Every serious commentator now recognises that only the Government are committed to improving the lot of present and future pensioners. The comparatively empty Opposition Benches show that Labour has literally abandoned the pensioners. Most Opposition Members are not in their places because they are too ashamed of their record on pensions to defend it. They are ashamed of the Labour Government's inflation, which wiped out a quarter of people's savings in a single year. They are ashamed that Labour failed to uprate the state pension properly, stealing £1 billion from pensioners. They are ashamed that Labour failed to pay the Christmas bonus. They are ashamed that, over the entire lifetime of the last Labour Government, pensioners' incomes rose little more than they have on average every single year under the Conservative Government.
Today Labour members are ashamed of their Front Benchers' reaction to our basic pension plus. Even commentators who are not unsympathetic to Labour, such as Peter Riddell of The Times, have said:
Labour's reaction was a depressing example of knee-jerk opposition politics at its worst".
Today Labour members are giving the hon. Member for Peckham (Ms Harman) a chance to redeem herself and to come up with some positive response. Some hope, it would appear.
I congratulate the Secretary of State on his non-partisan stance, and hope that that will be the temper of the whole debate.
I understand that the hon. Gentleman has been under some pressure to be less non-partisan. I congratulate him on his objectivity.
Conservatives, of course, have long been the party of the property-owning democracy. It was Conservatives who encouraged the spread of owner-occupation—two thirds of all families now own their own homes. It was Conservatives who gave council tenants the right to buy their own homes. It was Conservatives who encouraged the spread of share ownership, so that more people now own shares than belong to trade unions. It was Conservatives who encouraged two thirds of those in work to build up second pensions. The plans that I announced last week to give everyone, over a generation, their own funded investments in their own guaranteed personal fund will be the biggest extension of personal ownership ever.
The hon. Lady knows that everybody who was missold such a pension will receive restitution. They have the assurance of the regulators. That process is being accelerated by the vigorous action of my hon. Friend the Economic Secretary, and nobody will lose as a result—unlike the 1 million council tenants who would have been unable to buy their own homes if the Opposition had had their way.
Our proposal will extend to everyone rights previously enjoyed only by the better-off. It will give everyone the right to share in the success of our economy; the right to own their own personal investments; and the right to a better and more secure pension.
The Labour party, of course, has opposed every extension of personal ownership. In 1982, the right hon. Member for Sedgefield (Mr. Blair), who is now leader of the Labour party, said:
Labour would ban the sale of council houses. That is for perfectly sound reasons of political principle.
In 1983, the hon. Member for Peckham and her party voted against extending the right to buy. Throughout the 1980s, Labour opposed workers, customers and savers being given the right to own shares in the former nationalised industries, so it was no surprise that, last Wednesday, the hon. Lady instantly attacked the next big expansion of personal ownership in this country. She made such a mess of it in the morning that the shadow Chancellor had to take it out of her hands in the afternoon, but he still sounded too old Labour, so the leader of the Labour party had to take it out of his hands the next day. However, even he got it wrong, so the hon. Member for Birkenhead (Mr. Field) had to come along and heap praise on our scheme.
I am happy to pay tribute to the hon. Gentleman and his Select Committee for pointing the way to basic pension plus. In their report last October, entitled "Unfunded Pension Liabilities in the European Union", they wrote:
our concern is to ensure that there should be no misunderstanding about the hard choices which will have to be faced when future generations of elderly people come to claim the rights to income in old age which they believe they have earned and for which the younger working generations are no long willing or able to pay.
The Committee urged us to consider
ways in which unsustainable and unfunded pension promises can be replaced by sustainable pre-funded pensions in the individual ownership of the employee.
That is precisely what basic pension plus will do.
Everyone in work will have rebates paid into their scheme, so there will be potential if the investments do well. People will be guaranteed at least as good a pension as under the present system.
Our proposal has three key elements. The first is a personal fund for every young person starting work. They will choose an approved firm to manage it, and they will own it, so they will be able to pass on to their spouses or heirs any assets that are not used to pay their pension.
The second element is the rebate. Everyone will get a rebate from their national insurance. The Government Actuary calculates that £9 a week will generate a fund sufficient to pay the basic pension. A £9 a week rebate, rising with inflation, will be paid into people's funds over their working lives.
The third element is the basic pension guarantee. The state will guarantee that everyone will receive a pension at least equal to their basic state pension, increased in line with inflation.
My hon. Friend the Member for Dover (Mr. Shaw) first indicated an intention to intervene.
My right hon. Friend has referred to the report of the Select Committee on Social Security on unfunded pension liabilities. It recently hosted a seminar for parliamentarians from Parliaments across Europe. We invited them to the House of Commons to talk about their unfunded pension liabilities and our pension funds. They were full of admiration for what my right hon. Friend's policies have achieved, and they will no doubt be following very closely the basic pension plus proposal, which I am sure all European countries will want to copy.
I am sure that my hon. Friend is right: there has been much comment to that effect. We have led the way on most issues, from privatisation to labour market reform. Our reforms have been copied worldwide.
The Secretary of State referred to labour market reform. Does he agree with me that, as a result of such reform, many men are now leading similar working lives to those that women used to lead? They are on low pay, in temporary jobs, and they change from one job to another, so they cannot build up an adequately funded pension. With basic pension plus, the right hon. Gentleman is offering the pension that the Conservative party has always said it wanted to let wither on the vine. Do not the calculations show that, by 2040, that pension, if it is increased merely in line with inflation, will be worth only 23 per cent. of average earnings?
The hon. Lady seems to be attacking the policy of her own Front-Bench team, so she should address her remarks to them.
I shall give way to my hon. Friend, and then perhaps I can make some progress.
My right hon. Friend's scheme is visionary, because it gives people ownership of savings for pensions in their old age. More important, it is a basic pension plus, because, even on fairly conservative figures, it provides the possibility for the ordinary youngster starting out today to double the present rate of state pension. Does my right hon. Friend agree with that?
I entirely agree with that. My hon. Friend is one of the people who first had the vision of moving in this direction, and I am happy to pay tribute to his contribution to the thinking that has led to this proposal.
Under the proposal, each fund should grow to provide the basic pension. If, for any reason, a person's fund is insufficient, the state will top up the pension that it provides, so he will still get his basic pension. Everyone will be protected by the basic pension guarantee. No one will do less well than under the present state scheme. Everyone stands to do better if, as we hope, the economy and people's investments do well. If returns are 1 per cent. higher than assumed by the Government Actuary, people will receive a pension 30 per cent. above the level of the basic pension. If yield is 2 per cent. higher, the pension will be some 70 per cent. better than the present state pension.
During the past week, I have been challenged to say what pension people will receive not on the basis of an actuary's assumptions, but if investments do as well or as badly over the next 50 years as they have over the past 50 years or so. Of course, they may do better or worse in the future. If they under-perform, people know that their basic pension is guaranteed.
Since 1950, equity investments have grown at a rate of 7.7 per cent. a year on top of inflation. The Government Actuary calculates that if, over the next half-century, pension fund investments grow a little less—let us round it down to 7 per cent. a year—the basic pension that will be received under our scheme will be double its present value.
We are determined that the new generation should have the opportunity to share in the potential growth. Basic pension plus extends that right even to the less well-paid. We call the scheme "basic pension plus" because it is the basic pension, plus a fund, plus a rebate, plus a guarantee, plus the prospect of growth.
In the 1980s, my right hon. Friend the Member for Sutton Coldfield (Sir N. Fowler) and my right hon. Friend the Prime Minister, as he now is, paved the way for more funded provision by allowing people to opt out of the state earnings-related pension scheme into their own funded personal pensions. Two thirds of those eligible now opt for private schemes, but a third do not, mainly because their SERPS would be too small to make it worth their while to set up a personal fund.
That problem will not exist when everyone has a basic pension plus fund. Everyone in the new generation will also be contracted out of SERPS, and, in addition to the £9 a week rebate to fund their basic pensions, employees will receive a rebate worth 5 per cent. of their earnings on which they pay national insurance. That will fund an earnings-related second pension.
A person on average wages will build up a fund that should—on the Government actuary's cautious assumptions—be worth £130,000 when he or she retires. That is sufficient to provide a pension of £175 a week at today's prices. If investments do as well over the next half-century as they have, on average, over the last, the person on average wages stands to receive a pension of around £350 a week. That is based on the assumption that that person has made the minimum contributions over most of his or her working life. Once all those in work have their own funds, however, they and their employers will be able, and encouraged, to save more in those funds.
The hon. Lady has already had one bash, which turned out to be directed towards the wrong side.
I suppose that it was helpful to me, but I do not think that the hon. Lady is helping herself.
I will happily give way to the hon. Gentleman.
According to the Secretary of State's assessment of the contributions that will be made under the proposed new scheme, what would be the cost to the individual of paying into, in effect, a compulsory private scheme, as opposed to paying through taxation and national insurance contributions during his or her working life?
Clearly, a scheme that relies on taxation and charges rather than on savings and investment costs more, because people do not receive the benefits of the return on the investments that have accumulated over a lifetime. That is the advantage of what we are proposing, and I am grateful to the hon. Gentleman for pointing it out.
The response to our initiative across the board has been overwhelmingly positive. The Times said:
These reforms are a radical solution to a huge problem; they show a willingness to think far beyond this Parliament or the next; and they prove Britain to be an innovator ahead of its European partners. In sum, they are an example of good government.
But support did not just come from friendly newspapers.
And even the ranks of Tuscany Could scarce forbear to cheer.The Guardian acknowledged:
Like the concept of a shareholding democracy, it could also be empowering a new generation, which will have much more control over its own retirement arrangements.The Independent put it succinctly when it stated:
the Conservatives are trying to address the problem of how to provide a decent pension for all; Labour is not.
Of course, the only root-and-branch opposition to the proposals came from Labour, and that tells us all we need to know about the party. It still has a knee-jerk hostility to personal ownership. When the Labour leader wanted to launch his big idea, or his medium-sized idea, of stakeholder pensions, he flew off to Singapore. His model was a massive, centralised, state-controlled investment fund. The only trouble is that Governments, even the authoritarian kind that new Labour seems to admire, are not good at investing money.
The return on the Singapore state scheme for its population since 1980 has been just 2 per cent. a year more than inflation. Over the same period, the average British pension fund has earned nearly 10 per cent a year more than inflation. That was the last we heard about stakeholder pensions, at least until last week.
The second thing that Labour's reaction to our initiative demonstrates is that its pretensions to be able to reform the welfare state are a sham. The pretence lies in ruins. Labour cannot reform the welfare state, not because it has no ideas, although it does not, but because it is wedded to keeping people dependent on the state.
Labour hates the idea of people building up their own pension provision, owning their pension funds and even passing on capital to their children. The Opposition do not mind opting out of the state earnings-related pension scheme, any more than they mind opting out of the local authority education system for their children. Which Opposition Front-Bench spokesman has not opted out of SERPS? But what is good enough for them is too good for the rest of us. They cannot stand the thought of millions more ordinary people escaping the grip of the state, ceasing to depend on it, and no longer beholden to Governments for generously handing out taxpayers' money.
I shall examine in turn the three criticisms that the hon. Member for Peckham has levelled against basic pension plus. First, she says that the value of the rebates going into investment will be too great. But we are phasing this in over a generation, and more than halving the impact by switching the timing of tax revenues for that generation. Therefore, the net revenues forgone will rise by just £160 million a year on average. Moreover, even at its peak around 2040, the impact on public finances will be less than the peak cost of rebates from SERPS, which we have already taken in our stride. It is a fraction of the £13 billion annual savings which will result from our Pensions Act 1995 reforms.
The right hon. Gentleman will forgive us if we are a little cynical about this Government move. He says that he will phase this in over a generation. Will it take him any less than a generation to compensate those people who have yet to be compensated because of the misselling of personal pensions which occurred the last time he dabbled in this area?
I have explained that my hon. Friend the Economic Secretary is accelerating that process. The hon. Gentleman will recall that we have already rescued pensioners from the depredations of Robert Maxwell. Our Pensions Act, to which I have referred, was introduced to restore confidence in pension funds which had been damaged by Robert Maxwell.
Perhaps I may be allowed to make some progress.
It is a bit rich for the Labour party, which opposed the £13 billion of savings that we made in the Pensions Act, to complain that part of that would be absorbed by the scheme, especially as all the rebates will be invested. That will not only pay for future pensions, but strengthen our economy.
When the Labour leader was extolling the virtue of Singapore's scheme, he said:
It is a way of encouraging savings and investment … The idea of raising investment and savings is very important. We"—
need to increase our investment significantly".
Precisely so. Basic pension plus will produce a massive flow of extra funds for long-term investment in this country.
The Labour party has argued that more investment is the key to faster growth. If the extra investment boosts our growth by just a 20th of 1 per cent., the whole scheme will be self-financing. The extra revenues generated by that growth will exceed the net value of rebates. We are not counting on that, but Labour is surely not suddenly denying that investment is good for growth.
If I decline interventions from both my hon. Friend and the hon. Gentleman, I will make a little progress; I have given way quite a lot.
The second criticism made by the hon. Member for Peckham is that basic pension plus will, allegedly, be insecure. That is the reverse of the truth. We will underpin the basic pension with investments. We will guarantee the basic pension, should those investments be insufficient. I simply ask the hon. Lady which is more secure: her promise to pay the basic pension in future with no investments to fund it, or our guarantee to pay the basic pension with investments to fund it? She is welcome to come to the Dispatch Box and tell us which she thinks is more secure. I note that she does not.
Last year, the hon. Lady and her party voted to make companies invest even more to underwrite the pensions they promise their members, yet now she thinks that the state can be relied on to keep its pension promise without investing a penny to pay for it. As the hon. Member for Bath (Mr. Foster) said on "Question Time", Labour is defending the pyramid selling principle as the key to the future provision of Labour's state pensions.
The hon. Lady has made a lot of misselling. As I have said, the misselling in the late 1980s was wrong. It is essential that everyone who was missold a pension be reimbursed or reinstated into their old scheme. None of them must lose. The regulator's assurance to that effect is welcome, and so is companies' resolve, following a meeting with the Economic Secretary to the Treasury, to accelerate the process of compensating those affected.
I want to make some progress.
Needless to say, any company that failed to compensate for past misselling would not be eligible to manage a basic pension plus fund. However, that sort of misselling is not directly relevant to basic pension plus, and could not recur under this scheme. It occurred when people were persuaded to opt out of their occupational schemes into personal pensions that they did not need. It did not involve people opting out of SERPs into personal pensions.
A recent study by the actuaries Alexander Clay showed that as many as 99 per cent. of those who have opted for a personal pension and out of the state system were well advised to do so. Indeed, on average, their pensions will be nearly three times as large as if they had stayed in SERPS, and they could be nearly £1,000 a year better off on today's prices, if they continue to pay into their funds.
Nevertheless, it will be essential to have effective but simple regulations for basic pension plus to keep costs and charges low, to prevent churning, and to prevent over-risky investment exploiting the pension guarantee.
Is the Secretary of State aware that, of the 500,000 people who were missold pensions, in two and a half years only 1 per cent. of them have received compensation? Is not the likelihood that, at that rate of progress, most of them will have died before they are compensated for the misselling? What confidence can the general public have in the private pension industry, given that poor regulatory record?
The hon. Lady was obviously so anxious to get out her scripted question that she did not realise that I was replying to it as she was jumping up and down.
The hon. Member for Newham, North-East (Mr. Timms) has the other scripted question.
It is probably the same one; he just was not listening.
The third criticism made by the hon. Member for Peckham was that our reforms do nothing for current pensioners. Of course basic pension plus itself does not, but our Pensions Act reforms protect today's and tomorrow's occupational pensioners against the likes of Robert Maxwell, about whom Labour Members are singularly unconcerned. The House will remember that he was the only Labour Member of Parliament ever to take a serious interest in private pensions. It seems that his principle of providing pensions with a fund with no investment in it to meet them has now become official Labour Front-Bench policy.
I should like to make some progress.
Our success in curbing inflation is one of the key advantages that the current generation of pensioners has gained from the Government. They remember the damage that Labour's hyper-inflation inflicted on pensioners' savings when it was last in government. The extra £1.2 billion we have pumped into higher income support premiums is helping the less well-off pensioners, and, above all, we are not threatening them with the double whammy of a utilities tax, which would be paid for in the gas, electricity, telephone and water bills of pensioners and others, and which would hit the value of utility shares, the bulk of which are held by pension funds.
I should like to bring the Secretary of State back to the subject of pensions. If I understood him correctly, a few moments ago he said that the companies that have been involved in misselling personal pensions will not be able to be involved in basic pension plus. That includes many of the biggest insurance companies in the country, such as Prudential, Legal and General and others. Is he telling the House that those companies will not be able to be involved in basic pension plus?
As I understand it, the right hon. Gentleman is proposing that the Personal Investment Authority should regulate this matter. Is he aware that, on the day of his announcement, it produced its future strategy, in which it says that it does not want
to get involved in any form of direct approval of products or product design"?
The hon. Gentleman should have listened carefully to me and to Colette Bowe. We both said that the companies that failed to provide restitution for those to whom they missold pensions would not be eligible to run basic pension plus. Colette Bowe also said that the report did not apply to basic pension plus.
We should not let the inadequacy of the Opposition's response to our proposals for basic pension plus obscure the threat posed to pensioners by Labour's pension policies. First, Labour is casting doubt on its ability to protect the state pension against inflation. In an attempt to demonstrate his fiscal rectitude, in a speech in January, "Responsibility in Public Finance", the shadow Chancellor said that, in order to control the cash totals of departmental spending,
there cannot be an assumption that totals will be automatically adjusted upwards in the event of changes in inflation.
Does that mean that he is not promising to uprate pensions and other benefits, or, in view of the press release rushed out at midday by the hon. Member for Peckham, is the so-called iron shadow Chancellor proving rather ductile as soon as the heat is on, and running away from the pledge he made in January?
Secondly, Labour's policy of letting people draw their pension at age 60 will either cost the taxpayers £15 billion a year or involve cutting the basic pension by £20 a week. Labour's so-called flexible decade of retirement is identical to reducing the state pension age to 60. People are already free to defer taking their state pension, and for each year they delay, they get a 7.4 per cent. increase in their basic pension for the rest of their life.
In practice, 98 per cent. of people choose to take their pension as soon as they are permitted to do so. The Labour party does not propose to give them any extra flexibility, or incentives to exercise such flexibility. It proposes only that they can take their pension from 60 instead of 65. There is no reason to doubt that roughly the same proportion as now would draw their pension at 60 if allowed to do so, but that would cost £15 billion more than retirement at 65, unless the basic pension were cut.
Imagine my surprise when the hon. Member for Peckham wrote to me last year criticising me for saying that the Labour party's policy of retirement from the age of 60 would cost £15 billion a year.
It may be drivel, but I am quoting the words of the hon. Member for Peckham. She wrote
the taxpayer should not be expected to fund this personal flexibility. In government we will protect the public purse from any increase in expenditure arising from
allowing people to retire at 60. She continued:
we anticipate … a lower level of basic state pension.
She also wrote that she would ask the Government Actuary how much that would cost.
The Government Actuary calculates that, to avoid extra taxation, Labour's plan would require cutting the basic state pension by £20 a week for the rest of people's lives, or by £37 a week for a couple, and that it would plunge up to 2 million more pensioners below the income support level. The Opposition have said that they would not spend any more money under the plan. They would therefore not be able to top up incomes even to the income support level.
There is a third new danger from new Labour: its plans for a pension entitlement, which would mean a new means test for all pensioners. Labour plans to test all pensioners to determine whether they are eligible for pension entitlement. Moreover, I am not the only one who calls it a means test. Baroness Castle attacked Labour's
vague concept of a pensions 'Entitlement' which is clearly a means-tested guarantee by another name, with all the drawbacks".
Apparently Labour intends that every new pensioner, and presumably all existing pensioners, would undergo a once-for-all means test. If their total income fell below some unspecified level—presumably set at least at the income support level—they would be topped up to that level by a pensions entitlement. It is not clear, to say the least, whether all pensioners would like to be means-tested, however generous the Labour party's intentions might be.
However, once Labour had established the system to means-test all pensioners, it would certainly not stop there. It would be the start of a slippery slope; and how long would it be before Labour used the means test to claw back the basic pension from prudent pensioners who had saved enough for a decent private personal pension? Does anyone imagine that the Opposition would be able to fund their £30 billion of spending pledges without taking advantage of their means-testing regime for pensions?
No; I will make some progress.
The Government have a fine record of raising pensioners' living standards. Pensioners' incomes are now 60 per cent. higher in real terms than they were under the previous Labour Government. On average, pensioners' incomes have increased every year by nearly as much as they did in all four years of the previous Labour Government.
In 1979, only 43 per cent. of retired people had an occupational pension of their own. Today, 63 per cent. have one, and the figure is over 70 per cent. among the newly retired. The average size of occupational pensions has doubled in real terms over that period, and, as a result of encouraging people to opt out of the state earnings-related pension scheme, we built up £650 billion of funded provision. That figure is not only greater than that in any other country in Europe: it is greater than the amount that all the other countries in the European Community combined have bothered to save and invest to meet their future pension bills.
The next Conservative Government will build on that strength. Our plans for basic pension plus involve the most radical improvement in pension provision since Beveridge. It is the biggest enhancement of pensions and the greatest extension of personal ownership. Labour has discredited itself by its knee-jerk opposition to the changes. Its plans would leave pensioners vulnerable to inflation, cut the basic pension by £20 for life, and subject all pensioners to a means test. Our plans will give the United Kingdom secure pensions, high investment and low taxes.
The debate on the future of pensions is one of the most important political issues facing us. Unlike the Secretary of State, I shall attempt to point to some common ground between all hon. Members on the issue. We all agree that we have an aging population, that we need long-term planning for changes and that we need to encourage people to save more for their old age by giving them a stake in their own pensions.
In this debate, I will explain the principles that must underpin any change in pensions policy, why the pension system needs to change after 18 years of Tory government, why we believe that the Government's proposals fail to match up to those principles, and how Labour's approach will provide security in retirement. Those are the principles on which any change to pensions policy must be based.
Pensions policy must strike a fair balance between the generations, and it must fairly balance the responsibilities of the state and the individual, and of the public and the private sectors. It must provide a secure retirement for people on all incomes, and it cannot leave out those on low and modest incomes. The proposals made last week by the Government fail all those tests.
The Government's proposals are costly and risky. They give nothing to today's pensioners and they leave tomorrow's pensioners without adequate income in retirement.
The hon. Lady refused the opportunity during my speech to answer the question of which is more risky—a basic pension promised by her with no investments to fund it, or a pension guarantee with investments to fund it.
It is more risky to be blinded by dogma and to say that everything must be in either the state or the private sector. We are saying that we want a partnership between public and private provision. That is how one spreads the risk and provides the greatest future security. People understand that.
The challenge of achieving fairness for all generations will be met by striking a balance between today's pensioners, today's people at work and tomorrow's people at work. I shall deal first with today's pensioners because the Secretary of State talked at length about pension liabilities, but he did not say anything about today's pensioners. A quarter of all today's pensioners are on the poverty line or below and must rely on income support. Today, 1.6 million pensioners must rely on income support to top up their basic state pension. Another 1 million of them completely fall through the safety net, because they are entitled to income support but do not claim it, losing an average of £14 a week. It is a scandal that so many pensioners who have spent a lifetime at work or in caring for their families are among the poorest people in Britain.
The Secretary of State's pension plan will cost taxpayers a massive £312 billion over the next 40 years, but not a penny will be available for today's pensioners.
How could pensioners have any confidence in a state pension scheme administered by Labour? When Labour was last in power, it so mismanaged the economy that it could not pay even the Christmas bonus.
Pensioners' income has always been better under Labour Governments than under the Tories. Pensioners in the United Kingdom remember that the Tories promised them that they would not impose VAT on their gas and electricity but that, as soon as they got into government, they did exactly that.
Secondly, I will deal with today's work force. Millions of today's workers face financial hardship when they retire because they do not have an adequate second pension. Occupational schemes provide good second pensions, combining the employee's contribution with that of the employer. It is therefore worrying that the number of people in occupational pensions has been falling in recent years. Now, 12 million people in the work force have no access to occupational pension schemes.
If the hon. Lady is encouraging occupational pension schemes, will she assure us that if—it is a big if—there were a Labour Government, the present tax relief on pensions would remain the same as it is today?
