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“this may increase the cost to business of funding employee pensions and may reduce funds for investment”.
In 2005, a study by the Institute for Fiscal Studies, to which the hon. Member for Twickenham (Dr. Cable) has referred, showed that that had no effect whatsoever on investment, which should have been apparent even at the time.
My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) and my right hon. Friend the Member for Charnwood (Mr. Dorrell) made the very good argument that it is a curious idea that the best way to allocate resources is to keep funds within existing companies. The argument that the management of existing companies should not distribute profits in the form of dividends is absurd, because innovation often occurs in new companies. Freeing up funds from companies does not necessarily mean that those funds go to consumption and are lost from investment, because it can often be positive. When the economy has done well in recent years, it has often involved new businesses with, it must be said, private equity.
At the time, the argument was made that high dividend payouts are not necessarily bad for a company in terms of long-term investment, because high dividends often increase a company’s share value, and an increased share value improves a company’s position to borrow. The argument does not stand together either in theory or as it has turned out in practice.
Hugh Bayley (City of York) (Lab): The hon. Gentleman is arguing that the Government followed the wrong policy in reducing tax credits. Does his party support the reintroduction of those tax credits, and if so, what taxes would it raise to pay for that?
Mr. Gauke: Had the hon. Gentleman been present in the House during the earlier part of the debate, he would know that we have gone through that. As he well knows, Conservative party policy will be very clear at the next general election. The fact remains that the 1997 decision was made on the basis that it would help investment, but the evidence that emerged in the following 10 years shows that it simply did not do so. The purpose was to raise revenue, which, as I have said, is the purpose of taxation, but that was not how it was presented. That is the charge that we have made against the Chancellor.
What the Chancellor did in 1997 is something that he has done many times since—he raised taxes, but he did not say, “Look, I’m raising revenue. These are the downsides, but I want the extra money to spend on public services.” In that case, he said, “It is all for the purpose of improving investment”, which was palpably false. In the pre-Budget report, he claimed that he is helping the environment by doubling the rate of air passenger duty, when the truth is that that was for the purpose of raising revenue. It has been the style of the Chancellor throughout not to be open and transparent about his policies, but to try to conceal tax-raising policies by claiming that they are some kind of technicality.
I shall quote an article by Evan Davies, the BBC economics correspondent, in an article on his website, which was not entirely critical by any means of the Chancellor—indeed, there were a number of complaints in the comments section about its being far too sympathetic. It states:
“anyone listening to his account of the tax change...might have been forgiven for thinking it was simply designed to remove some technical distortions prevailing in the tax system. They knew it was more than that.”
The charge against the Chancellor is that he was not clear and straight with the British people, which is important for two reasons. First, it does nothing for the credibility of politicians as a whole when we are not open and clear with the electorate. Secondly, as my hon. Friend the Member for Putney (Justine Greening) has said, had it been clear that greater demands were being made upon pension funds, and had people realised that would be expected of them in their personal contributions, then maybe people would have adjusted their behaviour, but they did not do so, which is partly the fault of the Chancellor for not making the situation clear.
The Chancellor does not tend to be terribly straightforward, and as a member of the Treasury Committee I have witnessed that on more than one occasion involving not only taxes but spending—sometimes there is double counting, and sometimes the figures from several years are rolled up to come up with one grand total.
In this year’s Budget—this is directly relevant to the debate about occupational pensions—we saw another technique with regard to the financial assistance scheme. The Chancellor made great play of the fact that he has increased the amount from £2 billion to £8 billion but, as Treasury officials confirmed to the Treasury Committee, if one looks at it on a net present value basis, as every actuary would, the figure is much lower—£1.9 billion. There was no extra money. There are no extra sums for it in the Department for Work and Pensions budget; it comes out of the existing budget over a 60-year period.
That is important because the financial assistance scheme is supposed, but is failing, to help many of our constituents who have been left without their occupational pensions. The extent to which that is directly linked to tax credits and other factors makes it a complex matter. None the less, the parliamentary ombudsman has found that there was maladministration because of the publicity material that was provided. It has left people in great difficulties, including many of my constituents who formerly worked for Dexion.
Mike Penning: I am pleased to see the Secretary of State for Work and Pensions on the Front Bench to hear this intervention. Is my hon. Friend aware that Peter Humphreys, who heads the Dexion compensation team, is in intensive care suffering from a very difficult illness? He phoned me from there today to ask me to bang heads together across the House to support tomorrow’s amendment, which has cross-party support, so that people can get the compensation that they so rightly deserve.
Mr. Gauke: I am grateful to my hon. Friend, who has had constituents who have not lived to see compensation from the financial assistance scheme because of delays in the system. The administration has cost £9 million, and only £3 million has been paid out. There are great difficulties with the FAS as opposed to the Pension Protection Fund. I hope that we can make substantial progress on the issue tomorrow.
