One of the things that Government could do to help the debate is to provide proper information so that we can calculate the figures more accurately. I have often asked them to give me the run of numbers for the imputation tax credits forgone over the past 10 years. I
believe that the £5 billion included charity funds, so perhaps in the early days the figure was not £5 billion for pension funds overall, but I suspect that it is rather more now because the distribution rate has gone up, as have profits and dividends, so one would expect the credit to be worth more. I assume that is why the Government will not give me the figures, because if the amount were lower they would want people to know. However, it would be good if they published the run of figures so that we can run proper actuarial figures again, based on the actual figures that the Government can work out from the state of the funds and the dividend incomes flowing into them.
Funds today have less equity dividend flowing into them proportionately than 10 years ago when this dreadful business started, because many funds have been forced by regulatory, actuarial and other pressures to switch quite a lot of money from equities into bonds, so the figures would need adjusting for that factor, too. When the crisis hit, UK pension funds, quite reasonably, had two thirds or more of their assets in equities. They were growing assets, which, taking the normal run of years, outperformed bonds, but because of the crisis pension funds have now been talked into a much higher bond ratio, at a time when bonds are expensive and yields are low, partly due to the bubble effect of the regulatory pension fund crisis.
We could now be seeing the beginnings of another crisis in pension funds, because they can no longer make as much on investment gain to get out of trouble as they could 10 years ago before so many of them were switched into bonds. Why are they being switched into bonds? That is happening because the actuarial profession is becoming very cautious and primarily, of course, because so many of the funds are now closed funds. There is a case for saying that we need to be more cautious with a closed fund than with a growing or open fund.
It is a tragedy that many of our young people will now have no access to final salary schemesand it was an avoidable tragedy. It means that the remaining population of pension funds are being run in a much more defensive and negative way. That means, paradoxically, that they have a bigger problem with meeting future liabilities, because asset growth is less and the calculation of assets versus liabilities is even more unfavourable.
In todays debate, we have heard estimates of the deficit ranging from £75 billion to £550 billion. That shows that we are dealing with an imprecise science and also tells us that there are different bases for working out the figures. The £550 billion figure was based on the assumption that all the funds are now going to be wound up and annuities purchased through insurance companies based on long bonds. That shows what a difference there is between trusting a bond investment and the £75 billion to £100 billion deficit figure that is based on the assumption that healthy funds can continue and will continue to grow along with growing investments.
Of course, investment gain is very important in these funds, but it is quite ridiculous of Government Members to try and argue that having £5 billion or so less a year to invest does no harm whatever to investment funds. They need more money and the main reason for that is that the Government took the money away.
I am glad that my hon. Friend the Member for Caerphilly (Mr. David) mentioned some of the positive effects that the Government have had on the lives of pensioners since coming to power in 1997, but he missed out a few that deserve a mentionnot least the fact that the basic state pension is now guaranteed to rise in line with prices or 2.5 per cent., whichever is the higher, as we move to increase that pension in line with earnings. Pension credit ensures that no pensioner need live on less than £119 a week from 2007-08 and we have also introduced stakeholder pensions and the Pension Protection Fund, not to mention the financial assistance scheme.
I apologise for referring to my notes, but there are some figures that I really want to get right. As the Chancellor noted in his opening speech, many of the measures that we have implemented were opposed by Conservative Members, who called todays debate. In 1997 when we came to power, it was necessary to address historic under-investment and short-termism. The main rate of corporation tax was too high, pension funds had the incentive of encouraging companies to pay out large dividends, which inevitably had an impact on investment decisions. Dividend tax credits alongside corporation tax disadvantaged British-based international companies and an increasing amount of dividend tax creditabout £1.8 billionwas being paid to shareholders other than pension funds.
Our package of reforms included a reduction in the main corporation tax from 33 per cent. to 31 per cent., as well as the removal of the dividend tax credit, a reduction in the small companies rate of corporation tax and increased incentives for investment, including increased capital allowances. Those changes encouraged long-termism in the British economy. Abolishing payable tax credits allowed companies to base their investment decisions more on long-term commercial requirements and less on the need to pay high dividends.
Our reforms encouraged higher levels of investment, helping to account for a rise in business investment. In fact, the figures show that foreign direct investment has risen threefold since 1997 and is now at its highest level since records began. In the quarter after the summer 1997 Budget, business investment grew by 1.75 per cent., then by 6.1 per cent., and then by 7.1 per cent. So between the 1997 and the 1998 Budget, business investment rose by 16 per cent. Since 1997, total business investment has risen by 60 per cent., compared with 34 per cent. in the previous decade. Whole economy investment has risen in every year since 1997a decade of rising investment. In the previous 18 years, investment growth was negative for a quarter of that period.
The purpose of the changes was, of course, to make companies more profitable and to enable them, by being more profitable, to resume higher contributions to pension funds and to pay higher dividends. Companies were more profitable after tax, as rates of return rose from 13.5 per cent. in 1996 to 15.1 per cent. last yearhigher than ever before. Companies could afford to pay more in pension contributions, which were up 16 per cent. by 1999 and almost three times as much by 2006.