The right hon. Gentleman seems to be unaware that the National Association of Pension Funds, which is the organisation that represents the large employers that run occupational pension schemes, said that the Secretary of State's proposals would spell
the demise of the occupational pension system".
Therefore, the right hon. Gentleman cannot say that the Government's proposals would protect occupational pension schemes when such schemes have shrunk under this Government and the NAPF says that the proposals would spell their demise.
Twelve million people—
No. I have given way and answered the right hon. Gentleman's question.
Now, 12 million people in the work force have no access to occupational pension schemes. They have to choose between the state earnings-related pensions scheme, which the Government have halved in value, and personal pensions which, as the Consumers Association pointed out, can be poor value for money because of high charges and low contributions. People on low and modest incomes may find that the fees and charges associated with personal pensions can consume up to a third of their hard-earned savings—the money goes to the financial services companies and is not available for them when they need it in retirement.
Nearly 6 million people have no second pension provision whatsoever. Basic pension plus will give no help to today's work force who are destined to retire on means-tested benefit, having paid higher taxes to finance the Government's privatisation of pensions. The cost of the transition to basic pension plus will be borne by the current generation of workers who will have to pay twice through their taxes: they will have to pay for the pensions of the retired and for the pension funds of the rising generation.
The cost of privatising pensions over the next 40 years would be £312 billion. The Secretary of State said that he will get £160 billion from abolishing tax relief on pension contributions, but he may not be able to raise that amount. The NAPF warns that a new tax on contributions would cause a drop in contributions and so reduce the base and the yield for the new tax. As I said in response to the right hon. Member for Sutton Coldfield (Sir N. Fowler), the NAPF today said that the Secretary of State's scheme threatens the occupational pension system. How can people benefit from increasing prosperity and have security in retirement if the Government's plans are undermining their occupational pension schemes?
The Secretary of State has not even tried to explain how he will raise the other £150 billion and who will pay it. It will mean either increased taxes or increased borrowing. He has offered nothing to today's pensioners and nothing to today's work force except extra taxes and a threat to their occupational pensions, but has he put the public finances on a sounder footing for the future? No, he has not.
The Secretary of State claims that his plans deal with the so-called demographic time bomb but, as Andrew Dilnot of the Institute for Fiscal Studies points out in The Guardian today, he has got his timing wrong. The cost of introducing basic pension plus will peak at £14 billion a year at the very time when the demands of an aging population will be greatest. Pension costs and extra costs for long-term care and health care will be at their highest between 2020 and 2030, but during that decade billions of pounds will be spent privatising pensions. The public purse will be less able to meet the extra demands for health and long-term care—there will be less available to spend on the elderly just when the number of the elderly compared with the number in the work force is at its greatest.
I will not.
The Government's plans also fail to provide a secure retirement for all, whatever people's income. The Government have claimed that everyone will get £175 when they retire, but this morning the Government doubled that figure to £350, not at the suggestion of the Government Actuary because, as the Secretary of State admitted at his press conference this morning, he wrote it on the back of an envelope.
The £175 is not guaranteed, as my hon. Friend the Member for Wallasey (Ms Eagle) said; only £61 is guaranteed. The £175 is available only for people on average earnings, but three quarters of all employees earn less than average earnings. Today, £175 is worth half average earnings, but in 2040 it will be worth only 21 per cent. of average earnings.
If a private pension company fails to warn that the markets can go down as well as up, it is guilty of breaching the Financial Services Act 1986. If a private pension company fails to warn that one can lose the money that one puts into savings, it is guilty of breaching the Financial Services Act. If a private pension provider promoted £175 promises, as the Government have done, it would be found guilty of breaching the Financial Services Act. When the Government behave worse than the worst cowboys in the private sector, the regulatory system is wholly undermined. The regulators ought to give the Secretary of State a call—the Government have made false claims.
The hon. Lady is right to talk about regulation and making sure that people understand the figures. It is clear that her plan for a flexible decade of retirement would cost £15 billion, but she has said that a Labour Government would not raise that money. The alternative is that the basic pension would have to go down by £20 a week. I am perfectly prepared to accept in good faith what she told my right hon. Friend the Secretary of State in her letter to him last August—she said that she would not raise the extra money—but will she now confirm that her plans would reduce most pensions by £20 a week?
There is absolutely no question of Labour cutting the basic state pension. That is a scurrilous suggestion which the hon. Gentleman knows is untrue; it is unworthy of him—[Interruption.]
Order. The hon. Gentleman asked the hon. Lady a question. She is having great difficulty replying because she is not being given the opportunity to be heard. There is too much noise. The House must settle down and allow the hon. Lady to get on with her speech, just as the Secretary of State was allowed to do.
It looks as though we are going to get another one.
I received a letter from someone purporting to be Harriet Harman which said:
We will have to consider what level of basic state pension should be paid. … we anticipate … a lower level of basic state pension.
Is the hon. Lady denying that it came from her?
Some people describe the Secretary of State as an intellectual. He knows that we are not proposing to means-test all pensioners, although that is what he said this morning, and that we are not proposing to—and will not—cut the basic state pension. We will protect the basic state pension. He also knows that we are considering some additional flexibility and choice for a flexible decade of retirement. At present, some people are able to draw their pension later and take it at a higher level. We are against the idea that we are inevitably stuck with a one-size-fits-all welfare state. We shall continue to put forward proposals to modernise the welfare state to give people more choice and more flexibility. There is no suggestion of forcing anybody to retire early and take a cut in their basic state pension. If the Secretary of State wants to continue with his leadership bid, he had better build on his credentials. The main one is supposed to be his brain.
I should like explain the £175. The Government's proposals will not guarantee the full £175-a-week pension that they claim that someone on average earnings will get on retirement in 2040. The basic pension guarantee will cover only the basic pension element, not the 5 per cent. earnings-related element or any additional savings that an individual might make. The basic pension guarantee guarantees only £61 a week, which will be worth just 7 per cent. of average earnings in 2040. It is not a guarantee of £175.
The new second-tier additional earnings-related element will not provide a generous or adequate pension either. The £175-a-week pension that the Secretary of State claims that someone on average earnings will get in 2040 will result in pensioners falling further behind the living standards of people at work. A man on average earnings who retired last year, solely dependent on the basic state pension and SERPS, got a pension worth 36 per cent. of his earnings. By 2040, when living standards will have risen significantly, under the Government's plan a man on average earnings would retire on only 20 per cent. of his earnings.
I shall not give way to the hon. and learned Gentleman. I have given way six times. Each time, I have been asked questions that were not sensible and each time Conservative Members have not listened to the answer. [Interruption.]
Order. What is going on in the House this afternoon? I repeat, I hope that the hon. Lady will be given the same hearing and the same courtesies as the Secretary of State was. She has made it clear that she is not giving way, so I advise hon. Members to take that on board.
The £175 guarantee, which is not a guarantee, does not apply to everyone, but only to those on average earnings. Three quarters of the work force earn less than average earnings.
Some 2.6 million pensioners live on the basic state pension, topped up by income support. In 2040, after spending £312 billion on their privatisation plan, the Government predict that 3 million pensioners will be living on the basic pension guarantee, topped up by income support. Mervyn Kohler of Help the Aged has said that under the Government's proposals, a poor worker will progress to become a poor pensioner. Basic pension plus would be a guarantee of poverty in old age for more than 3 million people. After more than £300 billion has been spent, 3 million pensioners will still be struggling on the bread line.
Basic pension plus fails to strike a fair balance between the generations. It fails to give people on all incomes a decent standard of living in retirement and it increases risks because it abandons the partnership between public and private provision, putting every penny of every pension into the private sector basket. Every part of every pension will be at the mercy of the market and every taxpayer will have to stand by to bail out failed schemes. The Secretary of State has made reassuring noises today, telling people not to worry about misselling because it is all sorted out and will not happen again. The Government have a bad record on protecting people from the risk and cost of their ideological forays into personal private pensions.
In the mid-1980s, the Government's policy, backed by hundreds of millions of pounds, was to encourage people to opt out of occupational pensions and SERPS and go instead into personal pensions. Labour warned at the time that many people would wrongly be lured out of good value for money occupational pensions and would lose out. The then Under-Secretary of State for Health and Social Security, now the Prime Minister, swept our concerns aside. He assured Parliament that the Government would
safeguard people against unscrupulous overselling of personal pensions."—[Official Report, Standing Committee B, 4 February 1986; c. 27.]
That was the Prime Minister's promise. He did not safeguard people and 1.5 million lost out. There are 500,000 urgent cases awaiting compensation. Only 7,000 have received compensation. At least 18,000 will never receive their compensation. The Personal Investment Authority told me last night that 18,000 people have died before they could be compensated. Why should the public trust the Government's reassurances this time when they got it so badly wrong last time? They are forcing everyone into the schemes that have failed so many.
Can I clarify what the hon. Lady has said, which is open to misunderstanding? If people tragically die before they can be compensated, their families, their estates and their relatives get the compensation.
It will be too late for them. As a direct result of Government policy, they will have had a lower standard of living in retirement than they were entitled to. The Secretary of State and the Tory Government have shown no remorse about the personal loss and hardship that they have caused so many people. Far from it: they are trying to sweep the issue under the carpet and press on with their dogmatic and ideological proposals to get rid of all state provision and privatise all pensions.
The Government say that under their new scheme costs will be held down. Under the Financial Services Act 1986, they have always had the power to cap charges and have never used it. Their track record is to allow charges to soar. Why should we believe them now when in recent years they have allowed people's savings to be eaten up in costs and charges?
One of the planks of my right hon. Friend the Secretary of State's proposals is that the market will drive down charges. This lunchtime, I was with one of the major mutual companies, which reckons that it can provide one of my right hon. Friend's pensions at about 0.5 per cent. of the fund value each year. Moreover, the top-up could be provided free of charge, so I do not know how the hon. Lady gets the idea that those private pensions will cost more.
The Secretary of State asserted that, under the new scheme, charges will be lower than under existing personal private pension schemes because marketing costs, which form the greater part of the costs and charges that eat up so much of people's savings, will be brought down. As people will have to invest in those private pensions, the companies will not have to spend so much on marketing. The problem with that is that the Secretary of State fails to recognise that the system still offers a choice between different private providers. The advertising and marketing costs will be not a response to try to increase the market but a response from each personal private pension company to try to increase its market share. With more funds in play, it will be even more worth while to spend more on marketing and advertising, and to offload the charges on to people trying to save for their retirement.
I congratulate my hon. Friend on how she has coped with the bad-mannered interruptions of Tory Members, who are all suffering from bad cases of pre-defeat hysteria.
What assessment has my hon. Friend made from the nonsensical replies that she and many other hon. Members had to our questions printed in Hansard in the past few days, on how the Government reached the figure of £175? Conflicting answers printed on the same day say that the Government have worked on the assumption of an annual earnings increase of 1.5 per cent. and of 2 per cent. That will make a difference, as a percentage of average earnings in 2040, of between 18 and 26 per cent.—an enormous difference. The Government are confused. What assessment—
Interventions should be brief and to the point, but it is not uncommon for hon. Members to stray from that in this House.
My hon. Friend the Member for Newport, West (Mr. Flynn) is absolutely right. Although the Government's proposals are barely a week old, they are already unravelling. The Government contradict their figures on the costs and benefits day by day.
The Government have made it clear that their pensions priority is to spend 40 years and more than £300 billion privatising state pensions. Labour does not share those priorities. We agree with the Secretary of State, however, that we cannot go on as we have for the past 18 years because it leads to poverty and insecurity for too many. Our approach, however, is different. There is not one type of provision that is right for everyone. People have different lives and different family and work patterns. We cannot have a one-size-fits-all pension privatisation. Everyone should have access to a pension that offers security in retirement and the largest number of people should have a stake in their own pension scheme and be encouraged to make further savings.
We shall do that through partnership between the public and private sectors. We shall keep the basic state pension not means-tested. We shall keep SERPS as a choice, particularly for the low-paid and for carers. We shall protect occupational pension schemes and provide a new low-cost stakeholder pension for those who do not have an occupational pension and for whom a private pension is simply too costly.
Those fortunate enough to be in an occupational pension scheme will have the benefit of employers' contributions as well as their own, but the Tories have encouraged more than 1 million people to opt out of occupational pensions. Basic pension plus will undermine them further. We want occupational pension schemes to be strengthened and, where possible, extended. We shall keep constantly under review the issue of regulation brought in by the Government. We shall aim to reduce the burden on employers in terms of the cost of compliance while continuing to protect the public interest. We shall introduce an investors in pensions award to recognise and encourage employers who make excellent pension provision for their employees.
However, millions of workers cannot join an occupational pension scheme because they are in a small firm and are more likely to move between jobs. For them, the current choice is between SERPS and a private pensions but the benefit of SERPS has been halved and the costs and charges of private pensions are too high. There is clearly a need for a value-for-money, funded pension scheme that gives those people both flexibility and security at low cost. That is why we have been working with the financial services industry to formulate a new funded second pension—the stakeholder pension.
Stakeholder pensions will help to provide decent income in retirement for people who currently fall through the net. We want to encourage new partnerships, for instance between insurance companies and groups of small businesses in one industry or with employee organisations to provide stakeholder pensions. People in those new schemes will get a better pension because of reduced costs due to economies of scale. They will be able to take breaks in employment without being unfairly penalised.
Our approach to SERPS is based on choice. No overwhelming case has been made for ending SERPS as a choice, which is why we shall keep it for people who want to be in it and want to use it as a benchmark by which to judge second pensions. SERPS can also play a role in providing pensions for those—usually women—who care for elderly or sick relatives. Many of those people face retirement on means-tested benefits, but crediting them into SERPS could help to ensure that they gain a pension in their own right in recognition of the work that they do, which is unpaid but important to the community. Together with our proposals to ensure equal treatment for women, that could greatly reduce reliance, and hence public expenditure, on income-related benefits for those in retirement.
I wish to outline our proposals for today's pensioners. We shall defend the basic state pension from the Tories. Under Labour, it will not be means-tested and it will rise no less than prices. Our first priority, however, will be the poorest pensioners. One million pensioners do not receive the income support to which they are entitled. We shall examine how to help the poorest pensioners through our plans for a pension entitlement in addition to the basic state pension—replacing not the basic state pension but income support. It will ensure that people receive what they are entitled to without having to fill in a 35-page form.
The Government have failed 1 million people. Among the poorest are retired people who are too proud to have to jump over all the hoops and hurdles which the Government place before them in order to get the income support to which they are entitled.
I will not give way.
We shall get rid of the stigma of income support, replacing it with a pension entitlement. We shall make it easier for pensioners by making it possible to claim at a far wider variety of outlets.
The hon. Gentleman asks how much it will cost. We are talking about an entitlement for the poorest pensioners, which the Government have failed to allow them.
We shall use the information that pensioners have already given to the Department of Social Security and to their local councils to help identify those who are entitled to extra help and do not get it.
The Secretary of State asks how. We pressed the Government to amend the fraud Bill to allow cross-matching of data to help pensioners as well as catch fraudsters, but they refused. The Secretary of State says that pensioners choose not to have their income support; somehow a million pensioners are choosing to lose out on £14 a week. We are clear that our approach and our framework of policies are affordable and will address the needs of today's pensioners, and tomorrow's.
Under Labour's plans, the proud 78-year-old woman in St. Albans who does not claim her income support and who was afraid to turn up her heating last winter will get an extra £14 a week pension entitlement and a cold-weather payment—her entitlement. Under the Tories' plans, she will shiver with cold next winter and the winter after that—£300 billion for privatisation, but nothing for her under the Tories.
Under Labour's plans, the man on low pay will find that it is worth his while to put aside a bit extra for his retirement in a good-value stakeholder pension. Under the Tories' plans, he will pay more tax now to finance privatisation and will retire on to means-tested benefits. We will listen to the voice of pensioners, not ignore them as the Government do.
People of all ages need a far greater understanding of pensions. That presents a great challenge to any Government due to the view often held that pensions are too technical and too complex for people to understand. We want to be sure that people in their 20s are as familiar with AVCs—additional voluntary contributions—and IFAs—independent financial advisers—as they are with Sega and Nike. We want them to understand that OPRA—the Occupational Pensions Regulatory Authority—is not just a chat show.
Clearly, the trouble with that joke is that it is too complicated for Conservative Members. We shall have to start earlier.
I have already given way to the hon. Gentleman. I am about to conclude my remarks. I will not give way.
The Government can and should play their part in promoting a national debate on the future of pensions. The debate about pensions and their reform can be led only by a Government whom the people can trust—and no one can trust the Tories on pensions.
On a point of order, Mr. Deputy Speaker. There have been several discussions in the past few days about declarations of interests. Would it not be helpful to the House and the country if, during this debate, all hon. Members who have a financial interest in the pensions industry declare it—although it may well be registered—at the beginning of their speech?
The Chair—and I hope everyone else—always expects hon. Members to know the rules of the House regarding declarations of interest. I assume that all hon. Members adhere to them.
The House has listened to the hon. Member for Peckham (Ms Harman). I have been listening to speeches by Labour Front Benchers for, I guess, more than 20 years. I have heard the speeches of Baroness Castle, those of the late Brian O'Malley, for whom I had the greatest respect, and even those of my old sparring partner, the hon. Member for Oldham, West (Mr. Meacher). I have seldom heard a worse speech than the one that the hon. Lady has just made, above all because it was inadequate to the challenge of pensions policy before us. Its inadequacy was underlined by her failure even to attempt to reply to questions about tax relief in connection with pensions. The public will draw their own conclusions from that.
Clearly we shall have to go through the speech very carefully. Indeed, I suggest that during the coming election campaign it might be circulated in its entirety to Conservatives and to the public to show the complete vacuousness of what the Labour party proposes. The only new thing that I found in the hon. Lady's speech was the idea that we are to have an investors-in-pensions competition of some kind. I do not think that that quite amounts to a pensions policy or meets the challenge.
I congratulate my right hon. Friend the Secretary of State on his plans. I believe that many in the pensions industry, and many who observe it, think that his proposals are among the most imaginative to have come from the Government in this Parliament. It is good for public finances—that is certain—but, above all, it is a tremendous investment for the public. I also congratulate my right hon. and learned Friend the Chancellor of the Exchequer, as it is only with his approval, and through the Treasury and the Department of Social Security working together, that such imaginative proposals can be made.
Will the right hon. Gentleman give way?
I am very grateful to the right hon. Gentleman for giving way.
What happened to his proposals?
I hope that, with his normal courtesy, the hon. Gentleman can contain himself for 30 seconds.
What did the then Chancellor do to his plans?
The hon. Gentleman is uncharacteristically over-excited. If he can contain himself for 30 seconds, I shall give way. Before his uncharacteristic intervention, I was saying that the proposals before us follow changes that have been made over the past decade, which can fairly be described as a revolution in pensions.
Improvements affecting occupational pensions have hardly been mentioned. We tackled such issues as transfer rights—the scandal of the frozen pension—and put them right. The Labour Government did nothing about that. We have given the public new options—notably personal pensions, which have been taken up by millions of people. We have cut the emerging cost of the state earnings-related pension, to the undoubted benefit of future generations. On that fact, I know that the hon. Member for Birkenhead (Mr. Field) and I stroll arm in arm, through the Chamber, if not through the Lobby. I shall now give way.
I wanted to pick up what seemed to be the right hon. Gentleman's coded message to the Secretary of State, when he congratulated him on having the Chancellor of the Exchequer on his side over the proposals. Does the right hon. Gentleman recall what happened to his proposals, which in many ways were far more radical than those proposed by Ministers in this Parliament? Very late in the day, the then Chancellor of the Exchequer publicly destroyed his proposals for reform. Would it not be right to conclude from what he has said that today's Chancellor has not woken up to the proposals' long-term costs in terms of public expenditure?
I would put a different interpretation on history. It has been established over the past decade that my proposals, on which I admit I encountered a certain local difficulty with the Treasury, were correct. I am glad that the Treasury has caved in with enthusiasm and is backing my right hon. Friend the Secretary of State for Social Security. That is excellent, and I am well content.
The criticism made by the hon. Member for Peckham centred on the misselling of some personal pensions. I do not dispute for a moment the need to put right the misselling that took place. No one feels more strongly about that than me. I do not defend it; it must be put right—and quickly. However, it is being put right—too slowly, yes, but it is certain that it will be put right. What is important about today's debate is the assurance that has been given not only by the industry but my right hon. Friend the Secretary of State that no one will lose out. Mr. David Prosser of Legal and General, one of the biggest companies involved with pensions, is calling for greater speed, and is saying that the company has the resources to deal with the matter.
Conservative Members, including the Secretary of State, have been insisting that the problem of compensating the 500,000 people who were missold pensions is being sorted out. Is the right hon. Gentleman aware that the chief executive of the Personal Investment Authority appeared before the Treasury Select Committee only this week, and was unable to give a timetable for compensating 99 per cent. of those people? The fact that there is no end in sight must undermine public confidence in a wholesale move towards privatised pensions.
I hope that it will not. We will have to see what happens, but no one will push harder than me to see that the problem is sorted out. There is public and Government pressure, as well as pressure from inside the industry, to solve the problem.
I challenge the Labour party on the issue, because unfunded state schemes do not offer a miraculous improvement. The opposite is true, because mistakes made in the unfunded state scheme have never been put right—we need only turn our minds back to 1976 to recall that. The biggest pension scandal in this country was not personal pensions or Robert Maxwell's behaviour, but the action of the Labour Government when they deliberately fiddled the uprating system in 1976.
Until then, pensions had been uprated historically. In other words, we validated past inflation. Mrs. Castle and Denis Healey decided, when inflation was falling from astronomic levels, to forecast future inflation instead. The result was that they missed out the figures for inflation between March and November 1975. That decision meant a saving of £1 billion by the Labour Government—£4.5 billion in today's money. The Labour party never put that right, and it never will. That was a fiddle, a scandal and a swindle, and we all knew it.
Will the right hon. Gentleman compare the £4.5 billion cut with the cut that was achieved by decoupling pensions uprating from earnings?
I would not mind making that comparison, but it is not the Labour party's policy to restore the link, so it is an academic point. I will come to the point on earnings, because it underlines the peculiar and strange policies that the Labour party is pursuing.
Labour Members cheered the announcement of the £4.5 billion cut in pensions spending. We know that because we have the benefit of Mrs. Castle's diaries. Diaries are a great help to the public debate. We have the diaries of Alan Clark, although they are not always read for the politics, and the Opposition have the diaries of the right hon. Member for Chesterfield (Mr. Benn) and of Baroness Castle. She describes the Budget that contained the uprating statement as follows:
I slipped back on to the front bench in time to hear Denis"—
deal with social security. All ray officials' valiant efforts to make him stand up and be counted on the change from the historical to the forecasting method for the pensions uprating have failed. He skimmed over it and so got a cheer from our side for the amount of the increase, whose relevance they did not understand.
Labour Members may not have realised the significance at the time, but the people who lost out did not have the opportunity to ask the Personal Investment Authority for their money back. The cut was permanent and it has never been paid back. That is a real difference between the public and the private sectors, and it is a real plus for the private sector that mistakes are dealt with.
I now come to the point that the hon. Member for Birkenhead—I almost called him my hon. Friend, but that would embarrass him—made about uprating and earnings. That is another issue that cannot be taken to the Personal Investment Authority. Labour's promise to uprate pensions in line with earnings was made more solemnly and more often than any promise I can remember. It was made in the 1983 election and in the 1987 election.
Before the 1992 election, when my right hon. Friend the Leader of the House and I were responsible for social security, we were frequently attacked for not uprating pensions by the increase in earnings. What has happened? Much to the dismay of the hon. Member for Islington, North (Mr. Corbyn), who is in his place, Labour Front Benchers have decided to abandon the earnings-related uprating. They talk about the misselling of pensions, but the public would not be well advised to buy a pension policy offered by the Labour party, given its record in the past few years.
The right hon. Gentleman will recall the halcyon days of 1986 when we were members of the Standing Committee that considered the legislation to introduce the personal portable pension scheme. I am sure that he will also recall the warnings by my right hon. Friend the Member for Derby, South (Mrs. Beckett) about the inherent dangers and consequences of misselling. He brushed all those warnings aside. Does he now have even one iota of remorse about the legislation that he and the Prime Minister introduced?
I do not feel remorse about it, and I have just dealt with the point. I thought that the hon. Gentleman might say something sensible about earnings and uprating, but I will not embarrass him further.
