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11 Feb 1998 : Column 1193

6.23 p.m.

Lord Barnett: My Lords, it is my pleasure to congratulate the noble Baroness on an excellent speech. That is not surprising. I know the noble Baroness very well and I knew that she would make an excellent speech. I even found myself agreeing with some of it, as will be clear in a moment.

The main objective, to which the noble Baroness rightly referred--and it is the Government's objective--is to increase real, long-term savings. There are two real questions. First, what will ISAs do to the savings of middle income earners; and, secondly, what will they do to the savings of low income earners?

Critics have argued that ISAs will discourage middle income earners from saving. The National Institute is a body for which I have great respect. Its January review contains an article by James Sefton and Martin Weale. They talk about the replacement of PEPs and TESSAs by ISAs. They say that it,

    "is likely to result in a reduction in the overall level of national wealth by about 4% of GDP".

They base that on a model survey they did. The model will take a long time to be put into effect and, frankly, like most models, it arouses scepticism. I am glad to see my noble friend Lord Currie nodding. I may not be Euro-sceptical, but I am sceptical about such models. They go on to say that the,

    "extra taxation on the incomes of the wealthy discourages savings and this change is unlikely to be compensated by increased savings of poorer people".

I shall come back to that in a moment. I take first the point about the effect on middle income earners. The critics argue that they would be discouraged from saving. That is the projection of the National Institute in its review. Frankly, I am bound to tell the institute and your Lordships that that is not true, for one simple reason. I declare an interest. I have PEPs. And who would not? One might as well take advantage of the tax savings. I am happy to avoid taxation in that legitimate way.

I say that it is not true because it does not discourage my saving or that, I imagine, of many middle and higher income groups. The reason is that we are not talking about savings. It is tax relief on investments. In my case, if PEPs were abolished altogether and ISAs were not introduced, that would not affect my investments at all. I would pay more tax and so would most middle and higher income groups. One could live with that, as, I am sure, could my noble friend, even on his modest salary.

Much more important than the lack of effect on middle income earners is whether ISAs will increase real savings of the less well off, namely, the poor. My honourable friend the Paymaster General made a speech on 27th January. I even agree with him occasionally as well as the noble Baroness. My honourable friend said:

    "The stakeholder pension involves a commitment to lock money away in retirement"--

I shall come back to that in a moment--

    "while the ISA gives greater access to their money".

That is the point. And that is why ISAs, or PEPs for that matter--unlike TESSAs, which have to be held for five years--will not substantially increase real net savings

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because access will be available and it will be used. So the net savings will be minimal and the marginal improvement from ISAs, even if they are sold in supermarkets like Tesco or others--I do not know whether the noble Baroness knows of them--such as Sainsbury's, will be very little.

I declare an interest as a tiny shareholder in the Prudential. I have not done too well of late. Its criticism has been the other way around. It believes that ISAs will be hugely successful, but for low income groups. The Prudential believes that that will be at the expense of pension savings. Not unnaturally the Prudential wants ISAs to be moved into pensions without penalty.

I have great regard for the Institute of Fiscal Studies. It also wants reform explicitly linked to pensions. Keeping in mind the main objective with which I started, I agree with the Pru, the IFS and, indeed, with the Government that what they have in mind with regard to the stakeholder pension scheme--at least, what I think they have in mind or, as I see my noble friend Lord Haskel shaking his head, what I hope they have in mind--is that it is possible to kill two birds with one reform. One could have more real savings if one linked them with pensions. I should emphasise that I am not suggesting that everyone should invest in the Pru with their pensions. I do not. I am happy to tell it so.

I accept entirely the point made by the noble Baroness about the inevitable costs of insurance schemes. I hope that the Government will take account of that. If they are trying to encourage more long-term savings through pensions and annuities, I hope that they will look at those costs. However, as the noble Baroness rightly said, the costs represent something which cannot and does not come cheaply. If subsidies are to go anywhere, it might be sensible for the Government to look in that direction, although perhaps not at the firm of the noble Lord, Lord St. John of Bletso--I am referring to Merrill Lynch--because it can do that cheaply.

