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Sir John Butterfill: I very much agree that it is better to get the fund up and running, but the problem is that the Government have not yet confirmed whether they will move away from the flat rate and, if so, over what time scale. The Opposition and the hon. Gentleman need to press the Government on how quickly they will move to a risk-based premium.
Rob Marris: I certainly support risk-based premiums and the hon. Gentleman is entirely right to suggest that hon. Members on both sides of the House should continue to press the Government on the time scale, but I am delighted that the April 2005 time scale has been announced because it will at least get things moving, even though flat-rate premiums will be used.
I want briefly to discuss the structure of pensions in the United Kingdom. The motion refers to encouraging savings. The cost of tax incentives for pension contributions—the forgone tax revenue—is about £14 billion a year. That is a huge amount of money, and the better-off in our society disproportionately take advantage of those arrangements. Half that benefit is received by the top 10 per cent. of taxpayers and a quarter of it by the top 2.5 per cent. of taxpayers.
Massive amounts of money are involved, but does that money change people's savings behaviour? Evidence from the Department for Work and Pensions shows that it does not. Page 289 of the evidence volume published last year by the Select Committee on Work and Pensions—of which I am a member—that accompanied its report, "The Future of UK Pensions", says:
- "The Committee asked . . . whether there is actually any evidence for tax incentives to encourage people to save for their pensions."
- "There has been considerable academic work on the impact of tax incentives on savings behaviour. Its conclusions can be very broadly summed up as follows:
— there is little evidence that tax incentives can significantly increase the overall level of saving;
— but they can significantly affect its allocation."
Mr. Willetts: The hon. Gentleman is getting into dangerous territory. The crucial argument—indeed, it has been put by the hon. Member for Cardiff, West (Kevin Brennan) and other hon. Members—is that we are talking about deferred pay. As it is deferred pay, it is taxed only when it is received as pay. He argues that there is a special tax privilege. The tax-free lump sum represents tax relief, but apart from that, the money is taxed when people finally receive their deferred pay. That is a perfectly logical system; it is not a special tax privilege.
Rob Marris: It may be perfectly logical to the hon. Gentleman, but the other side of the coin is, as he says, that the sum is taxed when it is received in retirement. The Government's additional tax from that sum is estimated, from memory, at £8 billion, so the net cost—14 minus 8—is £6 billion a year, which is a considerable sum.
Kevin Brennan: Will my hon. Friend give way?
Rob Marris: I will not give way because I am limited for time and I know that another hon. Member wishes to speak. I wish to develop the point that I am making.
My hon. Friend the Member for Coventry, South (Mr. Cunningham) talked about a decent state pension. He is entirely right. I am not an actuary, but, according to the figures that I have calculated, if we got rid of the tax relief on pension contributions and put 1 per cent. on both employers' and employees' national insurance contributions, we could have a basic state pension of £150 a week for a single person and £250 a week for a couple. The Government could then get out of the pensions business in any other sense and get rid of all the regulations on private pensions. We could say, "If you want to save for your old age, save for your old age, and if you don't want to save for your old age, that's fine because the state will guarantee that you will not starve in your old age." Pensions have tax breaks to stop people starving in their old age by encouraging them to save. If the basic state pension is relatively high, the state does not need to encourage people to save for their old age, and tax breaks are not necessary. The Government amendment mentions "simplicity, security and choice". My proposal, which should be considered in a public debate, is to whack up the basic state pension massively and get rid of all layers of complex regulation—and that is covered by the amendment.
The hon. Member for Bournemouth, West (Sir John Butterfill) said that final salary schemes—defined benefit schemes—were better than money purchase, or defined contribution, schemes. There is mixed evidence of that because the situation depends on the historical snapshot that one considers and what the stock market did at that time. The attraction of a defined benefit, or final salary, scheme is that people think that what they will get out of it is certain. That is true in the public sector, but I predict that final salary schemes will wither and die in the private sector because such schemes have historically relied on a trading company topping up its scheme in bad times. We have increasingly seen over recent years that as companies go bust, they get out of such pension schemes, so the certainty of final salary schemes for private sector employees is going out of the window. Confidence has been eroded in the private sector, but not in the public sector.
