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Mr. Steve Webb (Northavon): The hon. Gentleman has criticised the £5 billion tax on pension funds. Will he tell us how much of that £5 billion would have been put back under the manifesto on which he stood at the last election?

Mr. Willetts: Our manifesto made it clear that we wanted to encourage people to save for their retirement. [Hon. Members: "Aah!"] I would very much like to be able to reverse the tax, but the fact is that that money is now being spent. That is why we cannot pledge to reverse it.

Mr. Chris Pond (Gravesham): Conservative Members continually repeat the figure of £5 billion. Will the hon. Gentleman confirm that the Conservative Government took £10 billion out of the state pension scheme while they were in office?

Mr. Willetts: I am coming to this important point: we are not talking about a one-off £5 billion. It is £5 billion a year—year after year, ad infinitum. The figure is now £25 billion and rising every year. That is the point.

Mr. Frank Field (Birkenhead): Will the hon. Gentleman give way?

Mr. Willetts: I will give way to the right hon. Gentleman because I greatly respect his expertise in this area, but then I would like to make some progress.

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Mr. Field: Given that the country is worried about its future pension provision, may I make a plea that, once the hon. Gentleman has made these points, he quickly moves on to what the Opposition will contribute to the evolving debate? It is understandable that he will point out the effect of changes in advance corporation tax on the prosperity of occupational pension funds, but does he agree that that was the second blow, and that the first blow was delivered when the Conservative Government changed the tax laws so that funds that were in surplus had to run their surpluses down to 105 per cent. of their liabilities or face penal rates of tax for not doing so?

Mr. Willetts: The fact is that all the other changes that have affected pension funds are dwarfed by the scale of the tax increase that the Chancellor imposed in 1997.

Mr. Field rose

Mr. Willetts: I would like to make some progress now.

Mr. Field rose

Mr. Willetts: I will give way to the right hon. Gentleman in a moment, but I want to give him one more figure. I respect his expertise and, as he knows, I am very happy to contribute in a constructive spirit to debates on his own imaginative ideas on pension reform.

I want to make two points. First, it is incorrect to compare the capital value of the loss of the value of shares—the capital effect—which may be hundreds of billions of pounds, with the flow of £5 billion as a tax hit. We have to realise that this is not just a one-off tax hit; it is £5 billion a year. That is why it is so significant. If we calculate the current cost of a £5 billion-a-year tax, we get a very large sum indeed.

My second point is that Labour Members regularly mention enormous figures for the total fall in the value of the stock exchange. They now seem keen to tell us how much value shares have lost under their management—that is the point that they like to make. They talk as if those shares all belong to pension funds. Pension funds own only about 18 per cent. of British equities, so it is not correct to compare the £5 billion, which is merely the annual effect of the tax, with the £450 billion, which is the total loss in value of all shares, of which only a small proportion are held by pension funds. That is why the tax impact was so great.

Mr. Field rose

Mr. Willetts: I shall give way to the right hon. Gentleman one more time, then I shall make some progress.

Mr. Field: I am doubly grateful to the hon. Gentleman. Is not it true that ACT has had the effect that it has because the Conservative Government forced pension funds to run down their surpluses? Had they not been forced so to do, many more funds would have had greater buoyancy to enable them to withstand the ACT changes. The running down of surpluses pushed more pensions nearer to the precipice. Most people would say that both sides have made mistakes, but the country wants to hear what constructive proposals the Opposition have.

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Mr. Willetts: I should now like to make some progress, during which I hope to answer the right hon. Gentleman's specific question about what proposals we would make.

I shall move from abstract statistics to something vivid and direct. I cite a Member of the other place, who is well known to Labour Members because he is a Labour supporter, a Labour donor and a Labour peer: Lord Paul of Caparo Industries. I shall quote what he said about the decisions that his steel company is making in its attempt to close its final salary pension scheme. When asked why he was closing his final salary scheme, he said:

that is the first point he mentions—

At the end of his list, he refers to

That is what a Labour peer who runs a business says. He is trying to use a Labour tax to close a final salary pension scheme, and instead put his workers into the Government's pet pension scheme, the stakeholder pension. He wants them to have one of the Government's stakeholder pensions.