In the past 18 years, the Government have tackled two of the central problems of pensions policy. They have tackled some of the basic dishonesty in the pay-as-you-go system, and exposed the errors in it. I remember when Mr. Kinnock was Leader of the Opposition and intervened in a debate—when my right hon. Friend the Leader of the House was winding up—under the misapprehension that the national insurance scheme was a funded scheme. He was the Leader of the Opposition, but he did not know that, of course, it is not.
National insurance contributions are, in effect, a tax. Today's contributors pay for today's pensions in the hope that when their turn comes, others will pay for their pensions. The trouble with that system is that Governments can make promises knowing that the bill will not be presented for 10, 20 or 30 years. That is the dishonesty in the pay-as-you-go system, and that is why France, Italy and Germany have enormous pension debts and will struggle in the future. Thanks to the courage of the Government, we have tackled that problem and we will be able to manage the future pension debt. That is an immense advantage for public finances.
Our policies also have immense advantages for the individual. All the evidence suggests that the public value a pension that they can call their own. Personal pensions are so popular because people have a personal fund, and that is what they want. SERPS is unpopular because it is complex and badly understood, and people do not recognise the pension as their pension. My right hon. Friend the Secretary of State for Social Security, to his credit, has moved the argument on. He has tackled not only the second-tier pension, but the basic pension.
Furthermore, the fund offers the prospect of a startlingly better deal and a bigger pension than one would have received under the present basic pension scheme. The entitlement that goes up in the fund cannot be altered, swindled or fiddled by the Government, as happened in 1976. We are using the tax system to encourage occupational provision, and that is important. The public and the pensions press will draw their own conclusions from the failure of the hon. Member for Peckham to give any assurance on tax relief.
I wish to make two final points. First, this is clearly a new scheme that, inevitably, is for the future. We cannot go back to the period after the second world war, when mistakes were made. Beveridge proposed a funded scheme—an idea that we never took up. Instead, we adopted a pay-as-you-go system, and we must not make the same mistake again.
We also need to concern ourselves with today's pensioners, including people who never had the opportunity of entering an occupational scheme—not because they did not want to, but because none was available—and people who were badly affected by the restrictive rules that existed in occupational schemes before the Government's reforms.
Those people did not have the opportunity to build up a pension of their own. Therefore, I advocate the development of family credit into a system of pension credit to give help where it is most needed—that is, to people in their 70s and 80s. We should not give a general pension increase for everyone, irrespective of income, but we should try to add to the income of those who need it.
Secondly, I hope that both sides will agree that we need to examine how we can improve the advice that we give to individuals in the public and the private sector. I have constituents who have lost out on their state pension entitlement because they were not provided with sensible advice. One constituent has lost about £10 a week because of that lack of advice. That has nothing to do with private advisers, and everything to do with the local DSS office and the information provided.
If we are to expand personal provision further, good advice is essential. We must learn the lessons of the past. The advice that companies provide on their products is reasonably good, but I want to see more independent advice on all companies' products. There are such advisers, but there are not enough of them.
The Government have introduced a series of reforms that promise to provide this country with the strongest pensions system in Europe. That is an enormous achievement. But we have done more than that: we have extended the options open to the public. The Government have extended the concept of property ownership and provided people with the chance to own a home of their own. We now offer them the promise of a good pension of their own. I believe that that record and that promise will stand us in good stead in the contest ahead.
One should not always believe what one reads in the newspapers, so what I am about to say may be unfounded in fact. Most of the newspapers reported that, when the proposals were first put to the Cabinet, the Secretary of State's slide show and introduction lasted 17 minutes. I noticed that he spent three times that long with us. I was not sure whether that was because he thought we would understand more than his Cabinet colleagues, and it was therefore worth spending longer with us, or because he felt that we would understand less and needed more time.
I welcome the debate, although I do not entirely agree with its temper—perhaps that is inevitable as close as we are to an important general election. I wanted to say—I hope that my comments will not be misinterpreted—that I welcome the proposals from the Government, but I register some surprise at the debate, which is developing as if we were debating a Bill. The Government have rightly suggested that we debate the proposals that were outlined last week, but they are merely proposals. Nevertheless, the proposals help to change the debate in a way that I believe to be constructive, and it is in that context that I want to make my contribution.
The announcement last week so changed the debate that it has become necessary to rewrite so much of the Select Committee on Social Security report, which was ready to present, that we are not sure whether we can present it this side of a general election, if at all. The Government have influenced and opened the debate, and questioned areas that some people thought one should never question. The roof has not fallen in, and one hopes that, as the months progress, the lead that the Government have given will be accepted and that the proposals will become one set of a series which future Parliaments and the country will debate in trying to find the best way forward.
On one area in which I am interested—the extension of compulsion—there was a great divide between the parties until last Wednesday. The Secretary of State always used to suggest that nobody would understand such a move and that to extend compulsion would be read by the country as increasing taxation, as people could not see the difference between compulsory savings and compulsory taxation. Since last Wednesday, we have moved on, and so dead is that part of the debate that it is hardly worth mentioning.
I stress that the proposals are for the long run. The proposals that the Secretary of State put to his Cabinet colleagues for the first time last week, and to the nation a day later, are addressed to a world that is as far in the distance as Beveridge is in the past to us now. If we look back on all the changes that have occurred in the world since the Beveridge proposals were implemented by the House—and if we look at how wrong most people were in that debate in prophesying what the world would be like—we should be cautious in thinking that our generation can read the stars better than our predecessors or that we can address with certainty a world 40 years hence with only one set of pension proposals.
It is with those long-term proposals in mind that I want to pick up one point made by the right hon. Member for Sutton Coldfield (Sir N. Fowler). I hope that the debate will provide us with an agenda of the issues for which we need answers in the context of the Government's major proposals. The right hon. Gentleman touched on one issue, which was that we must think seriously about the sort of financial advice that people can get. That will be an important part of the agenda.
I wish to add another issue to that agenda—trust. We have touched on that. My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) has referred to one aspect of trust, or lack of it, to which I shall return in a moment. If we are talking about pension reforms that will not take effect until as far in the future as Beveridge's reforms are in the past, they stand little chance of being successful if they are not operated with a degree of trust that does not exist now.
There is not only the issue of the security of pension funds, which was raised vividly by the case of Robert Maxwell, but yesterday, in the Chamber, another pension fund affecting the Chester, Ellesmere Port and Wirral area was debated—H. H. Robertson—where something similar may have happened. That has occurred despite the introduction of the minimum solvency requirements of the Pensions Act 1995 in an attempt to give extra security to funds. The minimum solvency requirements may help with the better running of well-run occupational schemes, but hon. Members representing Chester, Birkenhead and elsewhere are seeing that they produce no funds for those pension schemes where funds appear to have gone missing.
Therefore, if we are to rebuild trust, we may have to reopen that aspect of the debate in the new Parliament and consider whether we need an industrywide insurance scheme to ensure that those who are unfortunate enough to lose their assets are compensated. It is extraordinary that such a scheme exists for those who lose their holiday, but not for those who lose the whole of their income for the rest of their retirement. That is one aspect of trust.
My hon. Friend the Member for Hackney, North and Stoke Newington, in quizzing the Personal Investment Authority before the Treasury Select Committee last week—
As I understand it, the scheme about which the hon. Gentleman was talking was an occupational pension scheme and the matters complained of relate to a period before the introduction of changes under the Pensions Act which, of course, provides for compensation.
The main thrust of ensuring that the money is there to pay pensions is in the solvency requirements; in other words, the funds must be there to acquire the policies to pay pensions if the scheme has to be wound up. That works for well-run funds, because that is what they aim to do anyway, but it clearly will not work for funds where large parts of the assets have disappeared. As I say, that will be part of an on-going pensions debate in the new Parliament. There will never be a single pensions Act that deals with all the problems.
Does the hon. Gentleman, in his analogy with the travel industry and a failed holiday, mean to suggest that the pension providers should chip in collectively to compensate, or the taxpayer should do so?
I mean that, just as the travel associations run a scheme to cover the cowboys they do not want as members, so one would propose cover in occupational schemes.
The second aspect of trust, or a lack of trust, is the question of mis-selling. The Government's embarrassment in dealing with that issue is noticeable. It is intolerable to think that, in the next Parliament, we would seriously consider extending the scope of privately funded pension arrangements without that issue being satisfactorily cleared up. If the PIA does not have the necessary authority, the next Parliament should give it such authority so that it can set a time limit of a number of months within which it expects all the compensation schemes to be complete and, if they are not, interview the various companies and personally fine the directors of those companies that have not made proper settlements. In those circumstances, the arrangements may well be speeded up.
I am not blaming only the private providers of pensions, because a number of people have great difficulty in getting replies from the occupational schemes. The inability of some of those schemes to respond is becoming as serious as the misselling was in the first place. I am not saying that one side is guilty and the other not. If we are to fine companies that will not quickly come to an agreement on compensation, we should be talking about the directors of private companies and occupational schemes.
The third aspect of trust is whether Governments are believed any more. This week, the Government have introduced long-term care proposals. That will not make much impression on an important and growing area of concern because large numbers of people who will be considering the Government's proposals are unsure whether future Governments will keep the pledge that this Government are making on behalf of future Governments. That is a point that the right hon. Member for Sutton Coldfield presented in another way. In the new Parliament, we shall have to address the issue of how to ensure that our behaviour is such that it increases people's belief that Governments, now and in the future, will keep their word.
There is the long-term issue of reforms way into the future which, despite all the technical points which will be put forward, have to be debated within a framework of growing trust if they are to be successful and reach the finishing point of those reforms. The working and pensionable life of just the first cohort of people means a reform over an 80-year period.
On pension misselling, does my hon. Friend agree that, if there is to be a move towards funded pensions, more serious attention must be paid to the regime of financial regulation than Conservative Members so far seem to think necessary? For example, one reason there was so much misselling in the past was the commission-driven nature of product sales. The Government's proposals have more far-reaching ramifications in regard to financial regulation than any Conservative Member has considered this afternoon.
I hope that my hon. Friend will take heart from the fact that, as she was making that intervention, a number of Conservative Members nodded. I hope that they were nodding in agreement rather than in the manner of those little toy dogs in the back of cars who nod according to the movement of the car. That is an important point.
The next Parliament will consider the Financial Services Act 1986 and will perhaps go for fewer rules that are more clearly understood and so easier to enforce than the complexity of rules enacted during this and previous Parliaments. When looking to that future, part of the debate must be about the most sensible way in which to advance given that the Government are now inviting the country to address itself to that long-term prospect.
My response to the reforms is that, although I see a greater role for funded pensions, I also see a role for a basic state pension within those arrangements. I accept, as my hon. Friend the Member for Peckham (Ms Harman) did when she was allowed to in her contribution this afternoon, that it is sensible to share risks in a world where, while one or two countries have gone down the path that the Government say they wish to go down, we have no experience of a Government going down that path and seeing how the policy works out in practice. It is a matter of sharing risks rather than being ideologically for or against the proposals.
The right hon. Member for Sutton Coldfield politely drew the Government's attention to the fact that this was a debate about pensions policy, not only basic pension plus. He centred our attention on one of three issues with which future Parliaments must deal before basic pension plus or other proposals are implemented.
The first issue is what immediate action we should take on behalf of the poorest pensioners. My hon. Friend the Member for Peckham addressed that problem. It is crucial that we try to ensure that entitlements are tailor-made individually and die with the pensioner. They should not be built into the basic rates which we will all draw in time, irrespective of our particular needs. The new Parliament might address that issue by crediting into SERPS the oldest, poorest and frailest pensioners, and automatically paying them their pensions.
The second issue, which has not yet featured in this debate but will be addressed in the next Parliament, is long-term care. We need to increase the basic rate of retirement incomes so that, as people become more dependent on others, they can meet the associated costs quite normally without having to trigger something different in order to secure the income that they require for long-term care. We must decide how we shall pay for the one in five or one in six people who, under current arrangements, will need long-term residential and nursing care. We must consider that issue when debating the development of pension policy.
Does the hon. Gentleman agree that, because only one in six people require long-term care, we should look at proposals involving insurance? That is the classic way of spreading the risk, and the Government are doing that.
I do not think that the Government's proposals will take, because taxpayers will wonder whether future Governments will honour pledges about the release of funds implicit in those schemes. It is crucial to centre on insurance. If we had been debating pensions at the turn of the century, we would have said that it was totally proper to view them as insurance policies. At that time, most people did not survive to draw their pensions, so it was absurd to make most people save for that eventuality. Thankfully, the vast majority of people today do not require long-term care. I think that the Government have made the correct division: it is not sensible to suggest that everyone should save, when we know that five out of six people will not require those savings for long-term care.
Thirdly, long before we can put basic pension plus into operation, we must consider the adequacy and the payment of pensions to the large number of people who were born after the second world war. There is the immediate issue of helping the poorest pensioners now; the big issue of paying for long-term care; and the future prospect of providing for the generation of baby boomers when they take their places in the ranks of the retired. We must address those issues before we can think about very long-term provision, such as basic pension plus.
Nevertheless, I welcome the Government's focusing attention on 45 years hence. It is sensible to have a long and detailed debate about the next stages of pension policy in this country. I am confident that that debate will be conducted in a more rational manner than the Secretary of State displayed in his contribution today. I am sorry that he is not in the Chamber to hear my criticism. During this Parliament, the Secretary of State has shown real distinction in leading the social security debate, and his performance today was a sad conclusion. I put it down to a loss of nerve as the election approaches: he felt obliged to indulge in the sort of knock-about to which we were treated today.
I shall stretch my linguistic powers and try to bring my final point within the debate's terms of reference. The Government have moved quickly on a counter-fraud measure that is yet to go on the statute book. Advertisements have been placed for the three key positions in the inspectorate that the legislation would establish when it became an Act. The advertisement that appeared on Sunday lists the skills that those three individuals will need, but it does not mention experience in counter-fraud work. It appears as though the Department has already decided which individuals will get those jobs. I plead with the Government not to fill any of those posts until after the general election.
It is a real pleasure to follow the hon. Member for Birkenhead (Mr. Field) in the debate. He has made a substantial, thoughtful, constructive and mainly non-partisan contribution to the discussion of pension issues. I shall return to his position in a moment.
I must declare an interest in the debate as I have just become a non-executive director of the London and Manchester insurance company. That appointment reflects my much wider life-long interest in the encouragement of individual savings, especially long-term savings and pensions. I was not able to express my interest when I was in the Government because, apart from spending some time in the Treasury, I did not have direct responsibility for such matters. Since leaving the Cabinet, however, I have been able to address those issues. I wrote a pamphlet, "Pensions in the 21st Century", for the Centre for Policy Studies last year, which covered many of the issues that we are debating today.
Mr. Deputy Speaker, you were critical of a number of Conservative Members for constantly seeking to intervene during the speech by the hon. Member for Peckham (Ms Harman). I am sorry that she has left the Chamber. I have rarely heard a speech that was so vulnerable to criticism, which is why we tried to intervene. She must have been very much aware of that, because she failed to give way. I only hope that the shadow Chancellor, the right hon. Member for Dunfermline, East (Mr. Brown), saw her speech in advance as it was typical of many Labour Front-Bench speeches.
By criticising the current pension provisions, the hon. Lady implied that, if returned to government, the Labour party would give pensioners much more through either higher pensions or greater income support. However, she did not mention how Labour would pay for it. When asked how much her policies would cost, she replied, "We are talking about an entitlement." Like her other responses, that did not answer the question. It was old Labour writ large: make promises, pretend to be able to make provision, and claim that the issue of cost does not need to be addressed.
There is a big bill attached to the hon. Lady's remarks today. I draw attention to two points that she failed to answer. First, she criticised the fact that a number of pensioners who are entitled to income support are not receiving it. She argued that Labour would introduce measures to ensure that they did so. The Anson report, which was commissioned by the National Association of Pension Funds, discusses that issue. The operation would clearly involve a big bill—somewhere between £1 billion and £2 billion at present—and the hon. Lady did not say how it would be paid for. There would have to be corresponding cuts elsewhere if the shadow Chancellor's pledges were to be realised.
Secondly, and even more significantly, the hon. Member for Peckham refused to answer the question from my right hon. Friend the Member for Sutton Coldfield (Sir N. Fowler). I had intended to raise exactly the same point in my speech. I was much struck by the fact that when my right hon. Friend asked his question, the hon. Lady retreated into a woolly answer about basic pension plus and the criticism of it by the NAPF. Basic pension plus is a completely different scheme for future generations: it looks ahead 45 years. My right hon. Friend inquired about the position of existing occupational pension schemes and personal schemes, which are separate from basic pension plus. I suspect that the hon. Lady realised that because when my colleagues and I tried to intervene to repeat the question, she refused to give way.
What is the Labour party's position on encouraging occupational pension schemes? Does it intend to change the tax arrangements? That is extremely important, for reasons that I shall explain later in my speech. Although the shadow Chancellor said that Labour would not increase the basic or higher rates of tax, there are many other reliefs and allowances that could be tackled to meet the bill that a Labour Government would undoubtedly face. Are we talking about one of them? If so, we face an extremely serious position which means that the Labour party is flying in the face of everything that it has been saying about the encouragement of occupational pensions.
It is clear that the hon. Member for Peckham cannot come to terms with new Labour. The hon. Lady utters the old phrases but cannot explain how new Labour would fit in with the commitment that Labour would not spend more. That shows the pressures that the right hon. Member for Dunfermline, East would face as Chancellor if Labour ever took office.
My tribute to the hon. Member for Birkenhead was genuine. It is important and increasingly encouraging that the debate about long-term pension issues is becoming a cross-party issue. Indeed, among all those interested, we are beginning to arrive at the same sort of conclusions. That is because we all recognise the nature of the problems and challenges that we face. There is general agreement about those and I need not repeat them. I have in mind the demographic challenge and the inability of the state to meet the bill. We all seem to agree that the United Kingdom is much better placed than the rest of the European Union. I am glad that we are coming together on the issues. The hon. Member for Birkenhead has made a notable contribution in bringing that about.
It seems that basic pension plus is not so much a switch to compulsion—because it will be replacing a state pension scheme and state earnings-related pension scheme which are compulsory unless the person has opted out—but is instead a funded contribution. It is the funding switch that is so significant, but up to now it has eluded us in most of our thinking. I hope that the hon. Member for Birkenhead will agree that that is a major element in the proposed change.
Those of us who are engaged in the debate are beginning to agree on the problems, along with the background and the challenges, and on the solutions. I hope that the hon. Member for Birkenhead will agree and forgive me for saying that that is a tribute to Conservative policy over many years, and to the extension of wider ownership and personal responsibility in which we Conservatives have always believed and encouraged in so many ways.
I so much agreed with my right hon. Friend the Member for Sutton Coldfield when he referred to basic pension plus as the latest in a series of measures designed to respond to longer-term problems in a Tory context. He made a notable contribution to those measures. Indeed, a long-term approach is significant when evaluating basic pension plus as politicians are frequently accused of thinking only in the short term.
The Government have done much in the long term, not least with the measures that we have taken to equalise the state pension age. We now have a classic illustration of a Government who are prepared to think really long term in addressing the problems that will face future generations unless we act now—and if things are to be done properly, we must act now. That is a notable feature of what is now being proposed.
The proposal may not be of major excitement and significance to many people in the forthcoming general election, but in the long term it will come to be recognised as a significant step forward. I therefore pay tribute to my right hon. Friend the Secretary of State and to those who work with him for producing what I regard as thoughtful, objective and far-seeing proposals which are skilful in their solution of the double-funding problem that was facing future younger generations. We have not always known how to tackle that problem, but my right hon. Friend has arrived at an ingenious way of responding to it. Some details are outstanding, but basic pension plus offers a hopeful way ahead.
There are three packages of issues to which I shall refer. First, I have two questions about basic pension plus. I do not want to take up many details because we are all beginning to become familiar with them. These details may well be taken up in later and wider consultation. I was struck, however, by a response to questions and answers about "whether my spouse will still be okay if I die". Part of the answer to that question was that the funds of those in the new scheme who died before drawing any money purchase benefits would be inherited in full by the surviving spouse, or by the estate where there is no spouse. That is interesting and significant. The response tells us that some or all of the funds would have to be used to purchase an annuity, or that income could be withdrawn.
I hope that that thought will be developed. As we look ahead to the need for pension flexibility, it will an important element of basic pension plus and may lead to a reconsideration of what we are doing about personal pensions.
The editor of Financial and Tax Planning Through Pensions—a journal which I have never read and did not know of—wrote a letter which appeared in The Times to which one of my constituents drew my attention. At the end of the letter, the writer suggested that anyone who took a similar view should write to their Member of Parliament and an assiduous constituent of mine did so. The letter in The Times stated:
Whilst annuities can remain as the ultimate income provision for those who are security conscious there is no real reason in these days of investment sophistication why pension holders should ever have to annuitise their funds … The legal and practical objections to eliminating compulsory annuity purchase are quite slim. A tax adjustment could be made on the ultimate passing out of the pension fund to the family of a deceased member, if this were thought appropriate.
We can all identify some of the difficulties and we can all understand that as tax reliefs were given on pension contributions it is important that there is some assurance that the funds are used to fund pensions and not merely frittered away with the result that the individual goes on income support or whatever. It is clear that there must be some conditions. On the other hand, we must consider how there can be greater flexibility in the provision of pensions.
That is the interesting feature of basic pension plus. The proposal acknowledges the possibility that some of the funds may be passed on to the family when the owner dies. If that is accepted in that context, can it not also be accepted in considering personal pensions? I fully recognise the flexibility that has now been given to everyone with a personal pension in that it is not necessary to take a decision on the annuity on immediate retirement—the decision can be taken up to 75 years of age—but why not have some of the fund invested in equities from which the pension holder could draw, which at the end of the day would leave him with something to pass on to his heirs? Why should everything go to the insurance company in the annuity settlement?
That is an example of the issues that are opened up in basic pension plus. I do not know whether my hon. Friend the Minister realised that I would pick up that point out of basic pension plus, but it seems that it is one that we must all take up.
My right hon. Friend's remarks are fundamental. We need to refocus our minds on the nature of savings for retirement. The debate has been hijacked by the insurance industry by an historical accident. There is no tax relief unless there is some form of insured vehicle. We need to do away with saving with insurance because now there can be virtually no difference in the risk between, for example, a good unit trust personal equity plan and an insured life policy.
My hon. Friend makes an interesting point, which I shall take up in a different context. If we wish to encourage—as we Conservatives do—families to build up resources for themselves that they can pass on to their children, there is another element to be considered. I hope that that will be reflected in the consultation on basic pension plus.
It has been made clear in basic pension plus that an individual will be able to invest additional money of his or her own in the new investment account. It is argued that one of the strengths of the scheme is that it will give everyone a fund to which he or she can add additional savings. The issue was elaborated on in response to the question whether it will still be possible to take out a personal pension. The answer read:
You will be able to add your own savings to the new personal accounts or indeed a separate account with a different pension provider.
Will the additional savings that will be added to the account have to come from net relevant earnings as at present for any contribution to the pensions? I hope not. That is important when account is taken of the life styles and life patterns that we shall all have in work and generally. I hope that it will be possible for additional savings not to be related directly to earnings. Those are my two questions about basic pension plus.
I move on to groups who will not be affected by basic pension plus because they are too old, starting from 25-year-olds plus or whatever the age is—in other words, the issues of future pensions policy for the next 40 years for those not covered by basic pension plus.
We know that the whole occupational and personal pensions movement, which we as a Government have so strongly encouraged, has made a major contribution to the fact that pensioners now retire in a much more comfortable situation on average than was previously the case, and that there has been a 60 per cent. increase in real terms in their income during the period of the Conservative Government. However, in the next 20 to 30 years—in fact, almost immediately—we shall face two different challenges, the first of which is that of changing life patterns. People will change careers more often, for which personal pensions are clearly well attuned. Men and women—not just women bringing up families—will move in and out of work, by choice, at various periods during what would have been regarded in the past as their working life.
The second issue is that defined benefit schemes are declining, as a proportion of occupational pension schemes, in favour of money purchase schemes. I have predicted for some time that that would happen, but it is happening increasingly, particularly in companies with big occupational pension funds, which now say that all new employees will have a money purchase scheme. That pattern will develop not just because of pressures on companies but because it suits more correctly the career patterns and the movement in employment of future employees. However, it is likely that money purchase schemes will not provide the same benefits as occupational pension schemes have where, traditionally, people were fortunate enough to be in one occupation or company for most of their working life.
