Previous Section Back to Table of Contents Lords Hansard Home Page

Lord Grantley: My Lords, I am grateful to the noble Earl for giving way. Just to clarify the point, I was not arguing that governments should not impose limits on the extent to which pension funds can be drawn down. I agree with the noble Earl on that point. I say merely that there should not be limits on the investments into which the drawn-down income needs to be put.

The Earl of Clanwilliam: My Lords, I thank the noble Lord for that clarification. I agree with him. I agree also that the annuity is a nasty animal, but there does not seem to be a better one about. We have the long-established occupational pension scheme run by many of our great companies, greatly to their cost, where total contributions vary between 12 per cent. of salary in the smaller schemes and up to 16 per cent. in the schemes of some public bodies. That is extremely expensive. It is an indication of the level of planning required for personal pensions.

I shall take the bull by the horns on the subject of occupational schemes, which, in particular, have been hit by the Chancellor's raid on ACT. The effect has been to render some schemes liable under the minimum funding requirements. Fund managers of all types of pension plans have in some instances gone out of equities and into gilts, which reduces the effect that the Chancellor intended. In addition, it will require companies and contributors to increase their payments, adding to the load of tax rebates on the revenue.

Another snare is that a number of contributors will now tend, as has been said, to rejoin SERPS, which will be another added cost to the Exchequer. To avoid that, the Chancellor will have to increase the rebate on national insurance contributions for those who wish to remain contracted out. That will be yet another cost to the Exchequer. On that basis, the Chancellor is on a hiding to nothing.

15 Oct 1997 : Column 505

All in all, while it has been said that the previous Chancellor was considering limiting ACT, I can now see clearly why he did not do so. In relation to that I shall give one short excerpt from a press release from the Pensions Management Institute, which states:

    "For many companies, the increased costs of maintaining final salary schemes could mean a reduction in profitability or cash flow. Unless employees make increased contributions to money purchase arrangements for personal pensions, they will see a reduction in their expected pension. Local authority schemes will also be affected and this could well result in a rise in the Council Tax".
That matter was raised before the Recess.

Of the remainder of the population who are not in occupational pension schemes, fewer than a quarter have private provision. Those who miss out are the part-timers and the self-employed, including men and women who are taking a break between jobs, for whatever reason, and even more importantly those who are busy at home looking after the country's future generation. They have no earned income from which they can make contributions under existing Inland Revenue rules, and are likely to be left widowed, if they are not single parents, with greatly reduced resources and will be a consequent liability of the state.

The adjustment of the rules governing investment rates and fund limits, as well as the earnings rule, is one of the greater problems to be solved, and when tackled successfully will, I hope, lead to a greater level of savings in the long term. That certainly is a long-term problem, and obviously fits in with any decisions by the Inland Revenue in its future reviews in respect of tax relief on contributions on up to what has been suggested by some quarters of the pensions industry should be a relatively low maximum rate.

However, none of that dilutes in any way the overriding need to ensure that those who are in employment are compelled--I have to use the word "compelled"--to make a basic personal pension provision through the existing NIC system. I have spoken on this subject many times before. If people do not do it, it will be too late, as was pointed out by my noble friend Lord Mackintosh, who described the costs of late investment.

If there is to be a stakeholder plan, then the plan must belong to the stakeholder personally and not be a credit available from some Treasury fund which is so conveniently available for whichever Chancellor may be in power at the time to raid, as has been so spectacularly demonstrated recently.

We await decisions from these unending reviews, but in the meantime perhaps I may suggest that we take a leaf out of the Australian book with regard to fund management. They have "Major Funds" where a combination of major suppliers manage a series of funds. Managers of the occupational pension funds in this country have shown some skills in amassing some £675 billion and they would qualify to run such a scheme, which, one would imagine, would do a great deal to reduce the upfront costs which so beset personal pension selling at the moment, as has been demonstrated.

