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Mr. Peter Lilley (Hitchin and Harpenden): The greatest domestic problem facing all developed countries is how to finance retirement incomes for populations that are experiencing increasing longevity and declining fertility. People are living longer and having fewer children from whom to draw the work force of the future, and that is a serious problem. It behoves us all to participate as constructively and positively as possible in such debates, and I shall certainly approach this debate in that spirit.
Britain is better placed to cope with the problems of an ageing population than most other countries in Europe. That is not only because our expected population pattern is more favourable than those on the continent, but because we have taken steps to encourage people to save and invest for their retirement. We have more funded private provision for retirement than any other European country; indeed, we have more provision than all other European countries together, and the value of our funds exceeds that of all of theirs.
None the less, funded private provision still meets only 40 per cent. of this country's future pension liabilities. When the Government came into office, they set a target of raising that percentage to 60 per cent. by the middle of the century, and I unreservedly praise them for that. After all, we require companies to save and invest to ensure that they meet their pension promises to their employees. Even though Governments cannot legally bind their successors, it is extraordinary that they have not considered it necessary similarly to ensure that money and resources are saved and invested so that their pensions promises can be met. I therefore welcome the fact that the Government have at least set the target of making a major step towards more funded provision for our pensions liabilities over the next few decades.
Unfortunately, having set that target, they have, in practice, moved decisively in the opposite direction. They have vastly increased their unfunded pensions and retirement-provision liabilities by replacing the state earnings-related pension scheme with the state second pension, which is set at a more elevated level. Furthermore, they have raised the value of the basic state pension by introducing the minimum income guarantee, raising it and extending it across the spectrum through the pension credit.
At the same time, funded occupational schemes are in crisis. Many are closing to new members, many are cutting contributions and, therefore, the benefits to which employees are entitled, and many are in deficit. Insurance companies are advising older members in particular to opt back into the state second pension, which they will receive on a pay-as-you-go basis, not a funded basis.
Occupational schemes are being pushed in that direction largely because of the underlying problem of increasing longevity, which has been accentuated by the decline in investment returns in recent years. However, the situation was aggravated most of all by the extraordinary decision of the incoming Chancellor to impose a £5 billion a year pensions tax on people's pension funds. I christened it the "Maxwell memorial
That effect was aggravated further by an increase in the regulatory burden and the disincentives to savings created by raising the minimum income guarantee and extending it up the scale through pension credit. That, in turn, was aggravated by the impact of the financial reporting standard 17, which is not directly the Government's responsibility but has caused problems. I hope that the relevant accounting bodies will consider the proposals of the Confederation of British Industry to allow a spreading of the impact of pension liabilities on companies' reported accounts.
As a result of all those factors, the savings ratio has collapsed. There has been a serious overall impact that we cannot ignore. However, we must be constructive and consider how the Government might pull back from that decline and meet the targets that they have set and which I welcome. In substance, there are only two ways in which they can do that.
First, they could promote more saving, investment and back-up, and supplement state pension pledges. When I was Secretary of State for Social Security in the last year of the Conservative Government, I proposed a scheme called "basic pension plus", which would have ensured that every entrant to the labour marketevery young person starting workwas given his own pension fund, into which a rebate would be paid that was sufficient, over their lifetime, to fund a pension at least equal to the basic pension and the earnings-related pension. That would have been backed up by a guarantee from the state that if, through any misfortune or bad investment, the fund did not reach that target, the actual pension would be supplemented and topped up to the level guaranteed by the state through the old basic pension system. Those people would have had the prospect of sharing in a buoyant economy on the upside. If their funds did better than the modest projections by the Government Actuary, that would have acted as the basis for the rebates.
The scheme would have guaranteed the basic state pension to everyone in the country, enabled future pensioners to share in economic growth and given a massive boost to investment such that, if it had raised the growth level of the country from 2.2 per cent. to 2.3 per cent., it would have paid for the whole scheme through the extra revenues that it generated. It would have relieved taxpayers of the biggest single element of public expenditure that they faced and brought about the greatest extension of personal ownership since the spread of home ownership that ensued by allowing people to buy their council houses. In so doing, it would have resolved a major issue facing modern Governments: how to provide a decent, secure pension for increasing numbers of elderly people.
Sadly, although the scheme was widely welcomed by all the mediaapart from the Daily Mirror, and I should have been alarmed if it had supported itby those across the political spectrum and by commentators, the Government decided not to go
The Government went so far, as they often do, as to borrow some of my rhetoric and dress it up in stakeholder pensions, saying that they were adopting some of the substance of Lilley's ideas. Unfortunately, stakeholder pensions, about which I have said many favourable things, are as close to basic pension plus as a hologram is to the real thing that it representsas soon as one gets to it, one finds that the substance has disappeared. The most desirable feature of the stakeholder pension is that it is to be hoped that it will reduce the cost of provision and the element of savings siphoned off for administrative costs rather than being invested for future pensions.
It is said that people will save and invest only if they are either persuaded or compelled to do so. Persuasion costs money. Introducing stakeholder pensions, with their limit on costs, has removed the reward that could persuade people to save without replacing it with any element of compulsion that makes them save. Compulsion was clearly envisaged in the paper produced by the Government, "Partnership in Pensions" when the right hon. Member for Birkenhead (Mr. Field) was still gracing the Government. Since his departure, matters which were then going in the right direction have taken a downturn. The famous page 105, paragraph 9 of "Partnership in Pensions" referred to
I urge the Government to think again. If they intend to meet their pledge, should they not consider automatically giving to all or some of those accruing the state second pension rights their own pension fund, with a rebate paid into it and a guarantee that their pensions will, at the end of the day, be topped up if, by any misfortune, the fund is not able to provide them with the pensions foreseen by the state second pension scheme? In many ways, the state second pension lends itself to such an approach even better than the basic pension lent itself to basic pension plus. That is because the state second pension is accruing, over a generation, rights to a better pension when people retire. It therefore lends itself to a scheme that comes in gradually, with a generation.
