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Lord Taylor of Gryfe: My Lords, I am sorry to interrupt. Did the noble Baroness say that the Government are considering plans for expansion in England?

Baroness Hayman: My Lords, indeed I did.

Lord Taylor of Gryfe: My Lords, 90 per cent. of forestry expansion is in Scotland.

Baroness Hayman: My Lords, my noble friend asked me specifically about England. With his concern that with devolution the base and focus of attention might go to Scotland, I sought to reassure him that we were looking at the situation in England as well.

The countryside is a precious part of our national economic, cultural and spiritual life, a point made from the Bishops' Bench and elsewhere today. We have a collective responsibility for the protection and enhancement of the countryside and to ensure that development is sustainable. We will look at the demands placed on the countryside and the needs of rural communities through an integrated approach to rural policy. This bestows on all of us obligations as well as rights. We will take account of the points made during this debate and will be happy to go on listening to, and taking seriously, views from the wide range of rural organisations and from the people in the countryside themselves.

6.6 p.m.

The Earl of Lytton: My Lords, it falls to me to wind up. Your Lordships will be glad to know that I shall do so in fairly short order.

First, I thank all noble Lords who have spoken. When I arrived in the House today I was, frankly, amazed at the number of speakers on the list--and not a little concerned that there would be insufficient time for them to say what they needed given their expertise. I give special thanks also to what I have written down as two "outstanding maidens". I am sure that the House will take it in good part when I say that they were two very special maiden speeches. As I said earlier, I am pleased that they chose to speak on this occasion. The speeches were thought provoking, providing much food for thought for the future.

I am grateful for the positive comments made by the noble Earl, Lord Lindsay, and the Minister. I felt reassured by what the noble Baroness said.

There have been many candid expressions around the House from those with thoroughly non-partisan expertise. I cannot mention individuals' contributions because there is not time. I do not label the Government "urban"; nor do I criticise them for the present situation. We should not ask why things have happened. But we are in the present situation and we have to look forward.

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I wish to be forward looking. What is needed is a series of philosophical tools which will inform consideration of ever more complex sub-divisions, as one considers special interests and site specific considerations. I believe that we have lost some of that linkage. It needs to be rebuilt.

It is a huge subject area for debate. I hope that this is just a way station in a process leading to a larger discourse in the country generally. The countryside is a finite resource. It is a valuable resource. It needs to be nurtured and it needs inward investment. It is also an organism, not a static object. It requires process management. My time is up; I must sit down. My Lords, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.


6.8 p.m.

The Earl of Buckinghamshire rose to call attention to the case for greater pension provision; and to move for Papers.

The noble Earl said: My Lords, I think that it was P.G. Wodehouse who remarked that, "Earls are hot stuff". Fortunately for P.G. Wodehouse pensions did not become a burning issue in his time. Otherwise I imagine that he would have been stretched to make a comedy out of the situation that we face today.

The 1997 report of the Office of Fair Trading stated in its introduction:

    "Sadly, as we all know, in the past legitimate expectations have been betrayed".
The Director General went on to say:

    "I find that currently available products often fail to meet consumer needs".
Those comments set the scene for our debate. It would be appropriate at this stage for the House to note that I am a partner in Watson Wyatt Partners, a leading firm of consulting actuaries and human resource consultants. The views that I express today are mine and do not necessarily reflect the views of Watson Wyatt.

There are a whole series of issues which need to be faced. They include, first, the relationship between the state, the sponsoring companies and individual provision and, secondly, whether we pre-fund or switch to a pay-as-you-go system. We need to consider the inequality in pension provision, a topic raised yesterday in this House at Question time. We need to think about better provision for those who stay at home and the low earners among us; and we need to think very carefully about the impact of divorce.

The final issue is taxation, where we are moving away from a system of "exempt, exempt"--in other words, tax relief on contributions going in, tax relief on the investments from both income and capital, which was changed significantly in the last Budget, and then taxing on the benefits.

What makes the whole debate so fascinating is that it covers many diverse and conflicting pressures that will be very difficult to reconcile as we go forward. The

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Government have stated that they want to build a framework for pensions based on consensus. That has led Harriet Harman to issue at least nine challenges to the respondents to her inquiry. John Denham has separately required responses which consider the nature of the problem, the balance between state and private provision and the form that future provision might take. This debate is primarily about the nature of the problem and the need to try to encourage pension provision in the United Kingdom.

What are the problems? There are a considerable number, and they are well documented in the report of the Office of Fair Trading, the Consumers Association report and Sir John Anson's 1996 Retirement Income inquiry. The last made some very interesting observations on demographic trends. I draw to the attention of the House the 1996 IMF report, Ageing Populations and Public Pension Schemes, and further valuable work was done by Labour Market Trends. While the UK is not so badly off as other European Union countries, our ratios of those in work and those retired projected into the next century do not look comfortable. That is especially true when taken in conjunction with the current value projections for the state pension in the next century.

Of equal concern is the number and percentage of those below 65 who have retired early. The Labour Market Trends report indicates that for males aged 60 to 64 the percentage in employment has fallen since 1970 from 78 per cent. to just under 50 per cent.; and in the age group 55 to 59, the percentage has fallen from 93 per cent. to 75 per cent. I believe it was the Anson report that suggested that the major concern for our citizens is not dying early (which is an interesting subject for most of us) but living longer. It impacts not only on pensions but on the National Health Service and on health care provision.