15 Oct 1997 : Column 506

Admittedly the managers of occupational pension schemes manage defined benefit schemes as opposed to defined contribution schemes. My noble friend Lord Mackintosh mentioned the problem of combining occupational and personal pensions. We have free-standing additional voluntary contributions which can be separate from the occupational scheme. That is a personal pension. There is no reason why that system should not be developed so that personal pensions can take over from occupational schemes as they become too expensive for companies to run. As I have said, contributions of up to 12 per cent. per annum are too high. They are a vast charge on the competitiveness of our great companies. It is interesting to note that the cost to our companies of achieving that £675 billion has been something like 6 per cent. on their annual profits. That is a sum which has not been charged by our friends in Europe. They have not paid those sums. They do not have those funds. If they are to catch up with us, they will find themselves in a somewhat less competitive position with our own great companies.

I hope therefore that the reviews will determine that personal contributions will have to be supplemented to make a viable sum of something like £100 a month or 10 per cent. of earnings, whichever is the greater, to be supplemented by the state, or in the case of the employee, by both the employer and the state.

The personal plan, as has been said, must be portable and accessible. The beauty of it is that it is visible. The person who has it can see at any one moment what it is worth. He can adjust his contributions to it in accordance with the need. That is why for the past five years I have said that a personal pension plan is a vital element in any future pension planning operation by either government.

There is an urgency in the matter, as all are agreed, and I hope that my approach may be construed as constructive. We are in a prime position to deal with this demographic problem, but we must act soon or it will be too late.

7.30 p.m.

Earl Russell: My Lords, I, too, thank the noble Earl, Lord Buckinghamshire, for introducing the debate, which is very timely. During the general election campaign, to my considerable surprise, the requirements of party balance dictated that the BBC News should interview me on pensions. I spent about a minute expounding my party's pension policy and about 15 seconds providing a sound bite about the other two parties. I do not believe that anyone in this Chamber will be in any doubt which of those was broadcast.

For reasons of which that is typical, I wish to take the opportunity provided by the debate to comment on the pension policy of my party. I am sorry that the speech is not being made by my about to be ennobled friend Lord Goodhart who is the author of the policy and to whom I look forward to hearing on the subject on many future occasions. But, as it is, the task falls to me.

Sadly, it is an arithmetical rule that the more people belong to any category the harder it is to be generous to them. But as the noble Earl, Lord Buckinghamshire,

15 Oct 1997 : Column 507

pointed out, the ratio with which we are concerned is not just of pensioners to non-pensioners but of pensioners to earners. In financing pensions, the rule that early money is like yeast, which I am sure is already familiar to the noble Baroness, applies very clearly indeed. Therefore, I agree with the concern expressed by Chancellor Kohl that the increasing tendency to prolong the educational process is causing a funding problem for pensions. As part of pensions policy, we should be thinking about getting younger people into employment rather quicker.

We, too, belong to the consensus which has moved away from linking pensions to earnings and links them to prices. I entirely agree with what the noble Lord, Lord Borrie, said about the costs involved. Ann Robinson, addressing a fringe meeting as a guest at the Liberal Democrat conference in 1996, summed that up as a consensus that we should keep the state pension but not be too generous about it. I said to her that I thought that description was ungenerous but not inaccurate.

It is the dilemma caused by precisely that point which our party policy is designed to address. We have decided that we should keep the basic state pension. If it is argued that it is not affordable, I wish to quote a few words which I discovered by accident when looking through my papers. They were written by Mr. Donald Dewar when he was social security spokesman for the Opposition during the previous Parliament. He said:

    "After all, the Government's own statistics show that this country spends 23 per cent. of GDP on social protection. The comparable figure for the European Union is 26 per cent. As Ministers repeatedly imply that the country cannot afford adequate state pensions it is easy to forget that private pensions do cost money".

Furthermore, every means test that I have ever come across has gaps in it. There are always people who fall through the net. For that reason, some basic universal provision is essential. However, I entirely agree with what the noble Earl said about the need for partnership between the state, the employer and the individual. I hope that that is now common ground in every quarter of the House.

I do not agree with the remarks made by Mr. Frank Field in an interview with the Express on 4th August when he proposed as a long-term plan to abandon the income support supplement for pensions on the ground that it was necessary to compel people to go in for private contributions. I do not disagree with the argument for compulsion, but, as regards dropping the supplement, it is Mr. Field's job in this Government to think the unthinkable--it is the thinkable that he seems to find so difficult!

