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House of Lords

Thursday, 27th November 2003.

The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.

Prayers—Read by the Lord Bishop of Manchester.

Public Audit (Wales) Bill [HL]

Lord Evans of Temple Guiting: My Lords, I beg to introduce a Bill to confer further functions on the Auditor General for Wales; to make provision about the audit of accounts of public bodies in Wales and related matters; to make provisions about economy, efficiency and effectiveness in relation to public bodies and registered social landlords in Wales; and for connected purposes. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Lord Evans of Temple Guiting.)

On Question, Bill read a first time, and ordered to be printed.

Energy Bill [HL]

Lord Davies of Oldham: My Lords, on behalf of my noble friend Lord Whitty, I beg to introduce a Bill to make provision for the decommissioning and cleaning up of installations and sites used for, or contaminated by, nuclear activities; to make provision relating to the civil nuclear industry; to make provision about radioactive waste; to make provision for the development, regulation and encouragement of the use of renewable energy sources; to make further provision in connection with the regulation of the gas and electricity industries; to make provision for the imposition of charges in connection with the carrying out of the Secretary of State's functions relating to energy matters; to make provision for giving effect to international agreements relating to pipelines and offshore installations; and for connected purposes. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Lord Davies of Oldham.)

On Question, Bill read a first time, and ordered to be printed.

Health Protection Agency Bill [HL]

Lord Davies of Oldham: My Lords, on behalf of my noble friend Lord Warner, I beg to introduce a Bill to establish the health protection agency and make provision as to its functions. I beg to move that this Bill be now read a first time.

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Moved, That the Bill be now read a first time.—(Lord Davies of Oldham.)

On Question, Bill read a first time, and ordered to be printed.

Gender Recognition Bill [HL]

Lord Davies of Oldham: My Lords, on behalf of my noble and learned friend Lord Falconer of Thoroton, I beg to introduce a Bill to make provision for, and in connection with, change of gender. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Lord Davies of Oldham.)

On Question, Bill read a first time, and ordered to be printed.

Fishery Limits (United Kingdom) Bill [HL]

Lady Saltoun of Abernethy: My Lords, I beg to introduce a Bill to make provision for the United Kingdom to withdraw from the common fisheries policy of the European Union; to amend the Fishery Limits Act 1976; and for connected purposes. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Lady Saltoun of Abernethy.)

On Question, Bill read a first time, and ordered to be printed.

Committee of Selection

11.8 a.m.

The Chairman of Committees (Lord Brabazon of Tara): My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That in accordance with Standing Order 64 a Committee of Selection be appointed to select and propose to the House the names of the Lords to form each Select Committee of the House (except the Committee of Selection itself and any committee otherwise provided for by statute or by order of the House) or any other body not being a Select Committee referred to it by the Chairman of Committees, and the panel of Deputy Chairmen of Committees; and that the following Lords together with the Chairman of Committees be named of the committee—

B. Amos (Lord President),

L. Cope of Berkeley,

L. Craig of Radley,

L. Dubs,

L. Grocott,

L. Roper,

V. Slim,

L. Strathclyde,

L. Trefgarne,

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B. Williams of Crosby.—(The Chairman of Committees.)

On Question, Motion agreed to.

Address in Reply to Her Majesty's Most Gracious Speech

11.9 a.m.

Debate resumed on the Motion moved yesterday by the Lord Ashley of Stoke—namely, That an humble Address be presented to Her Majesty as follows:

"Most Gracious Sovereign—We, Your Majesty's most dutiful and loyal subjects, the Lords Spiritual and Temporal in Parliament assembled, beg leave to thank Your Majesty for the most gracious Speech which Your Majesty has addressed to both Houses of Parliament."

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, in opening the debate, I would like to outline the DTI Bills for this Session and the pensions Bill. I will also describe the work that my department is undertaking to improve productivity in UK industry through stimulating innovation, and the wider aspects of industrial relations policy that we are currently considering.

The DTI's Energy Bill implements the Government's commitment to delivering a truly sustainable energy policy. The energy White Paper, published in February this year, set out a new strategy, based on the four pillars of environmental protection, energy reliability, competitive markets and affordable energy for all. We are now delivering that strategy, and the Energy Bill will contain legislation to deliver some of the key commitments relating to support for renewable energy, provision of secure and reliable energy supplies and more transparent market regulation. It will also fulfil our commitment to establish a single wholesale electricity market for Britain, bringing greater choice for Scottish consumers and the benefits of a GB-wide market to all generators, including renewables. The Bill will also create a nuclear decommissioning authority as a new public body to provide long-term strategic direction to the clean-up of Britain's nuclear legacy.

The Bill on company law will address those recommendations of the post-Enron reviews that require primary legislation. We are moving quickly to put those priority measures into law, ahead of the overall review of company law, which we shall bring forward as soon as it is ready. The Bill will support the measures already taken, such as action by the audit firms themselves to rotate audit partners, and the improvement and restructuring of the regulatory system for accounting and audit. It completes the UK's thorough and balanced response to the problems revealed by scandals such as Enron and will ensure that our financial reporting system remains among the best in the world.

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The company law Bill also creates the community interest company, responding to a proposal from the Strategy Unit report on the voluntary sector—Private Action, Public Benefit. That proposal was widely supported. The community interest company will provide a simple, accessible and ready-made corporate form for many social enterprises. It will be more lightly regulated than charities and will offer a useful alternative to existing forms such as industrial and provident societies and ordinary companies. Community interest companies will be suitable for many areas of activity including regeneration and neighbourhood renewal, complementing core public services in areas such as leisure and community transport, and community self-help. They are a concrete example of the Government's willingness to encourage and facilitate social enterprise as a positive force in our economy and society.

We are committed to encouraging employers and employees to work together. The employment relations Bill will contribute to a stable economy and high performance workplaces through measures to encourage greater participation in the workplace. It provides for new powers to implement the CBI and TUC framework agreement on the EU Information and Consultation Directive, and improvements to the statutory procedure for recognition of trade unions by employers, where the majority of the workforce is in favour.

The Bill is founded on the principles of better regulation. It will meet our commitment to examine how the Employment Relations Act 1999 is operating in practice by implementing the findings of the full scale review of the Act which the DTI has undertaken. The review found that the Act has worked well and does not require substantial amendment. The Bill will therefore build on the success of the Employment Relations Act by introducing targeted measures to improve the law. For example, it strengthens protections for workers who wish to be represented by a trade union or make use of trade union services; improves protections for workers who wish to take official and lawfully organised strike action; and improves the operation of individual employment rights, including improvements to the national minimum wage enforcement regime.

