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Most serious commentators have highlighted three factors behind the development of the problems with pensions. First, employers took pension holidays when the going was good in the 1980s and 1990s, and they did not begin to contribute again when things started to go pear-shaped. Secondly, firms rushed to get involved in the dotcom bubble, which ended with the stock market fall of 2000. According to the Pensions Commission, in the 1980s and 1990s companies should have been investing, not cutting their contributions. As was said in earlier exchanges, they should have been looking at factors such as the increase in life expectancy and realised that more money, not less, needed to be put into pension schemes. I hope that such issues will be discussed in a more serious debate on pensions tomorrow when we consider the Pensions Bill.

It would appear that actuaries suddenly woke up and realised the cost to pension funds of increasing life expectancy. They started getting worried and demanding that each year any potential liabilities should be brought forward. I am not an accountant or an actuary, but other contributors will probably come in and make more points about the impact of that in terms of decreasing confidence in pensions.

It is hypocritical of the Conservatives to accuse my right hon. Friend the Chancellor when they themselves were responsible in considerable part for creating the conditions in which contribution holidays were taken by companies. My right hon. Friend the Member for West Dunbartonshire (John McFall), the Chair of the Treasury Committee, quoted Adair Turner’s report, which cited the changes introduced by Tory Chancellor Nigel Lawson in the Finance Act 1986, which forced companies to take contribution holidays. It said:

So the Conservative party cannot deny its responsibility for what was clearly an important factor.
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I am proud of a number of things that we have done to assist with pensions. I am proud of the number of pensioners in my constituency who have been taken out of poverty. I am proud that pensioner households will be £1,500 better off in 2007-08 as a result of the way in which the tax and benefits system has developed. I am proud that the average household will be £2,200 better off and that the 2007 Budget will lift a further 60,000 pensioners out of paying tax. I am pleased that we have introduced the Pension Protection Fund and that extra money has been announced for it in the Budget.

A lot of things have been put forward by the Conservative Opposition that have not been based on a serious analysis. My concern is that we should return to having a serious debate. I agree absolutely with the hon. Member for Putney (Justine Greening) that these are serious issues. None of us would undermine that assertion. I do not think that the to and fro of political polemics, in which I now find myself engaging as well, necessarily helps us take those arguments forward. These are serious issues.

Mr. Mike Weir (Angus) (SNP): Will the hon. Lady give way?

Judy Mallaber: I am coming to the end of my time, if the hon. Gentleman does not mind. We need to look at issues such as increasing take-up of pensioners’ entitlement. I applaud the work of welfare rights teams and other organisations in my constituency to increase benefits take-up. We need to look at investment decisions and the effects that they have.

We desperately need a consensus on the future of pensions. I thought and hoped that that was the direction in which we were going, so I have not found today a helpful diversion. We need to look at the future of our pensions system, which was created in conditions very different from today’s. Demographic changes have taken place since them. In the past we had different family and working patterns. We were not dealing with the problems of carers, for example, which I talked about in the Second Reading debate on the Pensions Bill. I hope that we can return to a serious debate on those issues, which are complex and difficult, and that we will get away from the back-biting and polemics and move seriously towards the consensus on our future pensions system that we so desperately need.

7.34 pm

Mr. John Redwood (Wokingham) (Con): I am a company director and the trustee of a pension fund, and I have put that in the Register of Members’ Interests.

Before I came into the House I was involved with the direction of investments for a wide range of pension funds and I have in other capacities kept in touch with the pension world. In all my adult life, I have never known the occupational pension movement to be as weak as it has been from 2002 until today. We need to understand why it is weak and the origins of the problem and we need to look carefully at the Chancellor’s defence of his actions.

The Chancellor and the Economic Secretary to the Treasury were at their cleverest today as they sought to find a contortion of an argument to get themselves off
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the serious charge made by my hon. Friends on the Front Bench and others—that one of the main causes of the disarray in pension funds has been the removal of about £5,000 million a year of income by the cancellation of the tax credit and the advance corporation tax system that was in operation before this Government came to power.

The Chancellor’s main defence seemed to be that it was good for companies to have that money taken away, that it meant that the companies would be able to invest more in themselves and that this would create extra value. One of the most important trustee rules in most pension funds is that they cannot invest in the company concerned, because that would increase the risk. The whole idea of a pension fund is that it should be separate from the company itself. However, if we take the Chancellor’s argument more generously, we could suppose that he was looking at the whole population of companies and he thought that, had there been this shift from distribution to investment, all companies would have done better. Of course, the truth is that that shift did not occur. We have heard good evidence already today that the payout ratio of profits going in dividends actually rose despite the change in the tax system.

