Pensions

HC Deb 09 July 1997 vol 297 cc953-1042

Madam Speaker

I have selected the amendment in the name of the Prime Minister.

4.27 pm

Mr. Peter Lilley (Hitchin and Harpenden)

I beg to move,

That this House condemns the Government's assault on pension funds through the removal of tax relief on dividend income of pension funds in direct betrayal of their election pledges; agrees with the National Association of Pension Funds that this is the biggest attack on funded pension provision since the War; believes the brunt of the cost of the Windfall Tax will also fall on pension funds; warns members of occupational schemes that they and their employers will have to increase contributions to maintain benefits; further warns personal pension holders that they will need to pay higher premiums or suffer significantly lower pensions; believes the Government is guilty of mis-selling personal pensions if it refuses to spell out how much this tax change will cost pension holders; demands that the Government increases the contracted out rebate to avoid large-scale contracting back into SERPS; deplores the total absence of consultation about these far-reaching changes in company and pension taxation which has resulted in shoddy, hastily prepared and ill-thought-out proposals; and calls for the Government to withdraw these measures until it has prepared a Green Paper on future reform of company taxation and its implications for pension provision. One of the most daunting challenges facing every developed country is that of providing decent pensions for an aging population. When the welfare state was set up, there were five working people contributing to support every single pensioner. By 2030, for every five working people, there will be three pensioners—three times as many pensions to provide.

There are only two ways of financing pensions: by taxes and charges, or by savings and investment. Continental countries rely almost exclusively on the tax system to finance their pension provision. They use this year's taxes to pay for this year's pensions of people who have already retired. It is pay-as-you-go. As a result, they face increasingly crippling burdens of taxation, as more and more pensioners are supported by fewer and fewer people of working age. When the Minister for Welfare Reform was Chairman of the Select Committee on Social Security, he highlighted the problem of unfunded continental pension liabilities, so the House is well aware of that.

By contrast, in this country we have encouraged people to save and invest for the future. We have enabled them to opt out of the state earnings-related pension scheme, and given them national insurance rebates to do so. When they opt out of the state scheme, their contributions are genuinely saved and invested; they go into industry and generate the profits and dividends to pay for people's pensions in 10, 20 or 30 years' time—without imposing a crippling burden of tax on our economy.

Mr. Michael Clapham (Barnsley, West and Penistone)

The right hon. Gentleman will be aware that two years ago, Coopers and Lybrand carried out a study which concluded that 2.4 million people on low incomes had been misled, and that their contracting out of SERPS would not pay for the administration costs of the personal pension schemes that they had entered. Therefore, what he has just said is not quite correct.

Mr. Lilley

I am sure that the hon. Gentleman will agree that the misselling of pensions in the past by the private sector is no justification for the misselling of pensions in the future by the public sector. Measures that reduce the return to pensions, relative to costs, cannot be an improvement.

The fact is that we have built up a huge flow of investment. As a result, we have accumulated about £650 billion of investment to pay for present and future pensions. That is not just more than any other country in Europe; it is more than all the other EC countries put together have bothered to save and invest for their future pension liabilities. Above all, it has been Conservative Government policies, encouraging savings and investment, which have put Britain in that strong position.

Kali Mountford (Colne Valley)

A constituent of mine did exactly as you suggest, but lost nearly £7,000 of his savings. He used to be a Tory voter, but he was so disappointed by what happened with his personal pension plan that he reverted to the Labour party, thank goodness. What would you say to my constituent, who has lost such a massive sum investing in the very way that you describe?

Mr. Deputy Speaker (Sir Alan Haselhurst)

Order. The only "you" in the Chamber at the moment is me, not the right hon. Member for Hitchin and Harpenden (Mr. Lilley).

Kali Mountford

I apologise.

Mr. Lilley

I should be quite happy for you to answer that question, Mr. Deputy Speaker. Still, I shall do my best. I would advise the hon. Lady to ensure that her constituent takes up his grievance with the regulators, who have given an assurance that no one will lose, and everyone will be compensated for misselling.

