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The Earl of Clanwilliam: I thank the noble Baroness, Lady Turner, and my noble friend Lord Dean of Harptree for speaking on my behalf. I am glad that I was found to be both innovative and unspeakable.

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I wish to refer to one point. A number of people will pay 40 per cent. tax. That is a disadvantage to my own case. Those who pay the higher tax of 40 per cent. will not receive as much benefit. Therefore they might not be missing so much income in their retirement which they do not need anyway. With those remarks, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.30 p.m.

The Earl of Clanwilliam moved Amendment No. 184A:

After Clause 114, insert the following new clause:

("Mandatory personal pension contributions

. No person shall be eligible for a retirement pension under the provisions of the Social Security Contributions and Benefits Act 1992 unless, from the date of their 25th birthday, they have made a contribution, amounting in each year to at least 10 per cent of their gross annual income, to an Appropriate Personal Pension Scheme to which contribution would be made on contracting out of SERPS.").

The noble Earl said: If I were innovative on the last amendment I shall be even more so now. We are now in the realm of personal pensions. Having examined in great depth the navel of the occupational pension schemes, we turn to the subject of personal pensions. There is the need for personal savings, not only for the benefit of the saver but also to create a savings philosophy and culture throughout the nation and to involve the estimated 50 per cent. of the working population who are not covered by some independent pension arrangement. Indeed, I believe I am right in saying that it was Beveridge's vision that we should make personal savings provisions and that in organising security, the state should leave room for voluntary action to provide more than the minimum. We need to provide more than the minimum because the £4,000 or £5,000 retirement pension, of which we have just been speaking, is not very much.

It is remarkable that Japan, which finances most of the world's debt, has successfully encouraged the accumulation of private capital. As a result, almost alone in the world, its pensioners as yet are self supporting. As I said on the last amendment, it is clearly acknowledged on all sides of the political spectrum that our own prospects of being able to support our old age pensioners in the 21st century are slim—certainly in the manner they might have expected. That was clearly debated in Second Reading speeches. Yet in this country some £500 billion is invested in pension funds largely provided from employers' profits. There is the need therefore to make radical improvements to existing pension provisions and to reduce the drain on corporate profits by providing increased investment for industry. I suggest that we do so by personal savings rather than at the expense of the company's profit and loss account.

There is the need for everyone to start a constant savings stream throughout their life. Would indeed that I had done so myself. The amendment proposes that a mandatory savings scheme shall be started by every national insurance contributor before the age of 25 by contributing 10 per cent. of his or her salary or wages to an appropriate personal pension plan with a minimum

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contribution ideally of £1,000 a year. According to Part A of the New Earnings Survey 1994, Summary A14.2 indicates that of the 20.8 million people employed in this country, 12.8 per cent. earn less than £10,000. One thousand pounds a year is 10 per cent. of £10,000. Therefore, it should not be difficult to achieve that figure.

For those who contract out of SERPS, the appropriate personal pension plan already receives 4.8 per cent. of rebate. Assuming that contributions attract tax relief at 25 per cent., an additional 2.7 per cent. is all that is required to make up a total gross contribution of 10 per cent. Surely that is not too great an additional sum to ask of savers, or with regard to the very low paid, of their employers—although it is not my intention to involve the employer except in extreme circumstances. It can be shown that just 10 per cent. of earnings adjusted in line with inflation and earnings will provide the traditional two-thirds of final salary after 38 years, using a growth factor of 8 per cent. Some figures extracted from Money Management of November 1994 detailing performance figures for unitised personal pension funds show that such performance figures are not exceptional, and indeed are accepted by LAUTRO. However, I must confess that the 8 per cent. figure to which I referred does not account for commissions and charges. I shall come to costs in a moment.

In this context, it may be relevant to quote the BZW Equity-Gilt Study of the Real Return on Equities since 1918. I emphasise that it is 1918 and not 1980. From 1918 to 1993, the annual return on UK equities with taxed income reinvested was 7.9 per cent. over 75 years. Therefore 8 per cent. may not be considered over optimistic, especially in view of the fact that it is a LAUTRO-approved figure, a figure that includes cost of commission and management of funds.

There is the need to make savings and pension plans more efficient and by the same token less expensive. Plans which are mandatory need no selling. Hence there can be lower commission rates and charges. Fund management can be awarded by the recently conceived fund based commission. The basic management charge could be increased with fund performance. Fund managers of occupational schemes would equally manage the separate savings or appropriate pension plan. That will provide a bridge between the two systems which I envisage would meld over time. It is not too much to expect that as company funded occupational schemes become too expensive for a variety of reasons (which are obvious and which have been widely discussed previously) companies will start money purchase group personal pension plans instead which can incorporate, if only for investment management purposes, an appropriate personal pension plan such as I propose.

Crucially there will be a fund performance table run by SIB or PIA which could perhaps license specific funds and management teams in order to ensure that we achieve the 8 per cent. performance. There is, too, a need to simplify the transfer calculation on changing jobs and to provide for instant recognition by the saver of the value of the fund accumulated and to create an identity between the saver and his or her fund. Such

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plans already exist in the form of the additional voluntary contributions and personal plans. Many of the additional voluntary contributions are applied to occupational schemes.

The mandatory appropriate personal pension plan which I propose is only an extension of the contracted out portion of SERPS which presently runs in parallel with existing occupational schemes and the AVCs which I mentioned. The APP would receive all transfer contributions. It already satisfies the requirement for portability between occupations. There should be reformed transfer charges but that would be the responsibility of the occupational pension fund managers and trustees who at present have a frightfully complicated system. The existing capping and funding limits of pension plans would continue to apply. The noble Baroness, Lady Seear, referred to a variable retirement age. That would be between 60 and 75—not just covering a decade. There would be no tax free cash sum. A compulsory pension would be taken from the accumulated fund.

One already has PEPs, additional voluntary contributions and many other additional ways of adding money to one's pension plan, if wished. Those could be applied through the normal routine of the present rate of charges and expenses and would top up the 10 per cent. that I propose. Capital sums would be available to pay off mortgages or other personal charges on retirement. Equally, the additional voluntary contribution scheme would be a vehicle for that extension of the principle.

The problem of the self-employed needs equal consideration, but only in respect of the enforcement of the contribution. That can be rated in the income tax return or the fund manager's certificate at present available. I have in my hand the BZW return on gilts, which carries through from 1918 to 1993 a figure of 7.9 per cent. The document has come from your Lordships' Library.

The suggestion may be considered innovative or even unspeakable, but I think that it is important. It is a contribution towards making personal pensions the new form of personal savings to look after our retirement and our old age. I beg to move.

Baroness Seear: This is an interesting proposal, but I do not believe it is compatible with what we are doing in the Bill. Some time ago the Liberal Democrats came to the conclusion that it would have been wiser to abandon SERPS and have a compulsory contribution along the lines that the noble Earl suggested. The more one considers pensions, the more one is aware that it is an enormous undertaking to attempt to provide adequate pension provision on the scale that people rightly wish to have. Sooner or later some changes much more fundamental than those proposed in the present Bill will be necessary. I suspect that something along the lines that the noble Earl spoke of will have to be considered. However, I do not think that it is possible to consider them in the light of this Bill, which has its own slant and approach to the problem. That is probably the best progress we can make at present.

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