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That is the story that led to the run. Was it preventable? I suppose that I would say yes. If Northern Rock one year ago had taken the advice that was probably available and said to its shareholders, “Look, we cannot go on in the way that we have been doing. It has worked so far but now we must change our position and you will not get increasing dividends or profits; you will probably get entirely the reverse”, the shareholders and the market might have seen it through. But it did not do that.
Moreover, there might have been liquidity insurance in the market. That involves a sum of money to deal with the first and possibly the second person who gets into trouble with refinancing their mortgage book; it then becomes a mutual, really, and all the leading players would need to be involved. That is the lifeboat that the industry could have made for itself, presumably with guidance from the Bank of England, although one has to doubt whether there would have been any guidance from the FSA. There might have been competition issues and so on. However, that was not done; perhaps it will be done now.
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There is also the issue of guaranteeing bank deposits, which is the other side of the coin. In my view, that is only mitigation and would not have prevented what happened.
As has been said, the present position is that Northern Rock is de facto in public ownership, or at least under public control. De jure it is owned by its shareholders but they have little or nothing to lose, and that tends to turn people awkward. I suppose that there is no early exit in prospect. The talk about February is, frankly, nonsense. Northern Rock is much more likely to need long-term managing with its book and still very large lines of credit. It does not much matter if somebody else stands in its shoes. Incidentally, the talk of a brand is nonsense; mortgage finance does not include branding.
The question is, what is the situation? I am not much interested in the blame game; it is uninteresting. You can, of course, blame Northern Rock. That would be the simplest and probably the most justifiable apportioning of blame. However, since it cannot carry any blame because it does not have the resources to do so, that is not a very interesting point. The issue now is not who is to blame but what is to be done. In contributing to solving that problem, I suggest that the best advice will come from the Bank of England; never mind what has been said by the media. The Treasury seems to come far behind as the number two and the FSA as the number three. However, there is a fourth stakeholder; that is, the banking sector. It would have been better if all the people in that sector had thought that it was a good idea to put together a bit of self-help with the regulatory system. The banking sector will come to regret the fact that it did not find a way of dealing with the Northern Rock situation before it occurred.
That brings me back to London’s contribution to the economy and the objective, which must be to cease the blame game but to look for ways of maintaining or—as people all over the world will be arguing—restoring confidence in London and its regulatory system. Mistakes have been made but sometimes mistakes offer opportunities to show, through leadership, how you can clear them up neatly and quickly. The problem is that it will not be solved by the Bank of England, although its advice would still be, in my view, the best. It will not be solved by the FSA. The problem sits on the desks of the Prime Minister and the Chancellor. The Prime Minister does not appear to find it all that easy to admit mistakes. I wonder whether the Chancellor is really his own man. Indeed, I wonder whether the Government are up to finding a solution. Since they now have control of Northern Rock, they have to find the solution. That is needed because London’s position within the UK economy is a vital component and it is in everyone’s interest that it is not damaged by this episode.
8.15 pm
Lord Northbrook: My Lords, I welcome the opportunity to discuss the matters in the Queen’s Speech connected with consumer affairs, industry and economic affairs. I am only sorry, like my noble friend
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I can applaud the general level of economic growth since 1997 and can give the Government some credit for this, although they inherited a very good legacy from our party. There are signs that all is not well on the growth front, particularly as the Chancellor has reduced his GDP forecast for 2008 to 2 to 2.5 per cent. Also I note, as my noble friend Lady Noakes has already stated, that the World Economic Forum's recent global competitiveness report shows that in its index the UK has fallen from second in 2006-07 to ninth in 2007-08.
I want next to focus on two economic issues: the level of government borrowing and inflation. The PBR total borrowing forecast for this financial year was increased by £4 billion. Government borrowing over the next five years is expected, as my noble friend Lady Noakes has already stated, to rise by £16 billion more than predicted in the 2007 Budget. Under the Government's own sustainable investment rule, public sector net debt as a percentage of GDP should be held over an economic cycle at 40 per cent. The 2007-08 estimate is 37.6 per cent and that for 2008-09 is 38.4 per cent. There are good reasons to fear that the 40 per cent target could be breached in the next two years.
