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Finance Bill

My Lords, as a member of the Finance Bill Sub-Committee of the Economic Affairs Committee, I pay tribute to our Chairman for the excellent way in which he chaired our meetings. I am also the chairman of several pension trustee funds, one of which is in a company which is a REIT. I want mainly to talk about pensions tonight, but will first say a brief word about the other two matters. The impression I gained from our witnesses is that there is clearly favourable progress on consultation, although an exception should be made for the measure on the duties of the accounting officers of large companies and the naming and shaming of serious tax defaulters. The first, especially, would have benefited from public consultation and I can see no reason why they could not have been subjected to that. On the measures related to foreign profits and REITs, about which the noble Lord, Lord Best, has talked so eloquently—at least those in the Budget as distinct from those that were not—the comments were more favourable than unfavourable. With the pension proposals, it was an entirely different matter. I accept that this was not an issue for prior consultation. Had the Government done so, they would have received devastating criticisms of the sort we heard from all our witnesses except HMRC. It was not a lack of consultation that concerned the committee, but the substance. I have to say that I have rarely heard such unanimous, persistent and outspoken criticism. I have sympathy with HMRC which had difficulty in dealing with the criticisms because this was clearly a politically motivated decision driven by the need in the current economic and fiscal circumstances for whatever tax revenue the Chancellor can find. He identified this one as an easy political target that would not attract widespread criticism in most constituencies. After all, it is about people with incomes of £150,000 or over, and most constituencies have comparatively few of those. That may explain why there has not been a major public fuss about it, except as expressed by the witnesses to our committee. It is a bit like the notorious ACT measure of 1997 in that its damage was not recognised by the wider public at the time, despite the efforts of many of us to draw attention to the consequences. Later, however, its devastating impact on pensions has become all too apparent. I agree that this particular set of measures is not on the same scale, but it will have something of the same impact. Many people with incomes much lower than £150,000 will feel the effects. As I listened to the litany of criticisms in our witness sessions, it became clear that this is likely to be a major mistake. The issues are summarised in paragraph 144 of our report, which states, ""the expectations raised by what had been said in 2004, the risk to pension savings, the comparatively low risk of forestalling in practice, the complexities of three regimes in five years. The need for a level balance between DB [defined benefit] and DC [direct contribution] schemes, the need to take account of special cases and the administrative and compliance costs"." I want to single out just four of the criticisms, the first of which relates to forestalling. I recognise that the Government made some changes at the Committee stage in the other place, particularly on irregular payments, but we heard a good deal of evidence about the effect on those who have been made redundant and in many cases are in receipt of a pension contribution over the figure envisaged in the Bill, in particular those who had been planning for retirement. People were expecting to make a major contribution to their pension contributions to achieve a higher figure just prior to retirement, but had not made the same level of contributions in earlier years. With great respect, I thought that the Minister was floundering in answer to my noble friend Lord Forsyth when he said—I think I have it right—"Nobody was given an assurance that those rates will remain in perpetuity". He certainly said the words "in perpetuity". I have to say to him that there was certainly no expectation that there would be change so soon and so quickly, and many people were planning for retirement not very far ahead on the assumption that they would remain. I would be grateful if the Minister would comment on that because there are areas of forestalling that have not been tackled and are still unfair. The second point is that I just do not believe that this measure will raise the tax revenue predicted by the Government for it. A very high tax rate is now applied to those who have been affected by the changes, and there is no doubt that among many companies and advisers a great deal of discussion is going on to bring forward proposals on substitute schemes for compensation packages. In other words, people will not be making maximum contributions to pensions; they will be putting the money elsewhere where it will have a better overall effect. HMRC has substantially underestimated the range of alternatives for many who are affected and therefore overestimated the revenue. Thirdly, as we all know, defined benefit schemes are already in a fragile state. It sometimes seems that companies, including major companies, are closing them down not only to new employees but to existing employees almost every month, if not every week. Time after time we hear of major companies that are making major changes to their defined benefit opportunities. This is just another nail in the coffin. The effect of the key decision-makers in companies disengaging themselves from company schemes and finding them less attractive can only accelerate that process. As we put in our report, while the numbers directly affected may be small, among them will be individuals who are influential in determining the pensions policies of many companies. The most worrying of all, and by far the most important, is my fourth criticism. After long consultation, the new regime, commencing with the A-day measures in April 2006 following the Finance Act 2004, was widely welcomed and hailed for its simplicity and flexibility. The Government hailed it as a transparent, consistent system, giving everyone for the first time—I challenge the "everyone"—the same opportunity to make tax-relieved pension savings over a lifetime. Above all, it was put over and accepted by everyone in the pension industry—companies, pension advisers, potential pensioners and pensioners—that there was a guarantee and an assurance of certainty in this new regime and an end to the chopping and changing of pension tax regimes. Now, after only three years, this has been broken and, combined with all the other non-tax issues that are currently adversely affecting pensions, even this assurance of continuity in the scheme has gone. A precedent has been established that the A-day tax regime is not certain; that if it can be attacked by a desperate Chancellor so soon, will there not be other changes year after year? In particular, a precedent has now been set for taxing employer contributions. Even the long-established fiscal rule that pension contributions are tax free because pension payments are taxed at one’s marginal rate when one becomes a pensioner has been undermined. I shall quote from three witnesses who appeared in front of us. The CBI said that the net effect will be to disincentivise pension savings completely. The Chartered Institute of Taxation expressed a worry that it will mean a complete reappraisal as to the value of pensions provision. The National Association of Pension Funds said that it will be a disincentive for employers to contribute, particularly to defined benefit schemes but to defined contribution schemes as well. In justifying the introduction of this measure, the Chancellor said that it was difficult to justify how a quarter of the cost of pensions tax relief went to the top 1.5 per cent of earners. But surely, after such a long period of consultation and gestation before the introduction of the regime, the Government had worked that out and knew what they were doing when they introduced the new regime. I do not think that that is in any way a proper justification of what has been done. The decline of defined benefit started in 1997 when another ill thought-out measure removed £5 billion a year from pension funds, now, cumulatively and compound; a huge sum. I accept that some of the reasons for the decline in defined benefit schemes—some of them substantial—are not the consequence of any actions by the Government: on the asset side, the effect of increased longevity in the mortality rates; on the liabilities side, an accounting and actuarial system based on gilt rates so that when they come down the liabilities rise. That can fluctuate widely even over a short period and so one has substantial changes in the apparent deficits. On top of all that, this is another serious blow to defined benefit schemes. Many people recognise that defined contribution and personal pensions do not offer the same advantages. As a result, we now have two nations—the private sector pension provision and the public sector pension provision. Now is not the time to repeat all the comments about the unfairness and huge future costs of public sector pension schemes. The Government clearly will not tackle this in the remainder of their time and in their enfeebled state. This makes this financial measure, which will not raise the tax revenue the Chancellor predicted and which will add even more to the decline of private sector schemes, even more unbalanced and ill thought through.