New clause 5 - Report to Parliament (No.1)
Armed Forces (Pensions and Compensation) Bill
3:30 pm
Mr Desmond Swayne (New Forest West, Conservative)
You are right, Mr. Griffiths. I was tempted down that path.
One way of devising a strategy to generate the resources for a funded scheme would be to move to a proper contributory scheme and abandon the current fiction in which an abatement of pay is used to take account of the benefits of the scheme. To give members of the armed forces ownership of their scheme through a proper contributory system would not only potentially generate the funding for a fully or partially funded scheme but have significant additional benefits for the scheme's management.
The argument for moving to a fully or partially funded scheme rests principally on the superior growth rate that equities have experienced during recorded history. It would also arguably take advantage of the Government's superior covenant for borrowing. The one thing that the Government can do better than anything else is borrow. They can do it more efficiently, more effectively and at lower cost, which is why I have always been somewhat suspicious of the private finance initiative and thought that it had more to do with the Maastricht convergence criteria than principles of sound public finance. However, I shall not go any further down that road.
A significant benefit can be drawn by separating out pension obligations from the balance sheet rather than confusing them with the current expenditure on the armed forces. It would also provide us with an opportunity to create a funded scheme for new service entrants, which, like our own scheme, might be significantly more generous at an affordable rate in the future. There are significant arguments against that, and with the greater potential growth in equities comes a significantly greater risk attached to the scheme. The Minister will have to examine those consequences in his report.
Equally, however, there are ways of offsetting that risk. I was interested to hear about a recent meeting sponsored by the Centre for Economic Policy Research and the Royal Economic Society on 3 February, entitled ''Defusing the Pensions Timebomb: What are the Policy Options?'' Professor David Miles of Imperial college fell somewhere in the middle of the arguments. On one side are those people whom I would describe as the counsellors of despair. They say that the system is far too expensive and that we cannot pay for it. Certainly, one problem is that people are trying to pay in one generation for two schemes, as they have to meet their existing obligations while starting to fund for the future. The argument
runs that given that the existing generation are voters, none of them will stand for it.
One the other side are the evangelists of the Adam Smith Institute, who say that the growth in equities is so great that it will more than pay the costs of the entire transition in one generation. Professor David Miles is sceptical about some projections of the benefits of swiftly moving to a fully funded scheme, although he accepts the long-term benefits of funded schemes.
When the Minister is compiling his report during the next two years, he should read the report of the recent meeting. In it, Professor David Miles considers the possibility of an insurance scheme that would run alongside the funded scheme, and its affordability, which would take much of the risk out of the equation.
The Minister will have to consider a number of possibilities when compiling his report. One is that the Government could reduce the burden of liability that they have built up by issuing Government stock and investing the proceeds in equities. The difference between the interest payable on Government stock and the equity returns would reduce the scale of the problem. Equally, they could borrow to purchase annuities or corporate debt and use the interest rate difference to reduce the cost of current pension benefits. A number of questions arise as a consequence of any thinking along those lines. Could the Government realistically borrow so much, and how much are we talking about? Would that have an impact on the markets—perhaps driving up interest rates and making the whole scheme unaffordable? What would be the impact on the financial markets? Could we devise ways of making such a change more manageable, perhaps taking it in stages? Would the markets simply take it as a one-off and absorb it accordingly, as a restructuring exercise?
All those big issues must be dealt with, but they are part of a current debate. The Adam Smith Institute is working on it now. Policy institutes and think-tanks are working on it, so it is part of a current and important debate. I return to where I began: if the Government are serious about their targets for 2050, they must go through the process of evaluating the measure. It is important to have answers to my questions. For that reason, we have given a reasonable amount of time in the new clause—two years—for the Government to go away, reconsider and report. This important issue must be fully examined if we are to come anywhere near the very desirable target that the Government have set themselves.