I am much more in agreement with the remarks being made by Mr. John Denham, who might be described as Minister for the thinkable. Writing in Parliamentary Policy Forum last month, he stressed the difficulties faced by low income workers, those with intermittent employment patterns and those who cannot contribute to second pensions; for example, because of caring responsibilities. One should also include those who are part-time and earning below the national insurance limit and a category in which I should declare an interest because I belong to it; those who have spent part of their working life abroad and who fall out rather badly in some ways.

15 Oct 1997 : Column 508

Taking those points into account, we decided that we would split the basic pension; we would keep a universal pension which was linked to prices and we would have a means-tested supplement which was linked to earnings. To that we have now added a further supplement of £5 a week for the over-80s. That is a limited category of pensioner among whom a great deal of poverty is concentrated and who are least able to supplement it with earnings, as they can do now that the earnings rule has been happily abolished. We would abolish SERPS which we believe produces a very bad return--20 per cent. of the final salary--while many of the occupational schemes such as mine can produce something approaching half the final salary or occasionally something better.

However, we would have a compulsory occupational scheme for all employees funded by the usual partnership scheme. Of course, where people are not in regular employment our second part of the basic pension--that related to earnings--comes into play. Therefore, I hope that we would target the state spending on those in greatest need--and I agree with the noble Lord, Lord Borrie, that that is a proper charge on public funds. I do not see what else it could be.

We also believe that we need much better regulation of the private pensions industry. There is a welter of regulatory bodies--what I might describe as an Acropolis of acronyms. I am not an expert on exactly how those bodies should be put together, but some kind of linking should be done. We are also concerned that not all the recommendations of the Goode Report have yet been put into force. We want trustees representing the employees and trustees representing the pensioners, who are two potentially conflicting interests. We want those trustees not to be removable by the employer's trustees and we want it to be clear and certain that under no circumstances will the employer trustees have a majority on their own over the other two bodies.

The need for that principle is clearly illustrated in the sad story of the bus company pensions; the Bus Employees Superannuation Trust, commonly known as BEST. It reminds me of the remark of St. Augustine that the decay of the best is the worst. Perhaps I may say to those who know the original Latin that they will notice that I made a parliamentary translation of the saint's words.

Originally that was an alteration of the clear terms of the pension scheme, which had directed that the surplus should be distributed to the employees, altered by a vote of the trustees to transfer the surplus to the employer from whom it got further diverted to the Government. I say that without respect to party because government policy on that has shown no sign whatever of changing as a result of the general election. We are dealing with a government as the executive animal rather than any particular political party.

The ombudsman was clearly of the opinion that that transfer of funds was illegal. I pass no judgment on whether or not that was so. But it clearly contradicted legitimate expectations because it contradicted the express words of the scheme under which people had contributed to their pensions.

15 Oct 1997 : Column 509

If the law were to be changed, it should have been changed by parliamentary legislation without retroactive effect. This matter is now sub judice in the courts. It may be that in the end the bus employees will receive what they believe, with some reasonable excuse, they deserve. But one should say that a posthumous pension, like a posthumous partner, is of very limited, if not negligible, usefulness. Therefore, I hope that the Government will think again about that and, whatever they think the law should be in future, they should do something now about that very legitimate grievance.

That exactly illustrates why there is a case for better regulation. We are asking people to invest a very great deal of their money and future security in schemes over which they do not have direct control. The degree of trust which is needed, especially if we are to compel people to do that, is very great indeed. I do not believe that our institutional framework is yet ready to bear the weight and something should be done about it.

I intend to make just one more remark dealing with the subject of long-term care. It is not perhaps technically within the words of the Motion but it is very closely related to it. The Government's manifesto committed them to a review. We agreed with that commitment and said something closely similar. At the end of the Labour Party Conference, the Prime Minister said that he hoped that those who conduct the review will not tell him that that is a subject which needs more money. According to the rules of counsel, as understood by every medieval ruler, it was the duty and first mark of a faithful counsellor to tell the ruler things that he did not want to hear. I hope that the Prime Minister has faithful counsellors.

7.43 p.m.