There is not time to study the statistics in greater detail--and it has to be said that within themselves the statistics hide other issues: for instance, between 1982 and 1986 some 2 million younger people joined the workforce, possibly causing the retirement of older and more expensive employees. There are at least four points to note about the statistics on early retirement. It is important to try to achieve a balance in our discussions on pensions since there is much adverse comment on pension provision in the newspapers. First, defined benefit plans have helped significantly in the process of retiring people early on reasonable incomes. Secondly, there is presently a trend in this country towards the introduction of defined contribution plans. That is particularly true of small and medium-sized companies. Even some of our major companies in the financial services industry have moved to defined contribution plans. Unless significant investment goes into such plans, they will not provide the same level of early retirement benefits for those leaving work in their fifties and early sixties. One outcome is that while early retirement benefits have been there, there must have been a considerable strain on unemployment and other benefits paid by the state. Lastly, as an individual who has reached the enviable stage of being over 50 (I hope

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that my colleagues in Watson Wyatt are listening) I can say that there is a considerable loss of experienced people at crucial ages.

Turning to other problems, the reports indicate that fewer than 50 per cent. of those employed are in occupational pension schemes. The statistics that I have show that in 1996 some £8.5 billion was invested in personal pensions. These seem very high figures. However, many people have made no significant investment in private pensions and will be totally reliant on the state unless something happens to change that.

In the 1970s, when I was involved in putting in many new pension schemes, I quite often heard the objection from members to the company pension scheme: "Why should I pay 5 per cent. of my income into the scheme? It will be a waste of money. The state will provide". I have not heard that comment for some 15 years. The comment that I now receive when I put in a new scheme is: "Will it be worth it for me to invest in a pension, because it may impact adversely on my husband's invalidity or other benefit?" In other words, there is an issue related to the introduction of means-testing and the level perhaps being set too low.

Other issues which have been a problem in the area of pensions are listed in an Office of Fair Trading report. There is mention of poor value for money in personal pensions. The pensions scandal has certainly done nothing to enhance the attractions of private provision. It will take some time for that particular spectre to go away. Looking back to 1978, there has been a considerable lack of stability over the past few years--I dare say that will give noble Lords on the Opposite Benches a means to get back at noble Lords on this side. Given the latest Budget changes in relation to tax on dividends, if we ever thought about changing the taxation system away from giving tax relief on contributions going in so that there was no tax relief at all on contributions but the benefit was paid tax free at the end, there is a question as to when any of us would ever trust that to be the actual position in 30 or 40 years' time.

There are a number of other problems in pension areas. Inequality of provision was touched on yesterday at Question Time in this House. There are low earners, part-timers and those who stay at home. These people all suffer from a lack of pension provision.

My final point relates to the complexity of the whole pensions arena. In my business we make money out of complexity. But matters are reaching such a stage that it will serve no good if the complexity, the regulations and other matters, are not simplified as we move forward. Other noble Lords will perceive other problems associated with pension provision in the United Kingdom which discourage people from taking up pension provision until it is too late.

What about the solution and the framework? I suspect that it will be easier to diagnose the cause of the problems than it will be to offer solutions.

It seems clear that neither sponsoring companies nor the state will be a bottomless pit for future funding. It will be necessary to re-emphasise that pension provision is a partnership between the state, the employer and the

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individual. Where there is no employer, the partnership has to be between the individual and the state. That partnership will need to be far more robust and a good deal simpler to understand than it is at present. The individual will need to pay more, and probably by compulsion, unfortunately, as voluntary provision seems not to have worked.

What about reallocating resources? I am not sure that it is true, but we saw in the press last week that the possibility was being raised of taking away tax relief at the higher rate. On the face of it, this would seem an easy thing to do, but what do you do about the non-contributory schemes unless you tax employers' contributions to approved schemes as a benefit in kind, and what will you do about the self-employed?

I should like to see some consistency in the approach to tax and benefits. I suspect that the Minister will be able to confirm that a review is being undertaken by the Chancellor of tax and benefits, although I understand that that will not form part of the current pensions review.

I have no statistical reason for saying this, but I have a suspicion that there is a need for greater co-ordination between the Treasury and the Department of Social Security. I think that would be helpful, although I suspect that the Treasury might miss those wonderful little surprises that they give us in each Budget.

I have already said that the framework needs to be simplified. I think that we shall probably need one all-encompassing pensions Act in order to do that. One of the points that I have found particularly difficult to deal with in my professional life is the fact that personal pensions and occupational pensions do not go hand in hand: you cannot be a member of an occupational pension scheme if you are in a personal pension arrangement. I believe that that has added to the difficulties we have had in the area of providing pensions in the United Kingdom.

I could continue to speak about the solutions to the problems we have, but I believe that that is for another debate. This debate is about the need to make greater pension provision in the United Kingdom. I hope that what I have said will form at least the basis for an interesting discussion this afternoon. In the interests of time I have decided not to raise in any depth the question of tax relief on dividends nor to discuss another situation dear to my heart, the minimum funding requirement, where I believe there are significant issues. However, noble Lords who follow me may well raise questions on those matters. My Lords, I beg to move for Papers.

6.24 p.m.

Viscount Mackintosh of Halifax: My Lords, I should like to thank the noble Earl for initiating this debate and bringing to the attention of the House a most important topic.

I should bring to your Lordships' attention the fact that I am a partner in a large professional services firm, Price Waterhouse, and in that capacity I advise individuals in relation to their tax and financial affairs.

