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The first, to which my right hon. and learned Friend referred in his speech, is that the argument for the change was that it would reduce a distortion in the tax system by reducing an encouragement to dividends and encouraging companies to reinvest in their own activities. That was also an argument put forward by the hon. Member for Birmingham, Erdington, and it was implicitly accepted by the Economic Secretary—I apologise to him for referring to him as the Paymaster General earlier. My right hon. and learned Friend, as Chancellor, made it clear at the time that he disagreed with that approach to policy on precisely the grounds that he set out to the House this afternoon, namely, that capital markets become progressively more efficient, and that,
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if we want efficient allocation of capital in the economy—as we should, as an issue of public policy—we will achieve that aim better through capital markets rather than through trapping investment flows within individual companies.

That brings me to the third reason why we rejected the option, which, in view of what has happened since, will be of some interest. We did not agree with the analysis, also put forward by the hon. Member for Birmingham, Erdington, that saw the dividend tax credit as a subsidy to pension funds. It is important to understand why we did not accept that logic. Until the present Chancellor did what he did in 1997, the taxation of pension funds in Britain had always been based on the principle that the revenues going into the funds went in tax free, with the result that we were then able to tax the pensions paid by the funds in the hands of the pensioners. That meant that the capital build-up during the life of the pension took place on a pre-tax basis.

That policy had been pursued for many years, and that was what led us to reject the option that the present Chancellor subsequently adopted. He has created a situation in which the revenues that come into the pension funds via a dividend come in tax paid. For the first time in the history of occupational pensions in Britain, the portion of the financing of the pensions that comes from dividends is now subject to double taxation. It is taxed when the income comes into the pension fund, and again when it is paid out as pension in the hands of the pensioner. That is why I hold the Chancellor responsible for having contributed in a major way to the practical decline of occupational pension schemes over the past 10 years. And that was precisely the practical reason that led my right hon. and learned Friend—ever a practical man—to reject the abolition as a policy option.

Ed Balls: I am grateful to the right hon. Gentleman for giving way again. I am not making an accusation here, because, given the conventions that exist, I have seen none of the pre-1997 papers. I also do not doubt his word that the Chancellor of the Exchequer at that time rejected the case for this abolition. The case had previously been made for a reduction by his predecessor, advised by the right hon. Member for Witney (Mr. Cameron). Did the papers prepared for and submitted to the then Chancellor—the Dorrell review—contain a proposal that the dividend tax credit should be abolished, which was rejected by the Chancellor? Or did the right hon. Gentleman himself reject the idea and the background papers? I ask only because those papers have not yet been made public.

Mr. Dorrell: If the hon. Gentleman wishes to make a freedom of information request, he is no doubt as free as any other citizen of the United Kingdom to do so. What I think he will find is that the way in which I tended to work as a Minister—I suggest to him that it is a sensible way for any Minister, particularly a junior Minister, to work—was to follow the principle that there is not much point in committing a huge amount of effort to preparing a policy option without having first established whether the Minister in charge of the Department is a receptive audience to the proposal. I took the precaution of establishing that my right hon. and learned Friend was not a receptive audience.

Ed Balls: With respect, I began by pointing out the right hon. Gentleman’s personal expertise in these matters.
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I know that his work at the time created a lot of interest, and it was called the Dorrell review, not the Clarke review. I entirely accept that the then Chancellor of the Exchequer made his decisions, but will the papers prepared for right hon. Gentleman for the Dorrell review and the background papers reveal his support for, or opposition to, the measure?

Mr. Dorrell: They will reveal that the options were examined and did not take the form of a final recommendation because we had had discussions that led to a conclusion.

