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Mr. John Taylor (Solihull) (Con): My right hon. and learned Friend refers to breaking the link with earnings. Surely the Administration prior to 1979 paid no attention to that link. They paid heed to it when it suited them and neglected it when that suited them.

Mr. Clarke: That Administration kept altering the rules of what they linked to, according to the financial crisis they faced. Interminable debates about whether one acted on forecasts of inflation or by looking back at inflation are buried in Hansard. My hon. Friend is therefore right.

We did not strictly stick to tying pensions to prices. The basic pension was worth more in real terms when we left office than it was when we started. However, we tried pretty doggedly to stick to prices. The Government have also doggedly tried to stick to that, but it is to their credit that they have not altogether stuck simply to linking with prices. The pension has increased a little more than that in real terms. However, no one in the past felt able to move to an open-ended commitment to continue to increase the basic pension in line with earnings. We all believed that the problem would be solved provided that we facilitated the growth of occupational and private personal pensions.

We know what went wrong and shattered that complacency. First, everybody underestimated the rapid growth in life expectancy of those drawing pensions. Of course, we all blame the actuarial profession more than anybody else, but everybody shared the delusion that life expectancy could not increase so quickly. We all overestimated the returns
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that could be got on investment. That was the flaw in the plan of my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) to move the state pension to a funded scheme. We were considering that in 1997. Even my right hon. Friend was rather carried away with the idea that as long as the scheme was funded, the sky was the limit in terms of the growth of the funds each year.

We also slightly scuppered the funding of corporate occupational pensions by getting rid of inflation. I played a part in that, which I should like to claim. It was amazing how the finances of occupational and corporate schemes worked provided that the wages of those who contributed kept going through the sky and therefore kept up the nominal value of the fund while it was paid out to pensioners. All that has gone wrong and we realise that we now face a considerable problem.

Sir John Butterfill: My right hon. and learned Friend said that none of us foresaw the problem. If he refers to speeches that I made in 1995, he will realise that I severely criticised our Government for the component of the minimum funding requirement. The operation of MFR meant that we did not get the returns on the investments that we thought that we might.

Mr. Clarke: I had already prepared a favourable reference to my hon. Friend for introducing a private Member's Bill, which I supported, two or three years ago. His expertise is considerable but he was a rare voice. Not many were heard in the Chamber casting doubt on our ability to proceed on the basis of private pensions.

The Minister for Pensions (Malcolm Wicks): I am following the right hon. and learned Gentleman's analysis with great interest and respect, but in fairness for the record, what weight would he give the Tory mis-selling of private pensions, which affected some 2 million cases and helped to undermine people's confidence in the system? Where is that in his analysis?

Mr. Clarke: The mis-selling of pensions was a sad story. It is rather harsh to describe it as Tory mis-selling. Introducing personal pensions was an important proposal, which Lord Fowler carried through. No one will unravel the personal pensions provision. When the scheme was introduced in the brave new dawn, I regret that many companies and their salesmen who sold the new personal pensions were careless. A scandal occurred, and I agree that it has helped to damage confidence in financial institutions generally. That is one of the problems in increasing the savings ratio now. However, I would defend with considerable vigour the policy of moving to personal pensions as an alternative to occupational pensions. It was far-sighted and one of the policies, of which we had several, whereby we did what elected Governments rarely do: look to the future and try to anticipate what our children would like bequeathed to them. Obviously, I do not dismiss the seriousness of the mis-selling scandal that ensued. It was an unfortunate incident, and I trust that protections against it now exist.
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Following the interesting remarks of the right hon. Member for Birkenhead and my hon. Friend the Member for Havant (Mr. Willetts), we must accept that the state pension will be the most important pension for a high proportion of the population. When talking about encouraging people to save—even worse, compulsion to save—the House should bear in mind that for the foreseeable future quite a large proportion of the population would be ill-advised to save in any significant way over and above the state pension for their own provision. They will not accumulate a big enough fund to make it worthwhile, whether or not we get rid of means-testing. People mostly do not go into a pension or save because they cannot afford it. That will not change, as we discovered with the abortive attempt to introduce stakeholder pensions, by introducing new and attractive schemes to encourage people to save if they do not have the money. That scheme got nowhere. The state pension is therefore important.