Lord Lucas: My Lords, when I saw the list of speakers I knew that today's debate would be of high quality but even those expectations have been exceeded. I listened with fascination and awe to most of the speeches and with relief to some of them, including that made by my noble friend Lord Buckinghamshire which was so high powered that I feel quite unable to even attempt to reply to it. I do not envy the challenge placed upon the noble Baroness, Lady Hollis, in responding to the debate.

The Motion addresses a matter of great national importance and it is one which the Government have set out to take on. In doing so I hope that they can count on a great deal of support from us because I think that we share the aims that they have set out and I hope that in many instances we shall be able to approve of the methods they choose.

We are all living longer, we hope, and living better. That places a great strain on the finances of the country and on the way in which that income in our retirement is to be provided. We face a challenge of what to do with our poorer pensioners not only as regards how we are to provide for them but how we are to deal with the transition between poor pensioners for whom the state provides and slightly better off pensioners for whom the state does not. It would indeed be a very odd twist of a

15 Oct 1997 : Column 510

compulsory additional pension scheme if it turned out to be a tax on the relatively poor, who ended up no better off than they would be on social security, and a benefit for the rich who ended up with additional money.

It is a problem of great complexity. We must understand how to incentivise people and to persuade them that parting with that additional money is the correct thing to do. We must understand how to control and decide on the degree of risk which individuals should be asked to take as to what their final pension is to be and, if we wish to moderate that risk, how it should be moderated. We need to pay particular regard to some of the side effects that those great changes will have.

I take one particular example which was mentioned by the noble Lord, Lord Grantley, in what I thought was a superb speech: that is, tracker funds. Tracker funds are a parasite on the markets of which they are a part. They contribute nothing to decision taking within that market and nothing to the ultimate functions of that market to allocate capital correctly. A market can withstand them in low volumes but they pose all sorts of problems if they become a serious part of pension provision.

What are they to track? Are they to track a limited index and leave companies out of it or are they to track an index comprising all quoted shares and become totally indiscriminate? Are they to take in European shares? Are we sure that the rules of the European Union and the ecu will permit us, in the evolution of the timescale that we are talking about, to have our principal pension fund investments restricted to UK shares? Indeed, what is a UK share? Is it one that is listed here or is it restricted to companies which have the principal proportion of their business here? If it is to be a company which is listed here, why should we discriminate in favour of a company which has chosen only to list here rather than one which has an almost identical business but happens to be listed in, for example, New York? There are all sorts of problems in deciding what to track.

If tracker funds become a significant proportion of a market, then the opportunities for people to play against them become enormous. Tracker funds have to buy shares and, as anyone who has looked at the way that currency speculators can make money out of markets where governments are committed to going in one direction will understand, there are enormous opportunities for people to play against tracker funds: to sell to them when they have to buy; and then to make it impossible for them to sell when the market is going down. It is possible to make extremely substantial amounts of money by playing against them. Therefore, I hope that we shall not go down that route.

But, of course, not going down that route re-opens the question of how risk and expenses are to be controlled in that additional saving. Asking people to save more also re-opens the whole question of what a pension fund should be. Again, as the noble Lord, Lord Grantley, pointed out, as currently structured, pension funds are disadvantageous forms of saving. The advantage is made up only by the tax advantages which they enjoy. The restrictions placed upon them are cumbersome and

15 Oct 1997 : Column 511

difficult to live with. If we are to be asked to save greater proportions of our money in pension schemes, it seems to me that we should look at how we incorporate houses and real property in them. Why should I not, during my life, put aside money in the form of a villa in the south of France? That is something which, when I no longer wish to use it, I can sell, and that is providing for my retirement. That is perhaps taking a rather gross example but why should saving have to be additional to that? Coming down to a more ordinary level, why should people have to put aside money throughout their lives when they have bought a house which is suitable for themselves and their children and which, in retirement, they will be happy to down-size to a smaller house and release that capital to be part of their pension funds.

The noble Lord, Lord Grantley, raised the question of annuities. I agree with him entirely. As currently set up, they are an iniquity. Few people with any sense and the freedom to choose would invest in an annuity. It does not reflect personal circumstances. There is the extraordinary situation whereby if you wish to insure your life, which is rather the other side of an annuity, your health will be assessed but if you want an annuity, the fact that you are likely to die two years hence makes no difference.