In the case of a final salary pension scheme, the bill for the Chancellor’s policy is met by the employer. In the case of a defined contribution scheme, it is met by the individual’s pension pot and, ultimately, out of the pension paid to the individual employee. It is therefore completely absurd for Ministers to claim, as they do, that the changes have helped employers, who have ended up paying the additional costs into their pension funds, or individual pensioners who are members of defined contribution schemes, who will end up receiving reduced pensions as a result of the increased burden on their pension fund. That is why it is correct to say that the primary effect of the changes has been to contribute, in a significant way, to the reduction in the availability of final salary schemes outside the public sector by roughly two thirds since this Government came to office.

It is significant that in the Chancellor’s responses to interventions all the statistics that he quoted in relation to the availability of final salary schemes ran out in 2000 or 2001. We are now in 2007 and anybody who has been engaged in private sector activity over the past decade must surely understand that private sector pension provision on a final salary basis has been in sharp retreat throughout that period and in particular in recent years. To an important extent, that is a result of the policies that the Government have pursued. It is also true that the primary effect of the changes has been to reduce pensions paid out by defined contribution schemes.

My final comments focus on the secondary effects of the changes. Increased tax burdens have resulted in reduced availability of final salary schemes and in less generous payments by defined contribution schemes. However, there have been two important secondary effects, and it is important that the Government not only accept responsibility for them, but are seen to do so in public debate.

The first secondary effect is that if additional costs to providing final salary schemes are imposed on employers, it has the effect of tipping some employers—marginal employers—into administration and receivership. It is those employers whose employees have been among the primary victims of the changes. Constituents of mine who were employed by the British United Shoe Machinery Company and who saw their savings evaporated, rightly hold the Chancellor not exclusively responsible—the hon. Member for Twickenham (Dr. Cable) was right to say that there were other important contributors—but responsible for public policy. The Chancellor took a position that was poor for those people at the margin and then made it worse. Their pension savings evaporated and they rightly hold him responsible for that effect.

The other secondary effect is much more broadly based across the economy and in the long run, particularly if we can agree to lifeboat proposals for the people who
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have been badly damaged by companies that have gone into administration, much more concerning for the social structure of this country. If we take a pension world that is moving more and more towards defined contributions schemes, and where those schemes are, as a result of this tax policy, becoming less generous in terms of the pensions that they pay out, and combine that with the tax credit policies that the Chancellor has also been pursuing, and therefore the increased reliance of pensioners on means-tested benefits, we can see that we have hugely undermined the incentives on people to provide for their old age. The end result of his policy has been reduced individual responsibility because, as my right hon. Friend the Member for Hitchin and Harpenden rightly said, pensions advisers are, entirely rationally, telling people who are on relatively modest incomes that against the background of the high level of means-tested benefits and relatively low levels of pay-out from defined contribution schemes, they do not have much interest in saving for their old age through a pension fund.

We have seen the result of the Government’s policy at the margin reducing, to an important extent, the incentive on the citizen to accept their individual responsibility for providing for their old age—what the Chancellor in an earlier age might have referred to as prudence. The effect of that has been the renationalisation of pension provision and a sharp move back towards seeing the state—the taxpayer—as the primary provider of income in old age, rather than encouraging individual responsibility during our working lives.

The key objectives of policy going forward must be to reverse the drift back into state dependency, to encourage independence and to encourage people to provide for their pension in their old age, and to protect to a better degree than the Government have yet shown themselves willing to do—my hon. Friends on the Front Bench have demonstrated that we are willing to do this—those whose interests have been sold down the river by the Brown mugging of the occupational pension scheme.

6.48 pm

Mr. Wayne David (Caerphilly) (Lab): It is important to remember the context of the debate. It is undeniably true, and it is certainly constantly repeated by my constituents, that senior citizens are far better off than ever before. Support for them has been systematically increased by the Government. As we all know, the basic state pension has risen by more than the rate of inflation and a raft of new benefits has been introduced since 1997. Hon. Members will be aware of them. As well as measures on the basic state pension, there is the winter fuel payment of £200 for households with someone over 60 and £300 for households with someone over 80. Free prescriptions and free eyesight tests have been introduced for the over-60s, and the over-75s receive free television licences. As we know, the Pension Protection Fund has been introduced. It is an innovative scheme, the first of its kind in this country. We also have the financial assistance scheme and related measures announced in the Budget. There have been many other measures as well. All those important measures and others have created a favourable situation for elderly people in this country.