So the Chancellor is left arguing the rather ludicrous proposition that if you take a fifth of someone’s income away they will be better for it. I asked the Chancellor of the Exchequer the terribly simple question—he is an intelligent man—whether, if I took a fifth of his income away, he would be worse off or better off .

Mr. Newmark: He did not answer.

Mr. Redwood: He did answer. My hon. Friend is quite wrong. He answered from a sedentary position and he said no, he would not be worse off. I have a simple suggestion for the Labour Front Bench. If it is the case in Labour economics that you are not worse off if you take a fifth of your salary away, will they all take a fifth of their salary and give it to the pensioners who do not have enough pension as a result of the policies that the Labour Government have been following? They would find it useful, and obviously the Chancellor does not think that it is very useful to himself.

The Chancellor said that it would not make him worse off because he knew what was coming next. The second part of my question was, if taking a fifth of his income away would make the Chancellor worse off, would not taking a fifth of pension funds’ dividend income away make them worse off? The Chancellor is left trying to argue that it does not make them worse off if the Government take that money away.

Perhaps the Chancellor does not understand the full power of compound arithmetic. A pension fund is a long-term fund. It may have a life of 50 or 100 years; it depends how long the company goes on making those promises and how long the members and pensioners live before the fund has finished its task. Every year, all those pension funds are receiving £5 billion less—probably more than that now; the Chancellor will not tell us the accurate figures—owing to the cancellation of the tax credit. It is not just that the pension funds are short of £5 billion a year. They would invest that £5 billion. Given that equities and property have been doing well in most of the years I have been involved with markets,
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after, say, seven years the £5 billion would be £10 billion because the £5 billion would have increased by 10 per cent. per annum. The funds would have £10 billion more just from one year’s dividend tax credit that has been forgone. Then the next year another £5 billion has gone missing; in 10 years the amount forgone would be perhaps worth treble. So a large amount of money has clearly been forgone by the pension funds.

We then come to the Chancellor’s second very clever argument. He says, “Ah, yes, but between 1997 when the money began to be taken away and 2000, stock markets went up.” Yes, that is quite true, Chancellor of the Exchequer. So he says, “Therefore, no damage was done because what pension funds lost on the dividend tax credit they made up on the share gains.” This is where stopping the clock at 2000 is an important part of the trick argument. From 2000 onwards, there was a sharp crash in the market.

If the Chancellor were here he would say, “Yes, but markets around the world fell so it was not just a British problem and it was not a result of my actions.” I have looked at the extent of the market falls in Britain and around the world. The evidence is clear that the British stock market fell by considerably more than the New York, Frankfurt and Paris stock markets. All the major markets performed rather better than the UK market. We can make a strong case that the extra decline in the London market reflected the economic policy of Her Majesty’s Government, especially the taxation policy.

I will make a concession. It was not just the removal of the tax credit; another important tax change had quite a big impact on share values and that was the decision to take £22 billion out of the leading sector at the time—the telecoms industry—in the form of the auction tax so that companies could carry on trading. That had a huge impact on the share values of Vodafone and BT, which were the leading investments in most pension funds at the time. There was a double effect. The pensions tax—the biggest item—and the telephone tax completely smashed the equity valuations in typical UK pension funds.

Stephen Hesford: Although I do not accept that there is any connection between what the Chancellor did and the so-called drop in the equity market, if the thesis of the right hon. Member for Wokingham (Mr. Redwood) was true and if that situation is continuing—because there has been no real change in the position over the past six years—the stock market would not have recovered to more than it was when it crashed. That would not have happened if the right hon. Gentleman’s thesis was true.

Mr. Redwood: I am afraid that the hon. Gentleman does not understand stock markets. On an earnings multiple valuation, the market has not actually risen at all in recent years; all that has happened is that earnings have gone up a bit and the stock market has kept pace with that rise. In real terms, the stock market is well below where it was at the market peak and it has not yet moved on to a higher valuation basis, as it had done before the full impact of the changes was discounted by the market.

I am not saying that the entire market drop was the direct fault of the tax changes. Quite a bit of it was a worldwide phenomenon; liquidity was withdrawn by
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central markets around the world, so world markets dropped. The extra fall in the United Kingdom is clearly the result of tax changes in the UK, so the Chancellor’s argument for getting out of jail tonight—that because share prices rose for a couple of years all was well—has to be looked at in the light of the fact that what happened next was that share prices fell. Clearly, if £5 billion is taken out of companies’ income, their shares will be worth much less.