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The provision of pensions is a most important part of such financial advice. I therefore felt that I should make a short contribution to the debate today but the views I express are mine and mine alone.

We are moving away from relative certainty in the field of pensions to a position of significant uncertainty. There was a time when people thought that they could rely on the state pension to keep in line with earnings. In addition, those employees who were lucky enough to be members of a company pension scheme usually relied on receiving a pension in line with their earnings on retirement. The amount which they paid into the scheme was not directly related to the pension they received; they had a defined benefit on retirement which they usually knew in advance.

These things are now not as certain as they were. The state pension is no longer linked to earnings but to prices and so it is gradually falling behind earnings. I do not necessarily think that that is wrong providing other income supplement is available for the most disadvantaged members of society. The state pension is not funded at all but is paid out of the taxes contributed by the current working population. With people living longer and an increasing population of pensionable age, the costs of providing a state pension linked to earnings would be a huge burden on any government. However, the Government should be honest about the state pension. If the state pension is not going to keep pace with earnings, those people who want an income in retirement that does keep pace with earnings need to make alternative arrangements. They should know when they start their working life that they need to make some provision for their retirement, not discover this at the end of their working life.

For those in a company pension scheme we are starting to move away from the old certainties of receiving a pension related to earnings. As the noble Lord pointed out, the defined-benefit schemes are becoming too expensive for companies to run. Life expectancy is increasing; people are retiring earlier; and, most significantly, in the last Budget the Government introduced measures which restrict the income which pension schemes receive on their investments by not allowing them to reclaim tax credits.

As a result, we shall see an acceleration in the number of pension schemes which change from providing a pension related to earnings to providing a pension related to the amount paid in to the scheme. This move to the so-called money-purchase schemes has already started but will gather pace and is the way in which those who are self-employed have had to provide for their pensions for some time.

In practice, this means that more and more the pension available on retirement is directly related to the amount of provision made during working life. On this basis there is significant under-funding of pensions and a need for a very large increase in pension provision. Many people will be disappointed, and some extremely worried, as they approach retirement when they realise at that point the extent to which they have insufficient funds to provide the pension which they hoped for.

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The size of pension which can be received from provisions put aside will vary depending on many factors, including current and expected interest rates, the age of retirement, whether a part of the pension will continue to be paid to the spouse after death and whether it will increase with inflation.

As an example, for a male employee retiring at 60 with a wife who is just younger than him, for every pound of pension received with no indexation he will need to have a provision of £10 at the time of retirement. Thus to provide a pension of £5,000 he will need a provision of £50,000 on retirement. That £5,000 will not be index-linked and thus in real terms will be decreased by inflation over time.

For an index-linked pension with, say, a two-thirds pensions going to the surviving spouse, for every £1 of pension received in retirement £18 of capital will be needed. Thus to receive an index-linked pension of £5,555 a year the huge sum of £100,000 provision on retirement will be needed.

The amount of provision required to fund pensions is very high indeed. As a workforce we are not making these provisions. An employee at the young age of 25 who wishes to retire at 60 on about two-thirds of final salary will need to put aside between 15 and 20 per cent. of income until the date of retirement to achieve this objective. If action is delayed until the age of 40 the percentage of income that will need to be saved for retirement to achieve a pension of two-thirds of final salary will be so high that most employees could not make such a provision.

There is a need for much greater pension provision but we shall only achieve that through a major exercise to educate the working population in the need to make this provision.

I spent a few days during the summer in the United States looking at how the workforce there copes with providing for retirement. Like many matters financial, what happens in the United States often happens in this country a few years later. In the United States there has already been a shift from the defined-benefit pensions schemes to the money-purchase schemes to which I referred earlier. There is still under-funding for pensions, but employees are much more aware of the need to make contributions out of income than, I believe, is the United Kingdom workforce today. It is not uncommon in the United States for employees at all ages, including those in their 20s and 30s, to take financial advice and have drawn up for them a formal financial plan. I am not talking just about senior executives earning significant sums of money. In the large corporations, hundreds and thousands of employees on average earnings are taking financial advice. Often the employer will provide a financial plan for employees as a benefit. The employee will state his or her objectives--how much income they would like to receive on retirement and the age at which they wish to retire--and take into account other income they may receive, such as federal income on retirement or from a company scheme. The plan will calculate the amount of provision the employee will need to make to reach his pension objective. The employee may not keep up the

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required contributions but at least he has a plan. If he knows what is needed at an early age to reach a given level of pension, the level of funding is likely to be higher than if there is no plan at all.

We must increase the awareness of what is required to fund pensions if we are to achieve adequate provision. We shall need the combination of employers and the Government working together to raise the awareness of the workforce, especially those starting out who must start making provision early. It is unfortunate that the misselling of personal pensions by a number of companies has meant adverse publicity at a time when many should be taking out suitable pensions. I hope the Government will attempt to counter those adverse factors by emphasising the importance of properly providing for retirement.

It also seems a retrograde step for the Government to have reduced the return on pension provision in the last Budget at a time when there is a need for much greater provision. Now, an employee will have to save even more for every £1 of pension that he or she receives on retirement. I hope that the Government will indicate that at least some of the extra revenue taken from employees' savings in the Budget will be spent on educating the workforce on the need for extra provision.

We certainly need greater provision for pensions. We need to start making that provision now.

6.32 p.m.

