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Kevin Brennan: Would it not be helpful if the hon. Gentleman and his colleagues explicitly stated that they would support my proposal that, for example, some sort
of assistance or compensation—call it what you will—should be paid to at least the worst cases among the workers concerned? Is the hon. Gentleman prepared to tell the House that now, and perhaps to support early-day motion 200?
Mr. Davies: I am not prepared to support early-day motion 200, for reasons that have already been given this afternoon, when it was very helpfully analysed. I do not want to go over them again, but I will live up to what I have just said and try to make some constructive and helpful suggestions, which I hope the Government will take on board.
The first thing that the Government have a moral responsibility to do is to make an estimate of the extent to which they have directly and explicitly contributed to this disaster through the abolition of the dividend tax credit. That must be a calculation that it is perfectly possible to make on the basis of the portfolios held over the relevant period of years since 1998 by the relevant pension funds. I am sure intuitively that substantial amounts of money are involved. It was inadequate and spurious of the Secretary of State to say that the abolition of the dividend tax credit was just part of a reorganisation of corporation tax, that the mainstream rate had been reduced and that that had to be taken into account.
The implication was that the abolition of the dividend tax credit or the so-called pensions tax was not a net tax-raising measure at all. It was part of a rearrangement of corporation tax. If the Secretary of State reads his remarks this afternoon in Hansard he will be thoroughly ashamed, as that was an extraordinarily disingenuous comment. We all know that the abolition of the dividend tax credit was conceived by the Chancellor as a massive net revenue-raising measure, and the inevitable consequence of that abolition were equally massive losses from gross funds.
Mr. Watts: Is the hon. Gentleman advocating a return to the previous tax system, and is he saying that that is the Opposition's position? There are a lot of crocodile tears on the issue, but no constructive ideas. The hon. Gentleman is criticising the Government but has not suggested any options himself.
Mr. Davies: I may have been hasty in accepting the hon. Gentleman's intervention, as I was about to propose a practical idea based on the dividend tax credit. We ought to start a debate about the amount of compensation that could reasonably be made by the Government from the figure that I have just asked them to produce—namely, what they have raised incrementally from the schemes that have collapsed following the abolition of the dividend tax credit. There is no doubt that that will be a significant sum. In some cases, it may have pushed into insolvency schemes that would not otherwise have become insolvent. In other cases, the deficit will be much greater than would otherwise be the case. The Government have a moral responsibility to be straight with the public and to quantify the extent to which they have deliberately contributed to that disaster. We should have a discussion about the appropriate level of compensation to be paid by the Government based on that figure.
The Government should deal right away with the disaster—I am not talking about closing the stable door after the horse has bolted and the Pensions Bill that we will debate next week—experienced by people who are suffering now. They should do something this week to change the guidance to trustees of schemes from themselves and the Occupational Pensions Regulatory Authority, which, frighteningly, has led trustees to take perverse measures. In most cases, when a company has gone broke and its pension scheme is insolvent or below full solvency it automatically winds it up and buys annuities at a disadvantageous price—as Members will know, the annuities market is entirely a seller's market and is distorted—which is a bad deal. Alternatively, the company sells the whole equity portfolio—the fall in the equity market over the past couple of years has largely contributed to the problems in these schemes—and moves it all into cash or fixed-interest securities. Again, that is the worst possible reaction, because it means that as the equity market takes an upturn, it is impossible for the schemes to recover lost ground. That does not make sense when the market—one never knows what the bottom or the top of the market is—has had an exceptionally striking fall from an historical high. It is crazy to get out of equities altogether, which is the absurd and damaging course of action that trustees have taken.
