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Mr. Waterson: May I reassure the hon. Gentleman about a point that he made regarding my party's policy to liberate pensioners from compulsory annuitisation? Our policy makes it clear that people would not be able to dissipate their pension funds below levels at which they would incur a charge on the public purse.
Sir John Butterfill: The hon. Gentleman referred to my Bill and said that people would be able to extract from their pension pots money that had enjoyed tax relief, and blow it all. They could not extract it without paying tax on it, so there is no question of people being able to receive tax relief at one end and not having to pay tax when money is taken out at the other.
Rob Marris: I am grateful to the hon. Gentleman, because I was not aware of that fact, although I was talking about the general situation rather than the specific provisions of his Bill. I shall rethink the issue after hearing those two interventions, but I am not saying that I shall change my mind.
As I said earlier, the hon. Member for Havant expanded little on the official Opposition's eight-point plan, so I thought that I should touch on its suggestions. The third proposal is a lifetime savings account in which Government contributions would remain intact to help during retirement, although personal savings could be withdrawn provided that they were replaced. Such a system already exists, and I participated in it when I lived in Canada. The scheme is called the registered retirement savings plan, although I am not sure whether the Conservative's proposal is on all fours with it. Under the system, people receive tax relief on contributions
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made to a RRSP up to a ceiling. They may withdraw money from the fund before retirement, but in a similar way to that mentioned by the hon. Member for Bournemouth, West regarding annuities, they must pay tax on it at the appropriate marginal rate of income tax for the year in which it is withdrawn.
The scheme worked well for me. I put money in when I was earning a good wage and took it out when I was a student. I had a low taxable income and a low marginal rate of tax. That system can work, but it is not a panacea and there are difficulties, as those who look at the Canadian experience will find. In times of economic downturn, people tend to pull out loads of money from their registered retirement savings plan. That can cause problems with the investment market and so on, and can cause problems for them later on in their life when they might wish to use the money for retirement.
The fourth part of the Conservative's eight-point plant is for longevity bonds, which the Government would issue to help pension providersthe institutionsinsure against the risk of providing a pensioner with an annual income for life. If I understand the proposal correctly, that strikes me as nutty. It asks the Government to underwrite huge amounts of private pension liabilities. It amounts to the semi-nationalisation of private pension provision, which is the last thing I would expect from a Conservative party and I do not think that it would work.
What I think would work is allowing companies to promote their pension schemes to employees, which is also a Conservative proposal. A strange situation arose from 1988, when the Conservative Government changed the legislation so that employers could no longer force employees, as a condition of their employment, to join the company pension scheme. Many of us said at the time that that was a mistake. Looking back on it 16 years later, it was clearly a mistake. I am glad that the Conservatives are proposing to reverse it to some extent by at least allowing companies to promote pension schemes. We should take it further by having an opt-out approach, which the hon. Member for Northavon mentioned and attributed to my hon. Friend the Member for Stalybridge and Hyde (James Purnell). Companies could assume that someone was in the pension scheme unless that employee specifically opted out.
A proposal in the eight-point plan with which I do not agree is having no limit on senior executive pension funds. The Government proposed a £1.4 million pot, as hon. Members will remember. That went up after discussions to a tax-free pot of £1.5 million. Even with today's annuity rates and the figures that people might aspire to save, £1.5 million is a huge amount. On today's rates, it would provide a 65-year-old man with £70,000 a year as a pension. Those people are the very rich, but the Conservatives, who as we all know have an affinity for the very richit is nice to see them being true to that every now and again because it helps socialists like mesay, "We should lift that; £70,000 a year for a pension? Not enough. Lift the cap." I disagree. The cap is too high as it is. It was extremely generous of the Government to budge upwards rather than downwards from £1.4 million.
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Mr. Waterson: The hon. Gentleman keeps picking out bits of our policies without explaining them in their context. I am sure he appreciates that in return for removing that cap, our policy is that the same scheme on the same terms should be available to all employees of a company. There is no longer the idea of senior executives having their own cosy little arrangement. It is what we call our fat kittens as well as fat cats policy.