Funds enjoyed high dividends despite the dividend tax credit change between 1996 and 1999, and even the dividend income of pension funds was higher in 1999 than it was in 1996. Companies did put more money into the pension fund. By 1992, total contributions, less refund, totalled £13.7 billionan increase of £2 billion compared with 1996. Before Opposition Members jump to their feet to say, Give the woman a job or whatever, I want to make it clear that I am very happy being a Back-Bench Member representing Stourbridge and a PPS in the Northern Ireland Officeand I do not want another job.
Justine Greening: The hon. Lady mentioned that, on coming to office, the Chancellor reduced the small companies rate, but in the last Budget he increased it. Is she as concerned as I am that that, combined with the personal accounting legislation that will make companies match contributions, will produce a total burden that could be difficult for small companies to manage?
Lynda Waltho: I do not share the hon. Ladys concerns because I believe that her analysis is incorrect. We cannot have it both ways. Either we analyse what happened in 1997 or compare it with how successful our economy is now.
Pension fund assets rose by £270 billion between 1996 and 1999. Dividends, employer contributions, employees contributions and total income all rose in 1997 and all were higher in 1999 than in 1996. It was disingenuous of the shadow Chancellor not to acknowledge that, or the fact that pensions were hit by a series of problems after 2000not least the stock market fall that year, which accounted for a reduction of £250 billion in the market value of occupational pension scheme assets between 1999 and 2002.
Increasing life expectancy, referred to by my hon. Friend the Member for Amber Valley (Judy Mallaber), should also be mentioned. Rising life expectancy obviously means that pensions are in payment for more years, thus increasing a funds liabilities. Many firms made the decision during the 1980s and 90s, despite rising liabilities, to take contribution holidaysthey were encouraged to do soin the belief that a bullish equity market was a long-term trend. Many funds continued with those holidays after 1997. Indeed, as I mentioned earlier, the Pensions Commission concluded that employers should have increased contributions in the 1980s and 90s, but in fact reduced them.
I think that the most interesting thing we have heard this afternoon is that, despite having called this debate, the Opposition are not committed to reversing the changes. Time and again, when given the opportunity, they have declined to say they are going to reverse them. Given their record on pensions, even if they said they would, I am not sure whether anyone would believe them. After all, the Opposition have very little credibility on pensions. They presided over the pensions mis-selling scandal, which caused misery to millions, destroyed confidence and seriously damaged the pensions industry in the process.
The Opposition also presided over a growing gap between poor and better-off pensioners. From 1979 to 1997, the incomes of the best-off pensioners rose by 80 per cent., whereas the incomes of the poorest fifth grew by only 30 per cent. They left 2 million pensioners living in poverty and expected a pensioner in 1997 to
live on just £68 a week. Many pensioners could not afford to keep warm in winter, and we all remember the phrase heat or eat.
Just as the Oppositions record means that they have no credibility, their values mean that they cannot really come up with a coherent plan for their future, or our future for that matter. As a matter of ideology, based on their values, they cannot be trusted to do what is needed to deliver social justice and opportunity. They say they want to tackle poverty and do more for pensioners, but they condemn the increases in public spending needed to do that and call them financially irresponsible. Their so-called proceeds of growth rule commits them to cutting public spending every single year. Their leader himself said:
As that money comes in lets share that between additional public spending and reductions in taxes. That is a dramatic difference. It would be dramatically different after five years of a Conservative Government.
If that rule were in place now, spending would be £21 billion lower than the Government plan, and lower still in the future. It is impossible to make those savings without hitting pensioners hard. For all the Oppositions supposed outrage on behalf our pensioners, there is no suggestion that they are going to restore the dividend tax creditlet alone match our spending on pensionsyet they have been allowed to get away with their own policy vacuum.
The closure of occupational schemes was not caused by the decision to cut dividend tax credit. However, we all have constituents who have been affected. That is why I would like to welcome the measures announced by the Chancellor in last months Budget and referred to earlier. The Chancellor announced that the Government will greatly increase the money available to the financial assistance scheme, to £8 billion in cash terms. The increase will ensure that pensions of all eligible members of affected pension schemes are topped up to a level broadly equivalent to 80 per cent. of their core pension rights accrued in their scheme. The cap on maximum assistance was increased from £12,000 to £26,000. As a result, the number of people helped will be trebled. The Government are also committed to keeping the financial assistance scheme under regular review. I am pleased that more help is going to be provided for people who have lost their occupational pension scheme as part of their companys insolvency.
That action shows that the Government have listened to the arguments of campaigners and to Members on both sides of the House, and have complied with the order in the recent High Court judgment, and that is another reason why pensionerswhen looking at the policies put forward by the Government and the Oppositionwill see through the crocodile tears and, despite the Oppositions posturing on this issue, will see that they have no plans to reinstate the dividend tax credit, nor to support our measures that have made a positive contribution to pensioners lives over the last 10 years.
