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Baroness Hollis of Heigham: My Lords, my noble friend dissented on two propositionsthat affecting survivors' benefits and that eradicating RPI from occupational pensions. I remind my noble friend that, under Pickering, those would be optional proposals that could be part of an employer's scheme. It is Pickering's belief that what encourages employers to leave DB schemes and transfer to DC schemes is the fact that the better the scheme, the more regulated and onerous it may appear. Therefore, if one strips it down to a bare bones scheme and makes it cheaper, there will be a greater willingness by employers to both support and access it. The problem is that that concept is counterfactual; one does not know whether or not it is true. That is precisely why we need the consultation for which my noble friend has called.
Lord Clark of Kempston: My Lords, in view of the fact that the amount of pension paid depends on the size of the pension fund, will the Minister say whether the recent tax changes relating to dividends to pension funds have assisted or damaged the funds?
Baroness Hollis of Heigham: My Lords, I thought I had answered that question fairly fully when I responded to the noble Lord, Lord Higgins. The noble Lord may disagree with my answer, but I certainly addressed the issue. I said that the reason for abolishing ACT was that, as it stood, it deformed the pattern of investment in companies through tax privileges, compared with the United States; and your Lordships can see evidence of that.
My second pointpressure of time did not permit me to make it initiallyis that the Myners report, as the noble Lord will know, said that what mattered was not the tax protection of ACT, but the asset allocation decision by good fund managers, which he reckoned was 10 times more important.
Lord Lipsey: My Lords, as Director of the Personal Investment Authority, I spent more years than I care to remember mired in the muck trying to sort out the pension mis-selling scandal. I therefore welcome the fact that, particularly for occupational pensions, some simplification is at last being advocated in this report.
Will the Minister agree that so long as pension providers are allowed to sell on the back of a lie, the lie being that in real terms investments can grow at six or eight per cent per annum, whereas four or even two per cent would be nearer the realistic mark, we shall have intermittent crises and problems in the field of pensions and will tempt people to under-provide for their pensions?
Baroness Hollis of Heigham: My Lords, my noble friend is absolutely right that we should all take more seriously, as I am sure we will, the health warning that investments can go down as well as up. All the evidence that I have looked at from 1955the same is true of all European OECD countriesis that over time, provided dividends and such like have been reinvested, equities have performed much better than either cash or government bonds. However, there is some volatility, but if one starts a pension fund at a sufficiently young age, as one should, that volatility should even itself out over 40 years.
My noble friend is right. No one can expect to revert to the years of six or eight per cent real return. We need to have much more realistic expectations, not only about what the Stock Market will return but, given longevity, about how much we need to save for the time we hope to spend in retirement. It is no longer the case that two people can expect to spend 30 to 40 years in retirement on the basis of one person working for 35 years.
One of the issues of great importance concerns people who have an opportunity to join occupational pensions but do not do so. It is estimated that 16 per cent do not, which means that 84 per cent, the vast majority, do. However, recognising that 84 per cent represents millions of people, 16 per cent represents hundreds of thousands of people. If one considers the beneficiaries of an occupational pension, such as husbands, wives and children, one runs into a large number of people.
When I was a trade union officer, I received all kinds of answers from people who were informed that the joining of a pension scheme was a condition of their employment. Unlike the noble Lord, Lord Higgins, they gave answers, such as, "I shall not live that long"
The Minister referred to pension holidays. Pension holidays have taken place. However, as I recallI was involved in pensions in my own trade unionin those days many employers were driven to introduce pension holidays after securing major improvements to their funds because otherwise there was a threat of taxation, which the previous administration introduced.
Baroness Hollis of Heigham: My noble friend has expressed views on the choice of employers to insist that an employee should join their company schemes. I recognise and respect that view, which is shared by many of our colleagues. That is exactly the kind of issue on which we shall need to seek consensus when we publish the consultation document.
Lord Hayhoe: My Lords, it is difficult to consider pensions in the round without referring to the very extensive pensions in the public servicethe Civil Service, the Armed Forces, the health service, teachers, local government, the police and other groups, which make up a very significant proportion of our country's employed people.
Public service pension schemes have tended mainly to be index-linked and to have had survivor benefits. I imagine that at least some of those who are looking forward to receiving public service pensions may be worried by press reports of this report, indicating that there are now questions marks over whether index-linking and survivor benefits will be continued. In those circumstances, will the Minister give some indication of the Government's view of the size of that matter? Such pension schemes, of which there is a wide variety in the public service, are often not funded. It is therefore necessary to take them fully into account, as I hope the proposed Green Paper will.
Baroness Hollis of Heigham: My Lords, I should like to respond by making one or two brief points. First, this is an independent report to the Government; it is not the Government's report. A whole range of proposals have been put forwardsome 52 in all. We agree with some of them because they are self-evidently virtuous while others are more provocative and we shall want to seek consent for them. The noble Lord, Lord Hayhoe, will understand therefore that we are not in a position to endorse every proposal.
Secondly, as the noble Lord, Lord Higgins, pointed out, we have to look at this in the context of the sound recommendations of Myners and the forthcoming autumn review. We need to contextualise this matter.
I turn now to the points raised with regard to public service pensions. I should like to say first that no existing pensioner could be affected by anything in Pickering. The report proposes an option for employers to make available to their employees. Thus it would be for the trustees, employers and employees of public sector firms to decide whether that is the way they wish to go and to trade, if you like, value asset in terms of the benefits of the scheme with cost of access and entry. Thus different schemes may reach different decisions. For example, I understand that the terms and conditions of the Civil Service scheme may be very different from those pertaining in my former university scheme. That is a decision made by the participants.
However, given the suggestions made in the Pickering report, it is not expected that the Government would require firms to strip advantages such as index linking and survivors' benefits out of their schemes against their current will. That has not been suggested in the report and nothing said today by my right honourable friend would suggest that either.
Lord Oakeshott of Seagrove Bay: My Lords, perhaps I may invite the Minister briefly to decontextualise for a moment and to respond to one question. Rightly she has deplored the dangerous trend whereby companies have been cutting the employers' contribution at the same time as they are moving away from defined benefit contribution schemes. What, if anything, will the Government do about this?
Baroness Hollis of Heigham: My Lords, I cannot answer the question because it falls into the same extremely difficult category as that of making pensions compulsory. If one followed the noble Lord's thinking, one would need, first, to make all pensions compulsory on employers and, secondly, to force all employees to join such compulsory schemes. Thirdly, the schemes would require a minimum contribution from employees and, fourthly, they would require a substantial minimum contribution from employers. Finally, agreement would have to be reached on difficult issues such as index-linking, survivors' benefits and so forth.
If the noble Lord is seeking to press me on what we are going to do about all five issues, then I cannot tell him. Those are not government decisions. What must be done is to build a consensus with regard to what people are willing to trade for what. Are they willing to pay for higher benefits? Are they willing to work longer for higher benefits? Are they willing to seek a second income in the household to buy those benefits? Finally, what securities and compulsions would they wish to see underpinning such schemes? As result, now is not the right time for me to ad lib in regard to some of the most difficult questions on which no government have been able effectively to reach a consensus over the past quarter of a century.
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