The investments underlying an annuity, as it is currently structured, have to be low risk, steady investments with a consequent low rate of return. When people are picking up such annuities to look after them for, say, 20 or 30 more years, the underlying investments should, if they are to give the best value to the pensioner, be much more flexible. If, as this Government suggest, we are to increase and make compulsory the additional pensions and additional savings for retirement, such matters must be addressed.

In proceeding with this difficult and important task--and one which we hope to be able to support--I hope that the Government will adopt three principles--namely, openness, thoughtfulness and trust. I say openness because what the Government know, in particular what the Civil Service knows, is limited. We are talking about enormously complicated areas. There are many people in the world who understand bits of such areas better than the Civil Service. The Minister need only look at the Pensions Act that we passed and its consequences to realise the limitations of the Civil Service which produced it. That legislation was produced by a team of 80 civil servants with a great deal of effort and intelligence. Yet it has still produced some side effects that we regret, as well as being a cumbersome and unpractical way of tackling the problems that it set out to address. It is most important that such matters should be widely discussed and aired before we commit ourselves to further legislation.

Secondly, I emphasise thoughtfulness. In my view it is enormously important that the Government should think before they leap. The Budget was a great example of doing the exact opposite. As the noble Lord, Lord Grantley, and my noble friend Lord Mackintosh, said, it will perhaps turn out to have been the death knell of

15 Oct 1997 : Column 512

defined benefit schemes. That is surely not something that the Government, in taking a longer term and calmer view of things, would wish.

The additional tax on pension funds was said to be a move to encourage companies to invest more long term. However, because of the structure of the pension funds industry and because of the way in which the Pensions Act that we passed bites and, indeed, because of the way that pension funds are currently valued, it will instead result in a net cash outflow from companies in the short term. It will also result in institutions taking a shorter-term view of investments and demanding even more cash back from companies by way of share repurchase and other systems to make up for their lack of income. Its effects in the medium to short term will be exactly the opposite to those which the Chancellor of the Exchequer said he wished to have. As pointed out by other speakers, that is likely to result in a large-scale return to the SERPS scheme which, again, is something which surely, given the time to think about it, the Government would not have chosen to do.

Thirdly, there is the question of trust. I believe that the noble Lord, Lord Borrie, and others quite correctly raised the issue of pensions mis-selling. Clearly, that is a betrayal of trust. If we are to ask people to trust us and to trust the investing institutions with money under restrictions over a long period of time so as to provide something which is very important to them, then trust is the essential ingredient. That is why we are seeing the likes of Marks and Spencer and Virgin coming into this market. They do so with a clean sheet and they are names which we have learned to trust. That must be an enormously important part of whatever is put before the public in the future.

However, it is equally important that the Government should earn our trust. An individual who was due to retire shortly after the last Budget will find, at a stroke, that he will get 16 per cent. less by way of pension. That is not the sort of action which is likely to encourage people to believe that their pensions, and the arrangements under which they are made, are in safe hands under this Government and the proposals which they make. As my noble friend Lord Lindsey and Abingdon pointed out, I very much doubt whether this would have been brought forward if the senior civil servants who proposed it had thought that it would mean a 16 per cent. cut in their pensions should they retire the year afterwards. But, of course, it does not affect them because they belong to a different scheme and are not subject to this particular additional tax.

Breaking the trust of the nation in the way that the Government did with the last Budget--indeed, breaking the trust in terms of the promise which they made not to increase taxes and directing that tax at pension funds where trust and long-term trust is so important--is a mistake which they will regret for a long time.

7.55 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, while there are many strengths in our pension system and many people who do enjoy a

15 Oct 1997 : Column 513

reasonable degree of independence and security in retirement, far too many, as has been mentioned tonight, do not. The failure of the last government over the past two decades to develop an adequate pensions strategy has resulted in widening inequality among pensioners. As we noticed yesterday in an interchange which took place during Question Time, the gap between the richest and the poorest pensioners has more than doubled in the past 18 years. A quarter of all pensioners either receive or--worse--are entitled to but do not claim income support. Many more depend on means-tested benefits. All the indications are that these inequalities will continue and widen in the future if we simply continue with the current system.

