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Mr. Redwood: What would the hon. Lady say to the workers of Caparo, who tonight are facing the closure of their final salary scheme and a substantial worsening of their pension conditions? Would she deny that their fund is being closed because of the dividend tax, or is she saying that they are rich enough to be able to stand it?
Kali Mountford: I would say to the right hon. Gentleman and to everyone having problems with final salary schemes that to try to narrow the debate and to blame one mechanism is complete folly. We must look at schemes and the markets as a whole.
John Robertson: Does my hon. Friend agree that the companies who are winding up these final salary schemes seem to be using that as an excuse not to plough money into their employees' pension funds?
Kali Mountford: In my experience, it is not unusual for any company that is failing on any ground whatever to avoid the real and honest issue and to try to blame somebody else, or another simple mechanism. That is easier for them than being honest with the people whom they are letting down.
James Purnell: Is my hon. Friend aware that the hon. Member for Daventry (Mr. Boswell) said exactly that in Committee recently? He said:
- "There appears to be a growing propensity among employers to pull out of the business of providing contributions themselves."—[Official Report, First Standing Committee on Delegated Legislation, 14 May 2002; c. 4.]
Kali Mountford: They are not the first and they will not be the last. I suspect that we will see more of that. That is very disappointing, but what should we do about it? There are mechanisms that we should employ and I hope that Pickering will pick up on some of the market failures and start to look at better regulation.
The Conservative party is usually very resistant to better regulation, which it regards as a burden on employers. However, it is a bigger burden for pensioners, who, as we are now witnessing, have to pick up the pieces of failed market activity.
There is also complete "ignore-ance"—I use that word again—of what has happened with pension holidays. I have heard a few figures bandied around on the issue today, and I will throw one into the pot myself. Tax office figures show that an estimated £19 billion was taken out of pension schemes through contribution holidays by employers and employees—
Kali Mountford: I seem to have caused a stir. I shall give way to my hon. Friend.
Sandra Osborne: I was puzzled when the hon. Member for Havant (Mr. Willetts) mentioned a figure of less than £2 billion. However, the TUC has said that, according to Inland Revenue statistics, employers took contribution holidays or reductions between 1987–88 and 2000–01 to a value of £18.57 billion. Does my hon. Friend agree that that is a more accurate figure?
Kali Mountford: It is very close to my own figure of £19 billion.
The TUC should take some cognisance of this, because it, too, encouraged pension holidays, as it believed that they would keep companies going that in fact needed more investment, rather than short-term mechanisms such as using pension funds to prop up a failing business.
Mr. Butterfill: While the hon. Lady is talking about pension contribution holidays, she may care to reflect on the fact that the Government have taken a holiday on the parliamentary contributory pension scheme for the past 10 or 11 years, and that in the past year alone it was 11 per cent.
Kali Mountford: That did not really take the debate any further forward.
Mr. Bill Tynan (Hamilton, South): Does my hon. Friend recognise that, in addition to pension holidays, many companies took the opportunity to raid the funds of pension scheme surpluses, using them for their own ends? Is not that a tremendous problem that should have been resolved at the time?
Kali Mountford: That neatly takes me back to the point that I am trying to make. We really need regulation that will safeguard funds if we are to tackle the issues rightly raised by the right hon. Member for North-East Hampshire (Mr. Arbuthnot). Not only do we have an ageing population but the number of people in work will continue to fall, because of demographic change. Currently, we have a high number of people in employment, but the problem is that the total population is falling, so the gap between the number in work and the number who have retired will continue to grow. We must take real cognisance of what the right hon. Gentleman said.
People in work will have to pay a larger proportion of their income to support those who have retired. It is folly to keep peddling the myth that we ever had properly funded pension schemes. The truth is that all schemes were pay-as-you-go, although some were dressed up in different ways. Today's workers pay for today's pensioners, whether in the state or in the private system. If we are to tackle that thorny issue, we must take account of the sort of savings that we should be encouraging young people to build up today.
I am only sorry that time is so limited that I cannot say any more.