Rob Marris: Whoopee-do. Is not that a great balancing concession from the Conservative party? The hon. Gentleman is right that I did not mention it, but I am aware of it. I take it as being almost nothing. Fat kittens? Great. The tiny pitter-patter of kittens is not a balancing concession for what I regard as a social inequity and inequality, although he clearly does.
The eighth point in the Conservative proposals isno doubt the hon. Gentleman will correct me if I have got this wrongto do with orphan assets. They want to nick those as well, but there are two considerations. First, orphan assets belong to someone in a legal sense, although it may be impossible or extremely difficult to trace those to whom they belong. Secondly, they are one of those things that lots of people would like to get their hands on. It becomes a bit of a panacea: "We've got a problem here with financing. Let's use the orphan assets." That proposal comes from a party which, when in government, stole the bank to which I belongedthe Trustee Savings bankand flogged it off. I never received a penny, as the Conservatives stole £1 billion from its members.
Rob Marris: I did not have £1 billion personally, but members of the bank must have had that sum collectively, as that is was it was flogged off for. However, like many Conservative sales of the family silver, it was probably underpriced for a quick sale.
The history of pensions in the past 30 years shows that there have been questionable acts and mistakes by both parties. The dividend tax credit could, with the benefit of hindsight, have been introduced differently, although the £5 billion figure that is bandied about is suspect. When that tax regime was introduced, corporation tax was reduced. I am happy to be corrected, but advance corporation tax, which had been knocking around for years, allowed people to keep a chunk of money. The £5 billion figure is therefore not correct and neither is the £70 billion at a 7 per cent. discount, invented by the right hon. Member for Charnwood.
We should learn from past mistakes and problems, but we must also learn from our current circumstances. Our Government introduced a regime of increased means-testing, which I support, to address pensioner poverty. If we want to deliver resources to the poorest pensioners we must use means-testing. Of course, there is the problem of people who choose not to apply for means-tested benefits or who do not do so out of ignorance, but the solution is certainly not to abolish the whole system, as the Conservatives believe. In my constituency, the average pension credit is about £44 a week, and we need to try harder to find out why some people have not applied for it. They may have chosen not to applychoice was an issue raised earlier in our debate.
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Means-testing is a catch-up mechanism. The right hon. and learned Member for Rushcliffe talked about the condition in which his Government left the state pension system in 1997. He mentioned a pension of £69 a week, and said that affordability was key. I accept that it is important, but so is poverty. The Conservative Government placed too much emphasis on affordability, because they would not raise taxes, even though they were borrowing money like crazy and pushing up Government debt. To achieve affordability, they increased pensioner poverty, which has not disappeared. Figures on the extent of the problem have been bandied about today, but most observersbut not all, given what has been said in our debateappreciate that in the past seven years, particularly the last four or five, pensioner poverty has been significantly reduced. There is still a long way to go, but the statistics show that the trend is moving in the right direction. That was not achieved deus ex machine, but was the result of conscious policy decisions by this Government that were put before Parliament and accepted before being enacted in legislation. I fully support those decisions to tackle pensioner poverty and abolish it if we can, just as I support our efforts to tackle child poverty. I accept that in both cases there is still a long way to go, but to say so or argue that we could have done more should not detract from how far we have come as a result of conscious policy decisions.
The expectations that people of my generation, who are in their 40s, have of retirement are unlikely to be fulfilled unless their attitude to saving changes markedly. We know people five to 10 years older than us, many of whom worked in public services, who retired on a full pension in their 50s. They benefited from an uprating to the sum they would have received at 65, as pseudo-retirement packages were used to disguise redundancies that were made in the 1980s and 1990s. People of my generation look at their older cousins and siblings who received such packages and believe that they, too, can retire in their 50s. That will not be possible unless my generation is prepared to save an awful lot of money.