As the scheme is, in essence, a flat-rate one, or will become so for most people, it is rather more suitable for people to opt out of than was the case with the state earnings-related pensions scheme. As SERPS was earnings-related, people with low earnings received a very low rebate, which was inadequate to cover the fixed costs of setting up and maintaining a fund. The state second pension would have a flat-rate rebate paid into private funds that would be more than sufficient to make it worth while for everyone, on all income levels, to opt out of the scheme and have their own fund generating a pension at least as good.
At present, 8.3 million people contribute to employers' pension schemes and 5.5 million have personal pension schemes. About 13.8 million in all have, therefore, opted out of the state earnings-related pension scheme, and about 7.5 million have opted in. We are talking of moving from a world in which two thirds of people have the benefit of a private pension to one in which 100 per cent. of those earning above the lower earnings limit have their own pension scheme. The current value of rebates paid into such pension schemes is £6.8 billion a year. That would have to be increased to cover the third not covered at present.
I have some questions for the Minister. I do not expect her necessarily to respond to them all here and now, but I hope that she will be able to provide answers in due course and that they will be placed in the Library to allow other Members to benefit from them. Why did the Government abandon their original proposal to make it automatic for everybody to have their own personal pension fund, equal in value to the state second pension, rather than leaving many people opted into the pay-as-you-go system? What would the value of the extra rebates be if the Government were to move to that system? What would be the value of a fund of an individual on average earnings if they paid into a fund to meet their state second pension liability by the time that they retired? How many ten or hundreds of thousands of pounds would they have accumulated through investing their rebates over a working life?
Was the reason why the Government were reluctant to move towards automatic opting out that for those who are older the structure of rebates does not fully reflect the rate of accrualthe value of the pension rights accrued by people who are working in older agebecause there is less time for those rebates to accumulate compound? How much would it cost if only younger people, perhaps those under 30 or under 50, were automatically opted out of the state second pension? I calculate that if new entrants only were opted out, the net cost of extra rebates for each year's cohort of people would accumulate at a rate of £100 million per annum, but I ask the Minister to check whether that back-of-the-envelope calculation is correct.
The underlying problem facing our pension system is that we are living longer, but we are not working longer. In 195052, the life expectancy of a man who had reached the retirement age of 65 was, on average, 11.7 years, which meant that he could, on average, expect to enjoy 11.7 years of retired life. By 199799, a man reaching 65 had a life expectancy of 15.3 years. For women, whose retirement age was and still is 60, their life expectancy in 1950 was 18.1 years at 60, but now it is 22.8 years. Roughly speaking, average life expectancy in retirement has been rising by about one month every year for the past few decades.
In theory, if people worked for a bit longer and were therefore retired for a correspondingly shorter period of time, they would have more time to save and they would be able to buy a higher pension at a lower cost for the slightly shorter remaining period of their lives. Ideally, people should be free to make that choice and should be equipped with their own pension fund. When they reach the sort of age at which they may want to think about retiring, if they have a fund sufficient to cover a pension
The evidenceI seem to remember seeing it when I was Secretary of Statethat people would behave like that is provided by the fact that those with money-purchase pensions, predominantly the self-employed, have been working for longer, while those with defined benefit pensions or those who are reliant on the state pension have been retiring earlier, despite their longer life expectancy. When people have a money-purchase pension to which they can continue to add by working a bit longer, they do that to enjoy a higher standard of living during a slightly shorter period of retirement.
Other countries have encouraged that process to a considerable degree. I was in Washington a while ago, and my taxi driver told me that he was 92. At first, I was slightly shaken by that, but he pointed out that he did not drive at precipitate speed, he drove with great caution, he had more experience than most taxi drivers and he drove extremely safely, which was proved because he had lived so long. People can continue working to very considerable ages if they so wish. Ideally, it should be up to them, but the Government have effectively repudiated plans to move towards a position in which all of us have our own pension funds, and all of us are free to make our own decisions about when we retire and whether we decide to work a bit longer. The Government have to face taking that decision collectively on our behalf rather than leaving it to us as individuals to make the decision.
In the Scandinavian countries and America, Governments have already begun to consider moving the pension age, or have already legislated to raise the state pension age, from 65, typically, to 67. I believe that it is time for the Government, working within their own parameters, to launch a debate about the future retirement age that they will be able to afford. They must consider whether it is more logical to raise the pension age by, for example, a month per year, so that those starting work now would probably work for three or four years longer than the previous generation, just as they would expect to live three or four years longer.
The decision will be important, whether the Government decide to go down that route or not. I emphasis that it is a decision that they face because they have chosen to rely largely on state pay-as-you-go obligations. They have increased those obligations and unless they do something about that they will not be able to meet their target of reducing the cost of state unfunded liabilities to just 40 per cent. of the total by the middle of this century.
My decision to equalise the state pension age for men and women at 65, rather than reducing it to 60 for both sexes, was extremely important. That was actually the biggest single cost-saving decision that any Government or Minister have or has ever taken. I am glad to say that it was endorsed by the then Opposition. Effectively, a consensus was achieved through the process of launching a debate, floating the arguments and allowing discussion. I believe that if the Government did a similar thing now, they would receive a similar constructive response across the political spectrum.
Are the Government considering that process, or have they closed their eyes to that option? What is the cost to the taxpayer of a failure to reflect in any way longer life expectancy in the state pension age? My calculation is that a single month's deferment of the state pension age would save about £3 billion grossperhaps £2 billion netof any extra benefits that would have to be paid. That is a very significant decision.
Mr. Tim Boswell (Daventry): Does my right hon. Friend agree that it is interesting and remarkable that the incentives for deferment of state retirement pension to a greater age are relatively modest and that doing so provides very little return? That may be reflected, as the memory of the earnings rule dissipates, in the much lower number of people who are deferring retirement and claming their benefit at the age at which they are entitled to it.