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Reference has been made to the dividend tax credit changes that were made in 1997. As has been pointed out time and again today, there was an emerging consensus that that was the way forward. In 1993, when Norman Lamont was Chancellor, he cut the credit from 25 per cent. to 20 per cent. He made numerous statements at the time, but I shall quote just one. In March 1993, he said that the dividend tax credit distorted the commercial decisions of British companies. I believe that that was true then, and remained true until the abolition of the credit.

A range of economic commentators and professional economists also said that the whole system needed to be modernised, and that the tax credit was outdated and an impediment to investment. I shall quote just one of those commentators. In his widely read and acclaimed book “The State We’re In”, Will Hutton said:

It was no surprise when, in 1997, the Chancellor of the Exchequer in a new Labour Government announced that the tax credit would be removed. Not only was the action generally anticipated and not only did it represent the summation of a developing consensus that transcended political lines, but it was widely expected in the stock markets. The day after the 1997 Budget share prices increased by 0.45 per cent., and that was not a one-off: the markets continued to respond favourably for some time afterwards.

We should consider not just the position of senior citizens from 1997 until the present day, but the particular circumstances inherited by the Labour Government in 1997. They may be difficult for us to imagine now. At that time there was still high unemployment, along with relatively high inflation, high interest rates and a large budget deficit. The need to achieve stability and do everything possible to encourage investment was widely accepted in the financial community, and that, I believe, was the rationale behind this and other measures introduced in 1997 and thereafter. Those other measures are also important. It is impossible and wrong to see this measure, which has attracted so much attention in this and earlier debates, in isolation from others introduced at the same time and subsequently. For instance, the Government introduced measures that reduced corporation tax, thus also reducing the burden on companies significantly. That was warmly welcomed at the time, and rightly so.

The difficulties that arose were not connected, directly or indirectly, with the difficulties that have been attributed to the change in the tax credit. As has been pointed out frequently today, there were other reasons for those difficulties. The fall in the stock market and the dotcom collapse were obviously of tremendous importance, and the reduction of about £250 billion in the market value of occupational pension schemes between 1999 and 2002 was enormously significant. Moreover, as at least some Opposition Members have acknowledged, life expectancy has increased. The 12 years for which a 65-year-old man could expect to live in 1950 have now become 20 years, and it is only common sense to realise that such a profound change in demography will have a profound effect on occupational pensions.

Mr. Jim Cunningham: My hon. Friend may recall that certain companies took pension holidays. I know of one major company that took a 15-year pension holiday.


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Mr. David: That is also a significant factor. During the 1980s and 1990s, despite rising liabilities, many firms decided to take so-called contribution holidays, which undoubtedly had a huge impact.

Mr. Redwood: Does the hon. Gentleman not concede that a company could take a pension holiday only if the actuary signed a certificate saying that there was enough money in the fund to meet all foreseeable pension requirements?

Mr. David: I do not claim to be an expert, but I suggest that some of the responsibility lies with the actuaries. Certainly we should acknowledge that the fault lies not with the Government’s decision in 1997, but with decisions made by individuals on subsequent occasions in complex circumstances. The main point is, however, that if we are looking for reasons for the difficulties that we have experienced, we should look beyond the ending of the dividend tax credit.

Judy Mallaber: Is it not strange that it apparently took the actuaries so long to start warning of the implications of longer life spans for pension schemes?

Mr. David: That is a valid point. While it is always possible to speak with the benefit of hindsight, it seems that the problems that arose at least partly as a result of increasing life expectancy were not identified by those who were supposed to have their fingers on the pulse, and they should look to themselves when these matters are discussed.

