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Mr. Brown: But the shadow Chancellor has said that he is not going to restore the dividend tax credit—he is not denying that. The hon. Gentleman cannot talk about what we are doing tomorrow night, when voting on those people who lost their pensions because their employers went bust, which has nothing to do with the dividend tax credit but which is an important issue that we must deal with. He wants to deal with council workers and council tax. Unfortunately his shadow Chancellor will not support him, but says that he is not going to restore the dividend tax credit. The Leader of the Opposition started it in 1992 by cutting the dividend tax credit, and the shadow Chancellor is not going to rescind its abolition. Why are the Conservatives promising tax cuts in every single area, or trying to do so, yet not one of them seems to want to restore the dividend tax credit? Is not that an example of short-termism, opportunism and completely
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unsubstantial policy? The hon. Member for Tatton (Mr. Osborne) has learned nothing in two years as shadow Chancellor.

Miss Julie Kirkbride (Bromsgrove) (Con): If the Chancellor feels so confident of his argument, why did he try so hard to have his Treasury officials block the advice that he was given at the time? Will he now answer whether the permanent secretary blocked further litigation because of the cost?

Mr. Brown: First, we introduced the Freedom of Information Act 2000. Secondly, I support it. Thirdly, I support the release of the papers. The debate has shown how the Act can give information, which people can dissect and then find Opposition policy completely wanting. Perhaps it is time to release the papers relating to the 1993 decisions. Doubtless, the shadow Chancellor has applied for that to happen.

Several hon. Members rose

Mr. Brown: I shall take one more intervention.

Mr. John Baron (Billericay) (Con): Earlier, the Chancellor mentioned pension credit. Is he proud of the fact that it is so confusing and complicated that the latest estimate suggests that 1.5 million pensioners throughout the country do not claim it, despite its being due to them? Half of them live in poverty. Is that a record of which to be proud? If not, what will he do to put it right?

Mr. Brown: Nearly 3 million pensioners who receive pension credit never received anything from a Conservative Government. If the hon. Gentleman wishes to support pension credit and get it to pensioners in his constituency who do not have it, we will help him to do so. However, it is about time Conservative Members stood up and said that they supported the winter fuel allowance, the free television licences, the pension credit and what we have done on pensions—the £11.5 billion.

In 1997, we made three major changes in the economy. The third was to remove the bias against investment—exactly the proposal that underlined the change that Lord Lamont made in 1992, and the five other changes in dividend tax credit that have taken place. The result of our change was not that the share price fell—it rose. All the figures that the shadow Chancellor gave today are wrong. Investment in the economy rose as a result of the measure. The shadow Chancellor asked about investment earlier: it rose by 10 per cent. in 1997, 20 per cent. in 1998 and is now £40 billion more than it was in 1997—a sign that the economy is working well. Corporate profits also rose as a result of all the changes that we made. We have had—uniquely under any Government— 39 quarters of economic growth unbroken by recession.

Pension assets rose from 1996 to 1999—they did not fall. Pension income rose, not fell, from 1996 to 1999. Pension dividends rose between 1996 and 1999—they did not fall. We made the right decision for the British economy—the right decision for investment, the long-term stability and growth of the British economy and British industry. It is clear today that the Opposition have no alternative to our policy. They would not rescind the dividend tax credit. All they talk about is short-term
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opportunism—it is insubstantial. Their policies do not add up and they have been exposed in every part of the debate.

4.47 pm

Dr. Vincent Cable (Twickenham) (LD): My colleagues and I intend to vote in favour of the motion. We opposed the abolition of dividend tax credits 10 years ago—I personally spoke against it. We believe that the Government made a mistake and that they should acknowledge it. However, the hon. Member for Tatton (Mr. Osborne) helped neither his case nor his credibility by turning the debate into a Punch and Judy show, for two main reasons.