Mr. Lilley : I announced an increase in incentives for those who chose to defer retirement. Under the long-established systemI think, since 1948anyone who deferred taking their state pension for a year subsequently received a pension that was 7.5 per cent. higher. I announced that that would be raised to 10 per cent. I am not sure whether that promise is being honoured by the Government, but I hope that it will be. I do not expect a huge impact from that. The evidence suggests that it will not be as effective as people having their own pension fund to which they can pay in extra if they work a month or two longer and buy a slightly higher pension at a lower cost as a result.
I reiterate that the Government have created the problem, not us. I pay tribute to my hon. Friends the Members for Daventry (Mr. Boswell) and for Havant (Mr. Willetts) for the constructive way in which they have approached the problems of longevity. I hope that the Minister will give a similarly positive and constructive response, rather than descend into the scaremongering and point-scoring that we saw during the 1997 general election. The problem is too important for us to take too partisan an approach.
In practice, pension provision over the years has been a case of each Government building on predecessors' work rather than undoing it. I hope that the Government respond to the building blocks that we have put in place, and to the ideas that I have put forward in today's debate.
John Robertson (Glasgow, Anniesland): I congratulate the right hon. Member for Hitchin and Harpenden (Mr. Lilley) on securing the debate. He raised several important pension issues, including how longevity in our population poses new challenges for the Government, and I look forward to the Minister's response. I shall expand the debate to incorporate final salary pension schemes, and discuss how the Government can seek to protect employees as more and more companies move away from such schemes.
A final salary pension is a type of defined benefit pension that guarantees, on retirement, to pay out a pension based on the final salary that the individual earned in a jobthat includes their years of service for a company plus any pension that they have transferred
However, such schemes are expensive for today's employers. Several factors have played a part in making final salary schemes much more expensive for them. There are social factors, such as demography and, as the right hon. Gentleman mentioned, an increase in life expectancy. Policy changes, such as the introduction of the minimum funding requirement and financial reporting standard 17, and economic circumstances, such as the fall in stock market returns have also contributed. Those economic conditions and policy changes have impacted enormously on employers who previously offered final salary schemes, so we must consider how the Government can instigate policy changes to take off some pressure. If we do not remedy the situation now, although the full impact will not be felt for 20 or 30 years, it will be felt. Failure to act will create a pensions time bomb.
The alternative pension scheme that companies are embracing is the defined-contribution or money-purchase scheme, which transfers any investment risk to the individual away from the company. Thus if the stock market underperforms, the employee's pension is likely to be less than it would have been under a final salary scheme. In broad terms, a final salary scheme guarantees a pension at a given fraction of final salarythe firm has to fund the scheme to achieve thatbut a defined-contribution scheme guarantees absolutely nothing.
According to the National Association of Pension Funds, 46 companies stopped accepting new contributions to their final salary schemes last year, offering money-purchase schemes instead. Nearly half the companies that ran defined-contribution pension schemes contributed 5 per cent. or less of employees' salaries. In a typical final salary scheme, companies contributed 10 per cent. or more. Without final salary pension schemes, retired workers could be 30 per cent. worse off.
A vast number of companies have closed their final salary schemes to new employees, citing the aforementioned factors, individually or collectively, as reasons. British Telecom closed the BT pension scheme, of which I am a member, to new employees on 1 April 2001, and many others, such as HSBC, Marks and Spencer, Abbey National and Barclays, have closed their schemes. To my certain knowledge, two companies have even closed their schemes to existing employees, and I fear that that may become commonplace. The Trades Union Congress estimates that the numbers in final salary schemes may have fallen from 5.6 million in 1991 to 3.8 million in 2001.
With money-purchase schemes, the size of the individual's pot at retirement determines the size of his or her pension. If the individual has not put in enough, or if investment returns have been poor, there may well not be enough to fund a decent pension. At present, the situation is made immeasurably worse by the high price
Closure of final salary schemes also has implications for employee relations. Although closing a final salary scheme may not be a breach of contract, it may break an implicit promise in the employer-employee relationship. Apart from the obvious damage to the commitment that employees have to their company, the loss of a guaranteed pension and reduced company contributions may increase wage demands as employees seek to maximise their pension.
There are several problems with the minimum funding requirement, which is an assessment of the funding status of pension schemes on the basis of rules established by the pensions industry with Government support. The test for the schemes is too onerous. A scheme fully funded under MFR rulesone that can meet its pensions obligationsis in fact over-funded; in other words, the MFR is too cautious. It might seem absurd to advance that argument, but it is not. Under MFR rules, schemes have to be returned to fully funded status in a fairly short period of time. It is now 10 years, and it used to be five years. The only way that that can happen is if employers make sizable payments to their pension schemes. The onus is placed on them to make up the shortfall, although in many cases the shortfall is really nothing of the kind.
Another problem is FRS 17, a new accounting convention, which is designed to force companies to show any shortfall in their pension scheme funding as a liability on their balance sheet. It is designed to aid transparency in company accounts by forcing companies to disclose the real state of their liabilities.
We must appreciate the sheer size of most mature pension funds. The BT scheme is capitalised at £28 billion, and is worth about 50 per cent. more than BT itself. If it were shown to be 10 per cent. less than fully funded, there would, under FRS 17, be a £2.8 billion liability on the BT balance sheet. That is a totally artificial state of affairs. First, when we define a pension fund using MFR, we greatly exaggerate the size of the deficit. Secondly, even under MFR, we have 10 years to put it right. FRS 17 grossly exaggerates that liability. It can seriously damage a firm's share value and current rating, making capital more expensive. Those two issues are, between them, driving firms to close their final salary schemes.
John Robertson : The hon. Gentleman has obviously read the penultimate page of my contribution. On his first point, I refer him back to the right hon. Member for Hitchin and Harpenden, who instigated the debate and said that we should not try to score points on the subject, as it is too serious. However, I would probably disagree with the hon. Member for Henley (Mr. Johnson) about national insurance contributions.