Rob Marris (Wolverhampton, South-West) (Lab): It is not a question of hindsight. I was a personal injury lawyer at the time, and I used life expectancy tables to calculate lifetime loss of earnings. I saw new tables every year showing increased life expectancy, and I took that into account in my professional practice. Actuaries advising those in charge of pension schemes clearly did not.

Mr. David: That is an important point. My hon. Friend is clearly far better versed in such matters than I am. I think we should have another debate, here or elsewhere, where they can be examined in more detail.

Those three factors—the fall in the stock market, increasing life expectancy and firms’ decisions to take contribution holidays—all contributed, in their different ways, to our current difficulties. Those difficulties are not due to the Government’s decision in 1997, as was argued at least initially by Opposition Members today.

Mark Tami (Alyn and Deeside) (Lab): Local authorities were mentioned earlier. Does my hon. Friend agree that it seems to have been Tory authorities that took the pension holidays that caused their employees the difficulties they are now experiencing?

Mr. David: My hon. Friend has identified a moot point. Opposition Members have gone very quiet, perhaps because there is quite a lot in what he has said. It is more than just a rumour or a suggestion; I believe that it may be based on hard fact, and I am sure that my hon. Friend’s intervention was based on sound knowledge.

Some commentators, for whatever reason—I suspect that it is more to do with politics than with economics—appear to have changed their position on this issue. The shadow Chancellor, the hon. Member for Tatton (Mr. Osborne), made a passing reference to Dr. Ros Altmann, although he did not mention her by name. The press have described
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her as being very critical of the 1997 decision, but I was interested to note that historically her view has been somewhat different. In evidence to a Select Committee back in March 2004, she made some very pertinent comments that were quite different from those attributed to her recently. Let me quote from the verbatim reports of that evidence session of March 2004. She clearly stated that the arguments that some had put forward to test the water were wrong because income was reduced by only about 0.9 per cent. She asserted that that was an insignificant amount. She said that the argument that some had put forward was

Mr. Philip Hammond (Runnymede and Weybridge) (Con): The hon. Gentleman might have been listening earlier when the right hon. Member for West Dunbartonshire (John McFall), who chairs the Treasury Committee, argued that the difference between a 0.3 per cent. annual charge and a 1.3 per cent. charge when accumulated over a lifetime would make a huge difference to the pension pot of ordinary working people. Is not the hon. Gentleman undoing that argument?

Mr. David: I am simply relying on expert objective opinion, rather than on political comment. Dr. Altmann’s argument certainly seems to hold water with members of that Committee, and she certainly was convinced of it.

Mr. David Gauke (South-West Hertfordshire) (Con): The hon. Gentleman praises the independent and expert advice of Dr. Ros Altmann. Will he therefore tomorrow support the amendments to the Pensions Bill, which are supported by Dr. Ros Altmann, a number of the hon. Gentleman’s colleagues and Opposition Members?

Mr. David: The hon. Gentleman knows the answer to that, so he has asked a rhetorical question. I quoted Dr. Ros Altmann simply to highlight that commentators need a degree of consistency and that it is wrong to quote people’s comments in isolation both historically and in terms of their wider contributions. In 2004 when some of the difficulties that we are alluding to were already becoming apparent, she was clear what the situation was.

This is an important debate. I am pleased that it is taking place because, sadly, over the past week or so there has been an unprecedented degree of misrepresentation in the newspapers of this country and from many Opposition Members. As we have addressed the details in this debate, the reality has become clear. The Chancellor gave a tour de force in explaining why the situation that we are discussing came about.

Mark Tami: The Chancellor wiped the floor with his opponents.

Mr. David: I agree with my hon. Friend, and I hope that the newspapers accurately reflect that reality tomorrow morning, but I will not hold my breath.

It is possible to say with honesty and integrity and with hand on heart that the right decision was made in the Budget of 1997. It was the right decision for investment. Investment in the subsequent 10 years has increased
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dramatically; that objective fact cannot be denied. Therefore, that decision was right for the long-term interests of this country.


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