Those of us who take an interest in pensionsI may hitherto have been in a minority of the populationexpect that one's pension should provide two thirds of one's income in retirement: that is, two thirds of the income that one had while working, if employed. Nobody knows where that figure comes fromit may or may not be suitablebut it is treated as though it is written in stone. Personally, I am not sure whether I will need two thirds of my income when I am retired, but that should be my choice. The Government are at last, albeit belatedly, ensuring that age discrimination legislation goes on to the statute book by December 2006. I hope that this Government are re-elected in order to do that, because a Conservative Government would have a real problem with it as it is part of the Amsterdam treaty.
That will affect people's ability to carry on working if they choose to do so. The right hon. Member for Charnwood talked about retirement age. The average retirement age may rise, or may be rising now, but we need to separate that from the state retirement age. The Government have been clearI fully support them on thisthat the state retirement age should not go above
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65. We are already starting to phase women's retirement age from 60 to 65. The state retirement age does not need to go above 65.
In today's climate, we must be aware that final salary schemes in the private sector will wither and die. The right hon. and learned Member for Rushcliffe adverted to that. They are sustainable in the public sector, although one has to look closely at their funding, but they are unsustainable, both politically and socially, in the private sector. A final salary scheme in the private sector says to the employee member, "You will have certainty as to how much you will get when you retire", but for many people, sadly, that certainty has already been done away with. Employees will increasingly wish to trade that supposed certainty for the certainty of a pot of money that has their name on it under a defined contribution schemeor money purchase scheme, as they used to be called. That is part of the changing pensions landscape.
The question of compulsion looms because, according to Turner's excellent report, 9 million people are not saving adequately for their retirement. The reason he gives is thatas Labour Members, and probably those on both sides of the House, have long recognised but not necessarily translated into actionthey cannot afford to save. That is not because they are wilful or profligate and want to blow all their money now. A tiny minority might fall into that category, but the vast majority cannot afford to save; it was ever thus. We already have some compulsory provision for those who are employed: national insurance contributions.
The Turner report talks about four alternative scenarios in relation to pension incomes in years to come: first, that pensioners will become poorer relative to the rest of society; secondly, that taxes or national insurance contributions devoted to pensions must rise; thirdly, that savings must rise; and fourthly, that average retirement ages must rise. As I understand it, it is not necessarily the case that only one will applythere could be a mixture. For example, average retirement ages could rise at the same time as savings. Nevertheless, they encapsulate the kinds of choices that our society faces in relation to prospective pensioners who are mostly currently employed, although some are unemployed, self-employed or carers.
I will nowbriefly, because I realise that other Members wish to speakput forward an immodest proposal to sort out the pensions mess. [Interruption.] I know that my hon. Friend the Member for Wolverhampton, South-East (Mr. Turner) has come in especially for this part of my speech. I am sure that my proposal will not command instant support, but it may prove to be a rolling stone that gathers moss.
The current private pension system is predicated on tax incentives for people to save for their retirement. If one asks the Department for Work and Pensions, as I have publicly done as a member of the Select Committeeit is in our proceedings from last yearwhat evidence there is that tax incentives actually encourage people to save, the Department replies that
"there is little evidence that tax incentives can significantly increase the overall level of saving".
"there is a degree of consensus in the research that there is little evidence of tax incentives increasing the level of savings."
To counterbalance that, the Department for Work and Pensions also told us in the Committee, following questioning from me, that although there was little evidence, as I quoted, that tax incentives increase the overall level of saving, they can significantly affect its allocation. So does an individual who is not one of the 9 million who cannot afford to save actually save in a pension fund or in some other form of savings? Well, tax incentives may direct savings into pensions.
The reason, as I understand it, that we as a society encourage people through tax incentives, even though they are not very efficient, to save for their retirement is that we do not want people living in poverty in their retirement. But those who are saving, by and largenot all of themwill not be living in poverty in their retirement anyway. The tax relief regime, which costs £14 billion a year in forgone tax revenue, is highly regressive, and I have to say to my Government as a progressive Government that we should not continue to support it. I have said it in the House before but it is worth repeating: half the benefitthat is, £7 billion out of that £14 billionis received by the top 10 per cent. of taxpayers.