The Chancellor has not been straightforward, open and transparent about his tax increases on pension funds, and the same applies in relation to the funding of
the financial assistance scheme and the way in which the information was released. It was extraordinary to hear him saying how pleased he was that it had been released after he had—for reasons that I can understand, to some extent—fought it for two years. As a member of the Treasury Committee, I was particularly frustrated by the fact that it was released on the Friday after Parliament had gone into recess, as that was the day after he had given evidence to the Committee. We could have had the opportunity to grill him on the matter in much greater detail even than on an event such as today’s debate.
It comes down to the same thing all the way through. The Chancellor fails to provide open and transparent answers but is evasive and, at times, sneaky. He claims, as a Chancellor, to be interested in the long term, but attacking pension funds is as short-termist as one can get. He claims, as a Chancellor, to be caring and compassionate, but he has done very little for the 125,000 workers exposed to losing their occupational pension funds. I hope that the House will do something for them tomorrow.
8.44 pm
Mr. Iain Wright (Hartlepool) (Lab): It is a pleasure for me to follow the hon. Member for South-West Hertfordshire (Mr. Gauke), whom I genuinely rate and like. We went through the Standing Committee on the Finance Bill together last year, and he regaled us with tales of Mrs. Gauke. I hope that she is well.
Last year, I participated in the pensions debate. I followed the hon. Member for Hemel Hempstead (Mike Penning), who is in the Chamber tonight and whose commitment to this issue is not in any doubt, as I think the whole House will agree. I was struck at the time by the Opposition’s amendment, which stated that the House should
“recognise the importance of consensus in ensuring long-term, affordable and sustainable pensions reform; and therefore welcomes the commitment of all major parties in the House to engage in the process of consensus building”.
The shallowness of that commitment is clear from today’s debate and the antics of Conservative Members, especially Front Benchers.
The idea that occupational pensions, especially those in defined benefit schemes, were perfect before 1997 and decimated by one single act in the Chancellor’s Budget—the implication of some Conservative Members’ contributions—is wrong, misleading and invidious.
We are experiencing a massive change in the provision of retirement benefits. Much of that is to do with globalisation and the links between Governments, companies and financial markets around the world, much is to do with demographic changes and much is to do with policies that previous Conservative Administrations pursued.
Companies in the post-1945 period provided an element of security for workers in retirement provision. Defined benefit pension schemes helped inject motivation and loyalty into the work force. That was entirely feasible in the relatively stable environment of the post-war period. The employer bore almost solely the risks associated with planning for retirement through a defined benefit scheme. If a defined benefit scheme fell short, the employer topped it up. Everyone accepts that that has been under severe strain for the past quarter of a century. During that period, some companies have tried
to transfer the risk of retirement provision from them and towards the employee or the Government.
Moreover, high stock market returns in the 1980s also prompted many companies, as we heard on numerous occasions today, to take pension contribution holidays. According to Inland Revenue figures, employers collectively saved almost £18 billion during the 1990s pension holidays, although employees were, more often than not, forced to carry on making payments.
The TUC said that contribution holidays have typically favoured employers over employees. It estimates that 94 per cent. of surpluses were used to reduce employers’ contributions or to give them a contribution holiday, with less than 6 per cent. providing employee contribution reductions—a ratio of 16:1.
In the 1990s, Unilever took seven years of pension holiday. It also took £270 million out of the then pension fund surplus and put it into its profit and loss account. In the decade after 1992, almost £1.5 billion was taken from its pension fund and almost two thirds given back to shareholders in the form of higher profits and larger dividends. I can envisage people saying, “Nothing wrong with that.” However, last month, the company announced that it would close its final salary scheme to new entrants. It has failed to provide for liabilities in the long term.
The general reluctance by firms to hold the balance of risk is predominantly due to demographic changes. That has been mentioned in the debate, though not as often as I expected. The developed world is getting older and that poses daunting challenges. Declining birth rates means that the work force is not being replenished in western Europe, Japan and north America. The ratio of workers to pensioners is getting smaller and that will have a momentous impact on productivity rates and tax levels. That is happening throughout the developed work and I therefore find it odd that the Opposition have not mentioned it in the debate.
The Opposition’s comments imply that only this country is affected by pressures on occupational pensions. That is far from being the case. A recent report by PricewaterhouseCoopers suggests that the state retirement age should be increased to around 70 in Germany and around 72 in Italy to allow state and occupational pensions to continue to be linked to earnings with unchanged contribution rates. PricewaterhouseCoopers also states that further delays will only make the required reforms more painful in the long term.
Mr. Graham Stuart: Does the hon. Gentleman agree with the right hon. Member for Birkenhead (Mr. Field) that we have gone from having one of the strongest occupational pension systems in Europe to having one of the weakest?
Mr. Wright: No, I do not. I am trying to make the case that, over the past quarter of a century, different challenges and massive global forces have changed the situation. I am not saying that everything was perfect in 1997, and that with this one change, everything has gone bad. I am trying to advance the case that there are more fundamental, long-term changes taking place. I would have hoped that the House would unite to scrutinise those organisations that fail to honour their promises to their employees, but that does not seem to be happening on a cross-party basis, at least not tonight.