Finally, the Government are committed to long-term reform to ensure that the people of this country enjoy a sustainable, fair and secure income in retirement. That is why we shall bring forward a pensions Bill, alongside the measures we have already announced radically to simplify the tax rules on pensions. We need to renew the pensions partnership that is the bedrock of how Britain has long provided for itself in old age. Employers, financial institutions, ordinary people and the state are all essential players in this partnership.

The measures we shall lay before this House will build on a sustainable system of state provision, ease financial and administrative burdens on employers, seal the pensions promise for ordinary people by strengthening the protection of members' benefits, and enable people to plan for their retirement and make informed choices about saving and how long they work. The pensions Bill will be a cornerstone of our reform programme.

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These measures will be introduced at a time when we are experiencing the longest unbroken economic expansion on record. This is despite a period of global uncertainty and recession in almost all our major trade partners. Since 1997 output growth in the UK has been more stable than in any other G7 country.

Employment has increased by nearly 1.7 million since spring 1997. Nearly 28 million people are in work, close to record levels. Over the past year unemployment has been close to record lows on both the claimant count and the internationally accepted ILO measure. The claimant count remains below 1 million, something that has not been achieved since September 1975. ILO unemployment has remained close to its lowest levels since 1979.

At the same time inflation remains close to target and is forecast to continue to do so over the coming years. The UK is benefiting from the longest period of low, sustained inflation since the 1960s. Interest rates are close to the lowest levels seen since 1955.

Prospects for the world economy are also improving—seen in business confidence indicators, better financial conditions and rising stocks markets. The global recovery is still very dependent on developments in the US but there are encouraging signs that activity is gathering pace there. Within the euro area, Germany, France and Italy have all come out of the recession they experienced early this year. However, it is still difficult to assess the underlying strength of the global economy. While we remain confident in the potential for stronger growth, significant risks remain and we must stay vigilant.

Looking ahead, improvement in the global outlook and strong domestic economic fundamentals will allow the UK economy to continue to expand steadily. The Bank of England's latest inflation report recognised that the outlook is now improved since its previous report was published in August. The new central projection indicates that growth is expected to be at, or a little above, trend throughout the forecast period.

But we should not be complacent about the challenges ahead. Our productivity still lags behind the USA and many of our European partners.

We have identified the drivers of productivity and have put in place measures to improve the UK's performance. One of these drivers—alongside competition, enterprise, investment and skills—is innovation, the successful exploitation of new ideas. Innovation is becoming of increasing importance, both for businesses and for the economy as a whole. This is for two reasons.

The first is simply globalisation. Trade liberalisation and a rapid fall in communication and transport costs mean that the UK has increasingly to compete against countries with significantly lower labour costs and reasonably well educated labour forces. In 1850 it took nearly a year to sail—or send a message—around the world. Now, you can fly around the globe in a day or so and send an e-mail anywhere almost instantaneously. At the same time wages in China are less than 5 per cent of those in the UK. Hourly labour

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costs in Korea are just over half UK levels, and the proportion of graduates in the working age population is almost identical to ours.

The second reason innovation is so important for companies and governments involves the major advances taking place in science and technology. Today technology and scientific understanding are changing our world faster than ever before and developments in ICT, new materials, biotechnology, new fuels and nanotechnology are unleashing new waves of innovation and creating many opportunities for entrepreneurial businesses to gain competitive advantages.

In the UK we have some sectors that lead the world in innovation: aerospace, pharmaceuticals, biotechnology, financial services and many of the creative industries. Some firms in all sectors are global leaders. However, our overall performance is no better than average.

A good indicator of technological innovation is the level of business R&D. The latest data for 2001 show the UK well behind the US and only slightly ahead of the EU average. However, it is encouraging that after a steady period of decline from 1.5 per cent of GDP in 1981 to 1.18 per cent in 1997, the trend line is now moving upwards to 1.28 per cent in 2001.

The challenge for the UK is to understand why our innovation performance is not as good as it should be and how best government can contribute to improving our performance.

The innovation challenge has been a clear theme of the Government's policy making since 1997. In that time we have published three White Papers: Our Competitive Future—Building a Knowledge Driven Economy (1998); Excellence and Opportunity—A Science and Innovation Policy for 21st Century (2000), and Opportunity for All in a World of Change (2001).

We have put in place the key building blocks of an innovation-driven economy, in areas such as macro-economic policy, fiscal policy, competition policy, trade policy, and education and skills. We have also invested in the creation of new scientific knowledge. In 2002–03, the science budget stood at 2 billion, and that figure will increase by 10 per cent a year in real terms until 2005, when the science budget will be nearly 3 billion. That will mean that in the eight years since 1997 the science budget will have more than doubled.

But there is more that we need to do, and over the past year the Department of Trade and Industry has been co-ordinating a review of innovation policy in the UK, which will be published in the coming weeks. The analysis prepared for the review—it was published last week—highlighted areas of great strength for the UK, such as the continuing excellence of the science and engineering base and the size and sophistication of our financial markets. However, there is also room for improvement in a number of areas, which the forthcoming review will seek to address.

The Government have also commissioned Richard Lambert to review links between universities and business and how those can be improved. His report on emerging issues highlighted the many current

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examples of good practice—how universities and businesses were working effectively together. We look forward to the final report and his recommendations on how good practice can be strengthened and shared more widely.

Another area of great importance where the Government have taken action is that of the skills and competencies that firms need to develop new products, services and processes. Although we compare well at the higher-education level, our percentage of the workforce qualified to intermediate skill levels, of apprenticeships and of skilled craftsmen and technicians, is low. It stands at 28 per cent in the UK, compared to 51 per cent in France and 65 per cent in Germany. The Government plan to increase education spending by 34 per cent to 5.6 per cent of GDP by 2005–06. We have also recently issued the skills strategy, which seeks to have a major impact on the skills deficiencies that we have, particularly at the intermediate level. We need to work closely with employers, trade unions and the education and training sector to deliver the strategy.

We have an enviable record of stability and growth in the past few years. But we live in a fiercely competitive global economy and we need to pursue vigorously our programme of micro-economic reform, so that we can improve our rate of innovation and compete effectively against the low-wage emerging economies.

11.23 a.m.

Lord Higgins: My Lords, there is universal agreement that the programme set out in the Queen's Speech is very heavy—23 Bills and seven draft Bills. That will inevitably put a major burden on your Lordships' House. Immediately after the end of the previous Session, the Leader of the House of Commons, Mr Peter Hain, made some critical remarks about how we had been dealing with legislation. Those were totally unjustified. We were carrying out our duty to act as a revising Chamber.