That leads me to a number of conclusions, but I shall mention only one or two today. The first is the need to continue to persuade people—particularly young people—of the importance of investing for their pensions at an early age. Most hon. Members will recognise that anybody who waits until he or she is 35 will have a much bigger challenge in providing enough for their retirement.
If the right hon. Gentleman is serious about getting people to save for their retirement, why do they have to wait until they start work before they start pension savings? Why cannot parents, godparents, aunts, uncles, and so on make contributions to such accounts? They need not be substantial, but it would start a saving habit.
Not for the first time, I agree with the hon. Gentleman. I am glad of his suggestion, because my next point is that we need to continue to encourage the investment of personal pensions and occupational schemes by means of up-front tax incentives. There is no up-front tax incentive for basic pension plus, but it will continue for voluntary occupational pension schemes. We need up-front tax incentives to encourage people to make provision for themselves. That is what was so worrying about the failure of the hon. Member for Peckham to answer the question, because that is what we need to continue to do.
If there is not to be an up-front tax incentive, people will be making provision out of taxed income throughout their lives. Some people will not live long enough to enjoy their pensions and the fund that they have built up will have to be passed on—in many cases to somebody other than the surviving spouse. In those circumstances, is it not particularly important that more progress is made on eliminating inheritance tax, which is an iniquitous tax because it is a charge on resources that have already borne tax during life?
That is a separate argument from the one that I am trying to pursue. Therefore, I shall not go down the route of inheritance tax.
In the short time that I have studied basic pension plus, I have been persuaded that the skilful element in it is the change in the tax regime to overcome the double funding point. Although I accept it for that reason, it is important to have up-front tax incentives for occupational and personal pension schemes, because given the disincentive to so many people to start long-term savings while bringing up a family or whatever, such an incentive is needed to encourage them to do so. Changing the tax regime for those people along the same lines as basic pension plus would not work because the fact that they will get a tax-free pension at the end of their lifetime is no big deal when they are aged 25. The difference is that those schemes are voluntary and therefore people need encouragement, whereas basic pension plus will be compulsory.
Given people's life styles and the fact that they will be moving in and out of work—the hon. Member for Birkenhead pressed me on this point—it is important that we break the link between pension arrangements and net relevant earnings. Of course a ceiling is needed, as there is with net relevant earnings, but there can be many situations in which the top-up can come for occupational pension contributions and personal pensions outwith earnings. It could be inheritance, a windfall, grandparents, investment income—a whole range of things. People might want to save very thoroughly for their pension and therefore eschew current spending and put any savings that they currently have into their pension.
We need to break that link if we are to ensure that adequate provision is made. That is why we should move towards something like a provision for retirement account that incorporates not only earnings but other income contributions. To keep it more tax neutral, I should have been perfectly happy to see the incentives for tax-exempt special savings accounts and personal equity plans withdrawn because they do not have the long-term nature that a provision for retirement account would have and which we need.
My last point relates to the European Union. It is widely acknowledged—I was glad to hear that the seminar that the hon. Member for Birkenhead and his Select Committee organised with European contributors recognise this too—that the United Kingdom is far ahead of nearly all our other European competitors in this context. The only country that might be a little ahead of us is the Netherlands. Other members of the European Union have massive, unfunded state pension liabilities. They have not taken the action that we have taken and which basic pension plus proposes, and their state liabilities would take them miles beyond the Maastricht criteria in terms of debt and so on.
It is always argued that under the treaty of Rome other member states do not have to contribute to the public expenditure provisions of other member states and therefore countries like the United Kingdom are protected from having to contribute to the massive unfunded state liabilities of Germany, France, Italy and elsewhere. If a single currency were to be introduced—I am a strong pro-European but a great cynic in regard to a single currency and will oppose it in the next Parliament—with the increasing movement towards single fiscal and expenditure policies, we would face a very serious issue in relation to the funding of those liabilities. I hope that that point will be addressed in the debates on the single currency in the months ahead.
My right hon. Friend the Secretary of State deserves the greatest credit for this major contribution to long-term thinking about pension policy.
It is a great pleasure to follow the right hon. Member for South Norfolk (Mr. MacGregor). His knowledge and experience were ably demonstrated in his speech, and we will all rush out now to order copies of his pamphlet. No doubt it will repay careful study.
This has been a good debate. Like the hon. Member for Birkenhead (Mr. Field), I think that the Secretary of State judged the tone rather inaccurately at the beginning. In my experience, Adjournment debates often give people a chance to listen carefully to what we are saying to each other and to learn from what is said. What other people can bring to bear in these debates is very important and informs our views about how we can make progress in this very important subject.
I was a bit scared when I first saw these proposals, because they are so very far reaching. The only party political thing that I will say in the next 10 minutes is that I wondered why they were being introduced in this way and at this time. There was much suspicion, which has not yet been totally assuaged, that the Government were desperate for something to say and so introduced these plans almost overnight. It is important to me that I get some reassurance about that in the Minister's winding-up speech. The last thing that we should do is to rush precipitately into making these changes. If we get them wrong, the consequences could be terrible.
I support hon. Members who have said that we cannot go into a general election campaign talking only about the year 2030. It is right that we should consider the development of pensions provision and pensions reform in the middle to longer term, but we must be fair to the pensioners who are struggling to make ends meet today and make proper provision for them now before we start to provide for the middle to longer term.
Through my casework and from other experience I have lots of evidence that many of today's pensioners feel betrayed and let down. Previous Governments of both parties have made promises, but many pensioners' perception is that the "cradle to the grave" provision has casually been withdrawn whether that is true or not, it is how they perceive it. The basic state pension was always considered to be a settled right available through national contributions to the state pension plan that has existed for many years. People are concerned that it will now be withdrawn without proper consideration.
In these debates, the Government always refer to the fact that the average income of pensioners has improved, and so it has. It has improved dramatically, and we know why. Occupational pensions have improved, which is good. If I have any criticism of the Government, it is that they always deny and run away from the fact that not everyone has enjoyed those average increases in the past five to 10 years. We must consider the problems facing current pensioners before we do anything else.
The right hon. Member for Sutton Coldfield (Sir N. Fowler) made an interesting speech. He rightly came to the conclusion that a much better system of information is required for future provision of private pensions, so that people know what is facing them and can make informed choices.
Information should also be available to the one third of pensioners—about 1 million of them—who are currently eligible for income-related benefits but do not claim all the money to which they are entitled. About £1.2 billion of benefits does not get into the purses and wallets of current pensioners. Those people miss out on council tax benefit, income support, housing benefit and, when the weather is severe, as it usually is in Scotland during the winter, they also miss out on cold weather payments. Individually, they may be missing only small sums, perhaps £1 or £2 a week. Other pensioners may be determined not to claim income-related benefits because of the stigma attached to them, and I understand that.
Much more could be done to inform the 1 million pensioners who are missing out because of a lack of information, and because the process of claiming benefit is too difficult. If we do nothing else in this debate, we should at least recognise that that problem should be dealt with as a matter of urgency. That would be a positive approach, and would deliver extra benefits to which people already have a legal entitlement.
I come across pensioners in my constituency who are struggling. They are over 75 or 85, usually single and the majority of them are women. Some of them face dire circumstances. Come the election, I anticipate that the Liberal Democrat manifesto will refer to a top-up pension for pensioners on income support premiums. We want to target provision in a way that is affordable through public expenditure, so as to give extra help to pensioners who are entitled to extra consideration, which is more than they are getting at the moment.
The hon. Member for Birkenhead rightly refers to the importance of trust, and to the bond of trust that should be established between the pensioner population and Governments. A recent example of a breach of that trust was the Government's handling of war pensions. Some terrible cases will result from the change to the rules on hearing loss. Many people with a serious hearing loss will no longer receive a war pension. There have been arguments about that. The people who really lose out are those who just fail to meet the criterion of a loss of 50 decibels. I do not believe that there was any case for changing the rules.
If the Government are so certain that what they are doing is right, they should listen to the Royal British Legion and the Royal National Institute for the Deaf. They both want a full scientific and medical review of the entitlement of war pensioners. Such issues chip away at the trust between pensioners and Governments.
We should not exaggerate the need for precipitate action. We are not in such a bad position as some other nations. I was interested in the final comment of the right hon. Member for South Norfolk. I know that his European credentials are—I nearly said as good as mine. If he believes that there is a problem with unfunded pensions, I am willing to reconsider the matter. Some other European countries may require to deal with the problem urgently, but there is no immediate panic for us to do so.
A graph in the recent edition of The Economist shows percentage pension costs in relation to gross national product. The trend demonstrates that there is no great problem in Britain in the middle term. Indeed, the graph is headed, "No problem for Britain". We should not be complacent, but we do have a little time to sort out some of these problems. It is a frightening thought that, if basic pension plus were implemented, Britain would be the only country outside Latin America with a pension system entirely privately funded. We must be a bit careful about getting from where we are now to where we want to be.
I do not deny that the proposals have some merit, and we shall examine them in greater detail. But how can we be certain that the basic pension plus scheme will lead to an increase in savings? The Government seem to argue in their documentation that, by personalising pensions, the habit of saving will be encouraged. However, the fear is that the tax changes that are part of the plan could discourage savings. The basic rate taxpayer would get, roughly speaking, £24 from the Exchequer for every £76 contributed. Pension contributions would come out of taxed income, but pension payments would not be taxed. Someone aged 20 or 30 may be tempted to boost his pension contributions by tax relief available to him today, but it is much harder to persuade a 20-year-old—my children are not yet 20—or any young person getting into the system that tax relief in 2030 is an attractive prospect. That is a problem.
I am also concerned about the impact of the tax changes. By switching the tax system, we could—I put it no higher than that—be directing tax relief at people who are at the richer end of the pension income group. People might retire better off, while managing to pay almost no tax. That is one of my key worries, not just in this context but generally. I am worried about the way in which the position appears to be skewed to the benefit of those with more rather than those with less.
My third concern relates to the way in which private pension schemes might behave under the new regime. We have had interesting exchanges today about past pension misselling, and I understand all that; but how can we be certain that the administrative charges for basic pension plus can be driven below the 20 per cent. of contributions that is typical of some existing personal pension schemes? If they do not fall by enough, will the Government be able to find ways of driving those high costs down?
A further difficulty is that the Government are creating what I understand economists call "moral hazard" in the introduction of a minimum pension guarantee. How will the Government discourage investment managers from making riskier investments than they would otherwise make, safe in the knowledge that the Government will bail them out? The technical note accompanying the basic pension plus pack states that the Government will discuss with the pensions industry any appropriate restrictions to guard against exploitation of the Government guarantee. Moreover, we are told that legislation might have to be introduced to require scheme managers to publish, and to be responsible for adhering to, a statement based on prudent investment principles. Investors would be expected to disregard the existence of the Government guarantee in investment decisions.
Drafting such legislation, let alone enforcing it—trying to prove in court that someone has acted improperly in making an investment decision—would be a difficult if not impossible task. I understand that I am going into the small print, but, in the case of some of these schemes, the devil is in the detail.
Finally, I am worried about the stance that the National Association of Pension Funds has taken. Like everyone else, I am determined to encourage the future development of proper occupational schemes with a "final salary" element. Such schemes are invaluable. They have served the nation well in the past and have stood the test of time, and I do not wish to do anything—certainly not under these basic pension plus provisions—that would strike at the heart of those schemes. The Government will have to deal with the issue. If the objections of the National Association of Pension Funds were sustained, my view of what the Government's scheme means in the long term would be prejudiced.
The Government have a duty to try to persuade people like my hon. Friends and myself that the scheme will not lead to retirement incomes becoming inordinately vulnerable to the vagaries of financial markets. I am thinking of the whole issue of money purchase, and the risks involved. The stock market can go up or down. We have seen the background papers, and we know some of the Government's working assumptions, and I am certain that it will have to be studied further before final conclusions can be made; but I believe that there is a real risk that the Government's plans will lead to more inequality in pension incomes.
The gap between rich and poor pensioners has widened significantly in the past 10 or 15 years, which is worrying. I do not think that the position of part-time and low-paid workers, and the issue of means testing, have been explicitly and properly addressed, and I feel that all these matters will have to be examined in far more detail before we can be persuaded that it would be right to abandon the universal state retirement pension scheme, occupational pension schemes and the other schemes that have benefited people to date.
I am certainly willing to enter into a debate about the issues. I think that we must all put our party political ideologies aside when we are discussing the mid to long-term future of pensions reform. We need a system that will stand the test of time and survive changes of Government—a scheme that will take us into the next 15, 20 or 30 years. We are willing to take part in a debate in that spirit, as long as we secure a system that can deal with the problems in the mid to long term, and a political consensus that will survive. That is the most important goal that we must strive to achieve in the weeks and months of debate that will rightly follow the publication of the Government's plans.
I shall try to be fairly brief, in order not to trespass on others' time.
I welcome this timely and interesting debate. Having sat through all of it so far, I have found all the speeches interesting, and have learnt a great deal already. It is good for the House as a whole to have effective opportunities to influence the development of long-term policies, and I hope that the usual channels in both this Parliament and the next will strive to ensure that we have many more timely debates on pensions policy.
I will not comment in detail on many of the interesting points that have been made, but I shall make a couple of comments. My right hon. Friend the Member for South Norfolk (Mr. MacGregor) said many fascinating things, but I was particularly struck by what he said in passing at the end of his speech about the strong case for tax neutrality in the encouragement of all forms of personal savings. A simple tax-free allowance of, say, £10,000 per person per year should be introduced, about which, under the law, the taxman need not know anything, provided that the saving was made in the full range of approved savings—personal, institutional or of any other kind. Such a scheme—which has been suggested by many people who are wiser than me—would encourage an aggregate approach to personal savings, rather than displacement from one category to another. That would also be useful in the context of self-assessment.
Listening to another interesting speech, that of the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood), I could not help thinking that one of the dilemmas involved in the whole area of pensions policy is that many people who are retiring now are either asset-rich and income-poor—hence all the schemes for reverse mortgages to help people meet the cost of long-term care by exploiting the capital value of their principal asset, the family home—or, in the case of the poorest 30 per cent., both assetless and income-poor. The House should be concerned about such people, and never forget their needs, as well as the needs of the more prosperous section of the population. The challenge for the longer term is to bring about circumstances, by the middle of the next century, in which those who retire have both assets and adequate income. That ideal should be the benchmark for any longer-term schemes.
I want to ask three main questions. First, how can we best look after the interests of today's generation of pensioners? A number of speakers have made that point. Secondly, how can we best address the needs of pensioners in the middle decades of the 21st century, in view of the demographic projections and the outlook for public finances? As we all know, much of the problem is due to the difficulty of persuading taxpayers to part with enough money to finance a pay-as-you-go system. Thirdly, how can we organise the transition from where we are now to where we hope to be between 2040 and 2060?
Over the past 18 to 20 years, we have had a coherent strategy for pensioners, based on three main pillars. First, we have maintained the real value of the state pension in relation to prices overall. Secondly, we have encouraged younger people to make their own provision for retirement, with the result that the majority of existing pensioners have done so. Thirdly, we have focused extra financial help on the poorest pensioners, and those in the greatest need. Those happen to be Conservative principles, but I am glad to say that they command widespread support on both sides of the House.
The strategy has had successful results. Between 1979 and 1994–95, the average incomes of pensioners have risen by nearly two thirds from all income sources. Almost nine out of 10 recently retired pensioners have incomes in addition to the state pension, and nearly two thirds of all pensioners have incomes from occupational pensions. That compares with about two fifths in 1979. In view of my earlier remarks, it is gratifying to note that the proportion of pensioners in the poorest decile has fallen from about 35 per cent. in 1979 to about 18 per cent. in 1991–92, the latest full year for which I have seen figures.
Despite the achievements there is a strong case, which I have put to my right hon. and learned Friend the Chancellor several times, for a well-targeted increase in the state pension for the oldest pensioners who form the cohort that is most likely to be poor and in need and who may be too proud to claim means-tested income support to top up their low incomes. My proposal, which I shall briefly outline again, is that everyone born in or before November 1921—to take the example that would have applied at the last Budget—should have a sizeable increase in the state pension. For example, in round figures it should be £90 a week for a single person and £120 a week for a couple.
The attraction of such a proposal, apart from its simplicity and its natural justice, is that it would be a limited public expenditure commitment which, by definition, would decline over time. Clearly, if it is linked to the date of birth, the scheme has a diminishing impact on public finances. I asked the Library to supply figures and yesterday I was told that the net cost rather than the gross cost—obviously in such a calculation, one must look at the net cost because of the impact on income support—would be £3.3 billion in the first year. For the reasons that I have given, it would decline in subsequent years.
Secondly, the scheme that I have sketched would be a sensible recognition of the fact that the most elderly pensioners tend to be those who are most likely to depend solely on the state pension and/or income support. Thirdly, I know from my mailbag that it would be much appreciated and that it is truly needed by the cohort of pensioners to whom we all owe so much. They are the people who participated on the home front or in the forces in the second world war and, relatively speaking, they feel that they have been left behind compared with the younger cohort of pensioners who came after them. There is a legitimate sense of concern and grievance which in natural justice we need to address.
What research has my hon. Friend carried out on pensioners who were born in or before 1921 who are relatively well-off? Apart from the high initial cost of the scheme, there is surely no point in spending £3 billion or a large proportion of that amount on people who are already well looked after and well funded because they were able to provide for themselves in their old age.
I am not sure what proportion of the age cohort that I have mentioned is well-off according to my hon. Friend's definition. We would need to have a long discussion about what constitutes being well-off. In the context of large sums of public expenditure, I would prefer to see this approach to looking after a deserving cohort in our population in preference to some other uses of comparable amounts of public money. We should need to examine the matter further to see how many super-rich people there are in that category. Of course, if the extra pensions that I have mentioned went to people such as Lord Hanson, as the pension is taxable, the state would claw some back. However, I do not want to spend too much time on that I prefer to rush to the second part of my contribution and speak about the principles underlying the excellent scheme that has been proposed by my right hon. Friend the Secretary of State for Social Security.
I welcome the Secretary of State's initiative for a basic pension plus. It is an example of the way in which the Government are still generating all the most constructive ideas in British politics. They are still following a Conservative agenda and, as the Secretary of State has said, Ministers are responsibly and thoughtfully directing their attention to the longer term. The challenges that lie ahead derive essentially from demographic projections of an aging population. In a sense, those problems are to be seen in the figures and the only consolation is that the projections suggest that we are likely to be affected less seriously than some comparable countries.
Secondly, as the House knows, the worsening nature of the dependency ratio suggests that whereas five working people were contributing to the support of one pensioner in the late 1940s when the present arrangements were introduced, by the year 2030 it is projected that five working people will have to support three pensioners. Plainly, that is a significant change in the dependency ratio.
Those factors also need to be considered alongside the significant changes in the labour market to which hon. Members have referred. Those seem likely to make it more difficult to sustain pensions based on traditional assumptions, which could classically be described as people working a 45-hour week for 45 years in full-time employment. That pattern of the labour market is disappearing fast. In such future circumstances it must be right to move away from the precarious basis of intergenerational transfers based upon the pay-as-you-go system to a funded system that is similar to the one proposed by the Secretary of State. That is the approach that was originally advocated by William Beveridge at a time when most people lived no more than three to five years beyond state retirement age. Therefore, how much more necessary will it be to have a funded personal system in the decades to come when the average length of retirement will be about twice or thrice as long as it was in the late 1940s?
In principle, the Secretary of State is right to pursue the line that he has suggested. I hope that it will have all-party support in the years ahead because that is essential for such a system to work satisfactorily.
Lastly, I should like to speak about how to organise the transition. In such matters the devil is often in the detail, but another form of devil is often found in negotiating the difficult transitional arrangements. It is vital to ensure that the transition from one system to the other is comprehensible, fair and affordable. That is especially important because the transitional generation, if I may call it that—those entering the labour market in the early years of the next century—will have to pay twice once on the current basis to support the pensions of those of us who will then be pensioners, and again on the funded basis to pay for their own new pensions.
I stress the importance to those people of three factors. The first is the long and gradual phasing-in of the new scheme, which is essential. The second is the degree of burden sharing that will be involved in the role of taxpayers in helping to finance the shortfall in national insurance contributions, which is implied in the promised rebates and in the ingenious switch in the tax treatment of pension contributions. That will make it easier to finance and to offer the benefit of pension income, which will be tax free to the recipients. All that has not been sufficiently brought out in the debate or in earlier debates. We are debating a partnership to help to finance the transition from one system to another.
The third essential element is rigorous and reliable regulation of the pension providers to prevent the risk of misselling on which we in the Select Committee on the Treasury recently took evidence. We must also try to work against excessive charging, which has been such a bane of the pensions industry in recent years.
The Secretary of State's proposals will need to be subjected to a great deal of further debate and consultation in the months and years ahead. They are an admirable start to what will need to be a long and sustained transition to a new, funded system which, when fully in place, will prove to be more generous and reliable and a real asset to the nation in terms of investment, economic growth and real security in old age.
I welcome the opportunity to take part in a debate about future pensions policy, but, of course, we can look at such matters in different ways. The debate, which has been promoted by the Government, has so far been about the continuing destruction of the universal welfare state and the promotion of the interests of private insurance companies and pension providers.
That systematic theme has run through Government policy for the past 18 years, and I hope that 1 May will bring some liberation from the gobbledegook of market economics that has dominated this country throughout that period. [Laughter.] Conservative Members may laugh, but of course they may not be here after 1 May, anyway.
Yesterday afternoon, I had the great privilege of attending the Greater London Forum for the Elderly annual meeting. Members of Parliament from three parties were there the hon. Member for Harrow, East (Mr. Dykes), a Conservative Member, the hon. Member for Southwark and Bermondsey (Mr. Hughes), a Liberal Democrat, and myself. We were joined later by my hon. Friend the Member for Peckham (Ms Harman), who gave a speech.
At the meeting, which was large and extremely representative of pensioner forums in every one of the 32 London boroughs, the forum put forward its manifesto for London's pensioners. Those people have given their working lives in all sorts of areas, including working at home caring for people, working in factories and administration. They are seriously concerned about the lot and plight of pensioners, so they argued for a new Greater London authority, which they thought would at least give some opportunity for promoting pensioners' interests. They argued specifically for the restoration of the link of the state pension with earnings, which I support, for the preservation of the state earnings-related pension scheme, and points relating to cold weather payments, zero rating of domestic fuel and concessionary television licences.
There was much discussion about the problems of community care, hospital services, travel permits, environmental planning, housing, leisure facilities, education and the need for pensioners to be able to lobby effectively to achieve their aims. Pensioners need to be able to put forward their case and demands.
What ran through the manifesto was a revulsion at the consensus among so many broadsheet newspapers and on television that all that matters is getting rid of the existing state pension scheme and bringing in a private scheme. The forum's voice was unreported yesterday, so I am using this opportunity to convey the sense of anger and outrage among older people about the way in which they have been treated—they the generation who brought in the welfare state.
Does the hon. Gentleman accept that he should not try to put forward a case which is not true—that the earnings link would be restored and SERPS rebuilt under Labour? He talks about people being liberated in May. That is not the policy of his Front-Bench team, is it?
I said that we would be liberated from the Tory Government on 1 May, and that we shall be. However, the Minister should be aware that the Labour party is committed to a process of statutory consultation with pensioner organisations, which the Government have never done. Indeed, I understand that they have often refused to meet the National Pensioners Convention or to have serious discussions with it. The idea of giving Jack Jones just 10 minutes in an office somewhere is outrageous.
I have met Jack Jones.
May I quote from figures produced by the Department of Social Security on pensioner poverty? In 1979, after housing costs, 21 per cent. of pensioner couples and 12 per cent. of single pensioner households had incomes that were less than half the UK average. In 1993, the comparable figures were 25 per cent. of pensioner couples and 33 per cent. of single pensioner households. Those figures are from the households below average income statistical analysis produced by the Minister's Department. They demonstrate what has happened in past years because of Government strategy.
In 1975, Labour Government legislation linked the state pension with earnings or prices, whichever rose the higher during each year, and every April an increase came through. The same legislation also brought in SERPS, which meant that everyone either was in an occupational pension scheme in work or had access to SERPS, which credited people who were in part-time work or whatever else. It meant that pensioners could look forward to some security in retirement and a share in any rising national prosperity, to the extent that, by 1980, the state pension was around 24 per cent. of average earnings. The SERPS formula meant that many others coming into retirement, then and later, would get some decency in retirement.