I did the sum for the Government shortly after the first Budget. In the Budget debate, I said from the Dispatch Box how damaging the proposals would be. I then made a back of the envelope calculation that they would cost £100 billion. It was an easy sum to do, because in those days the markets valued companies on 20 times earnings. In effect, £5 billion was being taken from company earnings, so multiplying that by 20 meant that there would be a £100 billion capital hit. In practice, the excess drop in the London stock market was more than £100 billion compared with other world stock markets, but that reflects the telecoms tax and other adverse factors that were then discounted by stock markets.

The Secretary of State for Work and Pensions is shaking his head in disagreement; in the wind-ups it will be interesting to hear his argument why taking £5 billion a year from company income does not have a negative impact on values and why one should not calculate how much more the London stock market fell than other stock markets.

Mr. Newmark: The point made by the hon. Member for Amber Valley (Judy Mallaber), which was the Chancellor’s argument, too, was that the measure would increase investments. However, the reality is that investment, especially as a percentage of gross domestic product, went down, which in itself leads the Chancellor’s thesis to fall flat on its face.

Mr. Redwood: My hon. Friend makes another extremely good point. Other colleagues have also referred to it. On the Labour Government’s watch, 1 million manufacturing jobs have gone and a large amount of industry has transhipped to more clement locations abroad, with better tax and regulatory structures and a more favourable environment for business. The hon. Member for Amber Valley (Judy Mallaber) lives in a dream world when she says, “But we all know it’s so wonderful”. Tell that to the 5 million people on benefits who cannot get a job. Tell that to the million people who lost manufacturing jobs in recent years. Tell that to the hundreds of thousands of people who no longer have access to final salary schemes or whose promises from such schemes will not be honoured in full, or who are nervous because they fear that those promises may not be honoured.

Labour Members—although not normally the Chancellor, I am pleased to say—seem to think that the origins of the problem lie in the so-called pension holidays. It is true that in the 1990s a number of companies either cut their contributions or ceased to make them, which was sometimes beneficial for employees, because some of the schemes had employee and employer contributions. However, Labour Members really must understand how pension funds operate in this country. Each fund has to have not only an independent trustee board, but a consulting actuary who has to produce a calculation to tell the trustee board and the employing
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company how much money has to go into the scheme to ensure that pensions can be paid in the future. All the companies that cut, or removed, their contributions had signed actuarial certificates stating that they need not put in more money; indeed, they were often told that they could not put in more money.

The rules are still the same. There are limits on how much anybody can put into a pension scheme, because it is a tax shelter. The rules are clear: a pension scheme cannot be overfunded beyond a certain amount, because it would be an unreasonable use of the tax relief, and that is right. The Conservative Government were right to impose a limit on the tax relief for funds and the Labour Government were right to continue with it. However, it is quite wrong to say that companies are to blame for a shortfall that emerged 10 years later; they had super-solvent funds at the time and the rules and regulations and tax requirements meant that they could not put more money into the schemes. Indeed, it would have been foolish of them to have done so.

Lynda Waltho: The Pensions Commission concluded that although employers should have been increasing contributions during the 1980s and 1990s, in fact they reduced them. Can the right hon. Gentleman explain that conclusion?

Mr. Redwood: It is wrong. The funds all took sensible advice when they were solvent, which was why they were allowed to stop making contributions. Had nothing else changed they would have carried on being able to meet their promises. At a certain point they would have resumed making contributions, depending on the balance between liabilities and assets in the valuations.

Stephen Hesford: But that is precisely the Chancellor’s defence. If conditions had remained the same as they were when he made his decision, we would not be having this debate. What happened was that the conditions changed much later on. It was the changed conditions that made pensions go down, not the Chancellor’s decision.

Mr. Redwood: Of course conditions changed; the main change was the tax increases that did all the damage. Subsequently, actuaries decided that they wanted to make more provision for longevity, which needed to be paid for.

There is a certain symmetry in the figures. My £100 billion guesstimate—a rough guess based on a simple calculation—has been turned into a much firmer figure by people who have made sophisticated calculations. They are trained actuaries—unlike me—and they say that £100 billion is not a bad estimate of the damage done by the tax changes. The longevity problem created a potential extra deficit, which is being taken care of by the increased contributions. The symmetry is interesting because the cumulative aggregate deficits are about £75 billion—they were about £100 billion but the stock market has performed better recently, which has helped—which is similar to the figure that many actuaries say would be the discounted cost of forgoing the £5 billion or more of income in the form of the tax credit that is being removed year after year.

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