Given the comments of Mr. Peter Thompson, and the fact that buying a pension has gone up by 40 per cent. in the past five years, the Government might well say that they want people and their employers to take more responsibility for pension provision. However, the introduction of MFR and FRS 17 has created an environment in which that is practically impossible. The result is that we shall increasingly have to step in and use taxes to fund pension subsidies in order to prevent consigning the elderly to poverty and future Governments of all colours to electoral disaster.
What should the Government be doing? A first step should be at least to reform or, ideally, get rid of FRS 17 so that it does not have such a major effect on decision making. There should also be further reform of MFR to make it more realistic. FRS 17 is due to be replaced in 2005 with an international accounting standard. I would like that to be speeded up, although I am concerned that the international standard may well be based on FRS 17. Perhaps the Minister will comment on that.
We could add incentives, such as abolishing advance corporation tax for those firms that maintain their final salary schemes, and abolishing it retrospectively for those who reopen such schemes. We could also consider giving firms transitional relief from other taxes if they can show that they are under genuine pressure because of their final salary pension schemes. We could lift the requirement on people to purchase annuities with their money-purchase schemes and make it mandatory for firms to pay a minimum of 10 per cent. of salaries into money-purchase or stakeholder schemes. Essentially, we must make it cheaper for firms to keep final salary schemes going while making it more expensive to switch to money-purchase schemes.
I am pleased to have had the opportunity to contribute to the debate. I realise that some of my ideas to alleviate pressure on companies and encourage employers back into final salary schemes may fall under
Mr. Boris Johnson (Henley): I shall be very brief, as all my points have essentially been made by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), at whose feet I sit and to whose briefings on pensions I used to listen humbly and sincerely when I was a mere journalistwhich, of course, I still am.
This morning, I asked my secretary, who is, I am afraid to say, a Labour voter, about her pension arrangements. She said that she had none, as no one in her family lived longer than the age of 50, and she saw no reason to make any private arrangements. That is a great shame, as I have every confidence, as she seems in the peak of health, that she will live a long time. As my right hon. Friend said, we live increasingly longer, and through several errors of policy the Government have gravely aggravated the pensions position in this country.
When sitting at the feet of my right hon. Friend, I used to write that Britain had the best private pension provision in Europe, which remains true. Unfortunately, however, we seem to be harmonising our position downwards, towards the rest of Europe. Perhaps that is a subtle scheme to approximate us to the rest of the Community, with a view to eventual membership of monetary union, or perhaps there is an agenda that I do not follow. However, I cannot believe that that is so. It seems more likely that errors of public policy, such as FRS 17, to which the hon. Member for Glasgow, Anniesland (John Robertson) referred, and advance corporation tax, which, as my right hon. Friend said, swindled £5 billion out of the general pensions pot, have contributed to a grave diminution in general available funds.
The question is, what are we going to do now, and how can we respond positively? Having listened to my right hon. Friend, I am delighted to discover that the Lilley plan rides again. We had such difficulty defending it in the 1997 election. The Minister smiles, because she remembers that at the time the Labour party grossly traduced and misrepresented it. It was a good idea, and I understand that my right hon. Friend is now offering a sophisticated variant that would do well and enable the Government to escape some of the mess that they have created.
The Government should think much more creatively about the retirement age. It is ridiculous that a man such as Sir Magdi Yacoub is forced to retire at 65 whereas a journalist such as Bill Deedes can, praise be, go on for ever, like my right hon. Friend's taxi driver. I am anxious to hear the Minister's comments about that, as I do not believe that many people will exculpate the Government for their failures in public policy over pensions. There is a risk that we will oscillate from apathy to panic. I am starting to detect serious panic about pensions. People my age are seriously wondering what is going on, and it is time that the Government did something to allay their fears.
I rise to speak with some hesitation, as I find my own personal pension arrangements immensely difficult to understand. An appropriate metaphor for today, to spare your blushes, Miss Begg, is that I feel like St. George taking on the dragon of the pension industry. The complexity of personal arrangements is difficult. I speak on behalf of my constituents, who tell me all their bewildering concernsfrankly, I often get lost.
Members of Parliament are a species of public servant who seem likely to continue to benefit from a final salary scheme. For those constituents who might criticise me, I would like to place on record that the average length of service in the House is not that long. The benefits of the final salary pension scheme are nowhere near as great as they may appear to the outside world, coupled with which, many of us take a substantial salary decrease to become Members of Parliament, so it is even worse than it looks.
I congratulate my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) on securing this debate on an important subject. Over the past year or so, my postbag has reflected a sharp increase in concern, not from the traditional pension lobby of those who rely entirely on state pensions, but from those who have put something away for their retirement and now find that it is under threat. In the past few months, employees of companies that are ending their final salary pension schemes have expressed complaints and concerns to me. The importance of that issue is growing. Politicians sometimes find it difficult to deal with because, typically, those who express their worries are approaching retirement or have actually retired. However, we must urgently focus our attention on it. The term "pension time bomb" was used by my right hon. Friend and by the hon. Member for Glasgow, Anniesland (John Robertson), in what I thought was a useful and thoughtful contribution, although I am not sure that the Minister would agree. He raised important and serious points.
In opening this important debate, my right hon. Friend took a characteristically emollient tone, and did not seek to score party points. I shall try to follow his example, but I believe that a substantial part of the fault for the problems that we face rests at the door of the Government. My right hon. Friend said that there were only two ways to persuade people to provide for their old ageby persuasion and by compulsion, but it is difficult to persuade people to deal with the issue against the confusing and complex background noise on pensions created by the Government.
Although the debate is primarily about final salary pension schemes, the subject cannot be divorced from the broader pension framework that the Government have sought to establish, the single greatest mistake of which is the growing reliance on means-tested benefit for pensioners. Pensioners have also been badly affected by the increase in council taxes, which is another source of taxation on pensioners that is outside the terms of this debate.