The fact is that we now carry an ever-increasing burden because programming and other devices in the House of Commons mean that it is simply not scrutinising legislation as used to be the case. That is a major problem. We are not simply dealing with what the Commons has expressed a view on; in many cases, we are dealing with huge chunks of Bills that are completely raw and have not been considered by the Commons in detail at all. The burden on us in this House will be very substantial, but we shall carry out that duty as an Opposition as best we can.

No doubt we will have a wide-ranging debate today, including a contribution from the right reverend Prelate the Bishop of Hereford. I understand that, sadly, the debate will be his swan song. He has made major contributions to our debates, and we shall certainly miss them.

There is always an element of uncertainty about debates on the Queen's Speech. One is never quite certain what is going to happen next; for example, a

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moment or two ago, I had not quite anticipated the speech just made by the noble Lord. In winding up a debate on a previous Queen's Speech, I was rather taken by surprise because the debate that I had expected to concentrate on pensions turned out to be almost entirely devoted to the euro. Perhaps I might say a word or two about that before I turn to work and pension measures.

On a day when the Financial Times carried the main headline on its front page:

    "Sanctions deal leaves euro pact in tatters",

it seems quite extraordinary that the Government should include in the Queen's Speech the statement:

    "A draft Bill will be published to enable a referendum to be held on the adoption of the single currency, subject to the Government's five economic tests being met"".—[Official Report, 26/11/03; col. 3.]

The first part of that statement was, of course, drafted by Mr Blair and the second part by Mr Brown. The reality is that there have been dramatic developments in Europe. Perhaps in addition to the five extremely vague tests, which are open to almost any interpretation, we should add one to say, "Providing that the Germans and French are going to stick to the rules". We thought all the rules were set in concrete, and that turns out not to be the case.

I shall make a personal suggestion. If we are to have a draft single currency Bill, one might combine it with a referendum Bill on the constitution. As an economist, I have always been in favour of economy of scale, so perhaps we could have the vote on the same day.

I turn to work and pensions, and refer immediately to the draft disability Bill so warmly supported yesterday by the noble Lord, Lord Ashley of Stoke. We certainly believe that there is an overwhelming case for the Bill. There are serious loopholes in the Disability Discrimination Act. However, the worry expressed very clearly by disability rights bodies is about the delay. The Bill is to be a draft Bill, but the matter has been mulled over for years. My impression is that there is very largely consensus on it now, so we share the disappointment expressed by the Disability Rights Commission and others yesterday, immediately after the Queen's Speech, that it is not a substantive Bill. If it is to go for further consultation, it would probably be quicker to use a Joint Committee of both Houses rather than scrutiny by the departmental Select Committee in another place, which has so many substantive responsibilities.

The Minister referred briefly to pensions. As for the state provision of retirement pensions, almost all the industry bodies that responded to the Green Paper called for state pension reform. We on this side of the House have put forward substantive proposals with regard to the position of the basic state pension. Without a firm and adequate state pension, more pensioners will be means-tested and incentives to save will be reduced. Every group, from the IPPR and Age Concern on the Left, through to the National Association of Pension Funds, the Pensions Policy Institute and the engineering federation, call for reform of the state pension to be given priority.

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The Minister referred to simplification. Certainly, we would welcome that. However, the Chancellor of the Exchequer's obsession with means-testing and tax credits has led to unbelievable complexity. It would take almost the whole of the time that I have available to list the number of different credits that have been introduced, abolished, reintroduced, and so on. Since October 1999, the Government will have introduced five new tax credits for families, scrapped four of them, and introduced three more.

The matter is unbelievably complex—so complex that even the Inland Revenue is now incapable of comprehending it. As reports have recently shown, it is not paying credits to those entitled to them, but is paying credits to those not entitled to them. There is no sense in it. The Government's own assumptions about take-up show that a huge percentage of those entitled to tax credits will not receive them, because they are too complicated. In addition, we have seen that something like 2 billion has been paid out by the Inland Revenue wrongly, as was reported the other day.

I turn briefly to a number of other specific issues. There are a considerable number of them. On baby bonds or the child trust fund, there have been widespread reports in the press that the Home Secretary is concerned about the risk of fraud and that he regards the proposals as inadequate. How will asylum seekers' children be affected? Will they receive the child trust fund payments? As the financial services industry will be underwriting the system, what remuneration is it expected to receive? I put that question to the noble Lord, Lord McIntosh. What payments is it envisaged will be made to providers of arrangements under the child trust fund? Will the figure be 1 per cent, as in the case of stakeholder pensions, which has resulted a much lower take-up than we had all hoped, or will it be a higher figure? Those engaged in bringing forward a product will need to know that.

The Minister referred briefly to company pensions and the pensions Bill. Before 1997, our company pensions system was the envy of the world. The amount invested in such funds in this country was more than was invested in all of the company schemes in the rest of Europe. That system has been undermined by the Chancellor's action on ACT, by falling annuity rates, by the stock market's collapse, the introduction of FRS17, and so on. The number of company pension schemes that have closed is tragic. According to an NAPF survey, only 19 per cent of companies now offer a final salary pension scheme to new employees and 41 per cent of those that used to do so have closed them in the past year. That is a disastrous situation for many people. The vast majority of stakeholder schemes are simply empty boxes with no contributors in them.

The entire system of tax credits and minimum income guarantees is undermining the system that we have so long regarded as important. The pensions Bill, which is designed to deal with companies that become

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insolvent—and welcome though its proposals may be when we examine them in detail—is a sticking plaster over an open wound. That is very worrying indeed.

Until last December, I was the chairman of a company pension fund. I went to visit the finance director of the company in question. Having managed to maintain a final salary scheme for so long—the decision not to change it to a defined contribution scheme had been a marginal one—I had to point out to him that the Government were now introducing their pensions Bill and that the company would have to pay a premium in case some other firm were to go bust. There is an element of moral hazard in all of that, but there is no doubt that the scheme will, on the whole, lead to more closures of final salary schemes. That is a matter of considerable concern.

I shall put another specific question to the noble Lord, Lord McIntosh. The estimates of costs from sources within the industry seem to vary from a 1 billion a year to three times that amount. What is the Government's estimate? In particular, as the CBI has asked, will the Government be the guarantor of last resort? I presume that the Bill is sufficiently advanced for the Minister to be able to provide a clear answer to that question when he addresses the matter this evening. The US experience in that regard is not reassuring. There is a huge deficit in its guarantor scheme. We must take that into account when we examine the proposals, which may well prove worth while as the details emerge.