In 1980, the then Chancellor of the Exchequer broke the link with earnings and substituted instead the retail prices index. In his autobiography, he called that measure his greatest single achievement. I do not know how he measures his own achievements, but to call breaking the link with earnings an achievement is wrong. Had the link been kept, the current state pension would be £82.25 per week, or £21 per week more than at present.
The Government claim that their legislation has ensured that pensioners are better off. I sat through the miserable experience of the 1986 legislation, which was promoted by the right hon. Member for Sutton Coldfield (Sir N. Fowler), by the Prime Minister and the hon. Member for Selkirk and lots of other places.
Indeed, and many more besides, I am sure.
The hon. Gentleman was also on that Committee, and he will remember two features about it. One was the highly questionable actuarial evidence that was put forward for reducing the value of SERPS. My hon. Friend the Member for Oldham, West (Mr. Meacher), who was leading for the Labour party, pointed out that that nonsense was being put forward to promote the private pension industry and that it would cost us all dear in the end. Many people have suffered from missold pensions as a result of that legislation. I would like them to hear the warnings that were given by my hon. Friend the Member for Oldham, West and my right hon. Friend the Member for Derby, South (Mrs. Beckett) during consideration of that legislation.
By reducing the value of SERPS, the Government have created a market for the private pension scheme and their policies have led to the misselling of pensions. We come therefore to the legislation that is being proposed—it is not legislation but a policy, because there is no opportunity for such legislation to be introduced. Indeed, come 1 May, I sincerely hope that the proposal from the Secretary of State for Social Security will be consigned to the dustbin of history. Someone doing a PhD in the next century might dredge up this debate and discover that someone actually proposed privatising the entire pension industry.
That concept has its origin in Jose Pinera, who was a Minister in the fascist Government in Chile, which privatised the national insurance system, and who now goes around the world making a great deal of money for himself addressing seminars on the promotion of the private pension industry. As my hon. Friend the Member for Peckham has said, private pension schemes, oversold and heavily sold, increasingly rely on heavy management costs, huge commissions for those that sell them and, above all, huge advertising budgets to compete with other pension schemes. Call that efficiency? Call that an effective use of resources? Call that a guarantee for the future? It is the opposite of that and Conservative Members know it.
Is the hon. Gentleman aware of the Alexander Clay report that showed that 99 per cent. of those people are better off than in SERPS?
Some of those people may temporarily be better off in those schemes than in SERPS. The reason is that the Government devalued SERPS to create the market for such schemes in the first place. The Minister knows that and he knows that that actuarial evidence, put forward in 1986, was deeply flawed.
May I quote from an interesting letter that appeared in The Guardian on 7 March from Professor Peter Townsend of the university of Bristol? It said:
According to a report on privatisation by the United Nations Conference on Trade and Development, there is little evidence that promises have been delivered"—
this is in relation to privatising pensions as proposed by the Adam Smith Institute.
In Chile the privatisation of pensions has resulted in only 52 per cent. of the workforce being covered for benefits. And many of these 'will end up with acquired benefits less than the guaranteed minimum'.
There is heavy selling of the idea of privatising pensions throughout the world by the International Monetary Fund and the World bank. Many people will rue the day that they agreed to go down that road.
The arguments for the privatisation of pensions are fundamentally flawed. One is that the promotion of a private enterprise market solution to the so-called pensions problem creates security, prosperity and a beneficial society. The compulsion element in it means that, in effect, everyone becomes a compulsory shareholder in a lottery, rather than a payer of tax and national insurance, with a guarantee, through a properly run welfare state, of the elimination of poverty in retirement. Having created poverty among pensioners by devaluing SERPS and the state pension, the Government are forcing people to choose a market solution, in which they know there is no guarantee whatever of the elimination of the poverty that the Government themselves have created.
The argument that the welfare state and the pension system are no longer affordable has been exploded by many people. For example, the recent article by Malcolm Crawford, a consultant economist and former business editor of The Sunday Times, talked about the "big pensions lie". It points out that the demographic time bomb is not that huge or serious—that has been well documented by many people. Behind all that is something more sinister.
I wonder whether my hon. Friend, in his wide reading, has read the book by the hon. Member for Havant (Mr. Willetts). It is called "The Age of Entitlement". The hon. Member for Havant may need to be reminded that the book describes the vast exaggeration of the demographic time bomb by a Government who wish to change pensions policy and were taking advantage of it.
I do read very widely, but not that widely. I often visit the bookstalls at stations such as Waterloo or Euston, and I am always looking for remaindered copies. I am sure that it will not be long before there is a pile of that book selling for £1 along with non-pulped copies of Charles Dickens's novels. I will get both and see which is the most interesting.
To return to the cost of pensions, there is a moral argument. The generation that is now in receipt of the state pension or an occupational pension is the generation that campaigned for and achieved the principle of a universal welfare state in the post-war period. There was the Beveridge report, and the idea of full employment and the elimination of poverty. The people of that generation achieved perhaps the single most important landmark piece of legislation in this country when they introduced the National Assistance Act 1948. It essentially worked on the principle that society as a whole is responsible for the welfare of each and every one of the people in it.
There was the idea of universal benefits, a universal welfare state, a universal education system and the provision of housing to ensure that there was an end to homelessness. It was a brilliant concept and a fantastic achievement. People of that generation ask me and others of the age group of many hon. Members how we can allow those achievements to be destroyed on the altar of market economics.
The hon. Gentleman will recall that Beveridge proposed a funded system. Is his objection to a funded system, or to a privatised system? For example, would he accept a proposal from the Labour Front Bench to do away with the pay-as-you-go pension, which is not providing adequate support for our pensioners, and to proceed to a properly funded system which is not run by private companies? Would he support that?
My objection is that we will all pay more for less security to promote the interests of private insurance companies, as has happened in Chile. That is the basis of the Government's proposals. We have a pay-as-you-go system in this country which it has been misclaimed is no longer sustainable or affordable. The work by John Hills of the London School of Economics and many others has pointed out that it is affordable if we are prepared to accept the moral issue, which is that we should pay for it.
Germany has a national pensions scheme, independent to some extent of central Government. As a result, pensions are much higher. Many other European countries have much higher pensions as a result of more enlightened social policies. We are heading for what I can describe only as the worst of all worlds. I do not believe that the present system is unsustainable. It is made unsustainable by the principle that one charges so little in taxation at a corporate level and to the richest in society that it becomes unaffordable. We are then blaming the poorest people for the lack of affordability of the pensions system. We should accept the principles surrounding the welfare state.
A number of themes run through social security debates. First, there is the applicability of benefits. This Government more than any other have gone against the principle of universal benefits and moved towards means-tested benefits. The state pension costs 1.1 per cent. of its value to administer. It is universally applied and universally payable and is welcomed by those who receive it—it should be considerably higher. Income support, which is means-tested, costs 10.2 per cent. of its value to administer. A funded pensions scheme costs at least 25 per cent. of its value to administer. I cannot give the figures for every private scheme, but they are all somewhere of that order.
The most ludicrous of all benefits is the social fund, which costs 61 per cent. of its value to administer. In other words, two thirds of its value is spent telling people that they cannot have anything from it. We should think seriously about the effectiveness of benefits such as pensions as well as the efficiency with which they are administered.
We are told that, in the proposed Valhalla of private pensions, we will end up with market efficiency in which a quarter of the entire value goes in commission and administrative charges.
I do not know whether the hon. Gentleman was here earlier when I intervened on the hon. Member for Peckham (Ms Harman), but I said that one of the main advantages of basic pension plus is that the market will drive charges down. As I said earlier, I was with one of the main pension providers at lunchtime today. It estimates that it can provide pensions at 0.5 per cent. of the fund's value—nowhere near the 20 per cent. to which the hon. Gentleman referred. What is more, it estimates that the top-up element can be done for nothing.
In the interests of transparency in public debate, the hon. Gentleman should tell us with whom he had lunch, where he had lunch, who paid for it and what he ate, as well as any relationship he may have with that company in the future. There are serious concerns that Government policy is heavily influenced by the wishes of the private pensions lobby.
I have no interest in the company whatsoever. It specifically said that it wanted to remain anonymous because a commercial interest is involved. The company does not wish its competitors to know who it is.
That sounds like a very anodyne and anonymous lunch. I should like to hear a little more about it because we need to know about the pressures being used.
Conservative Members talk about market pressures forcing charges down. Does my hon. Friend agree that does not apply to any other aspect of the financial services market? Market pressures have not forced down the cost of mortgages or any other such product. Is not that just wishful thinking on the part of the hon. Member for Cirencester and Tewkesbury (Mr. Clifton-Brown), or is it moonshine?
I think "moonshine" would be an appropriate description. There is no evidence that a plethora of pension companies competing with one another, with lots of people in little offices doing the same work, is an efficient use of human resources.
One of the colleagues of the hon. Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) once tried to tell me at a radio station that the most efficient thing that could happen to the Post Office would be the introduction of competition, so that, instead of one person delivering letters in a street, there would be two or three. I do not think that that is an efficient use of resources, any more than having dozens of pension companies. Surely it would be better to have a more rational system which would ensure that everybody gets a pension. What we have is a plethora of companies ensuring that not everybody gets a pension.
The arguments about the cost of pensions are set out in the Organisation for Economic Co-operation and Development report. Under the Government's current policy, with which I do not agree, pension expenditure in 1995 was 4.5 per cent. of GDP. By 2030 that would rise to only 5.5 per cent. If wage indexation was introduced, it would rise to 7.8 per cent. and only if there was later retirement would it fall to 3.4 per cent. Those are not particularly big increases when one looks at the social benefit of eliminating poverty among older people within our society as opposed to the ideology of the market.
Other countries have much higher pensions and will be spending more, but in Germany, with wage indexation, the percentage of GDP would rise from 11.1 per cent. to 16.5 per cent. I believe that the argument that there are huge unfunded pension liabilities all over Europe, which has been promoted by many people, is part of the promotion of the private pensions industry. It is heavily suggested by quasi-academic journals, which claim that the current welfare state is unaffordable because they all have a vested interest in proving that to be the case.
There are arguments across Europe over the welfare state. The Maastricht criteria on the single currency require public expenditure cuts and an attack on the welfare state, and promote the type of privatisation policy that we have been debating today. Many people in the United Kingdom—such as those I was with yesterday, at the Greater London Forum for the Elderly—benefited from the principles of a universal welfare state, and they will not allow the issues to fade away or the welfare state to be destroyed.
Consider the disputes, demonstrations and opposition to cuts in Germany, Italy, Spain, France, Belgium and the Netherlands. Those demonstrators were in the generation that lived through the second world war and saw the destruction it caused, and they wanted to ensure a secure social future—hence the development of the welfare state. They are now demonstrating and trying to defend that principle. If we go down the road of privatising pensions and other aspects of the welfare state, exactly the same debate will occur here, although much more keenly.
The public mood dictates that poverty should be eliminated among all our citizens. Many people find it offensive to see older people in supermarkets late on a Saturday afternoon waiting to buy cheap, out-of-date food. No one should have to live like that, but in modern Britain they do. It is wrong, and it is immoral. I for one am prepared to stand up for the principle of a universal welfare state.
I do not think that anyone could argue that the hon. Member for Islington, North (Mr. Corbyn) does not demonstrate a consistency and a coherency in his argument that are lacking in Opposition Front Benchers. However, I cannot agree with his faith in the virtues of monopoly provision or in the beneficence of the state's organisation of services, because the history of the United Kingdom and of comparable European countries has shown the folly of doing so.
In his peroration, the hon. Member overlooked the fact that people are out on the streets in Italy, Germany and elsewhere in western Europe because their Governments are, belatedly and with great difficulty, trying to grapple with the problems anticipated a decade ago by my right hon. Friend the Member for Sutton Coldfield (Sir N. Fowler) and his colleagues in government. We are able to cope better than our European neighbours with the demographic and social trends we share with them, because my right hon. Friend and his colleagues were ready to take the difficult decisions then and did not try to postpone them, hoping that they would somehow go away and not have to be faced.
I agreed with the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) about the sense of betrayal felt by some elderly people. They feel that they have been contributing through their national insurance contributions for many years, but that the contract which they believed was in place is not being honoured. One of the chief arguments in favour of a shift towards a fully funded pension system, as advocated by my right hon. Friend the Secretary of State, is that it would place pension funding on an honest basis for the first time since the second world war.
As the hon. Member for Roxburgh and Berwickshire said, both parties have led people to believe that they would receive something that was entirely dependent on the readiness of future Governments and generations of taxpayers to deliver. I do not think that Governments of either party have acted in a spirit of malice, but they did not anticipate future demographic trends or the attitudes of future generations of taxpayers. They also did not anticipate the rising expectations of generations of pensioners, who saw the higher living standards that their contemporaries at work gained through their earnings
Today, hon. Members on both sides of the House have said that, with such an important reform, it is critically important that we get it right, and that we do not rush to legislate before the ground has been carefully prepared. I agree, and I welcome the fact that the Secretary of State's announcement presaged a Green Paper later this year and full consultation of all interested parties before we move on to a White Paper and a Bill.
I hope that we can achieve the greatest possible cross-party agreement on any eventual legislation, as we did when passing the Pensions Act 1995, after the disaster of the Maxwell scandal. If such reform is to last for the length of time that we envisage it will, it is important to have that agreement among hon. Members, regardless of party affiliation.
The basic pension plus scheme is good, because it is an honest way of funding pensions. It is right for the Government to continue to guarantee the safety net of a minimum pension, and it is right to have an element of compulsion in saving.
I was sorry to hear the hon. Member for Peckham (Ms Harman) criticise the Government's statement that, under the scheme, there would be choice in pension providers. An element of competition will breed a desire to attract customers, and therefore to provide a better service—including lower charges, as my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) said. In our history since the second world war, there have been too many examples of monopolies that have been established for very well-intentioned reasons but which have ultimately delivered fifth-rate services and been operated in the interests of the organisation itself rather than in the interests of those they were created to serve.
Whereas our European neighbours are still grappling with how to trim their pledges and to deal with their taxpayers' readiness to finance such pledges in future, we are attempting to ensure that future generations receive higher and more adequate retirement income levels than those currently provided under the basic state retirement pension.
Although I welcome the principle of the scheme announced by my right hon. Friend the Secretary of State, I should like to raise a couple of issues that I hope will be addressed in the Green Paper and afterwards.
The hon. Member for Birkenhead (Mr. Field) and my right hon. Friend the Member for South Norfolk (Mr. MacGregor) raised the first issue, which is how we can ensure that both the current generation of workers and those who take part in the pension plus scheme save at levels that are adequate to ensure themselves a relatively comfortable retirement.
If we are not careful, there will be a risk that new entrants to the pension plus scheme who sign up in their 20s will complacently assume that that is all they have to do. They may assume that their compulsory contributions will be put to one side and invested on their behalf, and will consequently guarantee sufficient retirement income to support the life style that they expect at the end of their working lives.
People taking part in pension plus will probably need to be encouraged to make additional provision for their retirement on top of what is invested on their behalf through the state scheme. I agree with my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) and others that it would be helpful if we introduced a simplified tax treatment of long-term savings products so that people could be encouraged to make such provision, and in a way that best suited their circumstances throughout their working life. That might provide a solution which would assure the new members of the work force of the standard of living they would want.
The present generation of workers is going to have to pay twice. The hon. Member for Peckham said that in terms of horror, as if it was a wicked Government plot. In fact, it is a statement of the obvious. If we are to move towards a funded pension system, it is inevitable that at least one generation of workers will have to pay twice. If that key decision is taken, the political debate needs to focus on how we phase in the new arrangements and try to ensure that adequate provision is made for the current generation, who will, by definition, not be participating in the basic pension plus scheme.
The question-and-answer brief issued by the Department refers to the possibility that the basic pension plus scheme might be extended beyond the category of newcomers to the work force for whom it is intended. One question reads:
Can I join this new scheme?
The Department's answer is:
Our plan is to phase the scheme in gradually so that it is affordable. However, it may prove possible, if finances and growth permit, to extend the scheme up the age range.
I would be interested in anything that the Under-Secretary of State can say later to throw greater light on that matter.
Above all, if we are to look after the current generation of workers, we need to make sure that we keep in place the tax incentives for saving, particularly for contributions towards occupational pension schemes to which my right hon. Friend the Member for Sutton Coldfield rightly drew the House's attention. I, too, was very disturbed to hear from the hon. Member for Peckham what I interpreted as an implicit threat that a putative Labour Government would seek to trim, or even withdraw altogether, existing tax incentives for pension contributions.
As many hon. Members have said, as well as trying to make sure that people save over and above what is provided by the compulsory element of the proposed new scheme, we need to look carefully at the quality of regulation and advice available. I have read the minutes of the evidence given recently by the Personal Investment Authority to the Treasury Select Committee. I found the PIA's performance and attitude unsatisfactory.
While it is certainly true that rules are in place to ensure that anyone who is proved to have been missold a personal pension is properly compensated, the PIA and other organisations with responsibilities in this sphere seem to have been going about their work far too sluggishly. I am therefore pleased that my hon. Friend the Economic Secretary is now knocking heads together and trying to get action taken more speedily.
When the new system is set up, there will clearly need to be rules covering investments by approved organisations. We do not want to end up repeating the mistakes of the United States, where the Government's guarantee underwriting the savings and loans schemes led to silly, risky decisions being taken by some of those organisations because they knew that, at the end of the day, the taxpayer would step in and mop up the mess.
Some framework of regulation will clearly be needed. It could relate to the balance of portfolios held by the approved organisations. I am attracted by the proposal of the hon. Member for Birkenhead for a reserve fund, financed by the institutions, to guarantee against loss.
Perhaps we could also consider some guaranteed minimum level that would be promised to pensioners over and above the basic pension underwritten by the Government. Perhaps the institutions themselves could guarantee at least a minimum level of bonus pension, so that we could not only assure pensioners of a decent standard of living in retirement but protect taxpayers against too many people falling back on that ultimate Government safety net.
The quality of advice also needs to be improved. As a newly elected Member of Parliament in 1992, I was faced with many constituents who were victims of the Maxwell scandal. I vividly recall how difficult it was to explain to men and women in their 70s and 80s who were not accustomed to dealing with financial institutions how this disaster had come about, and what the Government and the various regulatory authorities were doing to try to recoup their pensions.
I shall give one example of the problems. Every month, the trustees of the pension funds would write to pensioners and, in accordance with their legal duty, say that, because of the uncertainties about the fate of the Maxwell empire, there could be no guarantee that they would be able to make further pension payments after that month. In fact, Members of Parliament who were talking to the trustees of the institutions knew that there was enough money in the bank to ensure that pensions could continue to be paid for a reasonable period, at least while things were sorted out, but the law insisted that such a statement was made by the trustees every month.
That placed elderly people under the most appalling stress. People came to see me who did not know how to cope with what they feared would be the removal, at the drop of a hat, of their chief source of income other than the basic state pension. We therefore need to ensure that people are given advice in language that they can easily understand, so that they can make well-informed decisions.
My final comment relates to Europe. I agree with every word that my right hon. Friend the Member for South Norfolk said. If there were to be a currency union in western Europe, which would imply common rules on borrowing and a single Union-wide rate of interest, the additional borrowings needed to cover the cost of unfunded pension liabilities on the continent would inevitably have consequences in this country, even if they were experienced only indirectly, in the form of higher interest and mortgage rates than would otherwise be the case. The Government need to consider that carefully and in detail.
We were delighted to hear what could well be a new Tory slogan for the forthcoming campaign—"Vote Tory and Pay Twice". That would be at least as effective as the lion with conjunctivitis and the handsome photographs of Labour's best asset—our leader—that the Conservatives are kindly putting on posters throughout London. Both pictures have the words "New Labour" above them. Most people conclude that both posters are paid for by the Labour party. The hon. Member for Aylesbury (Mr. Lidington) has told us frankly that the Government's proposals mean that to vote Tory is to vote for paying twice.
I appreciate the reasonable nature of the debate, but it is extraordinary how rare it is for us to be debating pensions. Four of my hon. Friends and I put down a motion when we debated our salaries recently suggesting forging an unbreakable link between our pay and the level of the basic pension. It seems reasonable that the pay of the poorest in the land should be linked to the pay of those in this House, where I understand that there are 200 millionaires. If we had established that link, it would have been impossible to fund the unreasonable pay rises that the House voted itself recently, but it would have had the beneficial effect of concentrating the attention of the House on the level of the basic pension. If our income were tied to that of the poorest pensioners, instead of a debate caused by a death-bed move by the Government, we would have constant, lively interest in the issue.
It is difficult to take the Government's proposal seriously. The subject is enormously serious and we must tackle it, but the Government's proposal is another death-bed gasp from a Government who have had a lifetime of sin. We do not expect them to be experienced in virtue in their dying days. This incompetent proposal will shortly be forgotten. What can we expect of a guarantee from a party that will be in opposition for a long time?
I have an example of how hopelessly confused the proposal is. The Government are contradicting their own words, not over a period of years, months or even days, but in one day. The proposal hangs by the thread of the great promise headlined in many papers of a £175-a-week pension in 2040. A written answer appeared today from the Under-Secretary of State for Social Security, the hon. Member for North Hertfordshire (Mr. Heald), making the basis of that figure clear to me and to my hon. Friend the Member for Peckham (Ms Harman). The Minister said that it would represent 26 per cent. of average earnings in 2040. A similar answer was printed in Hansard a few days ago.
I have collected my late mail in the past two hours and received a charming letter from the Minister, saying:
I am sorry that, in the haste to answer the large number of Questions"—
you tabled … about the Government's proposed new scheme … one of my Written Answers … was not as clear as I would like it to have been.
That is a grand understatement. His answers were grossly misleading and the figures were untrue by a large amount. I do not want to burden the House with the full details unless hon. Members want to hear them, but the Minister confesses to having—inadvertently, of course—misled the House in recent days on the crucial issue of the sum that the Government were promising in 2040.
The Minister confesses in the letter that the amount will not be 26 per cent. of average earnings. It is almost impossible to believe, but in their answers, some of them printed alongside one another, the Government have used two different measures, one assuming a 1.5 per cent. increase in average earnings and one assuming a 2 per cent. increase. The final sentence in the letter is:
Using 2 per cent. per annum real earnings growth, £175 represents 21 per cent. of average earnings in 2040.
That is a monumental mistake. After all the wonderful reforms of the marvellous new scheme praised by hon. and gullible Conservative Members, in 2040 a pensioner is likely to have a pension worth one fifth of average earnings. That is pitiful compared with what Governments of both parties have been able to pay for the greater part of the century. It is extraordinary that we are expected to believe that, although we could afford pensions worth one third or more of average earnings in the 1940s and 1950s, when the country was a great deal poorer, in future the best that we can manage is one fifth of average earnings.
The fact that the Government had still not got their sums right even two hours ago shows that the scheme has been cobbled together. We have heard several other extraordinary ideas recently and many of us are becoming seriously worried about the lean, mean electioneering machine that we have admired and been in awe of for so long. The Conservatives have come up with gimmicks such as the royal yacht, to be paid for by taxpayers, which was denounced by 75 per cent. of the population, the scheme for privatising the underground, which was denounced by 92 per cent. of the population and the extraordinary idea announced yesterday of privatising care, which has struck fear into the hearts of all those who might one day be in residential care—which is all of us. What the Government are offering goes against the reality that people know of private residential care, particularly where cost is the main factor. People know that services are often cut, diets become poorer, people share rooms and there is increasing degradation and indignity. The scheme has been produced by a Government who know the cost of everything and the quality of very little. Yesterday's stunt proves that and the people will rightly treat the privatised pensions scheme with the same suspicion.
This was a lively issue in the House back in the 1980s, before the hon. Member for Aylesbury was here. I commend to him Andrew Marr's book "Ruling Britannia", in which he goes through the speeches made on the Social Security Act 1986. The then hon. Member for Ashfield, Mr. Frank Haynes, made prophetic speeches about what would happen when the Conservatives decided to scrap SERPS. The Conservatives promised to get rid of SERPS. They did not fulfil that promise because of the might of the pensions lobby, which wanted it cut but not abolished. Insurance firms did not want the lower, poorer end of the market dumped on them. They preferred to keep the cream. That is why SERPS was not abolished, as promised before the 1986 Act.