Thanks to the minimum income guarantee, an impression has been created in the minds of some pensioners that they no longer have to provide for their old age. It may be that the closure of their final salary pension scheme does not concern them as much as it ought to. That worries me.
The Government's failure to move on annuities may also discourage people facing the end of their final salary pension scheme from making appropriate contributions to their own money-purchase scheme. The responsibility rests with the Treasury rather than the Minister's Department, but I urge her to look again carefully at the arguments relating to annuities. Final salary pension schemes appear to be in terminal decline, and there will surely be few private limited companies left with such a scheme within a few yearsmy right hon. Friend looks surprised, but it is difficult to imagine that any would maintain them. Therefore, the way in which the Government treat money-purchase schemes will become even more important.
The Bill introduced by my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) comes before the House again on 10 May. In the context of the demise of final salary pension schemes, I hope that the Government will take a more sympathetic view to that Bill than they have so far. The introduction of other pension arrangements such as stakeholder and second state pensions has made the background noise to the pensions debate immensely more complicated for people such as myself who, frankly, find such things very difficult to understand.
In October last year, the National Association of Pension Funds said that 46 companies had closed their final salary schemes to new members during the previous year, 13 schemes had been switched from final salary to money purchase, 95 per cent. of companies had said that providing an occupational pension took up more company resources compared with five years ago, and 92 per cent. expected that to continue. Fewer than one in 10 companies intended to replace any scheme with a stakeholder one. More than seven out of 10 private sector schemes said that the introduction of stakeholder pensions had had no effect on the benefits that they offered. Worryingly, as the hon. Member for Glasgow, Anniesland pointed out, more than three quarters of schemes said that the new accounting standard FRS 17 would make it less attractive to employers to offer a final salary scheme. The director general of the National Association of Pension Funds, David Cranston, summarised the situation very neatly when he said:
The two crucial issues that have been mentioned and cannot be repeated too often are the devastating impact of the Chancellor's raid on pension funds at the beginning of the New Labour Administration, final salary pension schemes
Mr. Lilley : My hon. Friend suggests that there was a one-off raid on pension funds and that is often repeated in the press. However, £5 million is extracted from pension funds every year; I hope that that is clearly on the record.
Mr. Luff : My right hon. Friend makes an important point. Like the increase in national insurance contributions announced last week£9 billion-worth of taxes on incomes, not just one year but year on yearso it is with the raid on pension schemes through the change in advance corporation tax rules.
The accountancy firm Chantrey Vellacourt DFK has calculated that a typical 30-year-old needs to save an extra £200 a year just to pay for the Chancellor's stealth tax. It has also been reported that Tesco has imposed a 15 per cent. increase in contributions to the company's final salary pension scheme as a result of that taxa 15 per cent. increase that will not boost the final pensions of employees, but will pay the Chancellor's stealth tax. The Chancellor said that the stock market would continue to rise and that the increase in value of pension funds would more than compensatehe said that it would be a direct result of the abolition of the tax, as I recall. Those of us with modest shareholdings and ISAs know how sadly untrue that has proved over the past couple of years.
My right hon. Friend made a powerful case concerning the damage done by FRS 17 to the pensions industry, particularly to final salary pension schemes. He suggested its repeal. I suspect that the damage has now been donerepeal will not undo it, and it cannot be unwoundbut I should like to hear the Minister's analysis of the point. Will she put pressure on the Inland Revenue to change the arrangements?
The issue is important, and there are three major Front-Bench speeches to come, so I shall not prolong my remarks unnecessarily. However, the total impact on pension arrangements of what the Government have done is serious. It is estimated that many will need to double their savings rates to provide a decent retirement income. An individual aged between 35 and 45, earning between £17,500 and £35,000 per year currently saves 10 per cent. of annual income for retirement. In order to provide a comfortable retirement, that needs to increase to between 10 and 21 per cent. of income. Those are immense figures. My fear is that, with their final salary pension schemes scrapped, such individuals will see the Government's promises to protect their income under the minimum income guarantee and decide that it is not worth the candle. When the Minister responds to the debate, she must set the demise of final salary pension schemes in a much broader context. This is becoming our most important domestic policy issue: in 20 years' time we shall have to face our constituents and say that we did not speak up soon enough to protect them from the poverty that confronts them.
Mr. David Heath (Somerton and Frome): I, too, congratulate the right hon. Member for Hitchin and Harpenden (Mr. Lilley) on having secured the debate, and on the way in which he expressed his views. He has a great deal of expertise and interest. I do not always agree with his conclusions, but I do not doubt the genuine expertise that he brings to the subject. My only regret is that my hon. Friend the Member for Northavon (Mr. Webb) cannot be herehe is a member of a Standing Committee that is sitting this morningas he has more expertise on the subject than I, even with my best efforts, could achieve. Nevertheless, I hope that I can contribute to what has been a good debate.
I congratulate the hon. Members for Glasgow, Anniesland (John Robertson), for Henley (Mr. Johnson) and for Mid-Worcestershire (Mr. Luff) on their contributions. The hon. Member for Mid-Worcestershire mentioned the parliamentary pension scheme, which is a serious problem. The idea that the House can vote to enhance its final salary scheme while the rest of the country sees its final salary schemes going by the board is difficult to defend, and I for one am not prepared to defend it. That, however, is a subject that should be addressed elsewhere.
The right hon. Member for Hitchin and Harpenden made a comparison with other countries. He was right to say that, in contrast to many European countries, we are fortunate in having funded schemes. I am glad that he did not follow the path taken by many of his colleagues on so many other subjects by saying that European models are preferable. I find it difficult to reconcile the Conservative party's telling us that health systems in Denmark are preferable to ours with what it says on other subjects. It took the biscuit yesterday when the shadow spokesman for the Home Office said that we should consider policing in Belgium as a model. The mind boggles.
