My Lords, I declare an interest as a pension fund investment manager for the past 26 years. I duck to avoid a brickbat from the noble Lord, Lord Haskel, and others who believe that the crisis is the fault of pension fund investment managers.
I thank the noble Lord, Lord Fowler, for introducing the debate. I agreed very much with his trenchant and perceptive introduction. I also agree with him that the Green Paper is a lost opportunity and also, indeed, that we need more radical solutions.
The debate has been dominated by speakers from the Conservative Benches. I believe that 10 out of the 16 speakers so far sit on the Conservative Benches. I agree with the analysis of the problem of those who have spoken from those Benches but I do not think that we have heard very much in the way of radical solutions. However, I pay tribute to the noble Baronesses, Lady Greengross and Lady Turner, to the noble Lords, Lord Naseby and Lord Vinson, who made radical suggestions, and in particular to those who are prepared to grasp the nettle of compulsion. We on these Benches believe that that is essential.
The International Monetary Fund, in its annual report on the UK economy issued this week, put its finger on the pensions dilemma facing this country. With its usual cautious wording it stated:
"Directors observed that the strength of the United Kingdom's underlying fiscal position depends importantly on containing future public pension obligations, which in turn depends on adequate individual retirement saving".
I am afraid that if you believe the British are doing that—making adequate individual retirement savings—you will believe anything.
What the language of the IMF means in plain English is that we in this country have got away with a rotten basic state pension for many years because most employees have been covered by generous and secure occupational pension schemes, certainly throughout the public sector, the former nationalised industries and widely in the private sector, certainly in larger companies.
But now we can feel the ground moving under our feet on private pensions. As the noble Lord, Lord Alexander, and others pointed out, this week alone we have seen Rolls Royce report a pension fund deficit equal to four times its annual profits. The leading City investment bankers, Credit Suisse, First Boston and Dresdner Kleinwort Wasserstein have estimated the current pension fund deficit of the FTSE 100 companies at between £70 billion and £100 billion. As we have heard, company after company are closing defined benefit schemes to new members, making members pay more for worse benefits and, as the noble Lord, Lord Freeman, pointed out, having to dig deep into their profits to keep schemes solvent.
As noble Lords pointed out, many of the companies now reporting massive pension fund deficits were only too happy for many years to boost their profits in the fat times by taking contribution holidays just when they could have afforded to pay more into their funds to protect their pension schemes against lean times like the present. In fact one company, Associated British Ports, last week closed its final salary pension scheme to new employees while it is still on a contribution holiday. The occupational pension promise in this country depends on either the company or the pension fund staying solvent. If they both go down at the same time, there really is nowhere at present for pensions and scheme members to go.
With occupational pension funds under such pressure, protection for members and pensioners when schemes wind up moves right to the top of the agenda. The noble Lord, Lord Fowler, made the welcome suggestion that we should seek consensus where possible. We on these Benches, and my colleagues in another place, welcome the emphasis in the Green Paper on the need for sharing assets fairly when pension schemes are forced to wind up. We are happy to work with the Government to get this much needed reform agreed and enacted in the very near future. Where there is a significant shortfall in a fund on wind-up, we believe that pensioners and scheme members with modest entitlements should be first in the queue. Their priority payments might be limited to a multiple of the basic state pension rather than, as at present, giving all pensioners, however well off, the biggest slice of the cake, leaving only crumbs in some cases for long serving employees about to retire.
Arrangements of that sort, however, only share the misery more fairly when a scheme winds up. They do not provide any more money for its members in total. We offer to work with the Government to see whether it might be possible to establish some form of national reinsurance or indemnity scheme to rescue pension schemes which become insolvent for reasons other than dishonesty by insolvent employers, which is covered already.
I am bound to say that such a scheme would be very difficult. It will certainly be a non-runner unless the Treasury is prepared to stand behind any industry-wide scheme as the underwriter of last resort. That could be done on the model of the Pool Re scheme, the mechanism by which owners of commercial buildings are able to obtain cover against terrorist risks which would otherwise be uninsurable. Of course, the problem is moral hazard, as in banking. Well funded and safe pension schemes backed by strong companies will be reluctant to pay a levy to support weaker schemes, particularly if that might encourage some schemes to sail close to the wind and not face up to the need to make payments. With DB schemes under so much pressure already, we need to be very careful before loading any more costs or bureaucracy on to them.
Many examples have been discussed in the House over the past year, in which the Treasury has been only too happy to toss letters of comfort and guarantees of contingent liabilities around like confetti to support PFI and PPP contracts, such as in the bailing out of British Energy and the case of Network Rail. The Treasury will have to decide whether the plight of British pension funds demands equal commitment.
On those two issues, we would be happy to work with the Government. However, they must go back to the drawing board on their proposals for a lifetime limit on pension savings by better-off employees. I refer to the £1.4 million cap. The Treasury document issued with the Green Paper gave a grossly misleading picture of how many people may be affected by such a cap. It states that only 5,000 people now have personal pension schemes worth more than £1.4 million. So what? The £1.4 million limit, with a 60 per cent effective tax rate for those who exceed it, will bite just as hard on members of final salary pension schemes, whose pension rights will be given a capital value when they retire.
The Treasury document states that 90,000 people earn more than £200,000 a year. I shall take the topical example of the noble and learned Lord the Lord Chancellor, who earns £180,000 a year and is entitled to a pension of £90,000. I have been officially told in an Answer that the capital value of his pension rights is officially, "at least £2 million". A typical final salary scheme pays a pension of at least half the final salary, so most of those 90,000 people would be caught by the £1.4 million cap. I estimate that, typically, members of a final salary scheme retiring on annual salaries down to no more than £120,000, and in some cases down to £100,000, would be caught by the cap if it were in force.
That is a much wider swathe of British management and the professions than one would presume from the government documents. I would be delighted if the Minister cared to analyse my estimates further and write to me stating how many people the Government believe would be caught. Quite a bit more of upper-middle England will be caught than noble Lords might believe.
The other problem with the lifetime cap is that it discourages pension saving by anyone who may be caught by it. The limit should be at the front end of saving for a pension, not the back. The Government's present proposals will force savers to take a massive gamble with their pensions. All professional advice is that one should start saving early, but if people do that in a relatively well-paid job 20 or 30 years before they plan to retire, how can they know whether their pension rights will grow to £1 million, £2 million or even more in real terms by the time they retire? Stock market returns fluctuate greatly.
The principle of restrictions on high earners contributing to their pension funds is fine. We do not oppose that. However, to be fair and transparent, a lifetime limit of £1.4 million or any other level must be calculated not on an unpredictable capital value of pension rights on a single day many years away but on the cumulative total value of contributions that have built up an individual's pension rights over the years, including employer's contributions.
Many speakers today, starting with the noble Lord, Lord Fowler, referred to a pensions crisis, as I did myself in a debate last May. I do not think that there is any point pursuing that question further except to ask the Minister gently, if this is not a pensions crisis, what one would feel like.
The future for pensions in this country is sombre. We have a poor basic state pension, right at the bottom of the European league, topped up by a mishmash of means-tested benefits. Above that, a tried and tested structure of high quality occupational pension schemes almost without parallel in the world is cracking before our eyes. We on these Benches will work with the Government to stop the rot, but the hour is late and the problems grave.