First, undoubtedly damage was done to money purchase schemes and final salary schemes. However, most of the serious analysis that has been conducted in the City suggests that, though it was a factor, it was not one of the three leading factors that contributed to the demise of final salary schemes, according to Stephen Yeo of Watson Wyatt, who was one of the leading analysts. Abolition was, therefore, a factor, but there is no point in exaggerating it.

Secondly, as the debate has already shown, the record of the Conservatives in office was not terribly credible. There were acts of omission—the failure to take action on pensions mis-selling—and acts of commission, notably taking action against the so-called over-funding of schemes in the mid-1980s, which the right hon. Member for Birkenhead (Mr. Field) highlighted, and nibbling away at, if not outrightly abolishing, the dividend tax credit through a succession of measures.

Mr. Graham Stuart: Does the hon. Gentleman accept that, under the last Conservative Government, occupational pensions were transformed in their scope through an almost tenfold increase in their funds? That was an outstanding achievement. Is it really necessary for the hon. Gentleman, only about 10 seconds into his speech, to show that the Liberal Democrats are heading for a coalition with Brown, if they can get away with it, and that they are here to support him? Anyone who votes Liberal is going to get Brown, and get Labour.

Dr. Cable: That last comment was really quite pathetic. I started by saying that we intended to vote in support of the Conservative motion tonight, but I am trying to present my argument in a reasonably balanced way—something that I do not think that the hon. Gentleman could begin to understand.

I will make no further reference to the speech by the hon. Member for Tatton. He was not here in 1997, and I think that he has become a bit preoccupied by a cult of secrecy and the exposure of information. I remember the debate at the time; it was very open. All these arguments were put forward, and criticism of the removal of dividend tax credit was made by the Conservatives and by us. There was no great secrecy about it. The arguments were fully debated at the time.

I took the view then—as I do now—that the move was a mistake, for several reasons. The first was a political reason, and not the reason that the hon. Gentleman gave. The Government judged that they needed to raise taxes in 1997 because of what they believed was an excessive level of public debt in relation to gross domestic product. Our view was that if they needed to raise taxes in 1997, they should have done so openly. We argued for
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direct taxation as an open and transparent way of achieving that, but the Chancellor decided to do it in a more roundabout way, and it has come back to haunt him. That was a political mistake. I am not quite sure what the hon. Member for Tatton was arguing should have happened. Was he suggesting that there should have been an increase in taxation, but of a different kind? Or was he arguing that the severe constraints on public spending that were built in by the right hon. and learned Member for Rushcliffe (Mr. Clarke) should have been made even more severe? What was the counter-factual case that he was advocating?

Stephen Hesford (Wirral, West) (Lab): The hon. Gentleman is talking about political mistakes, but the political mistake was not made by my right hon. Friend the Chancellor. The hon. Gentleman has agreed that taxes had to rise, and my right hon. Friend made the decision that we are now debating. The political mistake was the 1p rise in income tax that the hon. Gentleman’s party proposed in 1997 and 2001, but has now dropped.

Dr. Cable: Actually, the Government have done what we asked—they did it in a roundabout way, but they got there eventually—so I am not sure that that was a very telling intervention.

The first mistake was the political one of not being open and not accepting that taxes had to rise and doing that in a direct and transparent way. The second mistake involved the damage that was undoubtedly done to pension schemes. We can now quantify that damage in retrospect. Estimates have been made, for example, of the impact in a money purchase arrangement on someone who was aged 25 in 1997. That person will probably have lost about 17 per cent. of their pension benefit. However, there were not many people in that category.

If we take a more relevant group, namely, people who were 55 in 1997 and who are now retiring, their loss is estimated by the actuaries to be about 5 per cent. of their pension benefit. That is a substantial sum, and those people are angry about that. However, it is 5 per cent., not 50 per cent. We must look at this in some sort of context.

Mr. Brooks Newmark (Braintree) (Con): That is none the less a lot of money. The Chancellor has failed to answer this question: given that the abolition of the tax credit happened 10 years ago, what estimate have the Lib Dems made of the actual cost in pounds?