Setting that aside, we are historically lucky that many pensions are provided by funded schemes. Indeed, it is the schemes that are not funded that cause the greatest problems. I recall my time in local government when police authorities had difficulties with non-funded schemes because of the problems of finding the contributions to ensure the recipients a proper rate of return on their pensions, and of dealing with the ever increasing proportion of their revenue that went towards pensions. I am not sure that the answer is to keep hiking up the pensionable age. Doing so has clear attractions, but I am worried that we would start chasing our tails.
I recently heard an interesting exposition by the head of demographics at the United Nations. He was comparing the ratio between those of working age and those of retirement age in various countries, and Britain is by no means the worst in that respect. In order to maintain a steady ratio between those in work and those of pensionable age, some countries, including China, would have to increase the age of retirement into the 90s.
I shall deal principally with the crisis in funded pension schemes that so many hon. Members have spoken of, particularly that in final salary schemes. It is a hot potato at the moment, and is causing a great deal of concern to many people. Indeed, the hon. Member for Glasgow, Anniesland drew attention to it. Clearly, many factors are involved. I have no doubt that the impact of advance corporation tax is a factorone among several. Many people also point to FRS 17, but I am less convinced by that argument. That change in accounting standards will improve the transparency of the arrangements, but it will not change the value of the funds. It is the triennial valuation of the funds that tells fund managers that they have insufficient funds to meet their commitments, not the way in which they are reported.
Several hon. Members have suggested that the real problem is twofold. First, mortality rates have fallen and longevity has increased; secondly, stock market returns are lower. It is extraordinary that actuaries can glibly pass over their contribution to those eventualities, given that they predicted neither of them in the 1980s, and did not advise pension funds of the need to make provision for them. As a result, many large companies took a contributions holiday at that time, saying that they had a large excess in their pension funds. As we came into this century, however, they were facing deficits, which raises serious questions about the way in which actuarial science was practised in the 1980s.
There are two problems with the way in which companies have behaved. First, they have often used pension schemes to reorganise their structures. Throughout the 1980s and 1990s, companies that were disengaging labour, restructuring and downsizing used attractive enhanced pension schemes to move members of the work force into early retirement. Those people are now, of course, the beneficiaries of the schemes.
The other problem relates to contributions holidays, with which I have some difficulty, although I have always defended the concept. It is fair for companies to take contributions holidays from final salary schemes, because they take the investment risk. They may have to put more money in during the bad times, so it is only fair that they should put less in during the good times. The trouble, however, is that they have had no intention of putting more money in during the bad times, even though they have been happy to take it out during the good times. They see schemes as one-way arrangements, or no-lose bets, which is why we now have huge deficits following the performance of the stock market and the inclusion of additional beneficiaries. Companies must tackle their deficits. BT's is an enormous £3 billion, BAE Systems' is £776 million and Unilever's is £647 million. Those big figures must be tackled, but as we heard, many companies have chosen to do so by closing their final salary schemes and pulling out altogether or migrating to money-purchase schemes.
Whatever the scheme, the key is whether the level of company investment is the same as before. Time and again, however, we find that it has gone down. Marks and Spencer migrated from a final salary scheme to a money-purchase scheme, and its contribution fell from 22 per cent under the old scheme to between 6 and 12 per cent under the new scheme. That is the problem: not enough money is going into the system to meet the demands made on it.
The crux of Government policy must be to find ways to stem the reduction in contributions, and, ideally, to enhance them so that schemes have sufficient resources to provide benefits. The Government have announced their review; they are working on it at the moment, and we look forward to the results. What is the basis for that review and the decisions that the Government will then take? Do they want simply to staunch the wounds, or to enhance the contributions made by the corporate sector into the funded pension area? Are they prepared to ensure those levels of contribution by one method or another? Will there be a compulsory minimum contribution, and if so, what mechanism would be used?
Should there be a compulsory employer contribution, to stakeholder pensions if not to company schemes? That might be exactly the spark that is needed to get people to take out stakeholder pensions, because an employer contribution often persuades people to take out such a scheme. Are there changes in regulation or in costs to companies that would make a difference? In the context of the 1 per cent. rise in national insurance, some sort of fiscal incentive might seem attractive to companies.
Is it necessary to revisit FRS 17? It is not the villain of the piece. In terms of reducing the contributions, it is the messenger rather than the protagonist. Nevertheless, if some aspect of it needs to be reviewed, the Government should respond.
The Minister responsible for pensions told us that there would be legislation on the minimum funding regulation. When are we likely to see that, what is it likely to comprise and what is the intention behind it? The Minister is smiling, and I suspect that she may not be able to give me the answer to all those questions, but perhaps she willwho knows?
Is there a case for exploring the concept of insurance against insolvency again, so that there is at least a backstop for companies who find themselves in difficulties? Should we re-examine the fiduciary duties of trustees and companies to existing and future pensioners? It is clear that nothing illegal or improper has been happening in the closure of the schemes, but in terms of the actual effects on pensioners, something profoundly disturbing has been happening. The Government have a role in ensuring that those people's interests are properly protected. They are not necessarily well protected at the moment, and there is a case to answer. I hope that the Minister will be able to respond positively to some of the questions that have been raised.
Mr. Tim Boswell (Daventry): My right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) deserves all our thanks for securing this debate and for the moderate way in which he elucidated his concerns. For those who have any residual doubt about the efficacy of Westminster Hall as a sounding board for matters of policy, this debate justifies the innovation: a former Secretary of State and deputy leader of my party has taken the trouble to share his thoughts and give us his experience on this matter. In fairness to all those who have contributed subsequently, they have responded in kind.
My right hon. Friend drew on his experience and was critical, but not hyper-critical, of Government policy. He expressed concern about the expansion under this Government of unfunded liabilities. He made the point that savings and investment are central not only to the pension issue but to economic performance. He rather trenchantly made the point that persuasion costs money. We all need to remember that. The alternative to persuasion is compulsion, and many of us would not wish to go down that route without good reason.
Finally, he produced a series of specific thoughts built on his earlier thinking, which will repay further consideration. In particular, I welcome his ideas on incremental changes that would have a highly beneficial effect in the medium term, but might not necessarily either take the political trick or produce instant results.