I turn to a number of specific matters to which I shall speak more briefly than I would wish to do, but we can return to them later. As I understand it, the registration of civil partnerships is to be part of a substantive Bill rather than a draft Bill. My noble friend Lord Strathclyde referred to the issue yesterday. The system for taxing the inheritance of those couples should be comparatively simple. However, in other regards, it is certainly not; for example, what will be the position on the equivalent of widows' benefits? One of the curiosities of Beveridge's legacy is that individuals who are married receive a widow's pension to which they have contributed no more than would be the case if they were single. That is a situation that has developed over the years. What will the position be for same-sex couples? Will they receive a widow's pension, or will both of them have to contribute in the way that applies to individuals? That is but one example of a question that will be asked about the Bill. Huge complications will need to be addressed. It is a classic case of a draft Bill rather than a substantive Bill being required. Those issues are very complicated. I was to glad to hear my noble friend the Leader of the Opposition in another place say that there should be a free vote on the issue.

I turn to two further matters. The noble Lord referred to simplification. We would welcome simplification of the tax system for pension schemes. However, there is widespread concern that the 1.45 million cap on individual pensions will affect far more people than the Chancellor originally expected. The number of those people seems to have risen from 5,000 to 300,000 people, rising to almost 600,000 in the future. We must consider

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that issue carefully when we discuss it. Noble Lords on these Benches have proposed that the limit should be completely removed (apart from there being a restriction on the amount that can be taken as a tax-free sum on retirement) provided that everyone in a company's workforce is given access to a pension scheme on the same terms.

I shall devote a few words to the tragic situation of Equitable Life. Nobody envisaged at the outset that the Penrose inquiry would go on as long as it has. As was pointed out from the Liberal Benches a few days ago, the length of the delay has meant that many Equitable pensioners have seen a massive reduction in their pension after they have retired. I received more letters from them a few days ago. The regulation of Equitable Life has been a lamentable failure. The task of the regulator is simply to protect policy holders; and policy holders have not been protected. That matter must be resolved without further delay. It is regrettable that the ombudsman has not taken over responsibility for the matter, but has chosen to wait until Penrose reports. The delay is a serious problem.

I turn to annuities for over-75s. I notice that the noble Lord is waving. I am not responsible for the fact that the Minister spoke for such a short time. I gather that the normal duration for such speeches is 20 minutes, but I shall not speak for much longer.

Your Lordships' House has voted twice to remove the age limit of 75 for taking out an annuity, but it has been overturned in another place. The issue remains a source of justifiable complaint. It is more so at the moment because government borrowing is going through the roof, which will inevitably lead to increased interest rates. If that happens, someone who is 75 next week will have to take an annuity at present rates, whereas, if he could hang on perhaps for another 18 months, he would get a higher rate which he would get for the remainder of his life. This is a long overdue reform, and we really must sort out this particular problem.

I have no time to discuss in broad terms the economic situation. We shall no doubt have what used to be called the "Autumn Statement"; it now seems more like a Christmas saga of the Pre-Budget Report. We can debate these matters then. However, many issues are causing grave concern. There is a massive increase in private debt, particularly on credit cards. There is a massive increase in government borrowing, which is likely to result in increased interest rates. The conjunction of those two things may create a very serious situation indeed in the housing market and elsewhere. All I do at this stage is simply to refer to today's report from the OECD which clearly states that there are serious worries about the Chancellor's prudence. I share that concern. However, we look forward to hearing the rest of the debate on this set of issues.

11.41 a.m.

Lord Newby: My Lords, I join the noble Lord, Lord Higgins, in saying how sorry we are that this will be the final speech in your Lordships' House made by the right reverend Prelate the Bishop of Hereford. The

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right reverend Prelate was one of a number of your Lordships who made me feel very welcome in this House when I first joined. I am sure that we will all be very sorry that he will not be contributing to our deliberations in the future.

We have a very broad topic for discussion today. I, like the noble Lord, Lord Higgins, will attempt to gallop across a very broad field. I should like to start with the economy. I think that the state of the economy is like the curate's egg—undoubtedly some aspects are positive. Overall growth remains much more satisfactory in the UK than in a number of other competitor countries. However, if one looks at the components of growth and in particular the extent to which it has been fuelled by the massive increase in government expenditure this year, one will see that a number of questions can legitimately be asked about where the economy will be in the medium term. Inflation, which is low and looks sustainably low, is the other positive area. At a later stage, however, we will need to discuss a number of issues about how the Government will amend the inflation target when they introduce the harmonised index. But that can wait for another day.

There are also a number of serious question marks against the economy. As we heard earlier this week, investment in manufacturing is down to its lowest level for 20 years. Ironically, a major reason for that appears to be that businesses are using improved revenues to deal with their pensions problems. I will come to pensions later.

The Minister described the major problem in innovation. While I accept that he personally has worked very hard in this area, it remains an area of relative failure with deep-seated roots. For example, it is a major source of worry that, on the latest available figures, UK expenditure on higher education is 26th out of 33 OECD countries. However, noble Lords will not be surprised to know that we on these Benches do not believe that top-up fees are the answer to the problem.

An underlying problem, of course, is that the public finances are deteriorating. The public sector current deficit in this financial year is likely to be 8 billion greater than forecast at the beginning of the year. The National Institute for Economic and Social Research predicts that, far from decreasing in the next couple of years as the Government predicted, the deficit is likely to increase to 18 billion in 2004–05 and 22 billion in 2005–06.

That raises serious questions about the golden rule being met. Having spent six years telling us how central it was to his strategy, the Chancellor is now downplaying its importance while, behind the scenes, apparently frantically scrabbling to re-designate expenditure from current to capital to keep within the figures. That is hardly surprising given what is being said about the likelihood of the rule being met. The national institute thinks that at best there is a 50 per cent chance of it being met in the next couple of years. The OECD, in the report to which the noble Lord, Lord Higgins, referred, is now arguing that if the rule is to be met, and certainly if

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Prudence is to retain her central place in the Government's finances, there is a strong likelihood that tax increases will be required in the next couple of years. Underlying that is a real question about the robustness of the Government's tax revenue expectations, which appear very much to have been based on the circumstances at the height of the stock market and dot.com boom. In terms of stamp duty and, more importantly, income tax revenues, those circumstances no longer obtain.

I think that that raises a serious question about the Government's own forecasts and the way in which they are presented. Currently, the Government and the Treasury produce a single forecast with no information attaching to it about the margins of uncertainty about key target variables. There is no equivalent for the economy of the Monetary Policy Committee's fan chart of expectations of future inflation. I think that there is a strong argument for adopting that kind of methodology for the economy as a whole. However, the Treasury simply will not do it.