The trend away from defined benefit occupational schemes has been exacerbated—and, indeed, encouraged—by the policy decisions of Tory Governments. We have heard how Lord Lawson, as Chancellor, decided to tax pension fund surpluses in the mid-1980s, providing a marked incentive for companies to reduce those surpluses through payment holidays or additional dividends. That demonstrated short-term gain at the expense of long-term consideration for the British economy and the health of pension funds. The Thatcher and Major Governments also encouraged a shift away from occupational pensions towards individual private pensions.
Mr. Hammond: If contribution holidays are such a problem, would the hon. Gentleman also argue that the reductions that this Government implemented in the minimum funding requirement should not have been made?
Mr. Wright: I am not going to go down that route. Certainly there was an assumption that the sun would always shine on pension funds and stock markets, but hindsight is a wonderful thing. The long-term challenges, including an ageing population and other changes in society, have been recognised and should have been taken into account by actuaries and companies.
The Secretary of State for Work and Pensions (Mr. John Hutton): In relation to the point that the hon. Member for Runnymede and Weybridge (Mr. Hammond) has just made, I am sure that my hon. Friend will be glad to know that all those changes were made properly and in accordance with the actuarial advice that Ministers received. That was made clear in the ombudsman’s report.
Mr. Wright: I am extremely grateful to my right hon. Friend for that helpful intervention.
I want to return to the shift from occupational pensions to private pensions. The emphasis on commission meant that hundreds of thousands of people were persuaded—by fair means or foul—to leave good, safe occupational schemes and to take out inferior personal plans instead. Well over a million people have received compensation following that mis-selling, largely as a result of measures taken by this Government.
The crux of the Opposition’s argument about the Chancellor and occupational pension schemes seems to hinge on one single act, yet we have heard many times in the debate today that Lord Lamont, as Chancellor, announced a reduction in the dividend tax credit in his 1993 Budget, and carried that out five times. In announcing the reduction to the House in March 1993, he justified it by saying:
“The reduction in the tax credit that I am proposing will therefore have two important effects. First, the payments that lower rate payers, non-tax payers and particularly pension funds get from the Inland Revenue will be reduced by five percentage points, saving the Exchequer no less than £1 billion a year. Secondly, higher rate payers will have to pay an extra 5 per cent of tax on the dividends they receive in order to discharge their liability to tax at the top rate of 40 per cent. This, in turn, will yield an extra £200 million a year.”—[ Official Report, 16 March 1993; Vol. 221, c. 186.]
There is nothing there to help the underlying competitiveness of British industry, and nothing to stimulate a shift from short-term gain and boom and bust to long-term investment. It is merely a tax grab of £1.2 billion in a vain attempt to manage the economy following the debacle of Black Wednesday.
What hypocrisy we have heard today! I hope that, if the Opposition are genuinely outraged at the events of 1997, their Front-Bench spokesman will apologise for the things that happened four years earlier and pledge to reinstate the dividend credit, if they feel that strongly about it. From what I have heard today, however, I do not think that that will happen.
Hugh Bayley: Is it not worth recalling that the adviser to Lord Lamont, the Chancellor who cut the dividend, was the right hon. Member for Witney (Mr. Cameron), who now leads the Conservative party? Is not it extraordinary that, when advising the then Government, he pursued one policy, yet when in opposition, he advocates another?
Mr. Wright: My hon. Friend makes a good point. This has been mentioned earlier in the debate as well. I was reading Lord Lamont’s memoirs in the Library this morning, and I was struck by the fact that, when the right hon. Member for Witney (Mr. Cameron) was employed as a special adviser, Lord Lamont described him as an old Etonian with a taste for the good life. I wonder what that means.
It is true that the Chancellor in his 1997 Budget abolished tax relief on dividends, but that was accompanied by a range of other policies designed to move us away from short-termism towards stability and encouraging long-term investment. Corporation tax was cut to its lowest ever rate at that time in the UK. The small companies tax rate was cut by 2 per cent., to 21 per cent. There was a doubling—we have not heard about this today—of capital allowances on plant and machinery for small and medium-sized firms so that if companies invested in 1997-98, they could set off against tax a half of their total investment.
In those decisions made in 1997, the Chancellor laid the foundation for sustained economic growth. That was the conclusion of the International Monetary Fund in the past few weeks in its article IV consultation with the UK, which stated:
“The Executive Directors welcomed the economy’s continued economic performance, which they attributed in part to policy frameworks that are responsive to the requirements for sustained strong growth, low inflation, a stable value for sterling and continuing growth of London as a global financial Centre with sound institutions.”
That is not indicative of an economy beset by weak infrastructure and short-term decisions, which is where we were 15 years ago. The blocks are in place for stability and long-term investment decisions.
However, it is true that more needs to be done. Many of my constituents, who come from a traditional manufacturing area with good occupational pensions, have pension funds in schemes such as Roxby and Expamet. They have saved all their working lives and feel let down by changes and cuts to their planned provision. To tackle the plight of my constituents and others, a consensus is needed between the House, the Government, companies and individuals to ensure that those pensioners who have saved all their working lives in occupational schemes secure the benefits for which they planned. However, the comments and interventions by Conservative Members show that we are a long way from that consensus.
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