The plain fact is that the best way to increase long-term savings would be by linking ISAs into annuities or pensions with some tax relief for low-income earners. In that way the Government would meet their objectives while achieving the crucial increase in retirement income through a second pension. I hope that my noble friend the Deputy Chief Whip, who should be a Minister, can assure us that that is the way in which the Government's plan is intended to move.

6.31 p.m.

Viscount Runciman of Doxford: My Lords, this is the first time that I have addressed your Lordships in my capacity as deputy chairman of the Financial Services Authority. In that capacity, I should like to say, first, that whatever reservations any of us may have about the present Government's ability to turn the rhetoric of effective opposition into the practice of efficient administration, the decision to introduce an immediate and wide-ranging reform of the whole system of financial regulation was to us on the board of the SIB, as we then were, as welcome as it was unexpected. I have sometimes been asked what it felt like, to which I have answered that it was a bit like being a small boy who

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has been unsuccessfully begging the neighbouring farmer for a bag of apples and is then overnight presented by the farmer's successor with a whole blooming orchard.

The difficulties of combining the protection of investors--or should we say "savers"--with the maintenance of flexible and competitive markets for investment products will inevitably remain, even after the now manifest deficiencies of the 1986 Act have been remedied, as I trust that they will be, by the new legislation which is beginning to go through Parliament.

Whoever the innovator may be, innovations will always need to be carefully scrutinised for their potential hazards no less than for their potential benefits to the prospective investor, particularly when the investor or saver may have little or no personal experience of such matters.

It is therefore a little troubling that ISAs should appear to have been so proudly laid out before the investing public with so little thought having been given, as far as I at least can see, to regulatory matters. It is not even clear whether ISAs were first conceived of simply in terms of tax relief, in which case there would be no need for regulatory wrapping at all, or whether, as now seems apparent, they should have been seen from the start as a product of the kind for which an advice requirement is not only appropriate but necessary. That would be so even if the constituents of ISAs were to be deposit products only. Once there is a life assurance element--I have considerable sympathy with those who argue that there ought not to be, or not unless we are talking about single premiums only-- a quite considerable advice requirement (and quite a burdensome one) will be inescapable.

Here, I should like to echo some of the points on which the noble Baroness touched in her opening speech. We shall then be into suitability, actuarial projections, polarisation between tied and independent advisers, exit charges, illiquidity and, above all, surrender penalties for early encashment of the kind which, as I am sure I do not need to remind any of your Lordships, can be seriously damaging to investors' financial health.

There are also issues which do not yet seem to have been addressed, although I trust that we shall be assured that they soon will be. I refer to matters such as administration, custody, client money rules on interest, the handling of consumer complaints, marketing costs, possible investment in overseas jurisdictions and the need for proper authorisation of retail outlets.

All in all, the changes likely to be required in the existing regulatory framework will be far from straightforward--and that is even without regard to the obligations which may be imposed by European directives. Paragraph 14 of the Government's proposals for ISAs states that the Government will consider the appropriate regulatory environment and, if necessary, propose changes. I very much hope that that does not mean that the design of this new and potentially controversial product will be settled before the regulatory issues have been properly addressed. I hope to hear an assurance to that effect before the end of the debate.

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6.35 p.m.

The Earl of Buckinghamshire: My Lords, before I launch into my speech, perhaps I should bring to your Lordships' attention once again that fact that I am a partner in Watson Wyatt Partners, which gives financial advice to individuals. I hasten to add that that is not something that I do because I refuse to take any more exams!

Although this debate has been called to discuss the replacement of TESSAs and PEPs with Individual Savings Accounts, I intend widening the debate to consider some of the broader issues of savings and taxation in this country. There has, I believe, been a growing realisation that "savings" should be looked at in the round and not in isolated pockets. Unfortunately, the Government have not yet grasped the importance of that.

I turn first to Individual Savings Accounts. The noble Lord, Lord Barnett, mentioned that ISAs are intended primarily for long-term savings. However, I believe that it is the first time that a savings product being promoted by the Government (with tax breaks costing the Treasury revenue loss) has been introduced which also has some short-term savings objectives. I wonder how easily that will sit with the need to encourage long-term savings for our retirement and for our healthcare in retirement, where the costs are ever-increasing. It will be an interesting development and we shall await with interest its impact on savings ratios.