In any event, I think that there are a number of questions about the increasing bullishness of the Treasury's forecasts compared with those of independent forecasters. I wonder whether the time has not come to introduce a British equivalent of the Congressional Budget Office in the US which produces forecasts for the benefit of the legislature rather than the executive. There are a number of ways in which we could do that in the UK; it has been suggested that the National Audit Office might take on the responsibility. However, given the centrality of forecasts in how we view the economy moving forward, I think that the idea should now be seriously examined.

Consumer debt presents another concern about the current state of the economy. I now move on to consideration of measures that were not in the Queen's Speech. We were promised an early White Paper on consumer credit when we debated the issue in this House last month. We were led to believe that there would be a consumer credit Bill in this Session. However, there is no mention of such a Bill. Perhaps the Minister can explain where that Bill has got to. We do not believe that current consumer debt levels are at a crisis point in terms of the economy as a whole. However, the growth in consumer debt linked to housing has been steadily and significantly above earnings growth, and that is clearly unsustainable in the medium to long term.

In the absence of a massive and sustained increased in mortgage interest rates, we do not see a likely collapse in house prices or a return to the high levels of negative equity of 10 to 15 years ago. However, it is extremely worrying that many individuals are running up high and unsustainable debt levels. Research published last week by J P Morgan pointed out that 3.3 million individuals are responsible for 44 per cent of the 178 billion unsecured debt in the UK, giving them an average unsecured borrowing of 24,000 each. The report concludes that the debt appears to be,

    "one of over-borrowing on unsecured terms by relatively low-income consumers",

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and to be disproportionately concentrated on non-homeowners.

For those individuals, that is a major issue. Consumer credit legislation needs to be updated to deal with loan sharks and with the whole question of the aggressive marketing and advertising of products which seem to give one something for nothing. One can build up a balance and then transfer it somewhere else for six months. One does not have to pay anything on it. That balance can then be transferred somewhere else. It is hardly surprising that those under financial pressure see that as something for nothing—a maxim which is unknown in economics and certainly in the financial services industry.

I move on to Bills that are in the Queen's Speech. The noble Lord, Lord Higgins, has already spoken at some length about pensions. The centrepiece of the pensions Bill is, of course, the pensions protection fund to spread the risk of collapse across all final salary pension schemes. It is ironic that this Chancellor is introducing this measure, given his raid on pension funds with ACT and the fact that he continues to undermine the pension fund industry with a huge hike in stamp duty on long-term leases. That will come into effect next week and will have a major impact on the commercial underpinning of that part of pension funds.

When it comes to the Bill itself and to detailed questions about the pension protection fund, we shall want to question the Government on three issues. First, will they stand behind the fund as a lender of last resort, as they do in relation to the pool for terrorism insurance? We believe that their current intentions are not to do so. However, it would be a cruel deception on pensioners if the Government introduced the fund and it then went bust because too many individual schemes fell into insolvency.

We shall also ask about the cost and complications of the pension protection fund and whether it might lead even more employers to close down their final salary pension schemes early. Certainly for large employers, we are talking about a fund which will cost many millions of pounds to subscribe to, and that will be an important consideration for them as they plan the future of such funds.

Finally, we shall want to consider the question of reputable companies which are trying very hard to honour their pension promises and pay extra money into their schemes and the extent to which they will be protected from imprudently managed companies washing their hands of their pension liability. The "moral hazard" question, which has arisen in this area in the United States to a significant extent, is a major issue but currently we are unconvinced that the Government have come to grips with it. More broadly in relation to pensions, we shall monitor very carefully the operation of the pensioner credit, about which we have major misgivings, some of which have been expressed by the noble Lord, Lord Higgins.

Moving on to other areas of legislation, we are to have a companies Bill. I do not know whether I am alone in being unsure what that Bill will now cover. I

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am unclear whether it will deal with the whole raft of issues in the draft companies Bill which have been discussed over a number of years or whether it will concern a far narrower question relating to accounting. If it is the latter, again, as with the consumer credit Bill, the interesting question arises of why we shall not see rather more in the Bill. This matter has been on the stocks for a long time. Are the Government able to tell us anything at all about the limits of the Bill and the extent to which issues are not covered by it? Can they also tell us when they plan to bring forward legislation covering everything else that needs to be dealt with in terms of reforming companies legislation?

We are happy to give a very warm welcome to the community interest company Bill—an area in which we have been seeking legislation. The Bill will attempt to introduce a balance between flexibility and regulation for community interest companies. That is long overdue. At present, it is extremely difficult for many groups and individuals who try to set up such companies even to decide what corporate form they should adopt—far less to do it. Therefore, it is a long overdue change.

Baby bonds have all the hallmarks of a straightforward government gimmick. If 350 million per year is available to spend on benefiting children and given the whole raft of measures that could be taken, would one introduce baby bonds? We do not think so. The scheme contains a number of fundamental problems but one of its essential flaws and, in our view, one that presents a real problem is the extent to which it will help those who really need benefit as opposed to middle and upper-income earners, for whom this is just another ISA. We now have a baby ISA in addition to the individual ones. Given that we know that ISAs and stakeholder pensions have failed to attract savings from people at lower income levels because they do not have the money to save, the idea that this measure will effect a substantial change to the financial prospects of children from poor families is, frankly, a deceit.

We also have a draft Bill on the euro referendum. That simply provokes in me a hollow laugh. The Bill is being brought forward at a point when we know that there will be no euro referendum. If it had been brought forward last year or the year before, there might at least have been a suggestion that there was a purpose to it. But we know for certain that we shall not have a euro referendum in this Parliament. Therefore, the Bill is an extremely strange way in which to legislate. We shall support it and hope that it will be passed, but we should be even happier if we thought that it would then be brought into effect. Currently we see no such prospect.

The previous Session was a relatively quiet time for Treasury and DTI spokesmen in your Lordships' House. It seems that this Session will be extremely busy and we look forward to it with relish.

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11.56 a.m.

Lord Haskel: My Lords, unlike the noble Lord, Lord Newby, I thought there was very little about the economy in the gracious Speech. Perhaps, as my noble friend Lord Sainsbury suggested, it was because the Chancellor continues to maintain sound public finances. I am ignorant of economics but, from what I have heard, it seems to me that the Chancellor approaches the subject with five prudent golden rules that keep endogenous growth alive and that those golden rules are more effective than growth and stability pacts, whatever they might be.