Sir Nicholas Lyell (North-East Bedfordshire)

Is it not correct that the changes to advance corporation tax made by the Government in the Budget will remove, from a 30-year-old man building up a savings pension fund, not the £7,000 that the hon. Lady's constituent lost, but about £50,000 over his lifetime of work?

Mr. Lilley

My right hon. and learned Friend is correct. I hope that the hon. Lady will write to her constituent to point out the damage being done to all such people by the actions of Labour Ministers. Meanwhile, I am sure that she will join us in the Lobby tonight.

Mr. John Butterfill (Bournemouth, West)

Is it not also true that the changes that the Government propose to make to ACT have been viewed by independent observers as making it more difficult to complete the pensions review and as delaying the payment of compensation to those entitled to it?

Mr. Lilley

That is also correct.

As I said, the great achievement of building up this huge volume of pension funds, which enjoyed bipartisan support in the past, was primarily due to Conservative Government policies. To be fair to the Labour party, Baroness Castle's reforms also played a part. As far as I am aware, no Labour Government before this one ever tried to penalise or discourage saving in pension funds. Therefore, the Budget changes represent a breach with that bipartisan consensus. The Budget targets pension funds for many billions of pounds a year, which will reduce investment, penalise long-term savers and permanently subject pensioners to double taxation on the income that they put into the funds.

We should not penalise pensions provision. We need more pensions provision and savings, not less, which is why earlier this year the Conservative Government announced plans to build on our success by ensuring that, in future, every young person entering the labour force would have his or her own pension plan, funded by rebates from the national insurance system, to provide decent, secure, guaranteed funded pensions.

Basic pension plus involved the Conservative Government putting billions of pounds into pension funds; the Labour Government's Budget involves taking billions of pounds out of pension funds. The Labour party calculated that the accumulated value of the rebates that we proposed over 44 years—that is a long period—would total some £150 billion. On the same basis, it proposes over that period to take £230 billion out of pension funds and use it for other purposes, which only Labour Governments can devise.

There is a consensus that we should encourage more long-term saving. It is sad that, for short-term political reasons, the Government have decided permanently to discourage and penalise private pension provision, and it is no surprise that the National Association of Pension Funds described the Budget as the biggest attack on funded pension provision since the war.

Mr. Ivor Caplin (Hove)

The right hon. Gentleman has not yet responded to the question about the misselling of pensions. Ten years have elapsed since personal pensions were first sold, yet fewer than 12,000 people, including my constituents, have been compensated and more than 500,000 remain uncompensated. What did the right hon. Gentleman do about the misselling of pensions when he was Secretary of State for Social Security?

Mr. Lilley

Like other hon. Members, the hon. Gentleman raises an important point. I intend to come to it in the order that I choose; I shall respond directly to his point.

Mr. Dale Campbell-Savours (Workington)

Will the right hon. Gentleman give way on basic pensions?

Mr. Lilley

I shall give way to another supporter of my pension scheme, along with the Minister for Welfare Reform.

Mr. Campbell-Savours

I want to comment on that very point. Conservatives in my constituency blame the former Secretary of State personally for the disaster of recommending that the old-age pension should be privatized. They have read the literature and believe Labour's accusation that the right hon. Gentleman intended to privatise the old-age pension. Does he now have enough conscience to come to the Dispatch Box and apologise to tens of thousands of Conservative party workers throughout the country who blame him?

Mr. Lilley

I am happy to say that, although we suffered a big swing against us generally throughout the country, there was almost no swing against us among pensioners, except possibly in the hon. Gentleman's constituency. I advise him to ask his constituents whether they would prefer a state pension based simply on the promise of future payment from future tax revenues by a Labour Government, not backed by investment funds, or a basic pension guaranteed by the Government and backed by investment funds. I know which I prefer, and which any sensible person would prefer.