Treasury coffers in recent years have benefited hugely from the booming activity in the financial sector. The economist Richard Jeffrey of Ingenious Securities states that in 2006, financial companies accounted for 30 per cent of taxes paid by the corporate sector. The latest Treasury projections show corporation tax receipts rising to £51.5 billion next financial year from £46.8 billion in the current financial year. It is impossible, he believes, to be precise as to the extent that current events will hit profits or how prolonged the effect will be, but he believes that the loss to the Treasury will be measured in billions of pounds due to write-down of assets. As a result, he estimates that the 2008-09 budget deficit could hit £50 billion. If you add to this the effect of lower growth, which could well occur as a result of the global financial problems of the past few months, the deficit figures could be looking a lot higher even than this.
Cognoscenti of my speeches will know that for the past year I have been worried about inflation, especially in the areas of food, oil prices and the so-called “Chinese effect”. Yesterday's UK inflation figures for October showed a rise in the CPI from 1.8 to 2.1 per cent over the Government's 2 per cent target, and an increase in the RPI figure, on which many pay deals are based, from 3.9 to 4.2 per cent. Two other major contributors to these rises were, yet again, petrol and food prices. It seems ironic that we are now at a stage where the Government's preferred indicator of inflation, the CPI, is half what the old index, the RPI, is showing. Does the Minister agree that it is going to be very hard to force the public
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I note that another country’s inflation figures were published yesterday—those of China. Its inflation figure for October was 6.5 per cent—the highest rate since 1996. Why is that important? It is important because our inflation has been much helped by the cheap price of imported goods, many of which are made in China. If its inflation keeps going up, its workers will want higher wages and that will make China’s exported goods to us much more expensive and thus contribute to our inflation.
Returning to the subject of the Government’s borrowing problems, they have resorted to various stealthy ways to raise taxes. First, as many speakers have mentioned, there is the change in the capital gains tax regime to a flat rate of 18 per cent. This sounded like good news when it was first announced, but can the Minister confirm that it will raise an extra £2 billion in tax for the Government over the next three years due to the rate increase from 10 per cent and the abolition of taper relief and indexation? Does he also support the views of his colleague the noble Lord, Lord Jones of Birmingham, in a speech to business leaders in late October? The noble Lord, Lord Jones, said that he felt that the CGT package was fair but went on:
Would the noble Lord, Lord Jones, like to make any comment on that at this stage?
Also, does the noble Lord agree with the private equity boss, Sir Ronald Cohen, who said on 8 November that the CGT move sent out an “unfortunate signal” to budding UK entrepreneurs? Sir Ronald added:
- “and here you have the CBI and the Institute of Directors and the chambers of commerce and the Federation of Small Businesses joining hands and saying, ‘We want an entrepreneurial society, let people take risk, let them create businesses’”.
Can the Minister let the House know what the Government’s response will be to the strong plea by the noble Lord, Lord Bilimoria, and many individuals and business organisations to review the huge increase in CGT for many entrepreneurs? And are the rumours about a partial restoration of retirement relief true?
The Prime Minister promised an era of more open government, yet, in a couple of tax moves announced by the Chancellor in his Pre-Budget Report, he is back to his master’s old tricks of stealth tax increases. Can the Minister confirm that, in a very technical move which many of the public will fail to understand, realigning national insurance and income tax ceilings will increase the tax burden on middle-income families by £1.5 billion a year? Will he admit that, even more stealthily, bringing forward the flat-rating of the second state pension will bring the Government an extra £400 million a year? In the words of Chris Grayling, our shadow Secretary of State for Work and Pensions in the other place:
Next, in the area of tax, will the Minister agree that the Government have negotiated away £7.2 billion of
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I now move on to the saga of Northern Rock. There are certain questions that I should like to ask the Minister about this sorry episode. First, why did the Government not insist early on that the Bank of England provide liquidity to the money markets at a sensible rate of interest? The Fed did this to its money markets, and so did the ECB. As a result, there was no liquidity crisis in their interbank markets and no run on any of their banks. Was it not until the run on Northern Rock started that the Government belatedly realised they had to support depositors and the bank itself?