The hon. Member for Aylesbury talked about consensus. Nothing will come from the nonsense before us tonight, but there will be major reform from a consensus among all parties. I remind Conservative Members that SERPS was set up by consensus. It had the agreement of all parties. The destruction of half of SERPS was fought tooth and nail by Labour.
The Government's excuse for abolishing the state pension is that by 2030 there will be three pensioners for every five working people. The book by the hon. Member for Havant (Mr. Willetts) includes a chapter entitled, "The myth of the demographic timebomb", in which he describes how the Government deliberately exaggerated the effect of the demographic time bomb for their own ends. He justifies that because he is against SERPS anyway. It will be a time bomb, but not a series of time bombs that go on for ever—the baby boom generation will reach pensionable age in 10 to 13 years' time and the problem will then diminish. We know that because the people in that generation are alive now.
It is nonsense, therefore, to distort all our policies for that period. Whatever Government are in power, a larger proportion of our national wealth must be paid to pensioners during that period than before or after it, but that must not determine the shape of our policies.
The hon. Member for Gainsborough and Horncastle (Mr. Leigh) mentioned Beveridge, who wrote that the most inefficient aspect of pensions that he knew of was where men—they were usually men—went around collecting 1s 11d from one house and 2s 7d from a house in another street, mostly for industrial policies and insurance. It was a highly inefficient, wasteful system. Beveridge said that 50 per cent. of the premiums paid in those days were lost in commissions, administration and the inefficiency of the system. We replaced it with a system that has less than 2 per cent. administrative charges. It is an efficient system in that respect. We also avoided the main problem with money purchase schemes they are a gamble. Few people have mentioned that.
The hon. Member for Aylesbury referred to the Maxwell case. Although it affected a relatively small number of people, it should not have happened and the system must be strengthened. I hope that the reforms will work.
What about the people in money purchase schemes, who took their pensions on the basis of annuity in 1994? They would have received 35 per cent. less than they would have had in 1990 because of changes in the value of the annuity rate between those years. Nobody expected or forecast that, but those whose scheme was with the Norwich Union saw the value of their pension drop by 35 per cent. For others, the drop was even greater. If we cannot work out what will happen to annuity values within the space of a few years, how can we say what they will be in the future? Naturally, money purchase schemes are popular with firms because they represent less risk.
The Government's proposed scheme is nonsense because only people now aged 20 or less will lose their state pension under it, and none of them will have reached pension age by 2040. At that point, the proposal's effect will be to reduce the income of the national insurance fund by some £15 billion a year—a figure contained in a written answer to my hon. Friend the Member for Peckham a few days ago—while leaving its expenditure unchanged. It is absurd, but that was the answer from the Government about their cobbled-together scheme. The full effect of the proposals will not be seen until 2070, when no one has the slightest idea what the demographic circumstances will be.
Whatever the proposal's purpose, it has nothing to do with demography but everything to do with presenting a plausible scheme that is transparently unworkable before the election. There is no room anywhere—in this House or in any party—for those with an ideological view on this matter. We shall soon move away from the politics of ideology to the politics of reason under a new Government—[Interruption.] The Under-Secretary of State for Social Security, the hon. Member for North Hertfordshire, is chuntering away on the Front Bench. He cannot get his figures right in the course of a single day, but has the cheek to have a go at me.
In 1989, I took Barclays bank and the Midland1-bank to the advertising authorities for misselling and misadvertising personal pensions. I went to one of the biggest pension providers in the country—one of the famous names with a good reputation—which assured me that it had never missold personal pensions. Almost every question that I asked Baroness Thatcher at Prime Minister's Question Time was about the misselling of personal pensions. Many people knew what was happening when that wicked misselling was going on. It was fuelled and encouraged by the Government through their ideology and belief that everything that is private has a halo around it and everything that is public bears the mark of the devil. We must escape from that ideological nonsense.
My hon. Friend the Member for Peckham said that there is a place for SERPS and that we should continue with it. People on average male earnings, who were on SERPS from its introduction in 1978, would now have been enjoying double the state pension—an extra £70—from that scheme, which is good value and has paid out some of the best pensions. Many people who joined other schemes in the private sector have lost out and have little hope of receiving compensation in their lifetime.
The scheme that I support is a reformed SERPS, which would be partially funded and run independently of the national insurance scheme so that no Government could get at it in future and raid it, as the Government did when they tried to get rid of SERPS and use the scheme as a bribe to get people out of it. I propose that the managers who run it should be independent of the state and free to invest on a wide scale. The scheme should be kept as free-standing from Parliament and politics as possible. A reformed SERPS, which would have the security of being a state scheme and of not seeking to make profits, would be a far better proposition for pensioners in the future.
All the parties in the House would agree to such a scheme. When we decide on the scheme, which will work for many years into the future, we shall have forgotten the cheap, opportunist nonsense of a scheme that we have before us tonight.
I am delighted to catch your eye, Madam Deputy Speaker, because I believe that my right hon. Friend the Secretary of State's proposals for a pension plus scheme are extremely far reaching and visionary. As the hon. Member for Birkenhead (Mr. Field) pointed out, the first tranche of pensioners will, over a 40-year working lifetime, build up a substantial fund, but they may live for a further 40 years. The first tranche of pensioners under the scheme will therefore live until almost the 22nd century, so we are looking at a long time scale for this scheme.
I wholeheartedly agree with my hon. Friend the Member for Aylesbury (Mr. Lidington) that there must be a consensus in the House on how we proceed on pensions. Over such a long time scale it is essential, if the scheme is to last and prosper, that there should be all-party agreement on it.
My right hon. Friend the Secretary of State has produced a complete plan to transform the state pension scheme over a long time scale. According to a leader comment in The Economist:
The Tories have produced a plan that is workable, attractive and takes account of the undoubted difficulties that confront the project.
Last summer I wrote a paper entitled, "Privatising the State Pension Secure Funded Provision for All", published by the Bow Group in November 1996. I am delighted that many of the proposals in that paper are similar to the Government's proposals.
Last week, The Economist commented:
Reforming the welfare state is one of those nettles that politicians on all sides privately agree have to be grasped—so long as somebody else does the grasping.
For many of us, it was a complete surprise when the proposals were announced. The silence from the Opposition Benches at the end of last week spoke far louder than words. The best that the instant rebuttal unit could manage was that the plan represented "a chilling prospect"—so much for the desire of the right hon. Member for Sedgefield (Mr. Blair) to think the unthinkable on welfare policies. Many of my constituents might reflect that the unlikely advent of a Labour Government would offer a really chilling prospect.
Before moving to the detail of the scheme, I should point out that we are able to consider fundamental reform of the system in a manageable and careful way only as a result of the work undertaken by my right hon. Friend the Secretary of State and my hon. Friend the Under-Secretary. The decision to equalise the state pension at the age of 65 and the work that has been done to contain the state earnings-related pension scheme will be a key factor in constraining the future cost of the state pension over the next 40 years or so as we move towards the new system. Those two measures combined are likely to save about £45 billion at their peak. Therefore, the proposals are very far reaching.
It is important to put the matter in the context of our very well-performing economy. From a study of pension systems throughout Europe, the Organisation for Economic Co-operation and Development recently estimated that the United Kingdom should be able to pay off its national debt entirely by 2030—so much for the Labour party's continual carping about how we are increasing the national debt. In contrast, it is estimated that the national debts of France and Germany will double.
The key question in moving from an insecure funded system to a secure funded system has always been how to fund the transitional burden how to meet new funded pension contributions while simultaneously meeting the burden of the pay-as-you-go liabilities. The breakthrough that my right hon. Friend has made in drawing up the scheme of reversing the tax treatment of pensions—abolishing the tax on contributions while at the same time allowing the trading status of the pension fund to be tax free—is an ingenious and workable solution, which means that the cost to current taxpayers in meeting not only their future pension but the pensions of existing pensioners is manageable. I have not seen similar proposals anywhere else that meet that problem in such an admirable way. I wholly agree with my right hon. Friend's proposals.
The Labour party has been particularly disingenuous about the fact that the new scheme will include credited contributions for everybody, including non-working mothers, disabled people and the unemployed, so that from about 2040 everyone will be able to retire with a properly funded pension. Much more fundamental and far reaching is that, if privately managed funds perform anything like the way they have over the past 10 years, everybody from 2040 will be able to retire on a substantially better income than they do at the present time, with the consequent improvements in the standard of living.
In criticising the proposals, the Labour party is absolutely bankrupt of ideas. All that it comes up with are pension funds managed collectively by the trade unions. The Singapore system, on which I gather the right hon. Member for Sedgefield was so keen, was simply a cheap way for the Government to borrow money. All pensioners got in that system was roughly a 2 per cent. real return. By contrast, in the Chilean system, on which much of the proposals are based, the return was roughly 13 per cent. Indeed, the returns from privately provided pensions in this country over the past 10 years have been about 10 per cent. Everyone therefore has the prospect of retiring on a pension that will provide a substantially better standard of living.
The new scheme will also eliminate the question of whether a person should opt out of SERPS. That has been a difficult problem with which the Government have had to grapple. By creating a funded pension for all, the charges will be low enough to allow even modest earners to gain from the initial earnings-related contributions being paid into funded schemes. I have already made the point twice that charges on pensions can be driven down greatly—unlike the problem regarding personal pensions. The benefit of that has not been brought out in the debate. The compounding effect of high charges over a person's working life of 40 years makes a substantial difference to the amount of pension that one gets at the end of the day.
Among the greatest benefits of moving to a personal funded system will be that it will focus the minds of our young people on thinking about retirement the moment that they start to work. As other hon. Members have said, that is an extension of the share revolution that we in the Conservative party have brought about over the past 18 years. Not only will young people's minds be focused on the need to save for their old age, but the fact that private providers will have to produce a statement of how the pension has performed each year will begin to get young people to think about investments, how they perform, whether their company is performing any better than another and whether they should switch to another company to get a better performance. That is an important step forward in the savings culture, and one that we need to encourage.
Under the Chilean system, for example, there will be not only an annual statement but the possibility of using the latest technology, such as video display unit terminals in supermarkets. Once all the security measures are in place—one will have a personal identification number on a plastic card—one will be able on any day at any given time to find out what the pension is worth, how it has performed over the past year and how much one has contributed to it. More important, one will be able to ask questions such as, "What would happen if I retired two years early? How much extra contribution would I have to make for the same level of pension?"
Under such a wonderful new system with its smartcards, I wonder whether people will be able to see how much commission the salesman who sold the pension took and how much of their contributions are going on administrative charges.
Absolutely. That is part of the regulations of the Financial Services Act 1986. I cannot imagine that the Act would in any way need to be weakened by the scheme. In fact, we may have to strengthen, but simplify the regulations. I envisage that the pensions regulator will want to keep a very close eye indeed on private providers.
The hon. Member for Hackney, North and Stoke Newington (Ms Abbott) has made a very valuable point. In the Chilean scheme, which is not the same as that introduced by my right hon. Friend the Secretary of State but which the Social Security Committee looked at last year, all such things are completely transparent. One cannot possibly have transparency with an unfunded scheme—and we do not have it. From the details announced by my right hon. Friend, it is already clear that the scheme will be even more transparent than that in Chile.
I am extremely grateful to my hon. Friend for that very constructive intervention. He is absolutely right. The Chilean system has a very simple way of being able to portray to everybody exactly how their pension fund is performing, what the additional contributions are, and yes, what the initial and management charges are. I have always said, I shall repeat it and I will keep repeating it, that the compound effect over 40 years of even a small reduction in charges will make a huge difference to the total value of the fund.
I welcome the Government's proposal to make it possible to switch from one manager to another if they do not perform. The market will sharpen up management performance of all the funds that the Government allow to participate. I welcome the fact that the Government are to introduce a Green Paper so that all the detailed matters can be examined. The pensions regulator will need to look very carefully at the type and range of investments in which providers can invest. One thing that we want to be absolutely sure about is that, if we encourage huge numbers of young people to invest in a scheme—even though the Government are doing it on their behalf—none of the schemes goes bankrupt. As I suggested in my paper, we need to be very careful that the ownership of a scheme and the ownership of fund managers are kept totally separate.
We will also need to prescribe the range of investments, because we would not want people to invest in Peking bonds that would leave their pensions worth little in the end. We will need a wide range of investment instruments, so that pensioners can benefit from the performance of this country's economy and the worldwide economy. That will be one of the benefits of the scheme. In Chile, the economy almost doubled in six years because of the huge funds that were invested.
The Government will be able to implement imaginative ideas. For example, it may be possible for one of the financial instruments that I have mentioned to be invested in a Government private finance initiative fund. That would greatly extend the scope of the PFI. The fund would be a quasi-Government bond, as long as we could guarantee a realistic level of return.
I warmly welcome the scheme, and the fact that the Government Actuary has come up with figures that are similar to my own. A mere £9 a week, flat-rate contribution, plus a further 5 per cent. rebate from earnings below the national insurance ceiling, would produce a substantial fund. The Government's figures suggest that such a contribution would produce a pension, on a conservative estimate, of around £170 a week. That is more than double the current state pension. When I produced my paper, the media were intrigued by my figures and wondered whether they were correct. I welcome the fact that the Government Actuary has reached similar conclusions.
The scheme will encourage young people to think about investing for their old age at an early age, because they will own their schemes. As I said in my paper, they will
be forced to think about retirement income at the point when they first started work. Everybody would then learn the discipline of saving and how good the long-term return on those savings could be.
We may even be able to take a more radical approach. It may be possible, when the funds start to perform better than is currently envisaged—I am sure that will happen—to add bolt-ons, such as sickness and unemployment insurance. I have obtained some figures today that suggest that a one-year protection against unemployment would add just £4 a month per £100 of cover. Even more worth while, one-year cover against illness and accidents would cost a further £2 a month per £100 of cover. Somebody on average earnings of £300 a week would be able to cover himself fully against a year's unemployment and all sickness or accidents for about £24 a month for the rest of his life. To avoid selling a false prospectus, we would have to announce such schemes from the start. It would be unfair to bring youngsters into a scheme and then change the rules. If the scheme did not start with such insurance cover, we would have to introduce it for the next tranche of youngsters who entered the scheme.
Our proposals contrast sharply with the vacuum in the Opposition's thinking. They want something called a "flexible decade of retirement"—whatever that means. My right hon. Friend the Secretary of State has pointed out repeatedly that if people wanted to retire at 60 instead of 65, the state pension would have to be reduced by £20 a week. I do not know whether that figure is right, but the Government Actuary has checked it. [Interruption.] The hon. Member for Peckham (Ms Harman) should listen carefully, because I am about to make an important point. If the state pension is reduced and if people are to live on it, it will have to be topped up by income support. The hon. Lady has not told us how much that extra income support will cost. When she does her calculations, she will find that the cost will be substantial.
I welcome the Government's visionary proposals. Many details need resolving, but the scheme has many benefits. As my hon. Friends have pointed out, the scheme would enable wealth to cascade down the generations. I also welcome the fact that everybody, from 2040 onwards, should be able to retire on a better income. That must be the right way forward, and I hope that my right hon. Friends will introduce the scheme as soon as possible, at least by the turn of the century.
I am glad to have the opportunity to speak about the Government's proposals. I wish to speak briefly on an aspect of the proposals that has not had enough attention in the debate—the implication of a privatised pension regime for financial services regulation. I shall also speak about the experience of pensions misselling and shall make three points: first, the size of the pensions misselling problem has been underestimated; secondly, we are nowhere near solving the problem; and, thirdly, we must recognise that pensions misselling is not merely a past aberration which must be cleaned up, but raises issues for financial services regulation in the future.
Figures on the number of people who might have been affected by pensions misselling have been bandied around. In any debate about increased privatisation of pensions, it is important to stress that more people have lost money than most people imagine. The issue first came to light in 1984, when KPMG, one of the leading City accountants, reviewed the files of a sample of 735 clients who had been sold private pensions. Only 9 per cent. of the files showed evidence of substantial compliance with the regulations. The firm classified 37 per cent. of the files as suspect.
In my view and that of many members of the Treasury Select Committee, the 500,000 people whose cases the Personal Investment Authority is reviewing are the tip of the iceberg. The problem arose not just with pension transfers; similar bad advice was given on opt-outs and to people who left SERPS. Of the 5.2 million who left SERPS, 200,000 were paid so little that they did not even qualify for a rebate. Leaving SERPS could have had no possible value or benefit to them.
The problem is greater than we believe. We may never know its full dimensions, because many tens of thousands of people may die before they receive any compensation. I understand, from the evidence given by the chief executive of the PIA to the Treasury Select Committee earlier this week, that the industry's letters to people asking them to come forward do not even mention compensation. People are getting letters from financial services providers, with other junk mail from the financial services industry, with nothing to suggest that it would be in their interest to respond. The problem goes wider and deeper than anyone on the Tory Benches will acknowledge.
The hon. Lady is making a serious and thoughtful contribution. Many of her hon. Friends have majored on pensions misselling this evening, but will she accept that the elimination of misselling in every circumstance would involve more regulation? In that context, what does she think of supermarkets selling pensions without giving any advice?
As a member of the Treasury Select Committee, I have studied all aspects of financial services regulation, from Lloyd's of London, to home income plans, to pensions misselling. What we need is not more regulation but more effective regulation—which may, in some circumstances, mean less form filling and less bureaucracy. We must get away from what I believe to be a system of regulatory catch-up by the institutions. The board of the PIA is dominated by people who are in the same institutions that are accused of misselling. We need regulation that has the confidence of the consumer, and current regulation does not have that.
Does the hon. Lady think that misselling is continuing on the same scale as during the period to which she referred? What proportion of those million or so cases would be eligible for compensation? In many cases, there might have been some technical non-compliance, but whether people finished up with the wrong product is another question. I see a smile on the hon. Lady's face, and I am genuinely interested in her answer.
I love the phrase "technical non-compliance", and the financial services industry and its lackeys are keen on this type of euphemism. What we had were salesmen, almost all of whose income came from commission, scouring local newspapers for information about firms going bankrupt or coal mines closing. They then targeted the former employees and coal miners and sold them pensions, although even someone like me—with no expertise in these products—would know that, once those people lost their employers' contributions and the guaranteed benefits of an occupational scheme, they had to be worse off with private pensions. It was not, as the industry insists, a technicality. Salesmen were driven by the bonus system and by commission knowingly to sell people products that could not have left them better off. The problem was not a past aberration, but one of structure.
I hope to answer them in the final section of my remarks. Tory Members have said that the problem is being dealt with, but I want to know who is dealing with it. The Treasury Select Committee took evidence from the PIA this week, and we have said over and over again that it has taken two and a half years to deal with 1 per cent. of cases. On that time scale, we will reach the millennium without clearing the backlog. We asked how long it would take to clear up the problem, but the PIA could not answer.
Pensions misselling is tragic; but, when the pensions misselling review was set up, the Government, the PIA and the other regulatory authorities set their face against finding out what had gone wrong, to what extent it was a technical problem and to what extent there had been real fraud. They sought co-operation from the industry to get the matter cleared up as quickly as possible, but the industry has been let off the hook and still has not co-operated. The biggest names in financial services—including the Prudential and Legal and General—are some of the worst offenders. There is no evidence or information from the relevant regulatory authorities to suggest that we are in sight of clearing up the problem. I believe that many of the institutions are simply waiting for the grim reaper to do his work before they have to cough up compensation.
Some Tories have said that this was a technical problem, and asked whether misselling is still going on. The pensions misselling of the 1980s and 1990s goes to the heart of what is wrong with the financial services industry and the retail sale of its products. Far too many salesmen depend on commission for almost all their salary. When someone is commission-driven and has to pay his mortgage and pay for his shopping, it is only human nature for him to sell people products on the basis of how much commission he can earn rather than whether the product is what the customer needs.
I agree with the Consumers Association, which has said over and over again that we need to move towards a transparent system for independent financial advisers, and towards a fee-based system where people pay for genuine and clear advice, rather than having people posing as independent financial advisers. The implications of pensions misselling for financial regulation in the future are great, and we have to look at the commission and bonus system and at the continuing lack of transparency.
The industry has dragged its feet on this issue. People who try to buy financial services products will be deluged with paper that they do not want to read and that is unreadable, even if they try. The real information about commission, bonuses and administration charges is hard to winkle out.
As the hon. Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) said, we may need to limit the types of investment that pension advisers can make. We do not want to go the way of the United States savings and loans companies, which attracted investment from millions of ordinary Americans and, free from serious regulation, were able to throw their investors' money away on junk bonds. It cost the American taxpayer billions of dollars to bail them out.
As the Consumers Association said in 1994,
It is very difficult to have confidence that every single individual who has been affected and has been given what we would class as bad advice is necessarily going to be identified let alone given full compensation".
The PIA has acted poorly on this issue. It is no coincidence that the chairman of the PIA, Joe Palmer, was previously the head of Legal and General, one of the companies most heavily implicated in pensions misselling. We have to get away from self-regulation of the financial services industry, as it means that the regulators are unwilling and slow to act against their friends and colleagues.
As we move to an era in which many of the benefits that would have been provided by a welfare state—pensions, unemployment benefit and sickness benefit—will be the province of the financial services industry, we need a different, clearer and tighter system of regulation. When I was a schoolgirl, many ordinary people did not have a bank account or a mortgage. Twenty or 30 years ago, a person had contact with the financial services industry because he or she chose to do so. We are now moving into an era when most of us—whether we choose to or not—will depend on the financial services industry for pensions, unemployment benefit and care for the elderly.
We do not need more bureaucracy, but we need a more effective system of financial services regulation than we have had hitherto. The speeches in the debate so far have glossed over the grave issue of misselling. Unless it is cleared up and unless the lessons are learned, nobody—neither my hon. Friends on the Opposition Front Bench nor the Government—will carry any confidence with the public when trying to press on them private pensions as a way forward for security in old age.
I declare an interest, in that I am a consultant for Pinnacle Insurance, which deals primarily with creditor insurance, not pensions. I am also a member of the Select Committee on Social Security. As such—and with some of my hon. Friends who are in the Chamber—I have taken a long-standing interest in this problem under the able leadership of the hon. Member for Birkenhead (Mr. Field).
The interesting thing to emerge from the debate is that something must be done. Some doubt has been thrown on the demographic time bomb, particularly by the hon. Member for Islington, North (Mr. Corbyn), but nobody has denied that, when the welfare state was set up in 1945, there were five workers for every pensioner there are now only 3.4 workers for every pensioner, and in 2030 there will be 2.4. When Beveridge considered this matter, people were, on average, living up to five years beyond retirement age by 2030, people will, on average, be living 15 to 20 years beyond retirement age. We can argue the toss backwards and forwards and ask how serious the demographic time bomb is, but people on both sides of the argument accept that there is a problem. That is the first point.
Secondly, hon. Members on both sides of the House accept that we have broken the link between state pensions and earnings. The hon. Member for Islington, North lives in a socialist past or pantheon, a glorious age which probably never was, but those on the Front Benches have broken the link if we rely solely on a state pension, the amount that will be available to us when we retire will be derisory. We must be honest and accept that. We can promise that we will keep the state pension and uprate it in line with inflation, but it will form an ever-declining proportion of average earnings. Something must be done.
The interesting feature of this debate, which others may not have noticed, is that the hon. Member for Peckham (Ms Harman) seemed to accept that point. Of course, we are close to a general election and she must play party politics. We realise that she cannot accept what a Government propose a few weeks before a general election. I do not blame her for that; she has to criticise the scheme. She was a bit coy about what she proposed, but she seemed to accept that we had to create a new system. What she said was interesting—we have to create a system based on a partnership between the private and public sectors. I welcome that comment.
There was an even more interesting speech from the hon. Member for Birkenhead, who spoke immediately after the hon. Member for Peckham and who has acquired great knowledge of the subject over many years. He made it absolutely clear what those of us who sit on the Select Committee on Social Security know—that the present system is unsustainable, and that we must move towards a funded system.
Despite all the enjoyable partisan politics that we have naturally had across the Dispatch Box during the past three or four hours, both sides now accept that, to all intents and purposes, the present system is dead for the next century and, in a spirit of consensus, we must move to create a new system. It has to be done in a spirit of consensus, for the obvious reason that creating any new system will take a long time.
It is said that bad ideas are not claimed by anybody and that good ideas have many fathers. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) has written an interesting pamphlet and, three or four years ago, I wrote one on the same subject. The Chileans introduced a funded system in 1980. The truth is that many people in the Government think tanks, civil servants, politicians, pamphleteers and other Governments have been working on the problem for a long time. All their ideas revolve around something close to what my right hon. Friend the Secretary of State for Social Security proposed.