In any circumstances, a massive new tax charge on pension funds would be deplorable, but from a party that gave the electorate a clear pledge that it would not raise taxes, it is a betrayal of trust. Before the election, the then Leader of the Opposition told Birmingham business men: We have no plans to increase tax at all. The then shadow Chancellor said on television on 8 April: We've got no public spending commitments that require extra taxes.? The Government then come along and raise £5 billion a year—over and above the windfall tax—by imposing 17 new tax increases, by far the biggest of which falls on pension funds. That is a betrayal of trust on a scale that the Government ought to find deplorable.

I shall first examine the direct impact of the Government's changes. Secondly, I shall consider the arguments deployed by the Government to defend their claim that the measure will not affect pensioners. In the process of that I shall deal with the issue of misselling, which hon. Members have raised, and finally I shall examine the lack of consultation about those far-reaching changes, which is a scandal.

The Government hope to raise the very large sums that they propose to extract from the change in advance corporation tax credits without too much political pain, because the money is to be extracted at one remove from the ultimate losers, and the system is so complex that scarcely anyone understands what is happening.

Mr. George Turner (North-West Norfolk)

It is too complicated.

Mr. Lilley

We are discussing the Government?s measures, and I am inclined to agree with the hon. Gentleman.

In the course of my professional life I have had to study the ACT system in some detail over many years, and on at least three occasions I have understood it, but it is difficult to sustain that understanding for any length of time.

For the first time, a Government propose to tax the income generated from long-term savings. In effect the Government are imposing income tax on pensioners' dividends, which they previously enjoyed free of basic-rate tax. Previous Governments of both complexions have thought it right to encourage and reward long-term savers by ensuring that they paid tax once and once only on the income that they saved, and exempting at least from the basic rate of tax any investment income generated by that long-term saving.

My right hon. Friend the then Chancellor, Norman Lamont, adhered to that rule when he reduced the relief from the old standard rate of 25p in the pound to the new target rate of 20p in the pound. By abolishing that relief entirely—by reducing the credit from 20 to zero—the Government are in effect imposing tax at the standard rate of 20 per cent. on income generated by long-term savings.

That is a clear breach of Labour's promise not to increase the rate of tax on anyone's income, because it falls on the dividend income accruing to pensioners. People do not immediately see it that way, because that income is building up in their pension funds and PEPs.

The changes that have been made affect 10 million to 20 million people. In due course, the consequence of that tax burden will filter through to them in the form of higher contributions or lower pensions. Anyone whose pension fund was previously generating dividends worth £100 in a given period will now get only £80. People will have to increase their investment by 25 per cent. to get the same net income.

The effect on the value of the final pension is not quite as ferocious, because some of the final pension that people receive from their fund is repayment of their premiums, some of the growth might be capital gains and some of their investments might not be made in equities.

Taking those factors into account, the Association of Consulting Actuaries calculates that a 30-year-old person who was previously investing £100 a month will now need to invest £112 a month to achieve the same final pension as was previously expected. He or she will suffer a 12 per cent. penalty as a result of the Budget.

To most people it is self-evident that, if the Government extract several billion pounds a year from pension funds, those funds will sooner or later have to find several billion pounds a year more from their contributors or pay out smaller benefits. If the Government are £5 billion a year better off, it follows that the funds must be £5 billion a year worse off.

Astonishingly enough, the Government's response to that charge is complete denial. They claim that pension funds, pensioners and investments will not be harmed by the change. It was embarrassing enough watching the Chief Secretary to the Treasury on "Newsnight" being skewered by Kirsty Wark. He seemed unprepared for her simple question—how can the pension funds invest as much as before, if they have to pay £5 billion extra to the Government? However, the subsequent comments by the Financial Secretary to the Treasury in the House made the Chief Secretary look perfectly reasonable and thoroughly on top of his brief. She made the amazing claim: The measure is good for pensions and pensioners, not bad for them … People should understand that our tax reforms Will benefit pension funds.?—[Official Report, 3 July 1997; Vol. 297, c. 507.] Anyone who believes that must also believe that water flows uphill—or, if one argues hard enough, that it will change direction and flow vertically. I challenge any Government Member to defend the Financial Secretary's statement that the reforms will benefit pension funds.