Far too many people at work today face the bleak prospect in retirement in which they passport the poverty of their working lives into a poverty of old age. That will continue to be the case unless we tackle the failings in the current system. Past policies have left too many people without access to value for money, or to secure and flexible pension provision.

Occupational pensions now cover less than half the work force and as local and central government staff numbers have retracted, so has that proportion shrunk since the late 1960s. We need also to address the problems and difficulties faced by low income workers, especially those with intermittent work patterns--that is, those working part-time, casually or on temporary contracts. We need to understand the situation of self-employed people and we must also recognise, as many speakers have said tonight, those who cannot contribute to a second pension because of their caring responsibilities. As I said, even among those with access to occupational pensions, too many are choosing not to join such schemes.

We know that this is the broad picture of the pensions world that we have inherited and these issues are central to our review of pensions. The initial consultation period is now well under way and will last until the end of October. We plan to publish an initial framework for change in the first part of 1998. There will then be a period of further consultation before firm proposals are finalised. However, at the heart of the difficulty--and this has been mentioned tonight in our most thoughtful and wide-ranging debate from which I have certainly learnt a great deal--is the fact that pension provision today is too often misaligned with the world of work that it represents. The world of work has become a flexible world, but pension provision has not followed suit.

I shall now attempt to answer the questions raised by speakers tonight. In a thoughtful and most professional speech the noble Earl, Lord Buckinghamshire, was highly altruistic. He is someone who makes his money from pension complexity, but he called for pension simplicity. We look forward to his continued pro bono publico work in that area in the future. The noble Earl made two main points. First, he was right to emphasise the need for a good second pension and to highlight the inadequacy of existing second pension coverage. The noble Earl drew our attention to the fact that defined benefit schemes were being replaced by defined

15 Oct 1997 : Column 514

contributions which of course lay the risk off onto the employee--which is perhaps the downside--but which equally can offer good returns based on equities and a more flexible response, especially with transfers, to a flexible labour market.

The noble Earl also drew our attention to the problems which can arise with personal pensions, as indeed did other speakers. However, in my view none of your Lordships criticised the triple scandal surrounding personal pensions. I have in mind not only the scandal of mis-selling that has already been mentioned but also the scandal as regards charges. In the latter case, even if a personal pension lasts for only two years, 75 per cent. of the money invested can go into charges. If it is a matter of 10 years, then up to one third of the money can go into such charges. Indeed, overall, one quarter of the money is likely to go into charges. That is scandalous.

However, there is a third scandal; namely, that over 50 per cent. of these mis-sold personal pensions were based merely on the recycling of a national insurance rebate which is so low that they are unlikely to float their recipients off income related means-tested benefits in old age. That is a triple scandal. These pensions have been mis-sold to people and as a result people's own best efforts to meet the aim that we have identified tonight which is a portable, transferable and flexible means for secure retirement, have failed and their trust has been destroyed. I do not think there is any doubt in this House that we must seek to ensure that no such scandal ever recurs. When talking about the report of the Director General of Fair Trading, my noble friend Lord Borrie was right to make the points that he did. I am sure that all Members of your Lordships' House welcomed that report.

The noble Earl also referred to the problem of inequity of pension provision for part-time workers, for those who are caring for others at home and other such people. He will know that is precisely why, in addition to our stakeholder pension, we seek to provide for those in flexible labour situations. We shall introduce a citizenship pension to enable those who have home and caring responsibilities to passport into a version of SERPS the contributions that at present the Government would have to make. We hope that that citizenship pension will provide proper taxpayer support for the old age of those with legitimate caring responsibilities. We shall bring proposals forward for that in due course.

The noble Earl mentioned the need for simplification of our pension formula. In this he was joined by the noble Lord, Lord Grantley, and the noble Baroness, Lady O'Cathain. As your Lordships will know, the Pensions Act has been in place for less than 12 months. We are monitoring it. That is necessary to allow the new arrangements to settle down. However, trustees are required to provide information about the schemes. We shall want to monitor that to ensure they are doing so properly and successfully. The Government may consider an investors in pensions award to publicise such activity. As has been rightly said, if people do not know of the virtues, the advantages and the investment policy of the pensions that trustees are managing on their behalf they will not invest so readily in those

15 Oct 1997 : Column 515

pensions and they will not take advantage of the available opportunities. I am sure that we all speak with one voice on that issue.