In the gracious Speech, and as stated by the Minister, it was said that the Government would encourage enterprise, and it is about enterprise that I want to speak. My question is: how will they do it? Enterprise is a very human and personal activity. It consists of things such as vision, management, productivity and innovation. Those skills are not easily taught or transferred. Indeed, many firms tell me that enterprise is at the mercy of impersonal forces, such as inflexible wages, exchange rates, industrialisation in developing economies, unlevel playing fields, pensions shortfall, new technology, poor access to capital and overbearing regulation, particularly from Brussels. Indeed, many see the decline of both enterprise and manufacturing as inevitable because of that. But are those the real reasons?

I say at once that there is no need to be unduly depressed by the steady decline of manufacturing and its share of gross domestic product. That is happening in all developed countries and, as the Minister said, it is how we react that is important. I agree that it is inevitable that products and industries will leave a developed economy such as ours, but enterprise ensures that they are replaced by other products and industries of yet greater technological sophistication and which deliver higher value and higher productivity.

Enterprise means that new firms come into markets with new processes and ideas. It is true that old firms will die, but that is part of the enterprise process. Indeed, we know that around 50 per cent of productivity growth in manufacturing over a decade is due to the entry of good firms and the exit of poor ones.

What do those successful firms do that is different? It seems to me that they grasp their destiny firmly in their own hands. They are not victims. They sweep away the barriers of their own assumptions and, in that way, they seem to create their own luck and their own good fortune. They encourage and reward ingenuity, creativity, resourcefulness and initiative, items not on the balance sheet but without which there would be no innovation, no new products, no new services and no new enterprise. Instead of complaining about regulation, these companies seem somehow to reflect and adapt to the values of their communities and staff and to build up a special kind of loyalty in that way.

Among many, that is still considered to be soft management, less effective than the hard management of mergers and acquisitions, downsizing and re-engineering, all of which appear in the accounts. But

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business schools and researchers, stock markets and financial institutions have been collecting data for years which show that that is the way that leads to improved productivity, improved profits and improved stock market value. It has always been a mystery to me why more firms do not follow that successful formula. A modern enterprising nation requires a people and business building culture rather than a financial engineering culture. Professor Porter strongly made that point in his recent paper for the DTI about UK competitiveness.

The first barrier to sweep away is the separation between manufacturing and service. The idea that manufacturing is just making things is wrong. It is part of a highly connected chain from research through production to delivering services and satisfaction to customers. If managers decide that part of the chain is manufacturing in a low labour cost country, so be it, but reducing production cost is only part of delivering higher value.

Sadly, outsourcing has become an end in itself. Accountants still convince many managers that they can improve their balance sheets simply by cutting manufacturing costs by outsourcing and writing up the value of their brands. Many forget that cost is not the only element in the value of a product. High quality and superior function are valued by customers, especially if such qualities are obvious to the consumer. But solving problems by innovation and imaginative good service are especially valued by customers.

Enterprising management in a modern developed economy such as ours has to be a subtle mix of disciplines. It requires the vision to devise new sets of values—perhaps not yet recognised by financial markets—while building strengths in technology and design, devising new services and ways of customer support here in Britain while at the same time learning how to manage production both in low-wage countries and in Britain. Some of our leading companies, such as Rolls-Royce Aero-Engines, do that brilliantly. Some have failed and gone out of business but others have appeared to replace them.

Such entry and exit should be welcomed and not hindered. It is not a sign of failure but the way an enterprising economy improves and progresses. It is one way in which competition works. Clothing companies, which originally outsourced their products to Asia to cut costs, are now in turn being forced out of business by firms such as Zara, which turn their stocks over every two weeks. To achieve that, they need to have their clothing made locally, perhaps in Britain, Spain or Italy. They have to incorporate that rapid production turnover into their sophisticated management system.

Indeed, research shows that sectors with high rates of entry and exit achieve higher rates of productivity. However, that applies to manufacturing. We do not have enough information about the process in services. Therefore, I welcome the work done by the Advanced Institute for Management sponsored by the ESRC on these matters. One interesting initial finding is that almost no UK productivity growth in retailing comes

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from entry and exit in the UK while almost all retailing productivity in the US comes from that avenue. Perhaps the Government might consider whether such factors as planning or land use restrictions are holding back enterprise in the UK retailing sector and so holding back productivity growth.

That more generous view of manufacturing as a chain from conception to customer satisfaction opens up many more opportunities for innovation and enterprise. Innovation is not just new science and new technology but identifying relationships between previously unrelated and diverse matters. That ability to reinvent oneself by using new technologies and discovering new markets is an important part of enterprise. You have to be on the spot to do that. You cannot do it if you are too spread out or have lost control of your core activities. Surely, it is now no longer supportable to differentiate between someone who services a piece of equipment and someone who assembles it. Arguably, the person who services it needs more skill than the assembler and adds more value. Certainly, high volume employment has been lost in manufacturing but the picture is entirely different if we look at the value added by industry through enterprise.

It seems to me that government must stop considering manufacturing and services separately and start looking at a whole value chain. There is a story going around about a company with an excellent reputation for productivity and service which built a new factory staffed only by a man and a dog. The dog was there to bark for the service engineer when things went wrong and the man was there to look after the dog.

It is the task of business managers to create wealth. It is their task to imagine the future and to prepare for it or to go out of business. These are very special personal and human activities. They cannot be performed by government but can be encouraged by them. As my noble friend the Minister explained, the Government are giving encouragement by creating stable and healthy economic conditions, careful tax concessions, new technologies from a sound science base and facilitating skills training. However, in the end it is down to the enterprise of business managers to create wealth.

I should like the Government to change the way that they look at industry and to look at it in the more generous and broader way that I have described. Perhaps then they too will discover more enterprising ways to encourage it.

12.7 p.m.

Lord MacGregor of Pulham Market: My Lords, Brendan Barber, the general secretary of the TUC, said the other day:

    "The precarious state of pensions is one of the most pressing issues facing us all".

I intend, therefore, to concentrate on pensions and in so doing declare an interest as trustee of a pension fund and a director of Friends Provident, one of our major providers.

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That is a pretty devastating comment by Brendan Barber, given, as my noble friend Lord Higgins said, that in 1997 we were proud to be able to say that we had one of the best provisions for pensions in this country compared with nearly every other European country. There has been a dramatic decline in our position since then. So I am glad that there is a Bill on pensions in this Session. However, the real question is whether it will meet the need and the challenge.

Why did Brendan Barber make that comment? First, there has been a huge decline in the provision made through occupational pension schemes. Only two or three years ago a trickle of companies were closing their final salary schemes to new entrants. Today there is a flood. Seventy per cent of all the FTSE 100 companies have now closed their final salary defined benefit schemes to new entrants. Less than one-fifth of all employers now offer a final salary scheme to new employees. Over 40 per cent offering a final salary scheme closed it to new members last year.