The ideas that I put forward a few years ago were somewhat different. It is important that we accept that Britain has the most successful private pensions industry in Europe, with £650 billion in investments, and we must do nothing to put that at risk. I was thinking in terms of a kind of top-up scheme, so that people with occupational pensions remained in those schemes but, instead of paying a fixed amount in national insurance to a pay-as-you-go system, were required under a compulsory saving scheme to pay the money into a separate fund. Whether we talk of those ideas, or of what my hon. Friend the Member for Cirencester and Tewkesbury talked about in his pamphlet, or of what the Chileans have done, we are all going in the same direction.
The only purpose of my brief remarks is to try to stress, through all the partisan politics that have gone on this afternoon, that we must find a way forward that both sides of the House can accept. We realise that the pay-as-you-go system is not sustainable into the next century and we want to create a funded system, but there is a basic philosophical divide between Conservative Members, who believe that a compulsory savings system should be based on private insurers, and the view held by the hon. Member for Birkenhead and, I suspect the hon. Member for Peckham, that private companies, influenced by the profit motive, should not be involved and that we should consider the building society and friendly society concepts, or perhaps the Singapore concept.
I should have thought that there was a simple way forward through the jungle. We must create a consensual point of view because, however confident the Labour party may be about winning the next general election, it surely is not confident that it will still be in government in 40 years' time. Surely we can give people a choice. After all, we are talking about whether the compulsory savings system should be based on private insurance companies or on friendly societies or building societies—that sort of concept. I do not see why people should not have that choice.
If we achieve a consensus on that basis, we shall be talking about something very exciting. Young people will be building up a large sum of money. It may be held in private companies, which will be highly regulated. Many of the comments that we have heard today have been misplaced. Those of us who, earlier this year, visited Chile with the Select Committee know that the private insurance companies enjoy little freedom in how they invest the money: they have to invest in Chilean companies; the competitive pressure is based not on the nature of those investments but on the efficiency with which they deal with administration; and they are highly regulated. Therefore, to quote the hon. Member for Peckham, the Chilean system is a partnership between the state and the private sector. It is a highly regulated state system.
Let us dismiss many of the false hares that we have seen running across the Chamber tonight—that people's savings will be at risk and that insurance companies will put that money in schemes that will lose their funds. If we consider what is going on in the world and the countries that have introduced such a scheme, we see that funds are highly regulated.
Let us assume that we have achieved such a consensus and that, at some time during the next five years, we move to a funded system. The next point which we must address is for whom will the system operate? We must be honest—we are talking only about young workers. It is all very well to talk in glowing terms about Chile, but it has a remarkably different economy from our own. It has a much younger economy, and it has funded the changeover with privatisation receipts which are no longer available to us because most of the potential recruits for privatisation have already been privatised. Therefore, the changeover costs to a new system in our far more sophisticated economy, with a much older population, will be far greater in Britain than they were in Chile.
Having said that, Chile has achieved a remarkable consensus. All parties in Chile, across the political divide, including the Communists and the Christian Democrats—Chile now has a fully functioning parliamentary democracy—accept the principle of a funded system. It has achieved a remarkable renaissance in the Chilean economy because it has provided many new opportunities for funding Chilean industry. Those ideas are quite attractive, whether one is a socialist or a Conservative. Regardless of our position in the political debate, we all want to create a system some time in the next century that provides decent pensions. We want to create a system that allows young people to acquire a real stake in society. I thought that the Labour party believed in a stakeholder society, as I do. What greater stake in society is there than accruing a personal fund of £130,000? That is what the Government propose.
I do not know whether the Government scheme is perfect, but it is a very interesting idea. Instead of rubbishing it and reducing it to a footnote in an increasingly acrimonious general election campaign, we should congratulate the Government on coming up with bright new ideas after 18 years in power. Labour Members should say, "That is very interesting. We want to create a stakeholder society and we realise that you were forced to break the link between pensions and earnings. We realise that young people who are entering the labour market now will not be able to enjoy satisfactory pensions in 20, 30, 40 or 50 years. Let us therefore have a good debate about these ideas." We should not simply rubbish the ideas coming from both sides.
Whoever wins the next election should commission the Select Committee on Social Security, and others who have a particular interest in the subject, to conduct an in-depth study and produce a Green Paper on the subject. I predict that, whoever wins the general election, something very like the scheme that we are discussing will be introduced. Regardless of who becomes Secretary of State for Social Security, I believe that people will look back and agree that the present Secretary of State deserves much credit for the careful way in which he has thought through the problems and come up with a bold and imaginative scheme, on which I congratulate him warmly.
It is a pleasure to follow my hon. Friend the Member for Gainsborough and Horncastle (Mr. Leigh), as I agree with the tone and the content of his remarks.
One of the most interesting speeches today was by the Chairman of the Select Committee on Social Security, the hon. Member for Birkenhead (Mr. Field). I think that he deserves a prize for acrobatics. He did not want to criticise those on his Front Bench—we understand that, as there is an election coming up—so he tried not to say what he really thinks. He serpentined around the issues, but his views were clear to those of us who are familiar with them and who have read the excellent books and papers that he has published over the years. He recognises that this is precisely the way that we will go and that we must go, for the reasons that my hon. Friend the Member for Gainsborough and Horncastle advanced.
I am certain that my hon. Friend's prediction will come to pass regardless of who wins the next election and the one after that, this scheme—under whatever name and in whatever form—will be introduced. Why is that so? I refer again to the speech by the hon. Member for Birkenhead. He asked whether we could be any more knowledgeable about the future than those who took decisions following the publication of the Beveridge report. The answer is no; we are bound to do no better than they did. However, we know now that a funded pension scheme should have been introduced following the Beveridge report.
If that had occurred, this country's economy would be in a better state, and people would be stakeholders in society. They would have power over their lives and power over the methods, and perhaps the timing, of their retirement. We would not now be talking about the pain that the Government endured when we broke the link between incomes and pensions, or the pain that the Labour party is suffering—and no doubt will continue to suffer—now that it has made it explicitly clear that it does not intend to reinstate that link. That would be the correct decision for a Labour Government to take a link between incomes and pensions simply does not make sense.
This scheme is right. It does not matter who is correct—whether it is the hon. Member for Islington, North (Mr. Corbyn) or Conservative Members who have spoken in the debate—about the demographic time bomb. Plainly, the demographics are going in the wrong direction, and schemes will become more expensive.
However, it is not a question of whether the scheme is affordable if the political will is there, anything is affordable—within reason. We could afford to continue with a pay-as-you-go pension scheme. The question is: is it desirable? Most commentators who have examined my right hon. Friend the Secretary of State's scheme and those who have spoken in this debate on both sides—apart from those who have adopted a purely party political approach—agree that it is undesirable to continue with the old scheme. I hope that we may have the sensible debate to which my hon. Friend the Member for Gainsborough and Horncastle referred.
I agreed with the tone of some of the remarks by the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) about regulation. We should not look backwards—I think that the misselling of pensions is irrelevant to this debate. I hope that my hon. Friend the Minister will take note of the pleas for tight regulation. We met the regulator of the AFPs in Chile, who is very powerful. He can tell the AFPs how to invest, he can direct their actions, and he can threaten them. He can close down schemes—which he has done—and require other schemes to take over their customers. We need someone to act in precisely the same way. There can be no scope for the wrong practices of the pension industry.
We must regulate the industry tightly enough to enable everyone to benefit from the marvellous achievements of our private pensions industry. People should not think that the only achievement of the pensions industry is the misselling of pensions. The industry has guaranteed incomes to a majority of pensioners that were beyond their wildest expectations. After a few years, many retirees receive income in excess of their salaried income.
People did not expect that. There has been expenditure of £600 billion. I am told that people cannot comprehend the difference between a million and a billion. As Ronald Reagan said, "A billion here, a billion there, and very soon you are talking real money."
Will the hon. Gentleman tell me where I can buy a policy that will allow me to retire on more than I earn?
I was talking about the period under the last Labour Government, when they held down incomes, and pensions increased. Because of inflation proofing and the Labour party's dreadful record on inflation, retirees received more cash than when they were working.
I can give a practical example. My late father was Clerk of the Privy Council, having succeeded the previous Clerk, Sir Godfrey Agnew. Three years after my father took over the Privy Council Office, he was earning less than the previous Clerk, who had retired on an index-linked civil service pension. That was the absurd situation in the mid to late 1970s.
It bankrupted the Labour Government, and it nearly bankrupted this country. However, it did not bankrupt the remarkable pension schemes. We should pay tribute to them. We must recognise that some people do not benefit from the economy's vitality, and this scheme will put those people in touch with it so that they may share in its benefits.
I welcome my right hon. Friend's announcement very warmly. It is a very good start. It embodies many of the characteristics that my right hon. Friend has always demonstrated: a cautious and detailed approach, testing the water as he goes. My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Clifton-Brown) was correct when he said that there could be bolt-ons. Once the scheme is up and running, there may be scope for other groups to join it.
I return to the Labour party's position, and its proposal for a flexible decade of retirement. I shall be happy to give way to Labour spokesmen as I try to proceed point by point. It is common ground—I am sure that the hon. Member for Southampton, Itchen (Mr. Denham) will correct me if I am wrong—that most people take their retirement pension immediately it is on offer. They do not defer payment, although everyone understands that there can be deferral so as to obtain a greater pension later. Nearly everyone, however—I think 98 per cent.—takes his or her pension immediately it is on offer.
Therefore, if we have a flexible decade of retirement, or at least an arrangement whereby people can retire early, the likelihood is that the retirement pension will be taken at the first opportunity that it is made available. I hope that I am still on common ground. If the hon. Member for Itchen disagrees, he can intervene. It seems to be accepted that those who retire will take their pension at the first opportunity that it is available to them.
It is also common ground, therefore, that first-opportunity retirement pension has a cost. Indeed, it is bound to have an extra funding cost, and it will be £15 billion. If the Labour party, if it is in government, is not to raise £15 billion in taxation—the spokesperson for the Labour party wrote to my right hon. Friend the Secretary of State on 30 August 1996, angrily making it clear that that was not Labour's intention—the only alternative is to seek the advice of the Government Actuary.
It seems, however, that Labour would say that it is anticipated that those who retired early would receive a lower level of basic state pension. Is that common ground? If Labour is not to raise the necessary money from taxation, there must be a lower state retirement pension.
I regret that my hon. Friend is right.
I am making an important point, and the Labour party has been caught out. The hon. Member for Peckham (Ms Harman) blushed when she tried to deal with it. Indeed, she became terribly ratty when anyone sought to challenge what she was saying. We know that either expenditure of £15 billion must be raised by taxation or, as the Government Actuary has made clear, pensions will decrease by £20. The reason—[Interruption.] Does the hon. Member for Itchen wish to intervene? I shall be happy to give way.
I bet that the hon. Gentleman does not. I am sure that the hon. Gentleman would rather hope to find gin or whatever in the carafe on the Opposition Dispatch Box. I am sure that my argument is embarrassing to the Opposition. At least the hon. Gentleman is blushing.
There is a choice between increasing taxation and reducing pensions. As the hon. Member for Peckham has made it clear that a Labour Government would not increase public expenditure by £15 billion, pensions for newly retired pensioners, all taking their pension at the earliest possible opportunity, which is common ground between us, would decrease by £20. That becomes Labour party policy. It is clear—[Interruption.] I am sorry that the hon. Member for Tyne Bridge (Mr. Clelland) thinks that my remarks are funny. Those who are approaching retirement will not consider them amusing. If the hon. Gentleman would like to intervene to tell me that any of my facts are wrong, I shall be happy to give way.
I can only conclude from the giggling, schoolgirl attitude of the hon. Members for Itchen and for Tyne Bridge, who occupy the Opposition Front Bench, that we Conservatives are right, and that we have caught out the Opposition. It would seem that £20 off the state retirement pension is Labour party policy, and we must ensure that everyone knows it. The Labour party cannot deal with the basic point, which is the gap between what it says and the reality of its policies.
Is not the reality that we shall probably see an increase in public expenditure and a decrease in state retirement pensions? As I made clear earlier, we are likely to see a reduction in the state pension. If, however, we are not to see people retiring in misery, there will have to be an income support top-up, which in itself would have a substantial extra cost.
My hon. Friend is correct. Doubtless the Labour party will huff and puff to try to explain what it is talking about during the election campaign.
The debate has been useful in clarifying the basic pension plus and in flushing out the Labour party's policies on state retirement. It has also been useful to discuss other dangerous Labour party policies. For example, the Labour party does not talk about contributions to a stakeholder pension. It does not wish to discuss by how much national insurance contributions would have to increase. It does not talk about whether there would be a new category of contributions. We hear not a word from the hon. Member for Peckham about how money would come in to pay for the extra pension.
We know, however, what the Labour party plans, and I shall quote from its handbook. It refers to the stakeholder pension as
a new better-value-for-money framework for second pensions to redeem red tape and improve competition.
I do not know what "redeeming red tape" means. I assume that the meaning is the same as addressing problems. It is another term that has no meaning in the context in which it is used by the Labour party. At the same time, it is designed to sound quite good.
We know, however, that the Labour party's approach would allow political interference in pension funds rather than those funds being invested in the best interests of members. A BBC news release, which paraphrased what the BBC had been told by a previous Labour spokesman, read:
Chris Smith was particularly interested in Australia's Industry-wide superannuation funds, which are administered jointly by employers and Trade Unions, giving the Unions power over how they are invested.
That is what we shall see in future if there is a Labour Government. The funds that are delivering such good occupational and private pensions would be put into the hands of trade union barons to invest. It is—[Interruption.] It is no good the hon. Member for
Itchen moaning from a sedentary position. He is entitled to intervene to explain how the previous Labour spokesman, the hon. Member for Islington, South and Finsbury (Mr. Smith), was wrong. I suspect that he will not bother to do so.
The fact is that the Labour party would put people's pensions at risk. The 20 million who are members of private pension schemes would have their futures put at risk by the Labour party. The Labour party talks about side issues and uses electoral scares. It talks about privatising pensions rather than using private pension and personal pension funds. In so doing, it has done itself no service or credit this evening. Instead, the Labour party has revealed that its words are empty. At the same time, the threat of what it would do in government is real to every pensioner and potential pensioner.
I am grateful to be called, Mr. Deputy Speaker, even towards the end of the debate. I regret that I had to leave the Chamber for an hour or so, and thus missed one or two speeches. It has obviously been a most interesting afternoon and evening.
I am grateful to be called after my hon. Friend the Member for Harrow, West (Mr. Hughes), who performed an excellent and deft demolition job on the Labour party's position. It is clear that Labour has become impaled on a number of its positions, which are either expensive or damaging to pensioners. It has failed to address fundamental pension problems.
I would, however, caution hon. Members about drawing too many parallels with Chile. I visited that country as a member of the Select Committee, and although some of us went there open-minded and enthusiastic about what the Chilean system might teach us, the differences between the systems were striking; the biggest being that the Chilean system is miles behind what we have established in this country—the very substantial pension funds for investment and for future pensions.
However, the rate at which Chile is catching up is staggering. On coverage and the standard of living of the majority of pensioners, Chile is miles behind. Indeed, it will face many of the problems—pensioner poverty of certain sections of the pensioner population—that provoked my right hon. Friend the Secretary of State to present these proposals to the House today.
I wish to address the comments of the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) about misselling. In an intervention, I asked her two relevant questions, the first being whether misselling is continuing on the same scale as that recorded in the earlier period. She failed to answer.
We are still able to advance the case for private and personal pensions, because the problem was one of transition and of market growth and immaturity. That problem has been dealt with. Of course the cases of misselling that have not yet been addressed must be cleared up. Even though this is not an interest that I am required to declare, I was a former employee and adviser of one of the major insurers. As someone who has a connection with the industry, I see that more evidently, perhaps, than many other hon. Members. For the credibility of the industry and for future schemes of this nature, the problem of misselling must be cleared up.
The second question that the hon. Lady would not answer was: in how many of the cases where non-compliance has been recorded has the client ended up at a financial disadvantage, with the wrong product? Until all the cases have been looked at, it is not possible to know. The evidence of the cases that have been looked at is that, although there may be not have been all the crossing of the t's and the dotting of the i's in the paperwork, and that information required by the regulator before contracts are signed may not have been exchanged, the client has not necessarily ended up with the wrong product.
I would guess that, in the majority of cases, there has not been a miscarriage of financial justice, only a failure on the part of people selling pensions to observe the proper regulatory requirements, but that does not excuse it. The problem has to be cleared up, and it should have been cleared up much more quickly. I clearly heard my right hon. Friend me Secretary of State say that companies that still have that hanging over them will not be eligible to take part in what will be an opportunity for huge growth for the industry. That was a good warning shot to fire across their bows.
I would add that much of the problem, as the hon. Lady amplified, comes from fees and commissions. I agree that it is much better for advisers to charge fees rather than percentage commissions. As soon as the transparency of commissions was discussed, it was obvious that it was an issue that the pension salesman had lost from the outset.
Commissions should be declared in all cases. The industry is struggling with a tax problem: that it is possible to get tax relief on the commissions or fees charged if they are netted off from the investment being made. It is not possible for the client to get tax relief on the fees and commissions if they are added on. It is a problem of taxation, and perhaps one that the House should address.
The problem is also one of VAT. Fees netted off from the investment being made are not liable for VAT, but fees charged for advice over and above the investment made are, so it becomes instantly more expensive for the client.
An instructive lesson from Chile is that, as a matter of course, the fees are added on to the investment made, and are not chargeable for sales tax. When the client is looking for a provider to make his investment, it is obvious which one is offering the cheapest deal for the client. We should have a simple transparent system of that nature that is not open to abuse. We should not be taking people's tax-relieved money away from them in charges and fees, because it gives a false impression of how much they have saved if some of it has been taken away in that manner.
I agree with the hon. Member for Birkenhead (Mr. Field) that the exploration that pensions buffs enjoy to make in such debates sits ill alongside the party political battle. However, I cannot ignore the speech of the hon. Member for Peckham (Ms Harman) and her usual tirade against anything to do with the private sector, although she paid homage to a mixed economy.
The right hon. Member for Sedgefield (Mr. Blair), in an article in The Times, made it clear that he wanted to keep SERPS. On the "Today" programme, the hon. Lady said that the Labour party had agreed
that SERPS is not financially sustainable.
Such conflicts do not help the political debate.
The hon. Lady offered the idea of stakeholder pensions, which, as my right hon. Friend pointed out, originated in Singapore, where pensioners receive a 2 or 3 per cent. uplift over inflation, instead of the proper investment returns that they deserve. That is not because the Singapore Government are such bad investors, but because they cream off the profits from the central provident fund for their own purposes. That shows the danger of a state-controlled scheme rather than individually owned privately provided schemes.
The hon. Lady's speech denigrating the Government's proposals contrasted sharply with the comments that the right hon. Member for Sedgefield made in his article. He said that the proposals
give whoever forms the next government the chance to conduct the debate more sensibly.
We certainly all agree with that. It implies that he does not think that his own party has conducted the debate very sensibly up until now, and he is learning fast from my right hon. Friend's proposals.
The key issue is the problem of pensioner poverty in middle England. The hon. Lady laid that at the Government's door, but we are dealing with people who retired before 1979, and before the huge growth in pensioner incomes. The problem is not that people in full-time work throughout their lives tend to finish up in pensioner poverty: that section of the population has done particularly well. Nor is there a problem with people who have dropped out of the system, because the safety net catches them, however unsatisfactory it may be to live at that level. The problem is with the people between the safety net and pensioner prosperity: the people who move in and out of work, carers, housewives and people on the edge of the job market in part-time work.
The modern flexible labour market that this country needs to be competitive is not conducive to traditional forms of employment, such as long periods of employment with one employer and an occupational pension scheme to see retired people into their old age. What is so clever about the Government's proposals is that they make far better use of the cash flows that are invested in the existing state scheme.
The return for the average United Kingdom pensioner from investing the cash flows under the present scheme, taking account of redistribution, is virtually negative. The basic pension plus scheme maintains the redistributive nature of those cash flows by handing out the £9 rebate, but by investing them privately gets a realistic commercial return, and ultimately provides a much better pension for the pensioner.
My hon. Friend is absolutely right. The current national insurance tax system is our biggest tax-free distributive system. During a working lifetime, a person on average earnings makes £95,000-worth of national insurance employers' and employees' contributions, whereas he receives a state pension value of about £25,000. Does my hon. Friend agree that that is an extremely negative return?
Obviously it is a negative return for someone in the circumstances described by my hon. Friend. Moreover, if we hypothecate an aggregate amount of national insurance income that is invested in the basic state pension and then eventually collected by pensioners, we find that the return is almost negative. That is because the national insurance system is not a funded scheme: national insurance is not invested in anything.
The appeal of the basic pension plus scheme is that it preserves the redistributive nature of the basic state pension, while replacing the unreliable promises of politicians, who are generally long gone by the time that those promises must be redeemed, with personal ownership of capital in proper investments. It is extraordinary—well, not extraordinary; in fact, entirely predictable—that the gut reaction of a party that opposed the sale of council houses, and at one stage thought that property ownership was evil, is to oppose our proposals.
I agree with my hon. Friend the Member for Harrow, West that Labour Members will eventually realise that this is a major reform that will be irreversible, and that letting the cat out of the bag and discussing it will in itself create a momentum that, even if the Labour party became the Government, it would have difficulty in stopping.
What we are achieving is not an extension of compulsion, which is what the stakeholder pensions proposed by the Labour party are about. They are based on the Australian model.
I refer to the model from Singapore, adjusted by Australia. We are substituting a compulsory savings scheme for taxation, and turning a confiscation into the building up of an asset. That is something that no one can take away.
What the Government must get right, however, is the nature of the vehicle through which people will be saving, and the simplicity of the regulatory regime that will oversee the providers of the new pensions. As I said in an intervention on my right hon. Friend the Member for South Norfolk (Mr. MacGregor), we do not need to go into all these insured products. It is a hangover from the way in which the insurance industry developed the pensions industry over 150 years that insurance plays such a huge part in personal pensions.
There is no difference between the risk to the man in the street posed by a personal equity plan provided by a major financial institution and the risk posed by a life assurance policy. The only difference is that the man in the street generally understands what a PEP or a TESSA—a tax-exempt special savings account—means, while he does not understand what a life assurance policy means.
Another of the lessons that we brought back from Chile was that the simplicity of the product hugely increases the attraction of the whole scheme for the individual. Why do life assurance policies require so much selling? Because they are not easily understood. PEPs and TESSAs have not required nearly so much selling, simply because they are easily understood.
It is important for us to create a separate product regime, a separate tax regime and a separate regulatory regime, so that we can keep things simple and insulate the new pensions system from the huge complication of the tax and regulatory regime that currently surrounds pensions. Few people realise, for example, that there are several different tax regimes even for occupational pensions. It depends when they were set up or closed, or when people joined or left them. The system is very complicated, and that example refers to only a tiny proportion of it. Half the people are being taxed on what they put in and half on what they take out. The tax system limits what some people can put into their pensions, while others are limited in terms of what they can take out. It is an extraordinarily Byzantine structure.
The commencement of a completely new system, basic pension plus, gives us the opportunity to establish a completely fresh regime. New people entering the scheme need never become entangled in the mess of the present regime that has been created over hundreds of years.
A threat may be presented to the successful occupational schemes, but the great disadvantage of final salary occupational schemes is that it is difficult, even for actuaries, to decide a person's worth at any one time. One of the sources of the misselling misunderstandings is that it is almost impossible to give a fair assessment of an individual's rights in a final salary scheme because its terms, its uprating policy or its contributions may change. All sorts of alterations can make a huge difference to a person's rights, because the schemes are based upon final salary.
I agree with the hon. Member for Birkenhead that we are at the start of a much better savings structure for families. Members of a family should be able to talk about different schemes, and limits are not important. People should be allowed to pay as much as they want into a scheme, and by the time we have got rid of capital gains tax and inheritance tax, the distinction between being in a pension scheme and not being in one will be reduced. Instead of buying grandchildren premium bonds or lottery tickets, it would be marvellous if at Christmas granny's £5 could go into the child's pension scheme, which could have been established on the day the child was born.