It is unlikely that more than one or two of the top 10 per cent. of taxpayers would blow everything deliberately and rely on means-tested benefits when they got older. They would be saving anyway for their post-employed lifepresumably after the age of 65just as many right hon. and hon. Members have savings outside their pension schemes. Because we are well paid, we can afford to save.
The other figure that shows the tax regime to be regressive is the £3.5 billion a year of forgone tax revenuea quarter of that tax reliefthat is claimed by the top 2.5 per cent. of earners. We can hardly get more regressive than that. My immodest proposal is to take it all off them, including all of us right hon. and hon. Members who are presumably getting tax relief, except perhaps my hon. Friend the Member for Wolverhampton, North-East (Mr. Purchase), who I think is already outside the pension scheme because he is above that age. Almost all of us are getting that tax relief. We do not need it. We are earning £57,000 a year, Ministers are earning more, and we are getting tax relief on pension contributions. That is crazy.
My immodest proposal will, I think, take a long time to gather enough support to go through the House, but I ask hon. Members to bear with me. If one added 2 per cent. to national insurance contributions by employees and 2 per cent. to contributions by employers, that would raise £14.2 billion a year. If one abolished the tax relief on pension contributions, which is coincidentally almost the same£14 billion a yearthat would make £28 billion a year.
The minimum income guarantee and pension credit cost £9.9 billion a year and the income tax relief, as I said, is £14 billion. If one got rid of means-tested pensioners benefits and put all those figures togetherI am happy to go through them with the Ministerone could have a non-means-tested basic state pension, or a citizens pension as it has been called, not dependent on national insurance contributions or stamps, of £150 a week for a single pensioner and £250 a week for a couple. Other than that, the state could get out of the
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pensions market. Means-tested benefits such as pension credit could be abolished because the basic pension would be enough to live on.
The right hon. Member for Charnwood referred to choice, and I said that I would return to that subject. Under my proposal, people would have the choice of saving for a richer retirement than £150 a week, but if they choose not to do so, we, as a society, would say, "You will not starve in your retirement. You will get £150 a week." We can afford such a policy.
The Pensions Bill is going through Parliament, and the state is worrying whether eight regimes will become one or twodifferent parties count them differently. Under my proposal, all we would have to do is carry on regulating saving, which we have done with variable success. One would still expect people to save, but tax relief would not be available and savings would be regulated in a building society, stock market or bank, as they are now. However, the £1.5 million total fund, tax relief on pension contributions and the regulation of pension companies, which is necessary because of the tax benefits, would be cut, which would simplify the regime.
Pensioner poverty would be abolished on those figures. Yes, the cost would be great, but we are rich enough to afford a 2 per cent. increase in national insurance contributions for both employees and employers, which is double the amount that the Government successfully put through this House for the national health service in last year's Finance Bill. Leaving aside demography for one moment, a link with earnings rather than prices would be sustainable because the forgone tax revenue£14 billion of almost useless tax relief that would go into the pot to pay for the policywould otherwise rise with earnings, unless the saving rate dropped dramatically, and the 2 per cent. increase in national insurance for employers and employees would also provide increasing sums.
The structural question mark against the proposal is that demographic changesI cannot remember the figures, but another hon. Member may want to provide themmean that the ratio of workers to retired people will change adversely in the next 30 to 40 years, particularly as the baby boomers work through the system, as we are starting to.
On current trends, the projected population fall is 3 per cent. by 2050, but we could reverse that trend through immigration. There are enough people in the worldmore than 6 billionso we do not have to rely on the UK fertility rate. The history of the United States, along with that of other countries such as Canada and Australia, shows that net immigration is often beneficial for an economy, particularlyI realise that this point raises some questionsif the labour imported to work and pay for the older population is already educated. The demographic time bomb is not fixed, because it depends on millions of individual decisions by UK couples in the ensuing years. However, if the ratio of workers to retired people did not support my proposal, we could import labour.
I urge the Minister to examine my proposal. I realise that it has some political downsides, but it would provide simplification, get rid of means-testing, get the state out of providing tax incentives on private pensions, and provide enough for people to live on in their old age.
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