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What will happen? There will be a negative interaction between means-tested benefits and the new pension payments. We will have a situation in which some people will face the equivalent of an 85 per cent. marginal rate of tax on their new pension, and many will face a marginal rate of tax of 50 per cent. Many such people would be strongly advised not to take out such personal accounts. Yet one has a sense that the
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Government are so committed to this scheme that that advice will not be given and that many people will be lured into a scheme that is clearly not in their interests.

Underlying all of this is the most fundamental point of all: the reason so many people are on means-tested benefits is that the Government—particularly the Chancellor—have chosen to concentrate all their efforts on improving the pension credit scheme rather than the basic state pension.

Mr. Brian Jenkins (Tamworth) (Lab): Will the hon. Gentleman give way?

Dr. Cable: No, I am about to finish. Until there is a decent basic state pension without means-tested benefits there will be no platform on which people on low and middle incomes can make sensible decisions about their own supplementary saving and pensions.

Several hon. Members rose

Madam Deputy Speaker (Sylvia Heal): Order. I remind Members that Mr. Speaker has imposed a 15-minute time limit on Back-Bench speeches.

5.7 pm

John McFall (West Dunbartonshire) (Lab/Co-op): I am pleased to have been invited to contribute to the debate. Two words are particularly appropriate for it: “hullabaloo” and “hypocrisy”. “Hullabaloo” is appropriate because we are debating a decision that was taken 10 years ago and on which there was complex and competing counsel. The following question must be asked: what will this debate do for good government and good public policy in the future? Instead of opening up the workings of government as a result of freedom of information legislation, might it encourage Ministers to seek only advice that supports the decision that they want to take? If all civil service advice is prepared with an eye to publication, objections to official policies will not be put in writing and will soon be completely suppressed. I believe that I have support on that point from the right hon. and learned Member for Rushcliffe (Mr. Clarke). It is an important point, which has not yet been raised in today’s debate.

“Hypocrisy” is also a relevant word. If we look at the past record, we find that the previous Conservative Government were making progressive steps towards reducing, if not abolishing, dividend tax credit. I will mention a few of them later. I have also looked at the general press commentary on this issue. John Ralfe is a pension expert and former finance head of Boots. He has said:

He also said:

Yes, that idea is absolute baloney.

Stephen Yeo is a senior consultant at Watson Wyatt. He advises the Conservative party, and he said that

The decision that we are discussing is not among his top three reasons for that rise in cost. The top three reasons are the rise of guaranteed benefits, poor investment returns and greater longevity. For example, today a 65-year-old man is on average expected to live for 20 years, as against 12 years in 1950. As a result there
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has been a revaluation of pension scheme liabilities, which has contributed to the current situation.

Mr. Redwood: Does the right hon. Gentleman accept that one of the big impacts on investment returns was the dividend tax? If one takes away money that would have been received in income, the assets are worth less and the total return falls.

John McFall: The former Chancellor of the Exchequer, Norman Lamont, and John Moore and others in the Conservative party said that the tax relief was a subsidy. Pension funds do not pay tax and why should they get a subsidy? Steelworkers, miners and others do not get such subsidies. I would have thought that in true Conservative No Turning Back fashion, the right hon. Gentleman would agree with his ideologically firm colleagues on that issue.

The issue is the relationship between labour and those who have retired. A hundred years ago, there were 14 people working for every one retired. Nowadays, the figure is four to one, and in 2050 it will be two to one. That will lead to big problems. I regret the Opposition’s motion today, because I had thought that we had a consensual approach to the issue of pensions. A long-term solution is needed, but the Opposition are going for the short-term fix.

Mr. Jim Cunningham (Coventry, South) (Lab): Does my right hon. Friend recall that in 2000 some £250 billion was wiped off the stock market, which had a monumental effect on pensions? Most neutral commentators agree with that assessment.

John McFall: That is certainly one of the issues of concern. The basic issue is that not enough people are saving. Confidence in savings is declining. Indeed, the Treasury Committee has undertaken several inquiries into that issue, to which I shall refer. Two of the big questions are how we can restore confidence and how do we get people on between £10,000 and £25,000 a year to save. It is those people who are not saving, and they constitute some 8 to 10 million people.