Moreover, employers are now having to meet a substantial gap in the funding of most occupational pension schemes—the black hole. They are having to meet the 5 billion gap in cash flow created for them by the Chancellor in his dividend tax credit removal by contributing much more themselves. According to Mercer Human Resources, in the first few months of 2003 companies invested 7.8 per cent of their profits in pension schemes as against 5.1 per cent last year. That will have to increase substantially. We now know of black holes not only in many occupational pension schemes in companies but also among local authorities. One estimate I have seen is of a 15 billion gap for local authorities and many other areas. So there is a very real challenge and threat to occupational pension schemes.

In the current year—the latest year for which figures are available—average employer contributions into final salary schemes were 13.1 per cent of the total salary bill compared with 11.5 per cent in the previous year. They are expected to rise to 15.1 per cent, as are employee contributions. We are now seeing the demise of final salary schemes, compared with what was a golden age for those who benefited from them and are now in retirement. Defined contribution schemes are not replacing them in the way that one would wish.

It is significant that for defined contribution schemes the average last year of employers' contributions was 5.2 per cent compared with 13.1 per cent for final salary schemes. Employees contribute much less to defined contribution schemes than they did to final salary schemes. The result is that defined contribution schemes, which actually properly mirror our lifestyles and employment styles these days with people changing jobs so often, are not closing the gap because of those lower contributions. That is my first point.

My second point is on the poor take-up of stakeholder pensions, which are well below the Government's targets. Indeed, in companies where the employer does not make a contribution, there has been a take-up of only 13 per cent. Moreover, if a substantial

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proportion of those for whom the Government originally targeted the schemes were to take them up, it would be the biggest mis-selling scandal of all time, dwarfing all previous cases. It would be a government mis-selling scandal, from a Government who are quick to blame others. That is because of the impact of the minimum income guarantee and other pension tax credits. Therefore, it would be mis-selling to suggest to so many of those who were originally targeted that they should take up a stakeholder pension.

Thirdly, the British public are simply not saving on the scale needed. In the six years to 1997, the savings ratio was never lower than 9.1 per cent and in the six years since it has never been higher than 5.7 per cent.

Finally, there is the state provision. The Chancellor told this year's Labour Party conference:

    "I want the next Labour Government to achieve what, in 50 years of the welfare state, has never been achieved. The end of means-tests for our elderly people".

In fact, already 60 per cent of pensioners are on means tests. On present trends and plans that will rise to 73 per cent by 2025. Whatever the Government's good intentions, we have certainly gone seriously and heavily backwards in the past few years.

What has caused this? We had a debate in this House on 5th March in which many noble Lords referred to some of the factors, so I can deal with the matter very briefly. There is increasing longevity, which has substantially changed the balance between the number of years one spends in work and the years one would expect to retire on pensions gained in work.

The abolition of the dividend tax credit must be a major factor because already it has meant that 30 billion of cash, which would have been in occupational pension schemes, is not there. I remember well the debates we had in the other place in 1997 when this was introduced by the Chancellor. The Chancellor claimed that it did not matter because increases in the capital of pension funds as a result of the rising equities of the 1990s made it unnecessary to concentrate so much on dividends. That is a very false argument now—as many of us warned would be the case—because of the volatility of equity prices.

The decline in equity markets is a factor. Another is accountancy changes. My noble friend Lord Higgins referred to FRS 17. There are the contribution holidays that companies took in the 1990s when their pension funds looked in a good state—although many of those contribution holidays arose from Inland Revenue rules because they were over-providing earlier. There is the cultural environment—the emphasis now on mis-selling and the question whether pensions provide a good deal.

A huge factor is complexity—regulation and its costs. On regulation, if the Government continue with the 1 per cent cap on the costs for selling stakeholder pensions there will simply not be enough people in the market place selling stakeholder pensions. In order for a take up to occur, one needs people to sell them. If the incentive is not there; it simply will not happen.

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There was also the Statement of 11th June, in which the Government announced their proposal that companies closing pension schemes would have to meet the full liabilities or climb ahead. That was well intentioned indeed, but probably a further disincentive to companies to continue with defined benefit schemes. Indeed, one pension specialist, David Ritchie, has said:

    "Government has just decided that the defined benefit is a guarantee payment for the member's entire lifetime as a pensioner".

Finally, there is the "live for today" mentality. These are the problems we face. How does the Bill referred to in the Queen's Speech measure up? I shall deal very briefly with the pension protection fund because it was covered by my noble friend Lord Higgins and the noble Lord, Lord Newby. Again, that provision is well intentioned but we will need closely to examine the details. In particular—this is called the "moral hazard"—will prudent and well managed schemes be paying for others that may not be, and should there be a government guarantee?

I was on holiday in the United States in October and happened to come across this extract in USA Today on October 15th. It stated:

    "The Pension Benefit Guaranty Corp.,"—

that is a reference to the United States' scheme—

    "which insures U.S. pensions, faces a record $8.8 billion deficit and eventually might need a government bailout, its director told a Senate committee".

That is what has happened there. We need to pay attention to that warning.

The other reference in the Queen's Speech to the pensions Bill is the need to encourage employers and individuals to take out pensions. There is a fundamental point which we must embrace before we look at whether the proposed measures really add up. We have to say that in the current climate—and with many of the problems I referred to earlier—people must get used to working longer, getting their pensions later and paying more for them in their working years at the expense of some more immediate things.

Let me turn briefly to a few of the proposals that I think may be required, then we can see whether the Bill measures up to the need. The first matter is getting the balance right between legislation and regulation on the one hand and incentives and the need for personal choice and responsibility, including the principle of caveat emptor. I am sure that we do not have that balance right at the moment.

Turning to complexity, I must say that I think that the Inland Revenue document is a huge improvement on our present situation. It cuts down eight different pension schemes with a huge raft of regulations into one. But there is a problem on the 1.4 million cap. We will certainly have to examine that closely in the Bill. I have a suspicion that, because of the problems of moving in and out of that 1.4 million limit, this will greatly add to the complexity for many people making pension provision for themselves.

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I have thought all the way through that the right answer to this issue is to remove that 1.4 million cap but to be much less generous than the Government propose on annual contributions. One could halve the 200,000 limit and still enable people to make very good provisions for themselves. That would be a much simpler solution. I agree entirely with my noble friend Lord Higgins that the pension tax credit and the working tax credit—even the baby bonds now—so add to the complexity that it is inevitable that the take up will be small. Micromanagement, which the Chancellor continually emphasises, simply does not work.