Lord Grantley: My Lords, the House is indebted to the noble Earl, Lord Buckinghamshire, for introducing his Motion on this most important topic. Saving for a pension is, of course, just one among many different forms of saving and needs to be seen in that context. But governments have a particular interest in encouraging pension savings in order to avoid the growing burden upon the state to pay both conventional and earnings-related pensions out of public expenditure to an ageing population in the years ahead, arising from increasing longevity and the stagnant birthrate. That burden is not only growing but is widely considered to be unsustainable. So encouragement to improve currently inadequate individual pension savings is of the highest importance.

These developments have led to speculation that the Government are considering making pension savings compulsory, as happens already in countries such as Chile, Australia and Singapore. I should be in favour of that under certain circumstances but such arrangements do not yet exist. It must be recognised at the outset that compulsory savings represent a very serious invasion of people's liberty, with major implications for spending decisions and lifestyle. Most people save anyway, if they can. But pension saving is a very special and, in the abstract, disadvantageous form of saving as the saver loses access to the savings over the years or decades during which the pension fund is accumulating prior to retirement and there are restrictions on the use of pension funds post-retirement, which is a point to which I shall return.

To overcome those disadvantages, I believe that three conditions would need to be met: first, tax treatment to make pension savings clearly more attractive than other

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forms of saving; secondly, sufficient political stability--a point touched on by the noble Earl--to give people confidence that such tax treatment will not suddenly be withdrawn to their detriment after they have invested; and thirdly, complete freedom for people to invest their pension savings both before and after retirement as they may desire. None of those conditions is satisfied at present.

On the first point, it is at least arguable that investing in a personal equity plan (PEP) is better value than investing in a pension. Although one is permitted on retirement to withdraw up to 25 per cent. of a pension fund in the form of a tax-free lump sum, the "tax free" aspect is somewhat misleading as the balance of 75 per cent. has to be invested in an annuity, which is liable to income tax on both the interest and capital components. I cannot think of any other common form of investment in which return of capital is liable to income tax treatment rather than the normally more advantageous capital gains tax treatment. Since individuals can already invest up to £9,000 a year in PEPs, it is not obvious that there is any good reason to compel them in addition--always supposing that they can afford to do so--to invest any more than that by way of pension provision.

On the second point, the lack of political stability governing the tax treatment of pensions has been dramatically illustrated by two recent and, in my view, unwelcome developments. The first, mentioned by previous speakers, was the sudden withdrawal from pension funds of their ability to reclaim the tax deducted from dividends on equities. If that change had been made as part of a fundamental and comprehensive review of all forms of taxation and regulation of all forms of savings, including pensions, it might have been palatable. As it is, the way it was introduced has caused quite serious financial damage retrospectively to millions of investors in pension schemes who invested in good faith on the assumption that the tax treatment would be an enduring feature of the system.

Not only that: the change also has major adverse public expenditure implications. It has made contracting out of the SERPS considerably less attractive, which is surely not in line with the Government's policy of keeping public expenditure under control. I understand that the Government are now in negotiation to increase the national insurance rebate payable under the contracted-out scheme. The cost, according to newspaper reports over the weekend and depending on which newspaper one reads, would be between £500 million and £2 billion a year. I shall be interested to hear from the Government their estimate of the net, as opposed to the gross, public expenditure impact of the withdrawal from pension funds of the dividend tax credit.

The other unwelcome development is speculation that the Government are considering withdrawing full tax relief on pension contributions. In my view, if that happens, many people will do their sums and conclude that it may not be worth investing in a pension fund

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after all or that the advantages of doing so are not sufficient to compensate for the disadvantages of pension saving to which I have already referred.

I come to my third condition for compulsory pension saving. At present, one must invest by the age of 75 at least 75 per cent. of a pension fund in an annuity. I believe that that requirement is iniquitous and ought to be abolished. As a matter of principle, people should be free to decide for themselves how they wish their savings to be invested. Why should the Government insist that pension funds are invested in one form rather than in another?

In my view, there are two overwhelming reasons why people should not invest in annuities under any circumstances. The first is that investing in annuities is contrary to the interests of a family. Annuities are virtually unique among all forms of investment in that they are worth nothing when the investor dies. If, as I hope, it is government policy to encourage parents and grandparents to leave on death as much as possible to their children and grandchildren, the Government should not compel but on the contrary positively discourage people, particularly elderly people, from investing in annuities.

The second reason is simply that annuities are a lousy form of investment. That is not just a personal view but the market consensus, as can be seen from the fact that very few people indeed invest in free-standing annuities--that is to say, those annuities which people are not compelled to purchase--in comparison with other forms of investment.

The market in free-standing annuities is minuscule, and for good reason. On a short-term view, to obtain certainty of income--the only reason for buying an annuity--one would be better off in gilts. For example, at the end of last week a man aged 60 with a pension fund of £100,000 could have bought a level annuity guaranteed for five years of around £9,000 a year. Alternatively, for the same amount of money he could have bought gilts maturing between 2003 and 2007 with a higher income of £9,650 a year by way of interest and a fixed capital value on redemption of £82,000. That is, of course, a grossly misleading comparison because even pensioners should not be taking a short-term view of their life expectancy. The Office of Fair Trading made the point that frequently people's retirement even exceeds the length of their careers and therefore one should be taking a longer-term view.

On a longer-term view, undoubtedly people would be better off in equities in order to benefit from capital appreciation. I believe it to be the case that there has hardly ever been a period of 10 years or more in which people would not have been better off investing in equities rather than in fixed interest instruments. All financial advisers would agree that people's savings should be invested in an appropriate mixture of equities and fixed interest. But--this is the key point--it should be up to the individual, not the Government, to decide for himself or herself what is appropriate.