David Robbins, a pension partner at Deloitte, has said:

The problem has come to a head because people are living longer. Pensions provision has become so expensive that large numbers of companies have scrapped final salary schemes or closed them to new members amid fears that they could be crushed by the weight of future liabilities. It is incumbent on us as responsible politicians to recognise that issue.

Stock market volatility is another issue. In 2000, some £250 billion was taken off the value of the stock market. Other hon. Members have mentioned the issue of accounting standards and FRS17, which exposed the potential liabilities of companies. That also reduced confidence. The Secretary of State for Work and Pensions is in his place on the Front Bench and the Treasury Committee has worked with him on the pension issue. I make the point to him that the Cabinet needs to discuss today’s accounting environment. Many companies have told me that despite the good efforts of the Financial Reporting Council and others, one good measure is being built on another, so that the system becomes
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complex and difficult to apply, understand and compare. One company wrote to me this morning with an example in which the same transaction can be correctly accounted for in three different ways with quite different impacts. There is something wrong with such a system. That cannot be laid at the Government’s door, but it is a responsibility for them. We urgently need to simplify accounting and make it more transparent, and that should also be part of the debate.

Mr. Ian Taylor (Esher and Walton) (Con): The right hon. Gentleman makes some good points about the collateral harm to pensions and the lack of confidence caused by FRS17 and other regulations. The problem today is whether the Chancellor, in making the decision in 1997, realised the size of the impact it would have. The previous Conservative Government considered the move, but rejected it because of the impact it would have. The question today is whether the Chancellor fully understood, even on the Treasury advice he received, the damage it would do to pension schemes.

John McFall: That is a very good question, but Conservative Governments reduced the relief five times, from 35 per cent., so some in the hon. Gentleman’s party took a different view.

I said at the start of my speech that these are complex issues and that people have different opinions about them. I was in the City yesterday, and I asked one of the practitioners there about the decision taken 10 years ago. I was told that the market goes up and down on a daily basis, and that decisions must be judged according to whether they achieve their objectives. No one can see 10 years into the future, as the correspondence published in the Financial Times over the past few weeks demonstrates.

In a letter dated 3 April, a chartered financial planner named Peter Cave said that we should put the pensions issue into context. He said:

That is ambitious in today’s environment, but Mr. Cave went on:

So we are talking about 0.25 per cent. of £1,000 billion, but I can tell the House that, behind closed doors, fund managers can put up their fees just like clicking their fingers and we will know nothing about it. That is how complex the matter is.

As Chairman of the Treasury Committee, I have been lobbied a lot by industry representatives over the years. They have been concerned about two things: how to restore confidence in the industry so that people on lower incomes get saving again for their pensions, and how we can get people on average salaries of £10,000 to £25,000 to enrol in pension schemes—something that the Government have done a lot to facilitate with their establishment of the national pension saving scheme.

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The Treasury Committee has made its view clear, saying:

The Committee added that savers need to be given “clear, succinct information” that would reduce the risk of mis-selling.

The Treasury Committee has also been responsible for establishing a committee comprising industry and consumer group representatives to look forward and plan the pension industry. Richard Lambert, the director of the Confederation of British Industry, was kind enough to be the original chair of the committee. The Treasury Committee’s aim was to reach cross-party consensus about the pensions problem, and we made recommendations to the Chancellor about tax and benefits. We said that the present complex tax arrangements needed to be made more coherent to encourage people to save.

The Pensions Commission set up under Adair Turner agreed, saying that

It said that the combined result had been a dramatic growth in the numbers in the private sector work force who do not contribute to a non-state pension from just over 8 million in 1996-97 to nearly 12 million in 2004-05. Lord Turner concluded that

As responsible politicians, we must focus on that, on a consensual basis, as otherwise we will not succeed in making improvements. Lord Turner has performed a good service, especially in respect of the auto-enrolment that has been mentioned already, and of the annual management charge.

Stakeholder pensions were introduced with an annual management charge of 1.3 per cent. They failed because the industry was not attracted by that, and Turner asked for a management fee of 0.3 per cent. If, during the lifetime of a pension the management fee is 1 per cent. more—1.3 per cent. rather than 0.3 per cent., which is a low figure for the industry today—the end result for a worker is that they have 20 per cent. less in their pension. That is one fifth less. So it is important for us to engage in the setting of annual management fees and ensure that the industry brings its costs down. The Secretary of State for Work and Pensions knows that I have been on his back and I will keep on his and other backs on this matter because until we get low fees and competitive charges we shall be doing a disservice to those who save their money on a weekly basis. That is the issue that we should focus on.