What do members of the Labour-supporting steelworkers' union do in response to a Labour peer trying to impose a Labour pensions policy as a result of a Labour tax? The Labour-supporting trade union goes out on strike. That is what its members are threatening to do as a result of the measures that the Government have taken.

That is not the end of the story, because there is another stealth tax, perhaps even stealthier than the £5 billion a year tax on dividends, and that is the miserly uprating of the contracted-out rebates that was announced in April. The actuaries William Mercer estimates that those rebates are now about 15 per cent. below the level necessary to provide the contracted-out benefits that companies are obliged to provide as a condition for contracting out.

With rebates for pensions running at about £11 billion a year, the actuaries are saying that the contracted-out rebate is £1.5 billion a year short. It is not just the £5 billion a year tax on its own, but the £5 billion a year tax plus another £1.5 billion, because the value of the contracted-out rebate does not match the cost of providing the pension that has to be provided in return.

The Government have taken the two main forms of financial support that Governments have historically given to occupational pensions—the tax relief and the contracted-out rebates—and imposed an extra £6.5 billion a year burden on our pension funds.

I can now answer the question put by the hon. Member for Falkirk, East. The entire value of the contribution holidays taken by companies between 1987 and 2000, which has exercised Labour Members, works out at £1.4 billion a year. That has a far smaller impact on the value of company pension schemes than the tax and rebate changes made by the Government. I hope that the hon. Gentleman therefore accepts that it is no good turning to employers and blaming them for the effect of their contribution holidays.

Mr. Connarty: As an economist, I know that £1.4 billion invested in 1979 would be worth a lot of money now. Because it was not earning money, it is not

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in the fund. I have just done a little calculation. Some £81 billion has been lost in the value of pension funds if they hold 18 per cent. of the shares that have lost £450 billion in value, as the hon. Gentleman just told us.

Mr. Willetts: The hon. Gentleman is in a hole, and he should stop digging. I am comparing a £6.5 billion imposition by the Government with the £1.4 billion a year impact that is the maximum that can be calculated to be the effect of pension contribution holidays.

Several hon. Members rose

Mr. Willetts: No, I shall not give way. I want to make progress, because many hon. Members wish to speak.

The effect of the changes—the tax increases and the reduction in the value of contracting-out rebates—is to drive pensioners, now and in future, on to means-tested benefits. That is where they will end up; there will be lower pension saving and more dependency on welfare. In the early 1990s, the Chancellor famously told the Labour party conference:

Well, that is not what the Government are doing. In fact, they will have more than half the entire pensioner population dependent on means-tested benefits. Our vision is very different—it is of a country in which more and more people build up funded savings so that they can enjoy a prosperous retirement that is not dependent on state benefits or means testing, but a source of pride in that they have built up their own savings during their lifetimes

That is what we believe in, and that is what is being damaged and destroyed by the Government—although the Prime Minister pledged, in one of their first documents after coming into office, that his aim was to change the balance of pensioners' dependence on benefits and funded pensions. He said that he wanted to reverse the situation whereby pensioners get 40 per cent. of their income from funded savings and 60 per cent. from the state, so that they get 40 per cent. of their income from state benefits and 60 per cent. from funded pension savings. That is an objective that we completely endorse. However, typically of this Prime Minister, despite having that grandiose objective, he has done absolutely nothing to implement it. If one asked him to do the washing up, he would announce that he had a 20-year plan for a cleaner kitchen on which he would undertake widespread consultation—but a pile of dirty crockery would be left at the end of the day. That is what he is like. He has a grandiose objective and no means of implementing it.

Conservative Members, by contrast, know how that vision should be delivered. We are committed to the reform of annuities. My right hon. Friend the Member for Skipton and Ripon (Mr. Curry) has introduced a private Member's Bill that would do so. We have voted for such a provision time and again, but the Government tried to stop it every time. We have called for reform of the accounting standard FRS17. I was pleased to hear about today's announcement whereby, in line with our requests, there will be a delay in implementing it until we know what the European standard will be.

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We have called for less means-testing of pensioners. We worked with the right hon. Member for Birkenhead (Mr. Field) and with the Liberal Democrats to propose an alternative to the pension credit, suggesting that that money could instead have been put into a higher pension for older pensioners, who tend to be poorer, to offer more help to poorer pensioners without more means testing.

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