My final point arises from the pension report of the Office of Fair Trading published in July of this year. It is an excellent and comprehensive document and I agree

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with almost all of its recommendations. It may be quicker for me to mention the only two recommendations with which I disagree. The first is that annuity rates for men and women should be equalised, notwithstanding differences in life expectancy. That seems to me to be an absurd piece of political correctness. The second is that "designated pension plans" must be passively managed. There are good reasons for pension plans being passively managed, but I see no reason why an individual should be prevented from choosing an actively managed plan if he so wishes.

The Office of Fair Trading devoted a good deal of space, including the whole of one appendix, to showing how poorly early leavers are treated under occupational pension schemes of the final benefit type. It points out that nowadays people change jobs on average more than five times during the course of their working lives. The problem therefore has become widespread. I am an early leaver under a final benefit scheme and I know therefore how disadvantageous it can be.

I have one suggestion for the Government to consider on that point. If an employee is entitled to a pension calculated at a certain percentage of final salary or whatever, and leaves early, the employer should pay as a minimum such proportion of that pension as the period of service bears to the period the employee would have served if he had not left early. One may be forgiven for thinking that that is already the case, but it is not.

I conclude by issuing a modest challenge to the Government. Can they publish or cause to be published one pamphlet containing, in sufficient detail and with sufficient clarity for a layman to read and understand, all the relevant rules and regulations governing pensions and taxation of pensions in this country? I suspect the answer will be "No, we cannot do that. First, it would be far too long a document; and, secondly, it would be so complicated that nobody would understand it." That is precisely the point. Any simplification of the issue will be welcomed by everybody.

6.44 p.m.

Baroness O'Cathain: My Lords, I welcome the initiative of my noble friend Lord Buckinghamshire in calling attention to the case for greater pension provision. There can be few people who have not expressed concern about the future of pension provision. Indeed, there has been so much scaremongering about the difficulties which may be encountered in the early part of the next century that none of us can be unaware of it. The fact that our continental European neighbours are likely to be even worse off than us is absolutely no consolation.

Since the general election I have been in some difficulty in trying to ascertain what exactly the Government's position on this issue is likely to be. I feel that I have been receiving very strong conflicting messages and I hope that the Minister will be able to set my mind to rest and clear the air. The noble Baroness, Lady Hollis, says that she doubts it, but I doubt that she doubts it. Of course, I am very aware that it may be too early to get a definitive "steer" as to what policy is likely to be formulated, and when. But I hope that in the

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review currently taking place, the concerns and suggestions put forward in this debate today will be addressed.

At the outset I should like to state the two premises on which my thinking about the subject of pensions is based. First, coming from a background of many years in business I am somewhat surprised that successive governments have neither encouraged nor discouraged company schemes. On the most superficial examination it must be obvious that such schemes do a great deal to alleviate pressure on government resources and I believe that they should be encouraged. Secondly, I believe, most strongly, that individuals should be encouraged to think about their likely future financial needs long before they reach "pensionable age" and to save for their long-term future in the same manner as many save for short-term requirements, such as the family holiday or the new car. My noble friend Lord Mackintosh of Halifax gave us a stark picture of the amounts needed to provide for what many people would regard as a fairly low pension. His suggestion that such calculations should be emphasised more widely is very pertinent.

For many years I have been dismayed to realise that the propensity to save is by no means universal; there is little incentive to save--despite the good efforts of National Savings. Young people today are not "switched on" either by the concept or product. Perhaps it is a generation phenomenon. Perhaps this new Government who have certainly manifested their appeal to youth could encourage greater saving.

We have been told that the Government want individuals and their employers to provide for their retirement. I support that wholeheartedly. That desire of the Government can be met by both of my two personal premises; namely, that company schemes should be encouraged and that a new "savings philosophy" should also be encouraged.

"Encouragement" is the salient word. Without encouragement individuals are unlikely to be persuaded to lock away significant sums of money over a long period. Encouragement should include tax incentives. The growth of the pensions industry has been greatly helped by favourable tax treatment of pension contributions, of pensions fund income and of payment to pensioners--particularly the tax-free lump sum on retirement. Employer schemes should be encouraged. Such schemes are usually managed at company expense and costs can be as low as 5 per cent. of contributions. That is significantly less than the 20 per cent. or more the sellers of personal pensions deduct to cover costs and profit.

Another area of encouragement is flexibility. It is an obvious area of advantage and is also an obvious requirement if flexibility in the employment market increases. It is only fair that individuals are enabled to transfer funds between pension schemes. Flexibility should also be encouraged in permitting individuals to establish a higher level of contributions matching his or her circumstances. We all recognise that demands on one's income vary enormously from being very high when first setting up home, having children and seeing them through the education period to much lower when

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the mortgage seems to absorb a much less significant part of one's income and the children have fled the nest. Less rigidity would encourage greater saving for retirement--especially when retirement day does not appear to be as far away as it appeared some years previously. That sentiment is heartfelt.

Simplicity and clarity are two other areas where encouragement would not go amiss. Because of the high-profile cases I believe that the general public has a strong fear of putting their hard-earned resources into pensions. The almost arcane language of all pension documents does not help this case. As an aside, I recently received a communication from the DSS about my future pension and, quite frankly, I took several looks at the words, the layout, the length of the document, the attempt to "cover the waterfront" by addressing all possible types of situation whereas my situation is just plain and simple--at least that is how I see it--and I gave up. I shoved the lot back into the envelope and phoned my accountant. But not everybody has an accountant and not everybody can afford to employ an accountant. I shudder to think how long it would have taken me--and I am supposed to be reasonably intelligent--to plough through all that lot. I would probably have been no wiser at the end of it. We really must have clarity in this area.