Dr. Cable: Estimates have been made by people who are far more authoritative than us. Perhaps I can refer the hon. Gentleman to a careful study carried out by Watson Wyatt of the overall impact of the measures. It took the view that there is currently the equivalent of a deficit of about £540 billion in occupational pension schemes. It arrived at that figure by calculating that that is the sum that would be required to be made up if pensions were self-financing through an insurance arrangement. It also calculated that the damage done by the Chancellor’s changes was about 10 per cent. of that total. So we are talking about damage, but it is one factor among several.

Mr. Bailey: The hon. Gentleman is at least trying to put a coherent argument. Does he accept that part of the reason for that act was to rationalise investment decisions to improve the level of investment in companies, which in itself helped pension fund assets? Does he
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agree that his figures have to be discounted, at least because of the increase in the investment in companies—their asset value—that has also been reflected in the asset value of pension funds?

Dr. Cable: That is a good point logically, but it is factually wrong. I noticed that the Chancellor made the same point. Research after the 1997 Budget by City university business school tried to analyse the impact on investment—whether the abolition of the dividend tax relief did what it was designed to accomplish. It came to the conclusion—it had no political axe to grind—that the impact was zero. The claim that it would change investment behaviour was simply wrong as a matter of fact.

Mr. Bailey: I believe that the figure that the hon. Gentleman quoted was for 1997. Was that not a little early to make an accurate assessment? Does he agree that, looking at the stock market, the FTSE has gone up from 4,500 in 1997 to 6,500 now, and that the all-company index has gone up from, I think, 2,800 to 3,500? There has been a significant increase in investment and the asset values of companies.

Dr. Cable: I am touched that Labour Back Benchers have such faith in the stock exchange as a measure of business behaviour. The study was done several years after the 1997 Budget and established my point that despite the Government’s expectations, which may have been reasonable, they did not achieve their aim. There was no change in investment behaviour.

I tried to raise my fourth criticism in an amendment at the time, as did other hon. Members, and the intervention from the hon. Member for South-West Bedfordshire (Andrew Selous) was on this point. One of the unforeseen negative consequences was the impact on public sector schemes, in particular local authority schemes, which accounted for about 10 per cent. of pension fund assets. The effect of the change was to increase the Bill for local authorities by about £300 million. That was a substantial increase in council tax which was regressive and had a significant effect on local authority funding. It was clearly something that had not been thought through.

Mr. Redwood: Does the hon. Gentleman accept that the £540 billion combined deficit figure from the actuaries is predicated on wind-up and transfer into bonds, and we happen to be living through a gilt bubble, where prices are very high because of the pension crisis and regulatory pressure to go into bonds? Is not the more accurate deficit for ongoing pension schemes the FRS 17 deficit? Is not the current cumulative FRS 17 deficit about the same as the actuaries’ figure for the losses as a result of the tax switch?

Dr. Cable: The right hon. Gentleman makes a good point. Others take the view that the FRS criterion is very demanding, but he makes the valid point that we are dealing with a set of assumptions and could come up with different numbers. However, the work in the City suggests that damage was done as a result of the measures but that it was not one of the most important factors. As we are going over the historical record, it is helpful to review what those factors were.

The first factor was the impact of the tax holidays, which has been discussed. The second was changes in the stock market, to which several hon. Members have
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referred in different ways. The third was demography. In 1997, the life expectancy of a man coming up to the pension age of 65 was another 19 years. It is now 20.5 years. That is an 8 per cent. increase. Consequently, if there were no adjustments to contributions, the pension benefit would fall by 8 per cent., so demography has played an important part. Low interest rates contributed to the problem of annuities, which we have discussed often. One of the other contributory factors was the behaviour of many of the private companies.

Lynne Jones (Birmingham, Selly Oak) (Lab): Does the hon. Gentleman agree that one problem was that the actuarial advice to pension funds did not warn them of longevity increases? Those did not suddenly come about, but happened over a period and should have been catered for several years before the adjustments were made.