The noble Viscount, Lord Mackintosh, asked us to be honest about the state pension and its inadequacies. We are honest about it. It is precisely for that reason that my honourable friend in another place, the pensions Minister, Mr. John Denham, is reviewing proposals for a stakeholder pension. He, too, is concerned--as we all are--that people should think about and start pension provision at the beginning of their working lives, when they have ample time to build up a pension fund to meet the pension promise they are entitled to enjoy, rather than at the end. That is why in its New Deal proposals Labour is anxious to ensure that people enjoy a good working life as the basis on which to build a secure pension life.

The noble Viscount reminded us of the significant problem of the underfunding of pensions, particularly in the case of people such as women who have intermittent working lives. He was right to mention that. For that reason many years ago in the late 1970s my noble friend abolished the right of newly married women to pay a limited national insurance contribution which would result in only limited pension rights. As this scheme progresses, more and more people will benefit from pension coverage. The noble Viscount also asked us to consider encouraging employers to develop financial plans--as in the USA--for their employees to consider their long-term pension future and to increase their awareness of that. That is a useful and interesting suggestion and certainly one that I shall ask my honourable friend John Denham to bring to the attention of the pensions review if it is not already on the agenda, as I suspect it is. I thank the noble Viscount for that suggestion.

The noble Lord, Lord Grantley, made an interesting speech in which he considered the issue of compulsion. As my noble friend Lord Borrie rightly said, there is already a considerable element of compulsion within the existing pension arrangements. Contributions to taxation which funds the state pension scheme and contributions over the income level of £62 a week to SERPS or their equivalent are already made. However, I refer to the wider issue of compulsion. The Government are of course happy to consider representations made to us on this matter. If it is clear that there is an overwhelming consensus on this I am sure that the Government would be happy to move in that direction. However, at this stage it is an issue for the pensions review to consider in the light of representations made to it.

The noble Lord, Lord Grantley, was in favour of compulsion on three conditions: first, that there is better tax treatment; secondly, that there is sufficient political stability; and, thirdly, that there is complete freedom for investors to choose how they draw down their annuity rates. As regards tax treatment, that brings us to the spectre at the feast--if I can call it that--of ACT which either hovered over or subverted most of the speeches tonight. At the end of the day I believe that there is a basic division of opinion between those on the Benches

15 Oct 1997 : Column 516

opposite and those on these Benches who do or do not believe that pensions should be supported by an artificial distortion of the investment market.

As we all know, what has happened with ACT is that money has been drawn for short-term income benefit which in our view should instead have been invested in the capital strategies of companies to produce the long-term economic health on which the companies themselves and their long-term pension plans rests. There is a fundamental difference between us on this but we do not believe that people should be attracted to pensions exclusively by virtue of a distorted pensions regime of taxes as opposed to being attracted to pensions because they represent--as I believe they do--the most healthy and satisfactory method of making a long-term investment in one's own, one's company's and one's country's economic future. I believe that only pensions based on that premise will be healthy and secure. As I said, that is the division between us. Before the changes in the Budget, ACT warped and distorted the economic framework of investment in this country. The Budget in its wider context, including the reduction in corporation tax, the new deal proposals and other such measures seeks to establish a healthy pensions framework built on a healthy economy of investment. We believe it is right that we should take the long-term view on this.

The noble Lord, Lord Grantley, also wished to build sufficient political stability. I was delighted to hear the interesting speech of the noble Earl, Lord Russell, and the interesting comments of the noble Lord, Lord Lucas. I was delighted to hear that they will join with us in seeking to establish an agenda for a generation in which we can all be secure. Your Lordships were right to point out that pension schemes in which people can have no confidence for the future and which they believe are subject to the vagaries of political judgment will not attract the savings and the investment that they need. I welcome their contributions to the discussions and debates to ensure that that stability is achieved.