Similarly, we must have regulation which is easy to understand. My noble friend Lord Buckinghamshire referred, quite honestly, to the fact that his organisation makes money out of complexity, but he also made a plea for less complexity. I support that plea completely.

It really is in the Government's interest that in all these areas a long, hard look is taken in a constructive manner. If not, the Government may find themselves in a situation where there will be an escalating demand for yet more and more funding for retirement.

The Government surely want to avoid having to provide a base pension for every man and woman when they reach retirement age. That could be achieved by the following: first, employers should once more be permitted to make membership of the company's scheme part of the contract of employment. This compulsory element was allowed until 1988 and, with hindsight, it should really not have been changed. Secondly, if a benign environment is created for private pensions, the Government can concentrate on meeting the needs of those least able to look after themselves; for example, those not in paid employment such as a parent raising children or the unemployed, enabling them to receive credits towards a retirement entitlement.

I would now like to turn to the issue of fully funded versus pay-as-you-go pensions. It is quite right that companies are required to set up schemes separate from the employing company, controlled by the trustees and fully funded by contributions over employees' working lives. There is a sense of security in knowing that one's contributions are targeted on funding one's own pension. However, under the Government's present pay-as-you-go approach for state pensions we are paying for the pensions of current pensioners without any assurance that we shall reap commensurate rewards

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ourselves in the future. The sense of security that is present in the company scheme is certainly not matched in the state pension scheme.

Today, state pensions are funded by taxation: National Insurance contributions are seen as nothing less than a tax. To gain acceptance for the idea of investing in your pension, separate funding on a proper actuarial basis is surely needed.

We all recognise that the Government must seek to contain costs. One of the biggest costs is the DSS budget. Anything that can be done to contain or reduce this huge drain on the Exchequer must recommend itself for serious consideration. I really do believe that individuals can be persuaded to fund the bulk of pension needs, but they need incentives to do so--carrots instead of sticks. However, recent developments in this area do not fill me with the hope that common sense will prevail. The Treasury has increased the tax on pension funds and the DSS has got bogged down in over-regulation. Neither action is helpful and, I ask plaintively: do they ever talk to each other?

The disincentives currently being stacked up, or threatening to be stacked up, are formidable. I shall just mention three. First, the abolition of ACT credits has added some 10 per cent. to the average cost of funding schemes. Secondly, the growing complexity of pensions. The rules set up under the recent Pensions Act introduced a series of regulations so complicated that, I am told, even the actuaries are struggling. Has the DSS created a beast that is not capable of being controlled? Thirdly, the minimum funding requirement rules set up under the Pensions Act, which the Minister knows I have previously addressed in debate on the Pensions Bill, introduced a very serious contingent liability for companies, particularly companies with mature schemes which are heavily invested in equities during a period when equity prices are at the bottom of the cycle. There is a paradox here. The Government want to see more normal investment by companies, but seem to have forgotten that pension funds are still the biggest provider of new equity for companies.

MFR hits only at pensions that are based on final salary schemes yet all the evidence is that what employees most want is a pension scheme which relates to their salary prior to retirement. The alternative, the money purchase scheme, which is beginning to be the norm for newly-established pension schemes, does not provide this assurance as the size of the pensions depends crucially upon investment performance, and we know how unpredictable that can be over a long period with no guarantee of underpinning from any employer. Yet, ironically, and quite unbelievably, this inferior form of pension escapes the danger of MFR.

Have the Government any more "nasties" of this nature in mind? Will the review come up with yet more disincentives? I sincerely hope not. The company pension scheme is a very successful and efficient vehicle capable of delivering the relief that the Government seek from the burden of an ageing population with all the concomitant resource implications. Incentives need to be preserved. Previous incentives need to be restored. New incentives such as I have outlined need to be introduced.

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It is only then that we can build on our enviable strength compared to our Continental European neighbours. It is imperative that we take all these issues seriously and I do hope that the Minister can give us reassurance on these points.

6.57 p.m.

Lord Borrie: My Lords, the House must be immensely grateful to the noble Earl, Lord Buckinghamshire, for initiating this debate and indeed for giving us the benefit of his own personal expertise over his own lifetime. The Government have announced already their wide-ranging pensions review and therefore the House will certainly be looking forward to the reply to the debate by the noble Baroness, Lady Hollis of Heigham. In opposition the noble Baroness established a formidable reputation for knowledge in her field and for compassion and dedication.

In thinking about pensions policy I believe that there must be some measure of agreement among us all that the principal objective should be to enable the great majority of people to enjoy in retirement a standard of living which in some way approximates to the standard of living they enjoyed during their working lives. For some people already retired, and for some about to retire, that objective has already been attained and they can continue to enjoy in retirement quite a high standard of living as a result particularly of the growth in recent years of occupational pensions to which they have contributed during their working lives.

But, as has been pointed out by the director-general of the Office of Fair Trading in the report on pensions to which at least two speakers have already referred, most occupational pensions, by reason of being defined benefit schemes, are generally based on the employee's final salary, so that people who leave their employment lose out. Each time they move their employment the value of their pension or pensions is whittled away. As the noble Lord, Lord Grantley, pointed out, the average employee in the United Kingdom at the present time moves probably five times in his working life. Therefore, that is a serious shortcoming. Nobody is likely to predict that the number of changes in one's working life is going to reduce, because it may well increase further as the years go by.

