---

Occupational Pensions

We do not need a freedom of information request, because we had the details in glorious technicolour from my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who was Chancellor at the time. It was revealed that we had assessed the options for this measure as a tax-change proposal, and that we rejected it on three principal grounds. The first was a purely practical one, namely, that we feared the effect that it would have on pension funds. The other two were issues of principle, both of which are important to the debate. The first, to which my right hon. and learned Friend referred in his speech, is that the argument for the change was that it would reduce a distortion in the tax system by reducing an encouragement to dividends and encouraging companies to reinvest in their own activities. That was also an argument put forward by the hon. Member for Birmingham, Erdington, and it was implicitly accepted by the Economic Secretary—I apologise to him for referring to him as the Paymaster General earlier. My right hon. and learned Friend, as Chancellor, made it clear at the time that he disagreed with that approach to policy on precisely the grounds that he set out to the House this afternoon, namely, that capital markets become progressively more efficient, and that, if we want efficient allocation of capital in the economy—as we should, as an issue of public policy—we will achieve that aim better through capital markets rather than through trapping investment flows within individual companies. That brings me to the third reason why we rejected the option, which, in view of what has happened since, will be of some interest. We did not agree with the analysis, also put forward by the hon. Member for Birmingham, Erdington, that saw the dividend tax credit as a subsidy to pension funds. It is important to understand why we did not accept that logic. Until the present Chancellor did what he did in 1997, the taxation of pension funds in Britain had always been based on the principle that the revenues going into the funds went in tax free, with the result that we were then able to tax the pensions paid by the funds in the hands of the pensioners. That meant that the capital build-up during the life of the pension took place on a pre-tax basis. That policy had been pursued for many years, and that was what led us to reject the option that the present Chancellor subsequently adopted. He has created a situation in which the revenues that come into the pension funds via a dividend come in tax paid. For the first time in the history of occupational pensions in Britain, the portion of the financing of the pensions that comes from dividends is now subject to double taxation. It is taxed when the income comes into the pension fund, and again when it is paid out as pension in the hands of the pensioner. That is why I hold the Chancellor responsible for having contributed in a major way to the practical decline of occupational pension schemes over the past 10 years. And that was precisely the practical reason that led my right hon. and learned Friend—ever a practical man—to reject the abolition as a policy option.