However, the story has not finished yet. What does the noble Lord think the bank is now worth and what will happen to the Bank of England loan, which is now £20 billion, if no one comes forward to bid for it? Does he agree that, as today’s Financial Times says, this could leave the Government facing the political embarrassment of having agreed to a long-term guarantee that they could be forced to justify to the European Commission under rules governing state aid?
Another question that needs to be answered, already referred to by the noble Lord, Lord Oakeshott, concerns the conduct of the Northern Rock directors. I have been informed by a reliable City source that an interest rate hedge taken out was closed off in early August and the sum due taken as income due to pressure to attain an earnings figure expected by the market. Thus, Northern Rock was fully unnecessarily exposed when the interbank rates became challenging. Also, as other speakers have said, Northern Rock recklessly expanded its mortgage book from 10 to 20 per cent this year, taking on risky business to improve market share. Surely the FSA or the Bank of England supervision department should have been more aware of these developments and the directors should have been warned of the risks they were taking. Even now, as the noble Lord, Lord Oakeshott, stated, they should be censured for their actions. The House needs to know the Minister’s view on the Northern Rock situation.
Finally, on the subject of pensions, I hope that both the Conservative and Liberal Democrat Front Benches will finally get together and agree to the abolition of compulsory annuities. I suggest to my Front-Bench colleagues that we should not oppose the reasonable cost of a pensions commission if that is part of the package required to get the noble Lord, Lord Oakeshott, and his troops on side on this issue. It is high time that this iniquity was dealt with.
8.25 pm
Baroness Hollis of Heigham: My Lords, if that is not a bribe, I am not sure that I have ever heard one before. With so many Bills, I do not envy my noble friend but, in the context of personal accounts, I should like to talk a little more generally about poverty, pensions and risk.
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I wish to put forward four bold and rather obvious propositions. First, we are living longer—a year every three years or so. When we had this debate two or three years ago, the figure was a year every five years or so. In 1980, men at 65 lived for 12 more years; that figure is now 20. By 2020, it will probably be 25, meaning that the figure will have virtually doubled. Each additional year costs 3 per cent in defined benefit schemes or adds about £12 billion a year to the cost of FTSE 100 pensions.
Secondly, as Wanless shows, those extra years will be years of poor health and dependency. By 2025, there will be a need for 50 per cent more hours of caring from the same working-age population. As a result, caring for the generation ahead will cost many women the capacity to build their own pension and care for themselves in the future.
The third proposition is that the pensions world is increasingly one of defined contributions. I understand that 32 per cent of employees now have defined benefits rights, but for 30 per cent—a figure that is growing—it is defined contributions. To some extent, DB belongs to the world that we have lost—a world of male, full-time jobs in manufacturing—whereas DC tends increasingly to cover the service sector, women, the mobile and the part-time, which of course tend to be the same thing. All are pretty much coming into DC schemes, with 60 per cent of DB schemes now closed to new members. That is to say nothing of the problems of buy-out and the question of whether the FSA is an appropriate alternative regulator to the PPF.
The fourth proposition is that property is increasingly the investment of choice. Others may have seen the rather startling statistics produced by Lincoln, which showed that at the moment, excluding mortgage costs, people are putting twice as much per month into their homes as into their pensions. They are putting £300 a month into their homes, compared with £100 a month into pensions for women and £150 for men. In the light of personal accounts, which are extending the DC market to the under-pensioned and the low-earning—especially women—I want to ask what this will mean, what risks we face and what we might do about it.
DC schemes carry contribution risk. They can be as rewarding as DB schemes but if, and only if, there is the same level of contribution, which there is not. We know that since 2005 the average DB contribution from employers has come down to 16 per cent and to 6 per cent for DC contributions. Incidentally, employers contribute something like 15 per cent less if their employee happens to be a woman. So, even though an employee can pay in the same amount under DB or DC schemes, under a DC scheme he or she is likely to go home with half or less of a similar pension.
