advance corporation tax credit, the impact will fall on its shareholders, who will receive a dividend worth 20 per cent. less. That is certainly true for pension funds now and for individual shareholders from 1999. Its own
pension fund will suffer as it understandably holds a large number of SmithKline Beecham shares, within the limits allowed. It will be a double whammy.
Shareholders will suffer immediately and investors will be less attracted to the equity issue, so the cost of capital to borrow goes up, which means equity finance is more expensive, which again affects the capacity of those companies to expand and spend more money on research and development and investing overseas. As raising capital is a speciality of the City of London, it will be a loser under the proposed measures.
SmithKline Beecham may feel generous. It may feel able to pay out that 20 per cent. lost ACT credit in a higher net dividend to its shareholders. It would be exceedingly generous of that company to do so, but the effect would be less money in the pot for the important investment that the Labour party goes on about--so yet again, the measures are self-defeating.
What about the impact on individuals? I have already said that people with occupational pension schemes who rely on money purchase arrangements where companies are not making up the difference will be instant victims. Private pensions, which are unlikely to be in surplus, such is the nature of those schemes, will be hit to the tune of 11 per cent. The Association of Consulting Actuaries calculates that about half of final salary schemes will be in deficit and individual schemes will be hit as well. The implication is that pensions will be worth less at a time when the Government have just issued a new basis for encouraging further private pension provision.
The right hand of the Treasury appears not to know--or chooses to ignore--what the left hand of the Social Security Department is doing. Again, it will be self-defeating. Last week, we heard in detail about the implications for the investment trust and unit trust industry. Holders of those investments will be doubly hit by the changes.
The upshot is that the measures will undermine individuals' ability to retire early. They will undermine the great cliche of the flexible decade of retirement that we were promised by Labour before the election. Individuals with private pension schemes who already contribute the maximum are given no option to contribute more to make up the ACT shortfall. There have been no changes to the limits. As my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) said, there will be a serious impact as people will no longer be incentivised to contract out of the state earnings-related pension scheme and may indeed now contract back in.
There will be an impact on local authority pension schemes. We have had some mixed messages from Labour Members on that issue. My local authority, West Sussex county council, has already estimated that lost ACT credit is likely to cost it £3.4 million. Half of that will be down to the county council; half will be down to the district councils in West Sussex. It comes to about 5 per cent. of the annual payroll for West Sussex. We have received no assurances that that shortfall will be made up.
I want briefly to read from a letter from Sir Jeremy Beecham, the chairman of the Local Government Association, to the leader of West Sussex county council. He said:
"I am pleased to be able to report that the Association correctly anticipated the Chancellor's announcement"--
29 Jul 1997 : Column 176
very good Mystic Meg qualities; he obviously gets the Financial Times well in advance of most hon. Members--
"and had made representations to the Government about the adverse impact on local authority pension funds in advance of the Budget.
However, when the chairman of the UKSC, now the hon. Member for Putney (Mr. Colman), claimed it as a great triumph that local authorities would be underwritten for any shortfall of ACT credits, there was a great deal on squirming on the Government Front Bench and the assurance was not repeated. We have been given no firm commitment by the Government, upstairs, downstairs on in any lady's chamber, that the shortfall will be underwritten. We know that the result can only be increased council taxes, which also depend on what the Government do on capping, or further cuts in local authority services.
The Government has accepted that the loss of tax credits will need to be taken into account in determining local authority provision for 1999/2000 and subsequent years. We are, however, continuing to press the Government on this point and are asking for the increase to be fully underwritten by an increase in TSS and Government grant from 1999/2000 when the results of the next revaluation are implemented."
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