So far as concerns regulation, there is a real problem about cost, not just the cost of dealing with mis-selling and making compensation but regulation as a whole. That cost is met by policy holders and ultimately a reduction in capital for pension schemes. I am alarmed at the recent suggestion in the press that the Financial Services Authority might be suggesting that the simplified stakeholder pensions that the Government are now advocating may run up against the problem of mis-selling. If so, then we can say good-bye to stakeholder pensions. There is a very real threat that the regulations will inhibit entirely the need for more people to take up pensions.

I shall be very interested to see what the Bill says on incentives. There is no doubt, given the background that I have described, that there is a need to give more incentives both to employers and individuals—that means tax incentives—to take up pensions. There is a whole raft of proposals around; we are awash with different variations of schemes. But certainly there must be something—for example, a pension tax credit to replace the 5 billion that the Chancellor takes away every year from pension funds and which would not require going back to the old ACT scheme. A pension tax credit would be one way of doing that.

The trouble is that the Chancellor has already introduced and spent the stealth tax. That means that there must be further reduction in tax revenue to meet that requirement, but that will certainly be necessary if we are to have the pension take-up that we need. Another possibility is some variation on or something similar to the American 401k schemes. As I said, there is a raft of proposals. What is clear is that the present incentives are insufficient. If the Bill is to achieve its objective, we require something on those lines.

I would also remove the disincentive for people to take out annuities—and therefore to take out personal pensions that lead to annuities—of the age 75 barrier, which is becoming increasingly familiar to most people and causing them to wonder whether it is worth taking out a substantial personal pension. Removing that would be a simple measure.

Also—here I touch on another point mentioned by my noble friend Lord Higgins—we may have to contemplate more generational transfer of funds. That could mean amending the basic state pension—in stages—so that increases are attached to earnings rather than prices. The Conservative Party is now considering an ingenious proposal that would also require the abolition of the

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cost-ineffective welfare to work schemes to make it reasonably revenue-neutral. But that could be done in stages, starting with older pensioners. We must certainly consider that possibility, because of the problem that people are now living much longer.

More radically, have the Government done enough to raise expectations about when the retirement age should occur? It will have to be raised, both for state pensions and, further than the Government have provided, for occupational pensions and government employees—people in the public sector. There are various ways to provide extra compulsion or to move to pension provision subject to opting out, rather than simply encouraging people to opt in to occupational pension schemes. I suspect that the pensions commission will be the precursor to some such additional compulsion.

I do not pretend that any of that will be easy, but I suspect that the Bill, like everything else that the Government have done so far on pensions, will not match up to the challenge. If so, it will be an opportunity missed.

12.22 p.m.

Lord Paul: My Lords, first, I offer my apologies, especially to my noble friend Lord Sainsbury and the noble Lord, Lord Higgins, for not being here for the opening speeches. The congestion charge has solved many problems, but it did not stop the Horse Guards coming out on parade.

It gives me great pleasure to take part in this important debate. The contributions so far have been impressive and interesting, clearly showing the knowledge of economic and industrial matters that exists in this House. Noble Lords will know of my passion for the manufacturing sector—a sector in which I have been involved all my life. I declare an interest as chairman of Caparo, a manufacturing group, and as a vice president of the Engineering Employers' Federation.

Before I turn to the main contents of my speech, I shall say a few words about the relationship between industry and government. To achieve sensible and practical legislation, it is important that industry and government work as closely together as possible. Although differences of opinion sometimes arise, it is of paramount importance that the two sides continue to work together for the benefit of UK plc. I am encouraged that the Government have placed so much emphasis on that working relationship and congratulate my right honourable friend the Secretary of State for Trade and Industry.

I take this opportunity to list three areas where Government can do more to involve the business community. The first is on European Union directives. They tend to involve very technical issues. Timely input from the business community would help the Government to identify areas of concern.

The second is on regulations. The Government should discover more ways to involve the business community in that important area to provide better

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regulation—and, indeed, deregulation. The third is in ensuring that the Department of Trade and Industry and its regional bodies have sufficient funds to carry out their tasks and be a strong voice for business at home and abroad.

Despite the economic problems of the past few years, partly due to the slowdown in economic activity in the USA, the EU and Japan—all major export markets for British manufacturers—UK manufacturing remains strong and vibrant. It accounts for 18 per cent of GDP, 80 per cent of research and development spending and 60 per cent of UK exports. It employs 3.5 million skilled people, with up to 1 million other jobs in the rest of the economy directly linked to manufacturing.

While the rest of the EU has been struggling economically for the past few years, the UK economy—under the impressive stewardship of my right honourable friend the Chancellor of the Exchequer—remains strong, with low inflation, interest rates and unemployment. That has not come about by luck or chance, it is the product of sensible and well thought out policies advanced by the Chancellor and the Government.

The Government should also be congratulated on their determination to increase productivity levels. Manufacturing generates faster productivity growth than any other UK sector, averaging increases in output per head more than twice as fast as the rest of the economy during the past two decades. It is presently 25 per cent higher than that in the rest of the economy. The introduction of the research and development tax credit, the Roberts review on the supply of engineers and scientists, the extra funding for science and the forthcoming DTI innovation review and the Treasury Lambert review will help the UK's performance in innovation and, ultimately, in productivity.

However, the Government can and should do more about investment. Decades of under-investment are a key cause of the productivity gap. With so much of UK investment linked to internal finance, we are in a vicious circle from which it is hard to break free when margins are so low. I remain slightly concerned that the Government have yet to grasp the extent of the decline that we have experienced.

Investment incentives must increase. I know that creating new jobs is important, but retaining manufacturing jobs should be considered even more important. Investment is a complicated policy area, but I draw noble Lords' attention to the analysis conducted by the EEF in its pre-Budget submission and its call for an investment tax credit.

There are two other areas in which I should like the Government to take urgent action. The first is pensions, about which we have already heard; the second is employers' liability insurance.

On pensions, I congratulate the Government on the publication of their Bill, which I am sure will be scrutinised thoroughly in this House. I am delighted by the announcement of the setting up of a pension protection fund.

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A growing number of manufacturing companies with defined benefit occupational pension schemes now face increased costs in providing them. Although the Government have no influence over some reasons for that, such as demographics and a weak stock market, they can provide assistance in other areas and must avoid imposing additional costs or burdens on hard-pressed occupational pension schemes.

I urge the Government to publish at the earliest opportunity a clear timetable for the replacement of the minimum funding requirement, to respond quickly and positively to the Pickering report simplification principles, and, separately, to adopt a bold approach to the long-awaited review of Inland Revenue rules.

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