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Mr. Gibb: Does my hon. Friend agree that it is astonishing that the Red Book takes into account the extra pension contributions that companies will be required to pay because of the measure--it is stated on page 46 that there will be a consequent reduction in corporation tax--but that it makes absolutely no provision for the extra contributions that local authorities will have to pay so that they can balance their pension funds?
5.30 pm
Mr. Loughton: Of course it is astonishing--but then everything that Ministers have loosely said about their intentions to deal with local government pension funds has been quite astonishing. We have heard that the full implications for local authority pension funds will not really be known until next year, but--as any reasonable, responsible council leader or local authority pension fund trustee will say--it is prudent for all local authorities to have as soon as possible an ad hoc valuation of the very real damage that will be done.
Mr. Clifton-Brown: Is my hon. Friend aware that not only is it desirable to make up those contributions but the prescriptions governing rules of local government pension funds require trustees to make an informal valuation each year? If they feel that there is a shortfall, they must make it up each year--not when the next actuarial valuation is due.
Mr. Loughton: My hon. Friend is absolutely right. Ministers' sense of urgency in the matter has been positively snail-like and quite disgraceful. Yet again, local authorities have been left on their own to assess ways of making up the damage. The Government have left local government in a disgraceful position.
On a related subject, I have a copy of a letter from the Minister for Local Government and Housing to the hon. Member for Putney in which she wrote:
"We spoke briefly last night about the impact of the Budget on local authority pension funds.
29 Jul 1997 : Column 177
Pension funds should benefit from improved company performance as a result of encouraging quality long term investment, reflected in long term share values. The reduction in Corporation Tax announced yesterday will greatly assist company performance."
As my hon. Friend the Member for Grantham and Stamford (Mr. Davies) asked, however, will the Government reverse their decision when the stock market starts going down? In Committee, I elaborated on the fact that the UK stock market rise has been something of a mirage compared with the much greater rises in other major markets, and that that has had a particularly significant impact on multinational companies, the share prices of which, in many cases, have fallen alarmingly.
The Government's measures will have a serious impact in four spheres--resulting in a quadruple whammy for companies and their company pensions funds, for beneficiaries of those pension funds, for ordinary people with private pension funds, and, inevitably, for anyone who pays council tax. It is entirely fallacious to suggest that dividend payment levels have positively discouraged investment, because those levels and investment are not mutually exclusive. I have already mentioned how a comprehensive study has shown that, in the vast majority of the past 18 years, dividend payments rose as investment rose.
Let us leave the final word to the former chairman of a major quoted engineering technology company. On the first page of the company's report and accounts for last year, the second strategic objective was described as achieving
The chairman believes that dividend payments and investment are not mutually exclusive, and that dividend payments are a major incentive for equity finance--which is one of the cheapest and most cost-effective ways of producing funds for expansion and research and development--and I believe him. I trust that his colleagues on the Labour Benches will believe him also, because that former chairman of TransTec plc is now the Paymaster General. It is a shame that he is not in the Chamber to echo the words that he wrote only a few months ago in his own company's report and accounts. I hope that one of the few Labour Members remaining in the Chamber for this debate might pick him up on those points.
Mr. Clifton-Brown:
The change to advance corporation tax amounts to an income tax of 20 per cent. on pension schemes that hold equities. ACT is paid because the taxpayer suffers an income tax rebate of 20 per cent., which is collected by a corporation on behalf of the Treasury. The tax change is therefore a severe raid on people's pension funds.
I shall dwell on the effects of the change on local authority pension funds. As I said in an intervention on the speech of my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), on 21 June 1997 I received a written answer from the Department of the Environment, Transport and the Regions stating that the next actuarial valuation for local government pension funds would be in March 1988. The Government therefore included the measure in the Budget, although they had no idea--if they did, perhaps the Minister will tell us--of the precise costs and implications for local government.
Various calculations have been made of the measure's costs to local government, the most accurate of which is perhaps that provided by the chief executive of the London Pension Fund Association--who, as a memberof the Chartered Institute of Public Finance and Accountancy, is a professional in the field. He has calculated that the combined cost to local authorities will be £200 million to £400 million. The effect for most local authorities, including mine, will be increases in council tax bills of between £10 and £12.
Mr. Richard Cockcroft, whose current title is director of corporate services for Gloucestershire county council--it is a job to keep up with his title, because he keeps giving himself new jobs--has made the point that the next actuarial valuations will be made in March 1998. He states that an informal survey was conducted on behalf of the United Kingdom steering committee, which showed
Richard Cockcroft goes on to say that, even before the Budget measures, Gloucestershire county council was
This is a serious matter, because the Government announced in the Budget that they would stick to the previous Government's targets for the next two years. If they do so, it means that there will be no extra money for local authorities to meet their additional burdens. Local authorities will therefore have to bear those burdens themselves. If, as they said the other day, the Government are going to apply strict capping criteria and not allow council taxes to be increased above very tight limits,
the extra contributions will have to come straight out of the money for front-line services. I hope that council tax payers and the recipients of such services across the country will be made aware that their services will deteriorate solely because the Government have introduced this new measure.
Mr. David Ruffley (Bury St. Edmunds):
I suggest that the position is in fact even worse than my hon. Friend describes. Given the change in the forecast for inflation, it is estimated that there is a cut of between 1 and 2 per cent. in real terms in the amount of central Government grant to local authorities. That is estimated to be a cut of about £570 million this year, and double that the following year. Is not the position therefore rather more grievous for local authorities than my hon. Friend described?
"sustained growth in dividends per share."
In his report, the chairman was quite proud to report a dividend rate increase of 15 per cent. over the previous year, when he was able also to increase investment in the company by well over the 15 per cent. dividend increase rate.
"that the average County Council was less than 90 per cent. funded".
Therefore--far from being one of the 50,000 companies with a pension fund surplus mentioned by the Chancellor of the Exchequer--the local authority sector is in deficit and must quickly make up the shortfall.
"already contributing an additional £1m a year to rectify the situation, with the fund's other employers"--
the district councils--
"also having to contribute significant extra amounts."
He states that preliminary discussions showed that actuarial costs for the county council would be
"at least another £2m a year, with the District Councils in total being faced with similar additional costs."
Moreover, he states--as I said in an intervention on the speech of my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton)--that the
"Regulations governing Local Government Scheme require all 'actuarial deficits' to be made good by the employer."
Mr. Cockcroft continues:
"Without some form of assistance, I can see no option but for those additional pension contributions being made at the expense of 'front line' services."
He states that, alternatively, council taxes could be increased. A third option, of course, would be to increase local authority standard spending assessments.
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