5.42 pm
Mr. John Butterfill (Bournemouth, West): I was interested to hear what the hon. Member for Northavon (Mr. Webb) said about encouraging a wider discussion on this important topic. Such wider discussions have been going on for a long time. People have been talking about
the Australian proposal, which some of us have advocated since before he came into the House. We should remember that the Australian scheme is quite complex. As my right hon. Friend the Member for North-East Hampshire (Mr. Arbuthnot) said, it requires the trade unions to agree to forgo their annual pay increase in the year in which it is brought in, and then to moderate their pay increases in subsequent years. It also includes a proposal whereby the employees are gradually pushed into compulsory contributions. That has not yet been implemented. I wonder why. It was also accompanied by massive mis-selling, on a scale that dwarfed anything that happened here. Before we rush into any such scheme, we must examine it with more care and deliberation.The problem is that the whole pension system—especially for private pensions—is in crisis. There is a massive loss of public confidence, and it is essential that it be restored. There is no evidence that that is happening. Only 25 per cent. of companies are now inviting new entrants into defined benefit schemes, the Government's pension figures are wildly wrong, as they now admit, and the savings ratio is down to its lowest since records began. The Minister said that that is a reflection of the wonderful state of the economy. The economy was wonderful when the Government inherited power, but we now have a record and massive balance of payments deficit, the lowest—and declining—growth in the whole of the European Union, and a manufacturing industry that is in recession. That is not my definition of a wonderful economy, and nor is it true to say that a precise correlation exists between the savings ratio and the health of the economy. I urge hon. Members to be cautious. As all independent commentators agree, the Chancellor's growth forecast will not be met. Substantial tax increases are therefore likely, which will prove painful in years to come.
The point is that the public are losing confidence in this sector. Many are buying property not because doing so brings a tax benefit—it does not—but because they consider property the only safe place in which to put their money. There has been a failure to regulate the system properly; indeed, the case of Equitable Life constituted a massive failure of regulation. The actuary for that scheme should have known that the commitments taken on by the company required far greater reserving, and the Treasury that was responsible at the time for prudential supervision should have so required it. People have blamed the Financial Services Authority, but it came rather late to the case; it was the Treasury that failed to regulate.
Some hon. Members say that nothing was right before, and they utter the mantra of mis-selling, but only a minority of personal pension schemes were mis-sold. Had we not introduced them, the sum total of pension provision would be very much lower than it is. Moreover, they were mis-sold in relation to the occupational schemes that people were taken out of. Of course, as we now know, some occupational schemes are failing. Those who thought that they had been mis-sold a scheme might be glad that they bought a personal pension, now that they see their former occupational scheme failing. It all depends on what point in history one considers.
The Association of British Insurers estimates that the pensions savings deficit is about £27 billion. There is a great need to bolster public confidence, and perhaps to move to compulsion. In that regard, I agree with many Labour Members. In a speech to this House nearly two
years ago, I cautiously advocated compulsion for everybody, not just employers. At the same time, the Government must themselves do something to boost pension savings. What have they done so far? They have introduced a stakeholder scheme that had one beneficial effect: it reduced costs. As the right hon. Member for Birkenhead (Mr. Field) pointed out to me, the effect was major, and we agreed that reducing costs to an industry average of about 1 per cent. was a marvellous achievement. However, the scheme has not proved efficient in reaching its target audience.The problem is that linking a scheme such as the stakeholder scheme with a minimum income guarantee creates a considerable disincentive to save for those on the lowest incomes. Despite what the Minister said, that problem is not met by the pension credit, which, as he knows, is an extremely complicated scheme. Many of those representing elderly people say that it would be beyond the wit of most of them to work out how to implement it, and that they will not necessarily claim it.
What else have the Government done to encourage people to save? Much has been said about the £5 billion a year that they have taken out in respect of advance corporation tax. Some say that that does not constitute a huge sum, but those with money purchase schemes have to increase their contributions by about 20 per cent. just to stand still. That is a lot of money for most people who are saving, but more important is the message that that sends—a message that has been reinforced by, for example, underfunding of the contracting-out rebate to the tune of £1.5 billion a year. It has been reinforced by other Government taxation and stealth measures. For example, people with personal schemes can no longer take advantage of carry-back arrangements. One advantage of the personal schemes was that people could pay in when they could afford it; when they had a lean year they did not need to pay in, but if they then did better they could claw back from previous years. That arrangement has been prevented by the new Inland Revenue rules. What sort of message is that to send to people who want to save for their retirement?
The Inland Revenue is the villain of the piece. One message that I should like to get across to Ministers is that they should have the courage to face up to the Inland Revenue, which thinks that every pension scheme devised—indeed, almost every savings scheme—is a tax avoidance device for the rich. It is perfectly easy to frame legislation to prevent tax avoidance. The Revenue fears loss of income to the state, but it forgets that if it encouraged people to save for their old age, the state burden would be so much less as to outweigh any temporary disadvantage. That is why it should consider annuity reforms. We need worry less about the type of person who has an annuity than the overall message that it gives. Young people on modest incomes say to me that they will not enter a scheme if it means that they must buy an annuity at the end of it. They want greater flexibility.
The Government should tackle the Inland Revenue. They should take up the very good proposals made today by the Association of British Insurers, to which the hon. Member for Northavon referred. Some of them are excellent and the ABI thinks that, if implemented, they would produce an aggregate of about £10 billion of savings.
I believe that the Government are doing one thing right in asking experts to advise them. What Ron Sandler and Alan Pickering are doing is extremely worth while. I just hope that when the reviews are completed, the Government will have the courage to implement the recommendations.
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