Something must therefore be done quickly about the guidance given to trustees. I suspect that they are taking such action because they have been advised that, to protect their position, they must go for the so-called lowest-risk solution—either buy final annuities or move into fixed-interest securities. As I have explained, that is the worst possible thing to do—trustees should increase their investment in the equity market, and they could increase their protection against a further fall in equity market through an appropriate derivative. As we have seen in the derivative market in the past few months, when the market is historically low, the cost of such protection is correspondingly low. The investment management strategies pursued by trustees in this situation have not been rational, and the Government should do something about that immediately. That point has not been made, and it badly needs making.
I have two more proposals, which are focused on how the Government should go forward in trying to prevent the repetition of such a disaster. When something like this happens, the legislature must try to ensure that it is less likely that the ill from which we have suffered will recur. The first thing that the Government should do is to consider making pensioners preferred creditors. The situation that we are addressing results from a combination of factors. When a company collapses, it becomes insolvent and can no longer make statutory contributions to the scheme, and the scheme can be wound up only at a considerable loss because it is itself insolvent. That unfortunate combination of circumstances is particularly likely to arise during a downturn in the economy when the stock market is at an historical low and there are a greater number of insolvencies in commerce and industry. That was the situation in 2002 and 2003. We should consider changing the law to make pensioners preferred creditors of companies that have become insolvent in those circumstances, exactly as employees are preferred
creditors at present, because a company that collapses has to pay its contractual obligations to its employees for the work that they have done.I recognise that one has to consider the disadvantages of any such move. I am not suggesting that it could be made retrospective, because suppliers have traded with the companies concerned, or lenders have lent to them, on the basis of the existing rules, which cannot be changed retrospectively.
Sir John Butterfill: I hope that my hon. Friend would exclude from those preferred creditors the directors who may have been pumping up their own schemes just as the company was going bust.
Mr. Davies: I thoroughly agree with my hon. Friend, who makes a just comment.
As far as credit ratings are concerned, we must bear in mind that if my suggestion were to be implemented in law, there would be no significant change for the vast majority of companies where lenders or suppliers see no real prospect of their going broke. There would be a problem between creditors only where a company became insolvent.
My final point is very important. We must look again at the whole issue of pension holidays. One aspect of the fundamental lack of symmetry in the present situation is inherently suspect—namely, that if a company finds that its pension scheme has a surplus, it can take a pension holiday, but if it has a deficit it does not have to make it up immediately. That is asymmetric. Nor does it make sense in terms of accounting or economic theory, because one has a liability that one should be providing for over the years as it accumulates. There should be a ceiling up to which it is not possible for a pension surplus to result in a pension holiday. Actuaries should advise on that ceiling, taking into account the expected fluctuations in the markets.
Clearly, at a time when equity markets are at an historical high, a well-managed scheme will always be in surplus. That should not mean that companies should cease to make any contribution unless the surplus is such as to provide protection against the likely cyclical downturn in the market. There should be symmetry on both sides. We should not have a situation in which companies can be expected overnight to make up a deficit in their pension fund because there has been a sudden fall in the market, but equally, by the same token, we should not have a situation in which if the pension scheme has a surplus of £1, the company can declare a pension holiday. That is thoroughly unreasonable and needs to be looked at again.
I am afraid that since this Government took over, the pension system, which was a flowering garden in the 1980s and early 1990s, has been turned into a desert.
The figures that my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) cited—I am glad that he did so because they should be known throughout the country—say it all. Only one third of defined benefit schemes remain open. Since 1997, hardly a week has gone by without the closure of a defined benefit pension scheme. The pensions system was steadily built up under various Governments, especially the Thatcher Administration of the 1980s, but we can go
back to the 1950s. It was one of the glories of our country, an enormous economic asset and a great asset to individuals and their families. It has been eroded.The rhetoric of current members of the Labour party—for example, the hon. Member for Wolverhampton, South-West—tries to rationalise the appalling position and pretend that it is thoroughly commendable that our pensions system is breaking down. I cannot imagine a more perverse or destructive policy. If this afternoon's debate has exposed the Labour party's genuine direction and goal on pensions, it has been worth while.
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