The hon. Member for Glasgow, Anniesland (John Robertson) made a valuable contribution, which was not uncritical of the Government, and considered the issues very much from the employee's perspective. It is right that we should do thatI often think that the trade union input to the pensions debate has not been fully developed in either its practical or its theoretical aspects. He gave us a fascinating statistic about the relative size of the market capitalisation of BT as against its pension fundtwin stars, as it were, with different sizes at different times. That was hugely interesting.
My hon. Friend the Member for Henley (Mr. Johnson) spoke with perspicacity and self-assumed detachment. I especially liked his reference to the danger of oscillation from apathy to panic, which was germane to what my right hon. Friend said. Although there are a lot of reviews in hand, the Government seem to be in apathy mode, but we do not want them suddenly to push the panic button and make a series of dramatic and eye-catching gestures that may not be right for the long term.
My hon. Friend the Member for Mid-Worcestershire (Mr. Luff) said what I might have said, but eloquently and with a passion that I cannot claim to matchand amen to that, because he put his points very clearly. He rightly said that we must all get to grips with the issue.
The hon. Member for Somerton and Frome (Mr. Heath) spoke for the Liberal Democrats. His colleague, the hon. Member for Northavon (Mr. Webb)or "the professor", as he is knownis speaking in Committee upstairs. Both the Minister and I should be there as well, so we are two-timing at the moment, but I make no complaint about that, as it is in the nature of the House
To summarise my views, this debate is analogous to the debate about the national health service, in that we are at a turning point in our affairs in relation to pension provision. It may be no accident that the NHS and modern pension provision have their roots in the wartime consensus and derive from action taken by the post-war Labour Government. Subsequent Governments have worked on them in various ways, and there is now an interesting difference between the two. Whereas the NHS has continued as a broadly monolithic state and taxpayer-financed provision, the pensions industry quickly moved away from that and took advantage of a mixed economy with a diversity of provision and a high degree of private financing. That may be the reason for the relative success of our system compared with the more state-funded systems on the continent.
That success may now be at risk. The Government's attitude, as shown originally in their Green Paper of 1998, did not so much mis-sell as oversell the Government line. The objectives were not badin particular, the aim of reversing the split of 40:60 between private and public provisionbut some hon. Members have expressed real doubt today as to whether that split can be achieved. Certainly, to achieve it, the Government must respond briskly to the reviews of Alan Pickering, Ron Sandler and the Inland Revenue that are under way, before going ahead with any changes.
I should remind hon. Members that funded pensions are what they say they arethey are pension funds, generally held in tradable securities. Therefore, the funds reflect the performance of stock markets and other kinds of markets, and whatever a Chancellor does is directly relevant to their success and to the amount that is available to beneficiaries. I cannot help but take notice of the changes to the national insurance contribution, just as I could not overlook the raid of advance corporation tax in the past. I had the privilege of serving under my right hon. Friend on our Treasury team, and we both remembered the impact of previous policies on pensions. We shared our knowledge with the Committee but, however hard we worked, people did not take much notice because they did not realise what could happen when the markets hit a downturn. Now markets have turned down, triggering difficulties for pension funds.
One cannot say that ACT was the sole cause of pension fund problems, but since 1997, perhaps coincidentally, there has been a series of phased retreats in provision by companies with company pension funds. They began by abandoning the pension holiday as finances became tighter and went on to close final salary schemes to new entrants, with the possibility that they might close those schemes to existing beneficiaries and place the arrangements on a new contractual basis.
As has rightly been said, the move from defined-benefit or final salary schemes to defined-contribution or money-purchase schemes is not, of itself, objectionable, but it is usually accompanied not by an extra contribution from the employer to acknowledge the transfer of risk, but by a reduced contribution, which
Our concerns have been well expressed in the debate, and we want the Minister to answer the points that have been raised. They centre on the targeting of private provision; issues relating to annuities, which were raised so passionately by my hon. Friend the Member for Mid-Worcestershire; the adequacy of contracting out rebates in relation to the state second pension; the interaction of the state second pension and the basic pension, both of which are probably still inadequate to reach the guarantee offered under the pension creditso there may not be an incentive to saveand that certainly will not help individual pensioners who have a partial contributions record; and the awful business of means testing 5.5 million pensioners, which has been referred to by several commentators, including the National Pensioners Convention.
What has come out of today's debate is an acknowledgment that we are all in this together. This is not just a matter for the young or old. The old will come and complain to us, now or in the next few years, and the young will be very critical of us if we let them down in the medium term or do not explain what is necessary to secure their future provision, which must be comparable with what we expect for ourselves. The concerns apply equally to the relatively affluent and to those who live at income support level. People need security in retirement, and it will be a long retirement because of longevity. We hope that people will be able to share in rising prosperity over that time. In addition, the issue should not divide either side of industry. Everyone needs to get together and decide whether provision should be made through a company scheme and, if so, how the burden is to be shared. Above all, the Government need to take the issue seriously and to level with the British people about what is needed and what they can do to assist us in providing for ourselves and our dependants for the future.
The Parliamentary Under-Secretary of State for Work and Pensions (Maria Eagle) : This has been an interesting debate. It is a shame that it cannot continue for a little longer, because it was apparent to me as I listened to the contributions of hon. Members that many of those present wished that they had a little more time to expand on their comments. None the less, we are stuck, as ever, with the time available to us.
Before trying to deal with some of the many points that have been made, I want briefly to say something about the Government's approach. The right hon. Gentleman mentioned back-of-the-envelope calculations, but although he might be able to do calculations on his specific, technical pointsthe value of rebates, the rate of accrual for older people contracting out and what the value of pension pots would be if only younger people opted outon the back of an envelope, I cannot. I do not have any envelopes with me, and I do not have the time or the wherewithal to answer those points in full now. I shall, of course, write to him on them and, as he suggested, ensure that my answers are placed in the Library of the House so that other Members can see them.