Mr. Gareth Thomas (Clwyd, West)

rose—

Mr. Lilley

I shall give way to the hon. Gentleman if he intends to defend the Financial Secretary.

Mr. Thomas

On the question of tax burdens on pension funds—

Mr. Lilley

The hon. Gentleman refuses to defend the Financial Secretary—and I can understand why. I shall give way to him later. It is only fair that the Financial Secretary should receive some defence from the Government Benches.

Mr. Geraint Davies (Croydon, Central)

rose—

Mr. Lilley

Will the hon. Gentleman defend the Financial Secretary's statement that the reforms will benefit pension funds? I shall give way if he will do so.

Mr. Davies

Does the right hon. Gentleman accept that the actuarial practices to which he referred that evaluate pension funds on the basis of dividend flows alone are quaint and eccentric? Growth prospects are employed in the evaluation of pension funds and minimum funding requirements, in terms of future values and so on, in other countries and for other financial products, such as unit trusts. The wider Budget package offers more investment in Britain and in British industry which, in the medium term, will be good for pensions, good for pension values and good for pensioners. So the right hon. Gentleman's claims are false.

Mr. Lilley

That effort should win the Mandelson prize for loyalty beyond the call of duty. The hon. Gentleman claims that actuaries base their practices on old-fashioned systems—such as the laws of arithmetic. If we subtract £5 billion from a fund, there is £5 billion less: that is old-fashioned arithmetic. I agree that it is out of date and does not accord with new Labour thinking, but that is how it has been done until now.

When we study Hansard, perhaps we shall realise that the hon. Gentleman's remarks contained kernels of wisdom and that somehow the pension funds will not suffer because, according to new actuarial analysis, everything will be all right. Therefore, I invite him to address another question that the Financial Secretary could not answer. If pension funds will not be hurt by the measure, why is it necessary to protect charities and personal equity plans from its damaging effects?

Mr. Davies

It is very kind of the right hon. Gentleman to ask me these questions—I did not realise that I was giving the speech. As I have knowledge in this area, I shall respond. My point is that there is no congruence between money not given in dividend flow and the eventual impact on pension value, because we have not taken into account the impact on equity growth due to the wider economic environment that the Budget creates. The Government have excluded charities not in order to neutralise the effects, but in order to give them the extra benefit that they deserve so much.

Mr. Lilley

Roughly interpreted, that means that funds will grow faster if we take away £5 billion—so imagine how fast they will grow if we take away £10 billion.

Mr. John Greenway (Ryedale)

Is not the real point rather different? The measure will drive pension fund investment managers away from investing in equities to investing in gilts. As a consequence, the gilts yield will be reduced, as will fund values. It is a question not just of the £5 billion, but of the effect that the measure will have on the financial markets, which will reduce yield.

Mr. Lilley

I am sure that my hon. Friend, who is an expert in such matters, is correct. It is part of the law that I adumbrated in response to the Budget: the further removed the tax charge is from the taxpayer, the more damage it does as it works its way through the economy. My hon. Friend has given an example of that damage.

As well as simply denying that taking money out of pension funds has any adverse effect, the Government's second defence is that many of the funds are in surplus. The simple fact is that no personal pension funds or money purchase funds are in surplus. By definition, there is no such thing as a surplus for those schemes. The impact of higher taxes will feed straight through to them. The changes will affect some £170 billion of such funds and 6 million people, particularly the self-employed who have been building up such a fund over a long period, all of whom will have to pay in higher contributions in future or receive smaller pensions.