Sir John Butterfill: Of course, any view of the relative attractiveness to employers of defined benefit and defined contribution schemes varies according to the investment climate of the time. When we had a boom, all employers thought that DB schemes were wonderful because they could take contribution holidays. If they had been in defined contribution schemes, they could not have done that because they would have had to pay the same amount—the attraction of a contribution holiday would have disappeared. Everything depends on the snapshot of time at which one considers the situation.
Rob Marris: The hon. Gentleman makes my point for me. Money purchase schemes can be just as attractive, or more attractive, in the long run because they do not give employers the incentive to take pension contribution holidays—they carry on paying into such schemes. Final salary schemes will wither and die, and, although it might be heresy to say it, I think that is good thing. Such schemes discriminate against the low paid and women—they are predominantly the low paid in those schemes. If people work in the same low-paid job for 30 years, they traditionally receive thirty eightieths of their pay under such schemes. People who work for 20 years in such jobs and get promoted so that they work for 10 years in higher-paid roles get the whole thirty eightieths—not just ten eightieths—of their pension paid at the higher rate. The schemes discriminate against low-paid people who do not receive promotion, and although the trade union movement traditionally defends them, we should have another look at them in the private sector because as confidence and certainty change, they will wither and die.
6.13 pm
Mr. Quentin Davies (Grantham and Stamford) (Con): If the complete lack of appreciation shown by the hon. Member for Wolverhampton, South-West (Rob Marris) of the importance of saving and having vigorous funded pension schemes, including defined contribution schemes, for the economy and the security of human lives and families is typical of the Labour party, it is not surprising that it has presided over such a disaster in pensions and savings in our country over the past six years. I accept that that was a political remark, but it was required and emerged spontaneously
because of the hon. Gentleman's speech. Nevertheless, given that we are contemplating a serious problem, I hope that we can try to reach the maximum possible degree of consensus.I hope that the House will agree on at least three points. The collapse of the pension schemes of companies that have become insolvent has been an unmitigated human disaster for many people. It emerged during the debate that the number of people affected is probably approximately 60,000—it was interesting that the Government confirmed that figure. That will inform the debate in the country as a whole.
The second point on which I hope there will be a wide measure of agreement is that the collapse is a disaster in a second sense, because it has done traumatic damage to people's confidence in pension schemes, to the credibility of our whole pension system. That can only flow through, inevitably, into a lesser inclination to contribute to pensions, which is most unfortunate.
Even though there may have been shortcomings in the 1995 Pensions Act—I have always thought that it was excessively bureaucratic—there was created in the 1980s and early 1990s a climate in which people felt that their pensions were secure. That was an enormous comfort to individuals, and it was an enormous benefit to the economy that we had a very large amount of savings generated through the pension schemes that emerged. I am afraid that we shall pay a terrible price for the blow to credibility that has resulted from the collapse of schemes and the fact that some people have been left high and dry. It follows a whole series of blows to pensioners, potential pensioners and the pensions industry.
The third point that I hope the House will agree on is that there can be no marks at all for coming here and simply expressing sympathy for the victims of a disaster and not doing anything about it. The people who have to do something about it are the Government. It is no defence for them to tell the Opposition, "You haven't come up with any practical proposals." For heaven's sake, they are the Government—though I regret that—and it is up to them to come up with a solution. They have come up with none.
The Secretary of State, who I regret is not here now, said this afternoon that he did not want to excite false hopes. One understands that. He added that he did not exclude the possibility of some compensation. If he does nothing, he will have aroused false hopes by putting things in that way. Unfortunately, he did not say that it was necessary for the Government to have more information or that certain preconditions had to be fulfilled before a decision could be made. In fact, it does not appear to me that the Government need any more facts than they have. They have simply tried to avoid the unpopularity of saying explicitly and frankly to the House this afternoon that they will not do a damn thing. I fear that that is their intention. They do not want to say that, because they know how unpopular that announcement would be, so they hope that they can get away with that kind of evasiveness, no doubt hoping that the political heat will go out of the issue.
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