The state pension will from time to time be increased modestly in value. Like every other Member of the House, I hope to get elected in the not-too-distant future, so who am I to stand in the way of the almost universal agreement that the basic state pension is now due for a bit of a surge forward? For the sake of my taxpaying constituents, I hope that the bidding match going on between the parties does not get carried away, but of course it must go forward a little. Therefore, I am happy with the idea, which is part of the eight-point plan put forward, that we restore the link with earnings for a time. I am extremely glad that my hon. Friend the Member for Havant has not extended that into the future indefinitely. He will be criticised for saying that at the moment it is only for this Parliament, and that he will find the savings thereafter to do so. In times gone by, I have spent 18 years defending that difficult line, so I look forward to seeing how we finance it more than three or four years out. I caution everybody against timeless commitments, which we heard the Liberal Democrats giving, to earnings-related state pension for ever, which is complete nonsense; the future pattern of demography makes it wrong. A little surge, however, would be welcome.

Some means-testing is therefore required because, for as long as I can remember, we have not expected those for whom the basic pension is their only pension to live on that. We used to have, for instance, the supplementary pension, which was means-tested, and that is still a requirement. On occasions, for older people in particular who had no opportunity to make provision, or for some of the women carers who have been rightly mentioned, some means-tested and even some non-contribution-linked addition is perfectly justified if it is worked out carefully.

Means-testing is one of those ridiculous issues that get batted backwards and forwards across the entire welfare field, usually from one extreme to another. All three main political parties have been on both sides of the issue at various stages over the past few years. The means test is the obvious way of targeting the poor, and it also seems one of the most obvious ways in which to destroy incentives to save, work or doing anything else if taken too far, when it becomes unfair. Some means-testing is called for. I have the impression that the Minister for Pensions agrees, as he has a valuable quotation in his record—that the Government have
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realised that they have taken means-testing much too far in what they are contemplating for pension credit. They have completely and utterly overdone it.

I am still not wedded to the tax credit system: it is expensive to administer, it has an appalling record of take-up, and it is mainly contrived to improve the presentation of the public accounts compared with the means-tested benefits that we used to give. The Government have not made as big a mess of pension credit as they made of child tax credit, working tax credit and various other things that they have tried to administer, but there are still many people who have never taken it up and never will. Some modest means-testing is called for, but we really must unravel the current excessive means-testing because, as my hon. Friend the Member for Havant rightly said, it is acting as a disincentive to save.

My main point is that when considering Adair Turner's three alternatives—I accept that we probably must do some of each of them—as a Tory, I find myself most instinctively drawn to doing everything that we can voluntarily to improve people's ability to make their own provision through private pensions and to encourage them to save. We are a more prosperous country, and the range of the population that can do that quite sensibly is greater, but they will not do it unless we create the right climate and enable and encourage them to do so.

I do not see a short-term solution to the occupational corporate pension problem. It is not corporate wickedness that has caused people to bail out of defined benefit pensions that tie everyone's pension to their salary; it is a realisation that their actuaries have been up the creek, that the market has collapsed and that pensioners are living longer. When we step back, we are able to see that it is absurd for a company and its pension trustees to give an absolutely open-ended guarantee of such substantial commitments in the future, which they claim to be able to finance out of a fund whose performance can be variable and which has no guarantee of meeting them. We have seen the dangers of the risk being carried by employers and their pension funds. It is inevitable that the risk will be transferred to employees in most cases, and I know of no easy solution that will reopen that. We are therefore talking about personal saving and personal pensions.

One of the things in which the Government are interested is compulsion, and the Secretary of State plainly hinted that after the election, compulsion will be on the their agenda: compulsorily joining one's occupational pension or making some provision. It is in the terms of reference of the Pensions Commission to consider in particular whether voluntaryism is defensible. I have at times been attracted to the idea of making compulsory saving or compulsory pension contributions part of our system, but I always come down against it. One reason is that voluntaryism is more flexible, and leaving people to make their own provision as they choose takes more account of the huge variety of circumstances in which people will bring themselves to save.