I mentioned the issue of hypocrisy. The dividend tax credit was cut five times in 18 years by the previous Government. Norman Lamont in his 1993 Budget clearly said that it could have damaging economic effects and it distorted the market. He said:

So hon. Members who have addressed the House this afternoon agreed with that Budget, but it seems that they have now turned turtle and they do not agree with the policy. This is where the charge of hypocrisy sticks.
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If it was okay during 18 years of Conservative rule to reduce dividend tax credits, why are Conservative Members bleating now—particularly those who have a firm ideological viewpoint? The tax credit should be seen as a subsidy, and why should people get a subsidy when other people do not get it?

The Pensions Commission reserved its real comments for Lord Lawson’s Budget and the Finance Act 1988, which forced companies to take contribution holidays. Turner said:

So we had a perverse situation in which companies paid more tax if they invested in their pension fund, but paid less tax if they paid out a dividend. Surely that was a market-distorting policy. Surely it was for the benefit of the long-term economic future of the United Kingdom to get rid of that policy.

My right hon. Friend the Member for Rotherham (Mr. MacShane) has written a letter to me. He says that he tried to get it published in The Economist, but it was refused. It regards the comments of John Moore, who was a Conservative Treasury Minister and has endorsed the release of this information. The letter says that John Moore said to my right hon. Friend that

He was a Treasury Minister, a professional accountant, someone who had experience in this House. So I hope that the charge of hypocrisy sticks perhaps only for today and that we get back to the consensual approach to pensions provision.

So what should we do? First, we need to get back to a consensual approach. We should accept that dividend tax credits distort the market. We should work together to reverse the historic under-investment and short-termism in the British economy. We should also continue on the path of reducing corporation tax. We should provide incentives for investment. I am particularly keen that the Government should provide incentives for those in low-paid work to save for their retirement. We should also recognise the long-term nature of the problems with pensions and get back together, working on a consensual basis to find a solution to a long-term problem.

5.24 pm

Mr. Kenneth Clarke (Rushcliffe) (Con): I agree with the right hon. Member for West Dunbartonshire (John McFall) that we are making a great hullabaloo about the events of 10 years ago, but there are perfectly good reasons for doing so and for holding this debate. There is an obvious public interest because the Chancellor has delivered his last Budget and is about to become Prime Minister, so the release of the information excited legitimate public questions about his judgment, his style of taking decisions and the consequences of some of the judgments he has made, which may give some clues to how he might act in future.

The questions were provoked by the release of information on the decision of the Information Commissioner. The
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Chancellor says he welcomes the release of such information, although—like the right hon. Member for West Dunbartonshire—I am not sure that I do; I am not sure that we want the form of government in this country to be altered in quite that way. However, it is inevitable that we should have a debate.

The debate is particularly relevant because the subject is even more important now than it was 10 years ago. We all accept that there is something of a pensions and savings crisis and we are all trying to produce long-term consensus on how to resolve it—not for the first time. I was involved in trying to reach consensus with Barbara Castle when she produced proposals that would have practically wiped out private occupational pensions if she had gone ahead.

The undoubted fact is that if people carry on contributing as little to their savings and their future retirement as they do at present we shall face great problems. We have to form a judgment about recent events, which will include coming to the conclusion that more should be done to encourage people to make their own savings and their own provision and that more should be done to encourage employers to help by trying to rebuild the system and reverse the decline of the occupational pensions industry. That will require continued tax relief—perhaps additional tax relief when it is affordable and even forms of subsidy—so it is important that we consider what the culture should be now. Never again should pensions be regarded as the easy source of revenue that they were in 1997 by the incoming Chancellor. If we can get that point across, the future consensus will be improved.

I turn to what is still relevant about what happened 10 years ago and will deal briefly with how the announcement was made. The decision was arrived at in great secrecy in opposition and there was no mention of it in the election campaign. It was produced in the Chancellor’s first Budget and he read it out in delphic terms; four sentences dismissed the heftiest part of a great increase in the burden of taxation in the 1997 Budget. We had been warned about the windfall tax—another disgraceful tax—but it did not raise enough for the Government, so out of the blue came those remarkable four sentences, ending with:

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