I have also read with interest the introductory comments on the product made by the Minister, Mr. Geoffrey Robinson, who said that it has been introduced for simplicity, flexibility, accessibility and fairness--a somewhat pious hope which I suspect that only a Treasury Minister could utter.

As my noble friend Lady O'Cathain mentioned, a number of administrative issues will prove difficult. I shall mention but one. It relates to the £50,000 limit. I believe that that refers to the market value and, if so, it will be almost impossible to police. If that limit of £50,000 is to stay--I would prefer not to have such a low limit--it seems to me that some form of contribution or book-cost method for determining that £50,000 should be adopted.

I turn now to the transitional arrangements for personal equity plans. I believe that the original proposals on which the Government are seeking consultation are somewhat defective. I hope that the article in the Independent on 5th February will prove to be correct and that the Budget on 17th March will include relaxation in that area. If it does not, there may be many who took out personal equity plans to secure long-term savings, such as mortgages, who will be aggrieved at the Government's proposals and would want another health warning to appear on the product which is being launched.

Having mentioned the Budget, it may be appropriate for me to turn to some taxation issues. The Green Budget produced by the Institute for Fiscal Studies argued that the reform of tax concessions for savings should be implicitly or explicitly linked to pension reform. A number of leaks in the press have suggested

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that the Government intend to embark on yet another series of taxation reforms of pension schemes, one of which relates to the removal of tax on higher rate payers. There are some 2 million of these individuals in the country who pay higher rate tax, many on relatively modest incomes. The peculiar position we face is that possibly a higher rate taxpayer will receive tax relief at a lower rate but will pay a higher rate when he retires. I do not believe that that is what the Government intend.

There has also been speculation that the Chancellor may introduce capital gains tax on occupational pension schemes. I note that that is something from which ISAs will be exempt. Linked with last year's Budget changes on dividend tax reclamation, one may ask oneself whether the Government really are in the business of promoting long-term savings. One of the outcomes not anticipated by the Government last July in their £4 billion raid on pension funds was the impact on personal pensions. They found that financial advisers throughout the country advised their clients to contract back into SERPS when faced with the removal of the ability to reclaim tax on dividends. In those circumstances the Government asked the Government Actuary to reflect on the loss. Having reflected upon it, the Government Actuary advised that the removal of ACT did have an adverse impact. I find that to be an interesting opinion given the Government's previously held view that their tax changes would have no adverse impact.

The Prudential in its written submission, and the noble Lord, Lord Barnett, this evening, have said that ISAs should be linked to pensions. That is an interesting structural comment but one that will certainly add to the complexity of ISAs and conflict with the Minister's view that simplicity is part of their attraction.

The noble Viscount, Lord Runciman, clearly outlined some of the regulatory issues surrounding such a move. One imagines that it will have an impact on life assurance unless the Government change the regulations. I fear that if we go down that road the regulatory system will make it very difficult to continue with these new products.

I make no apologies for widening the discussion this evening. We need to understand the close link between taxation policy and savings policy in this country. While ISAs, if improved following consultation, may encourage additional savings, the cost of long-term savings for retirement in this country is possibly very much higher than anyone outside our business appreciates. For example, if one is a 30 year-old and wants to retire at age 55 on a reasonable income of half salary one must start saving at a rate of 30 per cent. of salary per annum. If one bears in mind that this country is likely to enter EMU in future, with long-term gilt rates falling, that figure will increase to about 40 per cent. We already have an inefficient annuity market which I suggest the Government should also look at in their policy on savings.

I am about to overrun my time. However, I should like to turn shortly to the question of financial education. The new savings products and the realisation that the state will not provide for us in our old age mean that

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the level of financial information and knowledge must be significantly improved. Even if these new products are supposed to be simple, I believe that the whole area of savings in this country is so complex that thorough education is required. That should start in schools.

Finally, I am sorry to say that I believe the Government have missed a golden opportunity to reform the whole of the savings and taxation system in this country. While they may say that that is a Herculean task for them, I remind them that they have had 18 years to think about it.

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