People are saving at the moment. We should therefore ask ourselves: what is happening at the moment? They are saving by buying a house or flat. They think that they are saving by going into property. They do not trust pension funds, the stock market and investment funds.
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They do not trust insurance companies. They do not trust Governments. They do not think that they can rely on the state for a pension when they get older. An awful lot of young and middle-aged people think that their bricks and mortar are their pension—it is the only thing that they can think of which is bound to go up by at least 10 per cent. each year, which can be sold when they wish to dispose of it, and which will somehow look after them in old age. That is a real danger, and I think that it is the principal reason why we have a housing bubble at the moment, why housing is 20 or 30 per cent. over-valued, and why we are in danger of seeing values fall back. What we need to do, first, is to hope that that bubble is deflated by the Bank of England in a comfortable fashion, without too much disaster, and get back to deciding how on earth we encourage people to save properly.

Not all people would be well advised to put X amount into pensions each year. The Turner report says that if we are 40, we should be paying 20 per cent. of our income to provide a pension. I would not put 20 per cent. of my income into my pension were I a 40-year-old. I would examine my career expectations and how one maps things out. We are trying to encourage the middle classes and middle-income groups to save, and they have a much more complicated outlook in looking after their financial affairs. Most sensible middle-income people are not at their most broke when they are elderly. They are at their most broke when they are married, have young children, and one of the partners must give up work for the first time. That is when they go through a period of being really broke. They should not be piling vast proportions of their income into pension funds when they are bringing up children with a wife and trying to pay off the mortgage. Most of them expect to start really saving for their retirement in their 50s. An awful lot of people do that.

I will not go into the endless other varieties of provision that sensible people can make, but if we opt for compelling them to put a staggering amount of money into their pensions, it is not always in their best interests, and it is an inflexible form of saving. If we want people to save more than they would of their own volition, and if we want to tie it into pensions—which is one of the most unattractive forms of saving if someone is 30, because he can never touch the money until he is old, and he might die young and never see it at all—we have to give pretty attractive tax concessions to pensions. What we have now is inadequate.

Of all the ideas that have been suggested for extending tax relief and more favourable treatment for private and personal pension provision, getting rid of the annuity purchasing requirement is one of the most attractive and overdue. My hon. Friend the Member for Bournemouth, West (Sir John Butterfill) had a private Member's Bill advocating that three years ago, and I was pleased to be one of the sponsors from various parties who helped him with it. I am astonished that the Government have not changed the rules on annuity purchase, which would plainly get rid of one of the greatest deterrents to people putting up their pension provision to the full extent of the tax relief if that fits their personal requirements.

Our response to the Turner report should be a modest increase in the basic pension, some means-testing for those who have no chance to provide for themselves, but
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mainly incentives to save and make pension provision across the whole area, which can be done only through tax concessions.

Instinctively, I am against changing the retirement age. There are many men in heavy manual occupations who will not be able to make it to 65, and there will be personal and financial problems if we say that people cannot get the state pension until they are 70. We may be driven to it, and there are four western countries that have now raised the state retirement age from 65 to 67 in response to exactly the problems that we face, but I would like to see how they get on in Norway, the States and elsewhere before we go in that direction ourselves.

Those are my provisional views, but we must all have clearer views by the election. We should try to reach consensus. We nearly got consensus on the Castle Bill in the late 1970s, when I was our party's spokesman on pensions and we prevented Barbara from destroying private pension schemes altogether. Lord Fowler tried to get consensus when he introduced personal pensions in the 1970s. It is in all our interests to get consensus now, but it cannot be reached through a crazy bidding match in the run-up to the election. I think that the electorate will respond to a responsible reaction to the Turner report. They know that the parties cannot deliver the earth. If we do not grapple with the problems now, people in this Chamber in 20 years' time will curse us, because they will face a really, really serious crisis as a reduced number of working people try to maintain probably half the Members of this House in their retirement at a level that is unaffordable.

This is a serious matter that deserves a serious response, and it seems to me, in my unbiased way, that my hon. Friend the Member for Havant, with his eight-point plan, has come much nearer to the reality of grappling with the problem than the rival spokesmen from the other two parties.

3.23 pm

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