The noble Lord also referred to the need for investors to have complete freedom for investment and not to find by the age of 75 that 75 per cent. of their income is forced into annuities. The pensions review will consider the rules regarding the drawing down of annuities to see whether that is correct. However, we believe that pensions funds and the regulatory regime that surround them should be required to take the long-term view, as is the case with annuities. I believe that the noble Lord asked for a pamphlet on all the pension rules. My answer to that is that it would be some pamphlet and some rules!

I now address the thoughtful remarks made by the noble Baroness, Lady O'Cathain. She emphasised--rightly in my view--that government must encourage saving and that government must encourage a propensity to start saving early. We need to increase saving but the problem has been that irregularity of income, which is what flexible work engenders, does not encourage regularity of saving. That is why we must work with the pensions industry to develop new packages, new portfolios, with which to carry that investment into old age. As the noble Baroness said, we

15 Oct 1997 : Column 517

need to encourage employer schemes. She is right to emphasise that charges in occupational pension schemes at about 5 per cent. are very favourable and beneficial in good occupational schemes compared with personal pensions. She is also right to say that we must have regulation that is easy to understand.

The noble Baroness asked me whether the Government will reconsider the changes made in 1988 by the previous Government which did not require employees to join employer schemes. I believe that since 1988, and as a result of that change, 1 million employees now forgo the opportunity to be members of good occupational schemes. Like the noble Baroness, for most of them that must surely be short sighted, although in some circumstances it may be a prudent decision.

However, that is why we are considering the issues as regards what goes into stakeholding to make that an attractive alternative funded scheme in order to offer the benefits of flexibility, portability, and so on, that some of the occupational schemes have not offered in the past. We hope, therefore, that it will encourage the generation of people who I believe should be in occupational schemes to have a good, satisfactory alternative on a group base, or the like, which currently they do not have.

The noble Baroness and other noble Lords asked about credit for carers. That is exactly why we shall be developing citizenship pensions, so that those who in good faith take themselves out of the waged labour market to enter the unwaged labour market of caring should not be penalised in old age for doing so. We all know that too often being a carer and helping someone else to cope with the poverty of old age ensures that the carer will be impoverished and isolated when in turn he or she enters old age and finds no one to care for him or her. The Government take the issue seriously and will seek to review it. I am chairing a review on disability and carers' allowances.

The noble Baroness asked the wider question as to why we do not offer more carrots as well as sticks in encouraging people into pension provision. We should emphasise that pension schemes continue to benefit from significant tax exemptions. Government made it clear in the last Budget that, for example, they would not implement the previous Government's proposal to phase out tax reliefs on employee contributions. Companies were privileged as a result of the cuts in corporation tax--they are now the lowest in Europe--which we believe will provide an environment for investment. We believe that pensions continue to provide an attractive and tax supported regime for savings, but we shall look at the issue in our review.

My noble friend Lord Borrie, and the noble Earl, Lord Russell, raised the problem--it is dear to my heart--about the increasing inequality within the pensioner world, if I may so put it, through the growing dependence on income support while many others rightly enjoy the financial comfort of occupational pensions. Income support is received by 1.8 million people. A further million should receive it but do not

15 Oct 1997 : Column 518

claim it. About another 400,000 to 500,000 people are within £5 of income support levels and are therefore deeply poor.

My noble friend Lord Borrie and the noble Earl, Lord Russell, were right to draw attention to the problem that if we raise the basic state pension, all of us, including many of your Lordships, stand to gain except those who need it most--elderly women who simply see it deducted off their income support. How do we achieve targeted help without stigma? It is precisely because of that problem that the pensions review needs to consider over the next year the roots of earnings link as opposed to the RPI link for the state pension.

The noble Earl, Lord Lindsey and Abingdon, and the noble Earl, Lord Clanwilliam, raised the question of ACT. I hope that I have addressed that. There was reference to rebates to the National Insurance Fund. Should the Government Actuary decide to raise the issue with Government, at that point the Government would consider those representations.

The noble Earl raised a wider point about whether pensions were a burden on companies, handicapping British companies in the competition with Europe. Employers do not have to provide occupational pensions. It is a choice they make because they believe that it is to their economic advantage so to do.

Next Section Back to Table of Contents Lords Hansard Home Page