Moreover, the proportion of our working population who have joined an occupational pension scheme--the number has increased considerably--seems now to have stabilised at something less than half of that working population. That is hardly surprising given that such schemes are normally available only to those in permanent, full-time employment with major, or at least fairly substantial, employers. However, we are living longer and several other speakers have already referred to the need for saving throughout one's working life in order to achieve an adequate pension on retirement. As has been pointed out, there is also the question of early retirement. The need for such savings is becoming more urgent every year.

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The alternative of personal pensions has, for many, proved to be a mirage through the misselling of pensions and the lack of transparency as to the substantial commission and other charges (often upfront charges) which diminish their true value.

For purposes of clarification, perhaps I should point out that I have not been the Director General of Fair Trading for five years now so I take neither credit nor responsibility for the report to which reference has been made and which I should like to mention because the present Director General, Mr. John Bridgeman, has said--this was quoted in part by the noble Earl who initiated the debate--that in recent years the legitimate expectations of many have been betrayed through the misselling of pensions, especially to those induced to leave their existing entitlements in favour of some less advantageous personal pension scheme.

However, it is not just a matter of the scandals which we hope are past and which are now being dealt with, although in this context I should like to pay tribute to the forthright language and actions of the Economic Secretary to the Treasury, Mrs. Helen Liddell. In the report, the Director General, Mr. Bridgeman, states that too many pensions today are poor value. As the noble Viscount, Lord Mackintosh of Halifax, said, there will be many who will be disappointed, shocked and amazed when they are entitled to claim their personal pensions on retirement at what poor value they offer, compared with the prognostications made by those who sold them the pension. To quote Mr. Bridgeman:

    "Their benefits are consumed in the high levels of expenses needed to support the marketing effort and the active management of the funds. Their expenses are often loaded on the early years and ... employers' contributions may be inadequate or non existent".

Mr. Bridgeman puts forward an interesting and, I think--but I am not an expert in these matters as is the noble Earl--well worked out scheme for what he calls a "designated personal pension" which could be offered by friendly societies, trades unions and employers' associations as well as by individual firms or private companies. It would enjoy a contribution from the employer when the employee opts out of the occupational scheme. Contributions would be invested in tracker funds and be passively managed and, of course, the pension would be portable from job to job. I believe that that is essential in this day and age. I hope that the Minister can say that the Government are looking carefully at such proposals in the course of their pensions review.

Mr. Bridgeman came to no conclusion about compulsion. The noble Lord, Lord Grantley, referred to a number of conditions which he thinks should be met before any question of compulsion is introduced. I found those points good, but I also have the feeling that some element of compulsion will become essential to the success of any second pension plan. Above certain income levels, employees are already required to a degree to contribute to the basic state pension and to the state earnings related pension scheme, or to an equivalent contracted-out scheme, and this has been so ever since my noble friend Lady Castle of Blackburn introduced that scheme some 20 years ago.

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Of course, there will be those who, at least at some stages of their life, cannot afford to pay the kind of contributions that are necessary to secure a good second pension. The noble Viscount, Lord Mackintosh, mentioned the kind of contributions that could cause great difficulty to those in less well paid jobs. Others, by reason of being disabled, sick or unemployed at some point, will need to be credited with contributions. I know that that involves a public expenditure commitment and I know that those on the Benches opposite will not agree with me on this point, but it seems to me to be more socially just to charge to public funds such a credit for those who are unable to make their own contributions than it is to allow the 40 per cent. tax relief on contributions which is now available to higher rate taxpayers. It is certainly vital that a national pension policy for the 21st century caters for all--women as well as men, part-time as well as full-time workers, as well as for the increasing number of self-employed people and those on short-term contracts.

I am told--and I believe--that Her Majesty's Government look forward to at least 10 years in office. Surely any such government are right to be thinking of a strategy for the long term. Such a government should be seeking to lay the foundation for those who are starting their working lives now. I accept the point that those at the beginning of their working life need to be encouraged and educated to think of such matters over the next 30 or 40 years until they retire. Indeed, as I have said, the Government should be laying the foundations for those who are starting their working lives now and who will not retire before 2030 or 2040, but that does nothing for those who are now in retirement or who are soon to retire.

As this point has not yet been mentioned, I should like to say that we all know that the basic state pension is far too low to sustain any sort of dignified retirement, and that because of the indignity and stigma attached to applying for additional sums by way of income support, hundreds of thousands of pensioners fail to make a claim and have a lower income than is their legal entitlement.

Unlike my noble friend Lady Castle, who unfortunately is unable to be present today, I do not think that the answer lies in a substantial across-the-board increase in the basic state pension, claimable by all pensioners. I believe that that would dissipate large amounts of public expenditure and taxpayers' money on the significant numbers of retired people who do not need such an increase. The great need is to find a way to target those who right now urgently need more money.

I have favoured some sort of minimum pension guarantee, a sum set above the present basic pension and above income support levels, which would enable people to enjoy a reasonable standard whereby they can truly feel a part of normal society and not feel excluded from it through poverty. I certainly want to get away from the stigma involved in the present means-tested system, which involves, in effect, having to say, "I am

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poor. Please give me more money". That system inevitably leads far too many people to be ashamed to ask for what they are entitled to.