The Government's strategy is to try to ensure that those who can afford to save for their retirement do so. I do not think that that is different from the strategy of any previous Government. We want any saving undertaken to be rewarded, not penalised. We want individuals to have the right information to save enough. A theme that has run through this morning's debate is that it is how much people save, rather than the different ways in which they save, that is crucial. I do not think that people have ever saved enough. I am sure that it would be true of most of us here that, if we were to stop and examine our arrangements, we would be shocked to see how poorly we are providing for ourselves.
We must ensure that people have the right information. We must also ensure that regulation on employers and pension providers is proportionate, while providing the safeguards that people expect, and that the right savings products are available.
We have heard less today about those who cannot afford to save for their retirement, but they form a substantial proportion of our population. The Government are committed to developing policies that will enable such pensioners to share in the country's rising prosperity and that tackle pensioner poverty. As a Government, we value the genuine public-private partnership and mix of provision for pensions. That has been true of all Governments; although there have been different views on how to stimulate saving and the most appropriate way of doing that, the value of that genuine public-private partnership has not, I think, ever been questioned.
State provision, and pension policy generally, must seek to maintain a fair balance between the needs of today's pensioners and those of tomorrow's pensioners. We have heard little about that balancing act that Governments must carry out. Such balances are never easy to obtain, and there are bound to be tensions between the requirements of those of working age today, in respect of incentives to save, and the amount of money and basic state provision that we give to today's pensioners. There are trade-offs, and we must ensure that we get those right.
Pensions are a long-term business. We must bear that in mind, no matter how much sound and fury there is about the particular issues of today and the past year or two, although I am not saying that those are unimportant. It would not be sensible for any Government to make panic judgments based on whether the stock market is going up or down, and that could be even more true if, as the right hon. Gentleman argued for, there were a much greater extension of funded provision. It is important to bear in mind that, although in many instances political decisions are a reaction to yesterday's or last week's headline, politicians on either side of the House should not fall into that trap with regard to pensions. I am not accusing anyone of that; I am simply saying that that must be borne in mind when we consider what we ought to do.
The right hon. Gentleman said that he approved of the 60:40 aim for 2050the aim for more pension provision to come from private savings. He then said that some of our anti-poverty measures, which are aimed at relieving some quite bad poverty among today's pensioners, work against that aim. I do not accept that tackling pensioner poverty is a problem. We must ensure that the need for people today to have a decent retirement is balanced with the disincentive effects that adhere to increasing the basic minimum. Many Opposition Members would argue, and have argued this morning, that such disincentive effects adhere either to the minimum income guarantee or to the reward for saving that the pension credit tries to give. A balance must be struck, because there are those who have not had proper access to pensions in the past.
In the past, the pensions system was not perfect because many people such as carers and those who did not have full work records did not have proper access to it. SERPS was aimed at those who had worked for most of their lives. We have to try gently to move the entire system to benefit those who have not had that benefit in the past. We have to strike a balance between that and creating disincentives for tomorrow's pensioners.
We can argue about whether that balance is correct, but I hope that Government and Opposition Members will accept that the Government are not moving away from perfection. The right hon. Gentleman might believe that he approached perfection when he was in office, but many people were not able to have or to save for proper pensions through no fault of their own. We have to strike a proper balance, and I shall not apologise for trying to deal with pensioner poverty.
The right hon. Gentleman and some of his hon. Friends raised the issue of advance corporation tax credit. [Interruption.] My hon. Friend the Member for Glasgow, Anniesland (John Robertson) also raised that point. Those Opposition Members, and even my hon. Friend, do not always mention that a cut in corporation tax at least partially offset the cost of the removal of the credit, which is worth about £3.5 billion a year to companies, and that such company pension schemes also have tax privileges worth £14 billion a year. It was not just an annual removal of £5 billion because there were offsetting issues.
The hon. Member for Henley (Mr. Johnson) raised the issue of the national insurance increases in the Budget being an additional burden. If he had read Saturday's Financial Times, he would have spotted that employer national insurance contribution increases can
The right hon. Member for Hitchin and Harpenden argued that the state pension scheme is not sustainable with the additions that the Government are putting on to it to alleviate poverty, but we do not accept that. Even after the introduction of the pension credit, which will benefit half of all pensioner households, state spending on pensions will rise by only about 1 per cent. of GDP over a significant period of time. We think that that is sustainable, and so does PricewaterhouseCoopers, which also had a look at sustainability.
The right hon. Gentleman talked in some detail about replacing the basic state pension with funded provision, but one danger is that the state is always the last resort if funded provision goes wrong. It would be difficult for a Government to say, "Here is your rebate for your funded pension. Go and get your own pension pot. If it all goes wrong do not come back to us." There is no doubt that pensioners would come back. It is not possible for the state completely to get out of pensions.
I know that the right hon. Gentleman and others are looking at that, but a man retiring now would have to build up a pension pot of more than £60,000 to get a pension equivalent to the basic state pension, which, it is important to remember, is not all of the state's provision. A woman would need more than £80,000. The rebate for a 16-year-old man would need to be £623 a year. For a woman of that age it would have to be more than £1,000. To fund those rebates would require an increase in national insurance contributions of between 2 and 3 per cent. It seems that the Conservative party is against increasing national insurance contributions at the moment, but it may look at that and think that it is good value for money. There is, however, no cost-free way in which to do that.
Staying contracted into the basic state pension provides the certainty of a particular retirement provision. If people had contracted out in the past two years, for example, and seen the stock market fall as it has, they might have become worried about their basic state pension equivalent. There is a guarantee from the Government at present that one will at least receive the pay-as-you-go provision. If that were contracted out, could the state really say, "Go away, we will let you starve"? I am not sure that it could.
Maria Eagle : That would put the cost through the roof. I do not have a figure for it, but if there were a major stock market crash, we might end up with a large bill. I do not have much time to say more.