Dr. Cable: The hon. Lady is right. There was a substantial time lag, and when the adjustment was made after the profession insisted on the provisions of the minimum funding requirement, that was arguably a particularly demanding factor operating on the funds.

Mr. Russell Brown: My hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones) has made an important point. Does the hon. Gentleman also agree that companies that used their pension fund surpluses to make people redundant in the guise of early retirement did no more than compound the problem?

Dr. Cable: I am coming to that. In many instances, private companies behaved appallingly to their employees. Tomorrow we will discuss the way in which compensation can be given to employees who, through bad luck, found themselves in insolvent schemes, but in many other instances solvent schemes were closed in a very cynical and manipulative way.

A substantial number of my constituents belonged to the pension funds of two American companies, EMC and Parsons, both of which do large amounts of business with the Government. They are flourishing and highly profitable multinationals, whose offices can be seen by those driving out to Heathrow airport. A few years ago they took advantage of the existing arrangements to close their occupational pension funds to new entrants, and effectively to wipe out their obligations to existing pensioners. They did that within the law, but quite cynically. They shipped into the United Kingdom trustees who had been appointed at head office in the United States, and used the maximum scope that they had within the legislation to—“defraud” would be putting it too heavily—reduce the benefits of their employees substantially in a very cynical way, for which they had absolutely no justification in terms of their position. Employers of that sort have contributed to the lack of confidence in occupational pension schemes.

Mr. Mark Todd (South Derbyshire) (Lab): The hon. Gentleman is producing a thoughtful analysis of the problem, but he has omitted one factor. I think that companies’ perception of risk, particularly when deficits were exposed more vividly in accounting terms, altered during the period that we are discussing. Companies also became aware of the relatively low weight that a good-quality pension scheme carried as part of a retention
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and recruitment package. That was certainly my perception. My company’s pension scheme closed to new entrants while I was there, before I became a Member of Parliament in 1997, partly because the company did not consider it a valuable enough tool for retaining and recruiting quality staff.

Dr. Cable: Those are very good points, which add to my basic argument about the complexity of the decline of the occupational pension scheme. Some of it was caused by factors outside Government control, some was due to regulatory change and some was attributable to tax measures, although not necessarily the most important part.

Much of the debate has been retrospective. It has asked who was to blame, and why this happened 10 years ago. We should spend a bit of time looking forward. The hon. Member for Tatton was right to emphasise the need to do something about the 120,000 people who have been dispossessed as a result of the collapse of their occupational pension schemes. He also mentioned the proposal that we are to debate tomorrow, which the Liberal Democrats will support. It is a practical proposal designed to address the issue of compensation, and we hope that the Government will be sympathetic to it.

Another issue that is coming down the track and will have to be faced fairly soon is the Equitable Life inquiry by the ombudsman, which is close to completion. It relates to a serious case of mis-selling to highly sophisticated pensioners, which may well have involved a serious regulatory failing. The Government’s response to that, and to the ombudsman’s report, will be an indication of how seriously they take the issue of confidence in private funds.

Pete Wishart: I am surprised by the hon. Gentleman’s curious defence of the Chancellor and his policy. It almost seems likely that the Liberal Democrats will tell us next that Bob Maxwell was quite a reasonable guy. Given the hon. Gentleman’s response to the Chancellor’s speech, can he tell us how he will advise his colleagues to vote this evening?

Dr. Cable: I do not know whether the hon. Gentleman was having a private chat when I began my speech, but I think I said three times that we would support the Opposition motion. I presume from his intervention that he will be doing the same.

The other key future development in terms of the basic pension architecture that the Government need to get right is to do with personal accounts. We have supported the principle of creating a new mechanism for saving by the low paid and the principle of auto-enrolment, but we are worried that the new scheme could give rise to large-scale mis-selling, intentionally or otherwise. The reason for that is that the new plan is targeted at low-paid workers who might potentially be in receipt of benefit; I understand that about 50 per cent. of the target audience for the new personal accounts are potential recipients of benefit, and particularly pension credit.

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