There is also the investment risk, with women in particular choosing risk-averse, low-return default schemes, and the accompanying disinvestment risk in terms of both rates within the market and inflation rates over the years. I sometimes speculate that we seem to have set up a PPF which mostly protects DB men from defaulting employers but leaves mostly
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One answer, which I hope we will explore when debating the Bill, would be to raise the trivial commutation limit to, say £25,000 or £30,000, and then raise the capital—not income—cap on pension credit from its current £6,000 likewise to £25,000 or £30,000. One would keep both savings and pension credit. It is workable and what happens now to rolled-up basic state pension. Over five years, you can roll up £35,000 and as a capital sum it is exempt from the rules of pension credit. To raise it comes with a cost—perhaps £350 million—but we might decide it is well worth paying. It is essential to underpin personal accounts with a complete basic state pension, if necessary with the purchase of additional years. Otherwise we will guarantee mis-selling.
As the noble Lord, Lord Oakeshott, mentioned, noble Lords made their views very clear last summer. My noble friend, Mr Mike O’Brien in the other House, and the DWP, have been working honourably to deliver the proposals on added years. On behalf of the whole House, I thank them for that, but it seems to be stuck in the Treasury. I shall be returning to this if undertakings honourably given in the outcome are not honoured but instead end up in the long grass. I feel sure that your Lordships would feel as betrayed as the women we are seeking to help if those undertakings are not honoured.
Clearly those with small personal accounts will need advice on whether to stay in or out. Thoreson’s interim findings are not yet sufficiently detailed to help. I would favour a simple traffic light system: green if you are under 40, earning over £15,000 per annum, married with a potentially full NI record; red if you are over 50, earning under £12,000, single, in debt, tenant, no savings and a weak NI record; and advice for the amber group in between.
The DC world will remain entangled with means-testing for two other reasons, as opposed to the role of pension credit, to which little attention has been given. The first—both trends are really rather worrying—is that 90 per cent of DC pensions are level. Over and beyond the risks of investment and disinvestment, people are taking a punt on their own longevity and on inflation, both of which they consistently underestimate. That will press many back down into means-testing over time.
Nearly half of all women from 50 on—not just younger women—will not be married by 2030. Their family work—caring for children and the elderly—will cut across an adequate DC pension of their own. Even if they remain married, their husbands may default in another way because nearly all of them buy a single life annuity. It dies with him, so after 20 years
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What is to be done? Despite the fact that FTSE 100 pensions are pretty much no longer in deficit, the longevity and volatility of equity suggests that no employers will return to the old DB world, although we may be able to protect existing DB schemes by modifying them into, rather as Fidelity called it, “DB-lite”, with versions of career average, which is increasingly widely accepted now; possibly—I have reservations about this, but it is worth exploring—conditional indexation as in the Netherlands, which is worth about 16 per cent, provided that it is properly regulated by the TPR; and, I hope, more hybrid risk-sharing schemes—either sequential DC followed by DB in one’s later years; or DB for lower tranches of pay, topped up by DC for higher incomes; or indeed, matching longevity bonds. I expect a quarter to a third of companies to pursue such schemes, but I rather fear that everybody will invent their own, making regulation extremely complex. I hope that the TPR and the PPF can produce some standard templates, which companies may be encouraged to follow for the sake of transparency and simplicity.
I also hope that we can develop products that are more attractive and appropriate to the lives women lead, combining accessible short-term savings with long-term pension planning. I hope that we see revived again some of the Conservative proposals of David Willetts and Malcolm Rifkind for LiSAs—lifetime savings accounts.
What else can be done? I return to the fourth proposition—home equity. Half of all women over 50 own their homes. They can effectively be frozen-asset rich and income poor. We have to find safe, decent and transparent ways of freeing that locked-up equity to supplement declining pensions in a DC world. I mention some provisos on equity release. Many people will not have a home that is worth enough, and the housing market is currently highly volatile. It is probably much better if the family can help out, but often they cannot. It is probably better to trade down if the emotional and financial trade-offs make sense. But for 10 per cent or more of pensioners, equity release can provide the money to refurbish the bathroom, renew the heating or fund the social life to overcome isolation in retirement.
Regulated by the FSA and SHIPs, good equity release schemes have scrupulous personal interviews, careful financial audits, including benefit entitlement, no overselling, independent legal advice and guaranteed no negative equity. As long as the customer understands compound interest—often they do not—equity release may prove a useful and valuable supplement to declining retirement capital and income.
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