I shall now deal with incentives and costs. Any funded scheme will cost more in absolute terms than the state scheme. Under our state scheme, quarterly statements of how much has been put in and how much the fund is worth are not required to be sent to clients. No investment uplift is provided on each quarterly return. Of course it is cheaper to collect tax than to provide an investment service. The issue is what that should cost. The Chilean lesson is instructive. Even with some problems, the Chilean costs as a percentage of the managed funds are competitive by any standard.
If people are allowed to choose whether to give their money to the Government or to put it in their own account where it can build up for the future, there is no doubt that they will adopt the latter course. Rather than welcoming the scheme, for a time Labour will continue to say that people like paying national insurance contributions, just as they said that people liked to live in rabbit hutches whose front doors were all the same colour, and which were owned and managed by councils.
We have had a thoughtful debate and I should like to continue in that mode. However, I will first deal with a contribution which did not meet that standard—that of the hon. Member for Harrow, West (Mr. Hughes). The hon. Gentleman knows that there is no way in which the basic state pension will be cut by a Labour Government. No future pensioner and none of today's pensioners will be forced on to a basic state pension lower than the present one, whatever the future retirement age or upratings. There is a despicable campaign that is designed to scare the elderly into thinking that something might happen to the basic state pension, and that has lowered the tone of the debate.
There is no need for the hon. Gentleman to get nasty just because he cannot answer the point, which is very simple. I am not making those allegations: his colleague the hon. Member for Peckham (Ms Harman) is. I did not write the letter in which she says:
We would seek the advice of the Government Actuary, but we anticipate that those who retire early would receive a lower level of basic state pension.
The Government Actuary has been consulted and we know that the figure is £20. If that is wrong, instead of insulting me and my hon. Friends, why does the hon. Gentleman not simply tell us why it is wrong?
The Tory campaign throughout this country to frighten elderly voters into believing that their pension will be cut or that people will not be able to retire on the full basic state pension is disgraceful. If hon. Members cannot understand a simple letter, that is their problem, not mine.
The other claim, put forward as though it were fact—that Labour will put investment funds into the hands of trade union barons or, alternatively, into a Singapore-style fund—also exists entirely in the imagination of Conservative Members. I am under no illusion that merely pointing out the truth to them will change what they say, but it is useful to put it on the record.
What was the hon. Member for Islington, South and Finsbury (Mr. Smith) doing in Australia telling the BBC that he admired the Australian industry wide scheme and that he wanted it to be a template for Britain, with central or industry wide funds? He said that those funds would most likely be invested in a mix of the markets and job-creating schemes and would be administered jointly by employers and trade unions.
My hon. Friend was doing what any sensible person would do in that job—learning from international experience, as we have done. He has been abroad and we have studied the schemes in many different countries to find out not how one picks up a model from another part of a world, but how to develop a system that will apply and work in Britain.
With respect, the hon. Gentleman spoke for a great deal of time and I should like to proceed with the summing up.
There is just one reason for this debate: the Conservative party's proposals, just before an election, to privatise the state pension system over the next generation. Conservative Members have had their debate; they have had their chance to set out their case and to put their big idea to Parliament. Let me summarise where we are now. Their case is already in a shambles.
As a result of the debate, despite Conservative Members' comments about occupational pensions, we know that the demise of occupational pension schemes will be brought about by these proposals. The best schemes in the past for providing pensions will no longer be with us if the Government proceed with the proposals.
It has been made clear, not just by Labour Members but by Conservative Members, that people will have to pay twice to fund the huge costs of privatising the state pension system. Despite calls from Conservative Members that more should be done for today's elderly poor, we now know that that means that nothing will be done for them because of the cost of privatising the pension system.
It is clear that the policy is the pursuit of dogma for the sake of dogma, but I do not reject it simply on that basis. Let us analyse it, take it apart and find out what it really means because, by and large, Conservative Members have not done that; their speeches have been about theoretical constructs, not what would really happen. Let us consider, therefore, what the policy will cost, where the money will come from, who will go without, who will pay out without any payback and whose needs will not be met because of the cost.
We are told that some people, some time, when my children's children are born, will benefit, so let us consider the benefits. How good are they? Are they so good that the case for the policy is overwhelming? Are the problems of the future so insurmountable that we are forced by events beyond our control to adopt such a policy?
We know that the scheme will cost £312 billion over the next 40 years before there is any reduction in public expenditure. The Government claim that half of that will come from higher taxes on people saving for their pensions over those 40 years. However, as we now know and as the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) said, because the proposals strike at the heart of occupational pensions, the Government cannot be sure that they can raise their funds from those higher taxes. The people who contribute to pension schemes will not benefit from those higher taxes.
We do not know where the rest—£150 billion—will come from. We do not know who will pay or how much they will pay, but we do know that someone will have to pay. The Government say that they have taken those costs in their stride before, but we have had 22 tax increases since 1992 as they have taken those costs and others in their stride.
Who will pay now? Will it be today's pensioners when the Chancellor puts VAT on fuel up to 17.5 per cent. or puts VAT on their food bills, or will it be the people in work today who do not have the pension scheme that they would like? What will they pay for no benefit? It is a high cost. There has to be an overwhelming case for spending such a huge amount before any returns can be gained.
The hon. Member for Aylesbury (Mr. Lidington) said that it is inevitable that today's working population will have to pay twice, but it is not inevitable that such a huge cost has to be paid in the way proposed by the Government. It comes about only if the Government choose to privatise the pensions system in this way, and the case for doing that has not been made.
We have an aging population. Enabling that population to enjoy a secure and active retirement and care in years of frailty will demand more of the country's resources. The right hon. Member for South Norfolk (Mr. MacGregor) said that we must act now. The pay-more, get-less policy makes the problem worse, not better, and no Conservative Member has addressed that issue. From 10.3 million today, the number of pensioners will rise to 12.4 million in 2010, 14.7 million in 2030 and 15.7 million in 2040. The hon. Member for Gainsborough and Horncastle (Mr. Leigh) said that today two pensioners are supported by five working people, but by the year 2030 three pensioners will be supported by five working people. That is when the crunch will come.
What are the Government proposing to do to make the problem worse? When those extra 5.5 million people retire they will want security and an active life and they will want to know who will care for them, but that is when the Government want to maximise the cost of privatising the pension scheme. My hon. Friend the Member for Birkenhead (Mr. Field) said that the Government have to tackle the problem of the retiring baby boom generation before they can go ahead with the proposals. In the next 40 years, the Government plan to spend £312 billion on privatising the state pension system—about £11 billion a year between 2020 and 2040, which is when the number of pensioners will rise most sharply. That is twice what is spent by the Government today on residential care, and there is not a penny for pensioners or for long-term care over that time.
The message from the Government to today's pensioners and to those who are to retire in the future is clear: "There is nothing for you in this—go away and stop complaining." However, I heard the calls from the right hon. Member for South Norfolk and the hon. Member for Carshalton and Wallington (Mr. Forman) saying that something needs to be done for today's elderly poor. I heard the call from my hon. Friend the Member for Islington, North (Mr. Corbyn); it is no surprise to hear it from him, but it is interesting to hear it from Conservative Members. Despite those calls, the Government's message is that nothing will be done for today's elderly because the Government's priority is to spend the money privatising the state earnings-related pension scheme and the basic pension system. There is no fairness in the plans—it is simply Conservative policy.
Are there any other reasons for the policy? Is the existing state pension scheme about to go bankrupt? According to the Secretary of State for Social Security, the answer to that question is no. In his Politeia lecture he said that SERPS was affordable, so that cannot be the reason. It is the pursuit of dogma without any care for the cost or the consequences.
Of course we must look to future generations. I must look to the interests of my children's children's children because if any benefits materialise, they will be born at the time when those benefits may arise. What sort of pensions will those generations enjoy? As my hon. Friend the Member for Peckham (Ms Harman) so clearly stated, under the Government's proposals, rising generations will receive pensions that are dramatically smaller relative to earnings than those enjoyed by today's pensioners. A man on average earnings who retires in 2040 will receive 18 per cent. of average earnings, and someone who was out of work for 10 years will retire on 15 per cent. of average earnings. Moreover, as we have heard in this debate, there will be no occupational pension scheme to top up those amounts, because the Government's proposals would result in the demise of occupational pensions. It is a pay-more, get-less policy intended to privatise the pension system.
The Secretary of State held out the prospect of higher investment growth. I may be the only hon. Member in the Chamber to have been missold a personal pension, but even the man who sold me my pension did not try to pretend that investments only go up and never come down, as the Government have tried to tell us in the past week. The conduct of the Secretary of State and his colleagues is irresponsible and feeds the very type of behaviour that so blighted the financial industry—behaviour which the industry is now working so hard to put behind it.
In reality, at best the basic part of the Government's scheme will produce no more than the basic state pension; at worst, the taxpayer will pick up the bill. In short, the privatisation of the pension system offers the rising generation only a poor pension and a less certain or insecure future. They will pay more and get less in order to privatise the pension system for narrow ideological reasons.
The Government have had their chance today, but they have failed to make their case: their big idea is a bad idea. Isay that more in sorrow than in anger because, as the hon. Members for Gainsborough and Horncastle and for Cirencester and Tewkesbury (Mr. Clifton-Brown) said, nothing would be better for the United Kingdom than a new consensus on pensions policy. A 20-year-old starting work today will vote in about 20 general elections before they have retired and ultimately no longer need their pension. Their pension planning cannot be chopped and changed every few years. However, one cannot build consensus by badly thought out pre-election stunts which have damaging consequences.
I shall repeat the features of a sound pensions policy—an affordable and sustainable policy—for the future. First, there are clear strengths in funded, invested pensions. Secondly, many people want their savings to be invested in cost-effective pension schemes. The trouble is that too many people who are in work today—not only those in the rising generation—cannot join a cost-effective pension scheme. There are millions of such people today, and they have been ignored for the past 10 years.
The most striking feature in the speech made by the right hon. Member for Sutton Coldfield (Sir N. Fowler) was his lack of shame over misselling. We have been told, "It just sort of happened like that—it was a problem of market growth." However, not the industry but the Government issued advertisements stating that
soon employees will be able to choose their own Personal Pension scheme instead of staying in … an employer's pension scheme.
The Government issued that advertisement, which encouraged misselling and opting out of occupational pension schemes, and they should take responsibility for it.
Over the past 10 years, women involved in typical rebate-only personal pensions have had 30 per cent. or more of their savings eaten up in fees and charges. They have been ignored. What about all those people on low incomes who in the space of a few years gave up their personal pensions? Within the first five years or less, 2 million low-paid people stopped paying into their pension schemes. According to Money Marketing, someone on about £9,000 a year can lose between 50 per cent. and 87 per cent. of their savings if they keep their policy for only five years.
The Government have done nothing to meet the needs of people who would like to be in an approved value-for-money, cost-effective pension scheme which ensures that high minimum standards have been set. They would like a scheme that offers them flexibility so that they are not unfairly penalised if they are out of work for a time, and one that is operated in the interests of its members. They want a scheme that recognises the different types of working lives—with periods in and out of work, changes of job, self-employment—and the demands of balancing work, child care and looking after older members of the family.
Today many people lead lives which make such demands. That is why we have been working with the financial services industry to develop our plans for stakeholder pension schemes—to make value-for-money pensions available to people who cannot join them today, and to create new opportunities to establish individual savings.
I suppose that in one way we should be flattered because in launching basic pension plus the Government have been forced to acknowledge much of the truth of what we have been saying. They talk about controlling charges, approving providers and about benchmarks, but those are merely warm words for tomorrow: there is nothing for today and no one will trust a Government who have failed every test for the past 10 years.
The Government have failed to protect savers from high charges and from misselling, as my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) said. More people who were missold personal pensions have died than have been compensated. The Government have failed to protect the taxpayer because the cost of opting out of SERPS has been far greater than the saving that will be made in coming years.
The right way forward lies in addressing in practical terms the real needs of people in work today, and that is to be found in Labour's approach. The way forward lies in developing value-for-money funded pension schemes and in encouraging savings, but also in retaining choice. The Secretary of State tells us that SERPS is affordable, so why remove that choice? It is still the choice of millions. Let us keep the benchmark that SERPS provides and against which alternatives can be judged.
Let us keep a sensible balance between state and private provision and a fair balance between the needs of today's pensioners and those of tomorrow, not an ideologically driven dogma which means privatising the pension system no matter what the cost and no matter who has to suffer and go without in the coming years. Nor, however, do we want an ideologically driven dogma according to which the state must pay for everything: we need a sensible, practical approach that balances the needs and demands of different generations and the strengths and weaknesses of different types of pension provision and which recognises the needs of today's pensioners who have been so hard hit by the Tories.
We should not be stealing from today in the hope of better things tomorrow, but defending the basic state pension and looking after the needs of the million pensioners who do not get the income support to which they are entitled. The hon. Member for Colchester, North (Mr. Jenkin) said that the safety net catches people, but the problem is that it does not—1 million people are not caught, and we need to do something about that. The sensible approach lies in cutting the fuel bills of pensioners who are paying VAT at 8 per cent. and in helping them to have warm homes. That is Labour's approach.
We would seek consensus, but the Government's approach is not designed to generate consensus. We need a sustainable pensions policy. I do not know whether that is a big idea or merely a good idea, but I am sure that it is the way the people of Britain will want the next Government to govern—in the interests of the retired people of today and of future generations. In a few weeks' time, they will have the opportunity to decide.
This debate has provided a welcome opportunity to consider future pension policy. Parts of the debate have been extremely thoughtful and adorned, if I might say so, by the expertise and wisdom of my right hon. Friends the Members for Sutton Coldfield (Sir N. Fowler) and for South Norfolk (Mr. MacGregor), both of whom speak with the benefit of having wrestled with these issues for many years. Likewise, my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) made a thoughtful contribution about which I shall say a little more in a moment.
We heard contributions from my hon. Friend the Member for Aylesbury (Mr. Lidington) and from my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Clifton-Brown), who did so much in his pamphlet to influence the debate. There were also contributions from my hon. Friends the Members for Gainsborough and Horncastle (Mr. Leigh), for Harrow, West (Mr. Hughes) and for Colchester, North (Mr. Jenkin), all of whom are members of the Select Committee on Social Security, which spent many months considering the matter although its report is not now to be published.
The Opposition Members from whom we heard included the hon. Member for Birkenhead (Mr. Field), who seemed to welcome much of what the Government are proposing, and the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood), who gave our proposals a cautious welcome. The three musketeers of real Labour—the hon. Members for Islington, North (Mr. Corbyn), for Newport, West (Mr. Flynn) and for Hackney, North and Stoke Newington (Ms Abbott)—were predictable, but the hon. Member for Southampton, Itchen (Mr. Denham) was not as predictable as I thought he might be. In the past, he has tried to engage in a sensible and thoughtful debate on these matters, but he seems to have been taking lessons from the hon. Member for Peckham (Ms Harman).
I shall come to some of the hon. Gentleman's points in a moment. To suggest that nothing has been done to accommodate the costs of basic pension plus is nonsense. The Pensions Act 1995 makes savings rising to £13 billion a year. The cost of basic pension plus is a fraction of that. The hon. Gentleman need only think for a moment about the impact on the economy of a huge extra investment through basic pension plus to know that it must strengthen the economy and lead to growth.
My right hon. Friend the Member for Sutton Coldfield mentioned the Government's achievements over many years and the partnership between the private sector, the public sector and the individual that has been built on since 1979. We have enabled more people to contract out of SERPS to money purchase schemes through what are known as the Fowler reforms. Those reforms have led to this country having £650 billion invested in pensions assets. There has been a 60 per cent. rise in pensioners' average incomes.
It is easy to say that there has been nothing in the changes for the poorest pensioners, but that is not true. The bottom 20 per cent. of pensioners have had real-terms increases in their incomes of 28 per cent. In 1979, 31 per cent. of the bottom decile by income in Britain were pensioners. Now, just 7 per cent. of that group are pensioners. That is a tribute to the work of previous Secretaries of State, members of the Treasury team and my right hon. Friend the current Secretary of State, who outlined his plans earlier. Our step-by-step approach has put this country in a better position than almost any other country in the world—certainly far better than any other European country.
We must consider regulation and the advice available to people. An important part of the technical note that came out with basic pension plus highlights those issues in some detail and says that when the working group, made up of representatives of the industry and other concerned bodies, looks at the issues in detail, we must ensure that all aspects are carefully considered and properly regulated. All three members of the Select Committee who have spoken were right to point out that in other countries where a similar approach has been adopted, regulation has been a key feature. The Government are not shy in saying that there will have to be effective regulation and we shall have to consider the issue of proper advice.
Several hon. Members have spoken about misselling. Everybody has agreed that misselling should not have occurred, that it must and will be sorted out and that compensation must and will be paid. It is right that there should be a timetable for settling the issue. My hon. Friend the Economic Secretary is pressing for that. In her evidence to the Treasury Select Committee this week, Colette Bowe said that she is willing to give it quarterly progress reports. The issue is being pushed forward hard.
My right hon. Friend the Member for South Norfolk pointed out that the hon. Member for Itchen was not prepared to address the issue of tax relief for occupational pensions, which is one of the factors that has enabled them to grow. Is the hon. Gentleman prepared to give the House a commitment that there will be no change in tax relief for occupational pensions? The hon. Gentleman does not seem keen to address that issue, although I should be happy to give way to him.
My right hon. Friend the Member for South Norfolk also asked about compulsory annuity purchase schemes and whether those should continue into the future. The income withdrawal arrangements, which allow people to defer until the age of 75, were introduced in 1995. It is therefore right to see how those measures work because they are very much in their infancy. Once that is clear, the rules will have to be reviewed, at which stage we can better judge whether it is right to allow deferral to the age of 75 or whether something more imaginative might be possible. I shall certainly look at all the issues that my right hon. Friend raised with great interest. He has been very much part of the debate on pensions, the future of funding and related issues. The pamphlet that he issued last year was well received by the industry and by all parties in the House as a major contribution to the debate.
The hon. Member for Newport, West said that a major weakness of money purchase schemes was that people were vulnerable to fluctuations in annuity rates. That is one reason why the income withdrawal arrangements are such an important measure, and why they were introduced. We have now extended those arrangements to money purchase schemes. They deal with many of the concerns that the hon. Gentleman raised.
The hon. Member for Roxburgh and Berwickshire said that this all seems precipitous. We have been working on the proposals for a year, going through the issues in detail to ensure that we could produce proposals—[Interruption.] The hon. Member for Peckham is interrupting because she does not like to hear this. We worked solidly for a year, looking at all the issues and flagging up the main issues that needed to be addressed. If he has had an opportunity to read the detailed technical notes, the hon. Member for Roxburgh and Berwickshire will agree that most of the concerns, such as regulation, how the proposals can be funded, and so on, are addressed in detail. I agree with him that this is the starting point and that we need to work towards a Green Paper. We need a working party to work the proposals out so that they not only address the issues but address them correctly.
The hon. Member for Roxburgh and Berwickshire asked how we could be certain that the scheme would lead to an increase in savings. One cannot be certain but, if there is a massive increase in the sums being invested, it is likely to lead to such an increase in savings. Many commentators would say that that was almost inevitable, but the hon. Gentleman is right to say that it is not certain. He asked why charges would be lower. At present, the main elements of charges are acquisition costs, persuading people to save and fact finding to ensure that the product in question is better than another. Those exercises are not needed in basic pension plus because those comparisons are not to be made. The basic cost of the scheme will be that of managing the fund, so it is inevitable that the charges will be lower. If, for some reason, the industry was not prepared to volunteer the right levels of costing, the Government would not hesitate to cap the charges to ensure that the beneficiaries had a reasonable deal.
Much has been said today about the National Association of Pension Funds. Listening to Labour Members, one would never have thought that the first line of that body's parliamentary briefing says how much it welcomes those proposals.
The Minister should turn over the page.
I do not need to turn over the page. I had a meeting with the association last night to discuss those issues. It wants to be involved in the consultation because it has thoughts about the tax arrangements. We welcome that. We had a long and constructive relationship with the NAPF during the passage of the Pensions Bill and before that, and we know that it can contribute to making the proposals work. We therefore welcome its input into the debate.
The hon. Member for Roxburgh and Berwickshire also asked about better-off pensioners not paying tax. Contributions made at the beginning have been taxed. They are taxed at that end and, concerning the new proposals, that would be there. [Interruption.] The hon. Member for Itchen may laugh, but it would be there.
My hon. Friend the Member for Carshalton and Wallington raised an issue about how we help the wartime generation—the poorest pensioners in the oldest group. It is worth pointing out that many Opposition Members raise such issues but forget that older pensioners are in difficulty because of the high levels of inflation in the 1970s. People who had saved all their lives were suddenly subjected to average inflation of 15 per cent. a year. We often hear far too much from Opposition politicians about such issues.
The Government have a good record on the poorer pensioners. I cited some of the figures earlier. In addition, since 1988, it has been possible to target help on pensioners who are most in need—an extra £1.2 billion a year. The oldest pensioners receive premiums in income support, which for those aged over 80 and for couples is £38 a week. I shall obviously continue to debate the matter with my hon. Friend the Member for Carshalton and Wallington, who I know takes a different view. Targeting is a way of ensuring that those who really need the money get it.
Most of the points made by the three musketeers—the hon. Members for Hackney, North and Stoke Newington, for Islington, North and for Newport, West—have been well covered in the remarks that I have already made or in contributions from my hon. Friends.
My hon. Friend the Member for Aylesbury asked whether it would be possible to extend basic pension plus up the age range. With the growth in the economy that could result from the extra investment, there could be scope for that. If finances allowed, the Government would like the scheme to operate up through the age range. Initially, however, it is right to propose something that is fixed, certain and covers a younger age group. Certainly over time, extending it could be possible.
Other hon. Friends made various points about regulation, and it is right to take that into account. We must have a proper regulatory regime. I certainly welcomed the news conveyed by my hon. Friend the Member for Colchester, North, with his knowledge of the industry, that pension misselling is not now occurring. I agree with him that the matter is important. One of the benefits of funding is transparency, which is not otherwise available.
The strengths of basic pension plus are that the money is invested, there is a fund, it is a personalised account and there is a guarantee to it. It gives the opportunity to build pensions awareness for the future, with each individual being able to save on top of the basic pension to meet their own expectations of retirement.
I appreciate the thoughtful way in which the Minister is replying to the debate, but I am still very nervous and sceptical about the position of part-time workers and the low-paid under the plans. Will he take a moment or two of the time left to address that?
The whole purpose of having the basic pension guarantee is to be able to reflect the sort of national insurance credits that we have at the moment to help people who are out of work, disabled or are carers. The system of home responsibilities protection will also be replicated in the new scheme. Turning from the basic pension element of the package, the 5 per cent. of earnings-related contributions will also remain while people work and will build as a fund with a yield over the years. I would argue that that protects all the interests of the groups that the hon. Gentleman mentioned. Nobody would be disadvantaged in any way. Indeed, many people in those groups may be considerably better off.
I will end with three points about Labour's plans. First, Labour will not guarantee to uprate the basic state pension in line with prices. Whatever the hon. Member for Peckham says, the shadow Chancellor has made it clear that it cannot be assumed that totals will be automatically adjusted upwards in line with inflation. Secondly, Labour would cut the basic pension by £20 a week. Its plan is to equalise the state pension at 60 with a reduced pension. The hon. Lady cannot get away with it. She used the words:
we anticipate … a lower level of basic state pension.
She said that she would consult the Government Actuary about how much the cut would be. We did so, and it would be £20 a week. Thirdly, Labour's plans for pension entitlement would mean a means test for everybody before they received the state pension entitlement. Its plans would be a disincentive for saving, because the more people saved, the less state pension they would receive.
Those ideas may have come from Australia, because the hon. Member for Islington, South and Finsbury (Mr. Smith) visited that country to get some ideas. It is
wrong to say that stakeholder pensions are no threat. What is a stakeholder? It is Labour code for a trade union. John Monks said so in The Times on 17 January 1996. He answered a criticism that stakeholding was about the unions, because it will help them to rebuild their positions, by saying yes. He went on:
Independent unions are the means for individuals to … realise their stakes".
The right hon. Member for Sedgefield (Mr. Blair) went to Singapore to examine its scheme, and the hon. Member for Islington, South and Finsbury went to Australia. The schemes they praised were industrywide and operated by trade unions and employers. The investments were influenced by trade unions. Most people in this country would prefer British pensions to be run by the private sector providers, who have put £650 billion of assets aside, than by sticky-fingered trade union barons.
We have had a good debate. The Government's policies will continue to mean that pensioners in the future will have a better income in retirement and a better life.