Perhaps we should try a new system in which all who retire at 65 say that they are 65 and that they want their entitlement. They would disclose what other regular income, especially pension income, they were likely to receive. If it was small or nil they would be able to claim as of right the minimum guaranteed pension. If however they were in receipt of reasonably significant amounts of occupational or private pension they would receive from the state only the basic state pension as it now is or as it may be upgraded in November. The principle of to each according to his needs is a respectable one. We need an efficient claims system that is effective in putting that maxim into effect.

7.10 p.m.

The Earl of Lindsey and Abingdon: My Lords, I too should like to thank the noble Earl, Lord Buckinghamshire, for initiating this short debate. Just before the Summer Recess I tabled a Written Question regarding the proposed alteration to the treatment of advance corporation tax in respect of pension funds. I asked Her Majesty's Government why, in proposing to alter the treatment of advance corporation tax for pension funds, it was intended to abandon the convention that tax was levied either on contributions or on pensions in receipt but never on both for personal pension holders and the self employed. The Answer I received from the noble Lord, Lord McIntosh of Haringey, was as follows:

    "There is no tax charge on exempt pension funds when they receive dividends. But they will no longer receive a subsidy from the Exchequer on their dividend income. The reform of corporation tax has removed a distortion which gave a tax incentive for pension schemes to prefer dividends to long-term growth".--[Official Report, 30/7/97; col. WA 64.]
I believe that the Government may in the long term regret this change to the tax regime. I spent 38 years of my working life in the insurance industry. However, I spent only one-and-a-half years of that period promoting and selling personal pensions and money purchase schemes. One matter that I learned during my time in the City was that when trying to explain the advantages of an insurance plan which involved a long-term commitment the important consideration in the minds of most people was whether it was a tax-saving project. It was relatively easy to persuade people to take out schemes where there was an attractive investment which attracted as little tax as possible. This applied to pension schemes as well as to other insurance policies. Even in the case of Lloyd's I was able over the years to persuade about 30 people to become underwriting members. That was done on the back of tax incentives such as reserve funds which were exempt from higher rate tax, making capital work twice over, etc. When it came to explaining the downside, such as the high risk ratio and the aspect of unlimited liability, people tended to apply cotton wool to their ears. They did not want to know. What mattered were the tax advantages.

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There is also the concept of mis-buying as well as mis-selling. I am pleased that the Government are committed to retaining and upgrading the basic state pension. That must be available to everyone including the self employed, followed by a second tier pension scheme for everyone including the self employed, and then a voluntary third tier. My main worry is not so much about the larger company pension schemes in relation to the proposed change in advance corporation tax. They will comply and find ways to cover the extra cost. One unpleasant way of doing it is to lay off some of the older employees within 10 years of their retirement. That can be a big money saver for the employer.

The real danger arises with small businessmen and the self-employed who are not involved in big pension schemes. Having taken out what they believed to be a good personal pension to supplement the state basic pension, when they retire they find out that they are worse off because of the Government's retrospective legislation to amend the treatment of advance corporation tax on pension funds. I think not so much of the high-earning barrister but the 90 per cent. of people who earn less than £30,000 per annum during their working lives. They will not thank the Government when they discover that their pension plans are likely to yield 25 per cent. less than they thought. For a government that describes the mis-selling of personal pensions as one of the greatest financial scandals of modern times to propose a tax change that will hit many victims even more severely, along with the self employed who cannot belong to final schemes, this is an unprincipled act.

In conclusion, I make the following plea to the noble Baroness, Lady Hollis, on behalf of people with money purchase arrangements that have no surplus to absorb the shock. They can and should be exempt from advance corporation tax changes as are Treasury civil servants. Their schemes are not funded and therefore they are automatically immune to this discriminatory raid.

7.18 p.m.

The Earl of Clanwilliam: My Lords, we are indebted to my noble friend for this most important debate, especially as he comes from an actuarial background. The members of that profession certainly on this occasion, but not always, speak with one voice and a great deal of authority. There exist already two well researched proposals. I begin with Mr. Lilley's basic Pensions Plus, which seeks to solve the demographic problem over the longer term by the immediate introduction of compulsory pension planning. Secondly, there is the more immediate proposal by the Minister, Mr. Frank Field, which was published during the last Parliament. That combines reform of both pensions and social security and requires some kind of compulsory contribution. I feel slightly awkward in presuming to define these great appraisals so briefly, but I am sure that all noble Lords are well aware of their scope, which provides great food for thought.

In the meantime we heard in the Budget of the proposed reform of PEPs and the introduction of a new savings scheme. Perhaps we may assume that this is

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being considered by Mr. Martin Taylor, who has been appointed to review the proposals. On top of that there is the review by Mr. Denham. One wonders whether there is a danger of confusion which is compounded by separation of the two essential parts of the same problem. PEPs form a vital part of pension planning and of planning for the future and preparing for indigent old age, by providing tax-free capital from tax-paid contributions, as has already been said.

In addition, PEPs can be used to provide tax-free cash sums on retirement to pay off mortgages and to replace their anomalous counterpart, the tax-free sum from the accumulated pension fund. The accumulated pension fund should be used to provide income for the future, whether in the form of a partly or fully deferred annuity is another matter. Perhaps the noble Lord, Lord Grantley, will allow me to say that if the sum is totally free someone may well go off and buy a yacht, go bust, and then become an indigent person dependent upon the state for support. We do not want that. There should be some form of control. There must be a level below which an accumulated fund should not be allowed to drop.

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