Before the end of the debate, I should like to hear from the Government whether they agree with the Association of Consulting Actuaries that, for a 30-year-old paying in £100 a week, 12 per cent. extra is required to achieve the same pension that he had anticipated. Has the Treasury come up with any of the answers to the questions that I asked last Thursday? The Chief Secretary is present. I do not know whether he is here to listen. Perhaps I may briefly interrupt his conversation. Will he pay attention for a moment? Last Thursday, I asked him a series of questions during the Budget debate. He failed to answer them. We have given him extra time from our own. May we have an answer to those questions today?

I remind the Chief Secretary what the questions were. By how much will the contracting-out rebate have to be raised to prevent people being best advised to contract into SERPS again? How much will that increase cost the Exchequer? Was that cost included in the calculations in the Red Book and netted off against the £5.4 billion revenues, which will, allegedly, be raised by the tax? If there is to be no increase in the rebate, how many people who contribute to personal pensions will be best advised to opt back into SERPS, and how much will that cost in the long term? Will the Government advise those 6 million people of the impact that their tax changes are having on pensions that they have already taken out? Will not the Government be guilty of misselling if they fail to do so?

I now deal with the point about private firms misselling pensions, an act that I utterly deplore. I entirely support and endorse the measures that were taken by the former Economic Secretary, Angela Knight, and her successor, who was here until a moment ago, in trying to speed up the resolution of the problem. Past misselling by private individuals cannot justify future misselling by the state. The measure that the Government are introducing will have the effect of slowing down the resolution of the misselling. Both the Association of British Insurers and the National Association of Pension Funds have agreed that it will add further months of delay to the process of calculating and sorting out past misselling, because all the calculations will have to be redone, to take into account the impact that the measure will have on the costs of reimbursing people.

If the Government believe what they say, they believe that there is no impact, so there is no change in the calculations, so they can order the companies to go ahead and give compensation at the lower level that they had intended and not at the higher level that they now believe is necessary as a result of the tax changes.

Ms Sally Keeble (Northampton, North)

rose—

Mr. Lilley

I give way to the hon. Lady. We shall see whether she wants a higher or a lower level of compensation.

Ms Keeble

The right hon. Gentleman made a point about the advice that the Government might provide to pensioners, but could it could be any worse than the advice that the previous Government provided? In the advertisements, they said: Is the pension you're going to get the one you'd choose? and The right pension for you is now yours by right". Or how about this one?

The old pension rules made moving around a wee bit tricky". Rather a lot of people who took out private pensions will find that that advice was not very good. The right hon. Gentleman also mentioned that many pensioners did not vote Labour, but one place where they did was in Enfield, Southgate, which was the constituency of his former colleague who was responsible for those advertisements, Michael Portillo.

Mr. Lilley

If the hon. Lady is merely making a debating point, we can move on. If she is making a serious—[Interruption.] Well, a petty-minded debating point. If, as I judge, however, she is making a serious point, she will deplore any future misselling as she deplored any that occurred 10 years ago. Surely two wrongs do not make a right. If she thinks that what occurred 10 years ago was wrong, how does she think that it is correct for the Government to make changes without acknowledging their impact on the 6 million who already have personal pensions? That is, unless she is a Labour Member who thinks that her party can do no wrong.

The effect of the tax changes on personal pensions and other money purchase schemes is indisputable. It is true, however, as the Government have said, that many defined benefit occupational schemes are in surplus. To suggest that taking money out of such schemes, which happen to be in surplus, is harmless, let alone beneficial as the Financial Secretary says, is what might be called the classic Robert Maxwell defence. After all, Robert Maxwell made a habit, quite openly, before he moved on to straight theft, of stripping out surpluses from pension funds.

Mr. Caplin

When was that?

Mr. Lilley

It was when the Economic Secretary was working for him. It was when Alastair Campbell was working for him. It was when Lord Donoughue, now a Minister, was working for him. That is when it was. It was all out in public. They were his henchman, apologist and fearless reporter, but not necessarily in that order.

