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Pensions

My Lords, I am grateful to my noble friend Lord Fowler for introducing the debate. The Motion refers specifically to both public sector and private pensions. That is entirely apposite given the very different conditions of the two categories. Of course, what they have in common is massive underfunding, but the difference between the two is that the vast majority of members of public sector schemes continue to enjoy final salary-linked, inflation-adjusted, defined-benefit pensions, whereas most active members of private sector schemes no longer enjoy those benefits and have to make do with the vastly inferior money-purchase schemes. Furthermore, under this Government, the percentage of the workforce employed in the public sector has increased to more than one in four and continues to increase. The productive private sector and the taxpayers will have to pay the generous public sector pensions. That will represent a steadily increasing burden in future years. I agree entirely with what my noble friend said about the Government’s deplorable decision to abandon their long-held intention to increase the normal retirement age for public sector workers from 60 to 65. On the other hand, the private sector workforce is told that it must work longer and put more money into its pension pots. Indeed, it is reported today that the Pensions Commission is shortly to recommend the raising of the state pension age to 67. In 1997, our pension system was the envy of the world. Pensions are, for most people, the most important element of savings. This Government have attacked both pensions and individual saving schemes. I concede that pensions policy is not an easy area, but most of this Government’s actions have either caused serious harm, such as the removal of pension funds’ privileged tax status, as referred to by my noble friends Lord Fowler and Lord Freeman, or have made an already over-complicated system even more cumbersome and expensive. The levies payable to the PPF under the Pensions Act may, paradoxically, result in more companies going bankrupt. The financial assistance scheme is, and was always going to be, woefully inadequate. The stakeholder pension scheme introduced in 2001 is largely a failure. Most recently, the new provisions regarding SIPS will give help where it is least needed and are likely to distort the housing market, putting the acquisition of reasonably priced housing out of the reach of many young people eager to get on the housing ladder. I return to the subject of the taxation of pension funds, already mentioned by my noble friends. In the past, pension funds have perfectly logically enjoyed a privileged status in that they were able to receive dividends from UK companies gross; that is to say, UK companies could effectively pay dividends to them without the deduction of corporation tax. The Government changed that with the Chancellor’s decision in 1997 to abolish dividend tax credits. That was the notorious stealth tax, so called because it was not at all clear what the Government were up to, as very few people understood the system. I was interested to hear the noble Baroness, Lady Turner, accept that that act was probably not helpful. The Chancellor got it badly wrong. He mistakenly believed that he could increase the tax on pension funds by as much as £5 billion a year without endangering the system. As the Association of Chartered Certified Accountants—to which I believe the noble Lord, Lord McKenzie of Luton, belongs—has stated,"““the withdrawal of the tax credit is, in our view, the most important single contributory factor to the problems that currently afflict schemes””." The noble Lord, Lord Young, reminded us that companies have benefited from the reduction in the level of corporation tax, but he omitted to mention that the vast majority of that reduction was implemented by Conservative governments. Killik & Co, the private client stockbroker, has estimated that the Chancellor’s stealth-tax raid destroyed around £300 billion of stock market value. I believe that the cost of the Chancellor’s raid is rather more than the £40 billion to which my noble friend Lord Fowler referred because we should consider its cumulative effects. We can assume that some 50 per cent of the stolen tax credits would have been reinvested in UK equities, yielding perhaps 3.25 per cent per annum. Taking that into account, the cost of the Chancellor’s stealth-tax raid to pension funds rises to £56.6 billion. Secondly, we should also consider the fact that our stock market would today be much higher than it is if pension fund managers had not significantly reduced their weightings in UK equities as a result of the stealth-tax raid. This is the reason why, in spite of our relatively good economic performance, our stock market has massively underperformed in relation to the average of the American, German and French stock markets. If the UK stock market had performed in line with the average of those three markets, our corporate pension fund assets would be worth an additional £110 billion, which together with the £56.6 billion I mentioned, amounts to £166 billion. I fear that the Chancellor made a huge miscalculation in his stealth-tax raid. Its cumulative effects, coupled with his other tax increases and the imposition of an increasingly expensive and bureaucratic regulatory and compliance regime, have undoubtedly harmed the economy and weakened our competitive position as an attractive financial centre. It is very likely that the stealth-tax raid actually resulted in a substantial net loss to the Exchequer because it has had such a huge negative effect on corporate earnings, on the level of the stock market and on tax receipts. As the noble Lord, Lord Kirkwood, rightly said, there is no more time to get this right. I believe the two most important things that the Government must do are, first, to reverse their decision not to increase the retirement age for current public sector employees and, secondly, to restore the completely logical, and now badly needed, privileged tax status for pension funds. Once again, I thank my noble friend Lord Fowler for introducing this interesting debate and giving me this opportunity to speak today.