Justine Greening (Putney) (Con):
I am pleased to be able to make a contribution to the debate today. I am also aware that many Members still want to make their contributions, so I shall try to keep my comments quite brief. I want to touch on the longer-term impact of the changes that the Chancellor has made in relation to
occupational pensions and, in particular, I want to talk about young people taking out occupational and also private pensions.
There is no doubt that the Turner report raised a number of issues about the pensions crisis. It talked about the fact that the sorts of advantages that pensioners currently have will not be enjoyed by people who are pensioners in 30 years time, and about the fact that the dependency ratio, which we have not really discussed today, is dramatically increasing. It is not just a question of longevity increasing. The reality is that the number of people who will be expected to fund the state pensions is declining in relation to the number of pensioners that there will be. We have some serious problems. Turner pointed out that even if we have what could be called a modest rise in public expenditure on pensions in proportion to GDPgoing from the current 6.1 per cent. to 6.9 per cent. in 2054that would imply a 27 per cent. fall in average pensions relative to average earnings. For us to match the current level of pensions in relation to earnings, we would need to raise the proportion of public spending on pensions to 13 per cent. of GDP.
Turners conclusion was that that simply is not affordable, and therefore future pension provision has to involve people looking to their own private provision. That is why the changes that the Chancellor made in his first Budget were so damagingthey fundamentally undermined peoples confidence in being able to do that. I want to talk, in particular, about the impact that it will have on younger voters. Twenty-somethings living in Britain today will face a double whammy. Not only will the money that they pay into pensions be worth less because they will disproportionately suffer from the tax takeit will affect the entiretyof their pension contributions, should they choose to make thembut they will be a generation that has disproportionately to fund an elderly generation claiming state pensions, in a way that no generation has had to do in the past.
There are some serious barriers when it comes to young people and their ability to afford the consequences of the pensions crisis that has been stored up. Unfortunately, the issue goes further than that. For example, earnings have risen in recent years, but the earnings of young people between the ages of 18 and 29 have risen at only a third of the rate of people in the age group above them30 to 39. In fact, 56 per cent. of those who graduated in 2002 are still dependent on their parents for some form of financial support. That is an amazing statistic.
When it comes to those who will graduate in the coming years, we also know that the financial rate of return on degreesa degree has often been seen as a way of being financially independent and being able to provide for oneself in the short, medium and longer termhas fallen. A study in 2005 by the university of Swansea said that, for some graduates, investing in a degree may have a negative rate of return. That is an important point. For a long time, the Government had a policy of getting 50 per cent. of all young people into university. Some people may have taken a decision on the basis that they thought that it would be financially appropriate, given the rate of return, but it has not been. Not only that, the other aspect is that we know that the average graduate a couple of years ago left with debts of about £14,000, but the average person entering
university now will leave with debts of £20,000. It is okay for the Government to come up with schemes such as personal accounts, which are there for young people to use to save, but my point is that aside from young peoples lack of confidence in the pension system, they also simply will not have any disposable income to be able to invest in their long-term financial independence. These chickens are in danger of coming home to roost.
Only last month, the Chancellor raised tax on low earners with no children. Again, those affected will disproportionately be young people. At the very time when we are hoping that this generation will be able not just to provide for themselves in a way that no young generation has had to in the past, but pay for more pensioners than any generation will have had to do in the past, they are having money taken off them by the Chancellor. That is happening not just when they invest in their pension potthey will have to put up with this tax grab for longer than any other generationbut because they are having their income taxed more than it has been in the past.
It is naive of the Government to think that putting in place new tools will necessarily mean that young people are in a position to use them. There is also the issue of whether many young people today believe that they are contributing to an adequate state pension through their national insurance and tax contributions. The National Consumer Council said:
Younger consumers are not convinced that they are building up rights to an adequate state pension when they pay tax and National Insurance contributions.
People fundamentally do not have confidence in the system that they currently pay into. The key statistics show that, whatever the warm words we have heard from those on the Government Benches tonight, what matters is what people in the real world think and their response to the policies that the Labour Government have brought in.
There are clear-cut statistics that show what is going on with younger people and their pension provision. Let us look at the Living in Britain general household survey, which was carried out by the Office for National Statistics. It shows that in 1995, 40 per cent. of all men aged between 18 and 24 in full-time employment had pensions. By 2003, the figure had fallen to just 27 per cent. We might have thought that given that more women were in the work force over that period, more would have been taking out pensions, but we would be wrong. In 1995, 46 per cent. of women aged between 18 and 24 in full-time employment were saving in an occupational or personal pension, but by 2003 the figure had fallen to 30 per cent.
The situation was similar for the next age group up. In 1995, 91 per cent. of men aged between 25 and 34 in full-time employment had either an occupational or personal pension. However, the figure in 2003 was 63 per cent., so the number of people in this country providing for themselves independently of the state has gone backwards. The situation was similar for women. Back in 1995, 83 per cent. of women aged between 25 and 34 in full-time employment had an occupational or personal pension, but the figure had fallen to 66 per cent. by 2003. There are similar statistics for people aged between 35 and 44.