It is perhaps not surprising that a Government composed of Robert Maxwell's cronies should resort to his old excuses. I do not believe in guilt by association, however, and I would have expected them to be rather uncomfortable to find themselves in a Government who are doing on a huge scale what their old employer did rather more modestly. But perhaps they believe that surpluses do not belong to the pensioners. If they do, they should acquaint themselves with the view of the right hon. Member for Glasgow, Anniesland (Mr. Dewar), the Secretary of State for Scotland, who thinks otherwise.

We had long debates on pensions surpluses during consideration of the Pensions Bill in Committee in 1995. The right hon. Member for Anniesland, who then represented Garscadden, said: I do not accept that simplistic argument"— that the surplus belongs to the employer. Most pension schemes are contributory because, if the surplus has evolved from real-term growth of assets over a period of time, a contribution to those assets has been made by the employees … morally and logically … those employees should benefit from and have a stake in any surplus."—[Official Report, Standing Committee D, 18 May 1995: c. 255.] So surpluses should not be taken away by Governments any more than, in the right hon. Gentleman's view, they should be taken away by employers.

Liz Blackman (Erewash)

Will the right hon. Gentleman explain to the House why half the major pension schemes took tax holidays by reducing either partially or fully their contributions?

Mr. Lilley

That was because of the splendid performance of industry, companies' profits and the stock market over the past 18 years under Conservative Governments. Many pension funds have found that their investments have grown more rapidly than they anticipated. They therefore built up a surplus. They had the opportunity either to take a contribution holiday or to increase benefits for their employees. A mixture of those two options has been put into effect by different schemes.

Mr. Geraint Davies

rose—

Mr. Lilley

The hon. Gentleman has been given enough rope to hang himself on two previous occasions. I think that I would be cruel to give way to him again, and I do not propose to do so.

Mr. Butterfill

Will my right hon. Friend give way?

Mr. Lilley

On the application of the rule of frequency but not of hanging, perhaps I should not give way to my hon. Friend unless he insists.

Mr. Butterfill

I should be grateful.

Mr. Lilley

Very well.

Mr. Butterfill

is it not true that even funds that are in surplus—for example, the Sainsbury fund, which has a £230 million surplus in its pension fund—calculate that the effect of the Government's proposed changes will be to turn their surpluses into deficits? Sainsbury calculates that it will face a deficit of £30 million and that it will have to double its contributions as a result.

Mr. Lilley

That is absolutely true. As a result of the change to the tax treatment of pensions, many companies that were previously in surplus no longer will be. Actuaries estimate that, on the new calculations, almost half the new funds are no longer in surplus, and many more will cease to be in surplus. Moreover, when the contribution holidays end for either employers or employees, depending on the arrangements, the jump will be all the greater, because the level of contribution will not go back to what it was beforehand, but will reach the higher level now needed to fund the taxed provision in the future.

Many funds do not have satisfactory surpluses, and many local authorities are well aware that pension provision for their employees is not in surplus. The Association of Consulting Actuaries has calculated that an extra charge of £12 per head on council tax throughout the country will be required merely to fund the higher cost of pension provision for local government employees. Alternatively, there will have to be cuts in services throughout the country. We expect the Chief Secretary to tell us how he intends to finance that or to manage the cuts.

One of the changes that we made in the Pensions Act 1995 was to introduce a minimum funding requirement. Currently, if a company is underfunded or is dangerously close to its minimum funding requirement, it has to inject substantial extra money. Following the previous tax changes affecting advance corporation tax, BT had to put an extra £1 billion into its fund. Many other funds may be putting in large sums now, and those initial injections attract tax relief. Companies will pay less in the years in which they pay in lump sums, and that will reduce the revenue to the Treasury in the early years. Has the Treasury taken account of that phenomenon in its calculation of the impact of the tax changes, or is it hoping that there will not be any such injections into pension funds that have become underfunded as a result of the Government's measures?

The third line of argument that the Government deploy to explain the impossible assertion that their measures will not affect pensioners, pension funds or the level or investment is worth savouring. They claim that the combined effect of reducing corporation tax and increasing tax on dividend distributions will encourage sufficient extra investment to produce extra income to make good the £5 billion tax charge. Even Robert Maxwell did not rely on that excuse, although, had he survived to come before the courts, I can imagine him saying, "Well, your honour, I was just doing it to encourage investment."

Arithmetically, such a scheme could work only if large sums in dividends were withheld and that was offset by an above-average return on those dividends. That is extremely unlikely, but, if large sums were withheld, tax revenues would fall correspondingly. It is clear that the Government do not expect that to happen, because they have not allowed for it in the Red Book.

It is equally unlikely that the investments that companies would make as a result of retaining more of their profits would be more profitable than the investments that they were making anyway. It is unlikely that they previously invested in less good investment opportunities and held in reserve high-yielding investments just in case the Government forced them to invest in them; but that is necessary for the Government's theory to be correct.

What is bad about this process is that it encourages investment abroad, and to the extent that it encourages retentions, it encourages money to stay where there are less good investment opportunities, so that it is not recycled by the capital markets into small, growing, new, cash-strapped companies. The money stays with cash-rich companies that do not need it, and does not get to the cash-poor ones that do.

I am not always 100 per cent. in agreement with my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), but when he introduced his system, he described the old one that it replaced, to which the Government want to revert, as the survival of the fattest. This scheme encourages money to stay where it is least needed. I know of no reputable economist who believes in the Government's assertion that the scheme will be capable of generating such extra economic and profit growth as to be self-financing over any period, let alone over the period of a Government.

The changes that the Government are introducing have vast ramifications, not only for pension funds and pensioners but for company taxation as a whole. In opposition, the Labour party called for a bipartisan approach to both company and pension taxation. With regard to pension taxation, Labour said in its last Opposition document: A pensions framework which changes with the government of the day will never give people the confidence they need to plan for retirement. Yet within weeks of its arrival in government, Labour has changed the pensions framework, legislating in haste.

Changes of such magnitude need careful consideration, wide consultation and thorough debate. We set an example with basic pension plus, which was given thorough consideration before we published our proposals. We then said that there would be a Green Paper, in whose drafting expert groups would be involved, followed by a long legislative and consultative process enabling everyone to contribute, to ensure that the policy would be implemented to the best possible standard. In contrast, the measures in the Budget were prepared in great haste, in just eight weeks. We know that the Government cannot have been preparing them before the election; if they had been, I am sure that they would have told us, but they said that they had no such plans.

The Minister for Welfare Reform (Mr. Frank Field)

How long did the right hon. Gentleman spend considering basic pension plus?

Mr. Lilley

About a year.

Mr. Field

So the right hon. Gentleman was thinking about it in secret for a year?

Mr. Lilley

Yes. I am sorry not to speak through you, Mr. Deputy Speaker. I can tell the Government that I thought out my proposals in great detail for a year, and then published them. I sought consultation before there was even a Green Paper, which was due to appear next, followed by a legislative proposal. The present Government have given their proposals no proper internal consideration, have arranged no proper external consultation, and are planning to truncate parliamentary deliberation to such an extent that it is an insult both to Parliament and to outside interests that have a right to have their say on these measures.

I urge Ministers to withdraw the proposals as they stand. I urge them to return with proposals in the form of a Green Paper, to seek wider consultation and to allow parliamentary deliberation over an extended period. We shall then give their proposals positive consideration and see what aspects we can possibly support. As long as the Government proceed with their present cack-handed, ill-thought-out approach, however, we shall feel obliged to oppose their proposals root and branch and to defend the interests of pensions, pension funds and long-term investment in this country.

I urge my hon. Friends to support the motion.

5.7 pm

The Chief Secretary to the Treasury (Mr. Alistair Darling)

I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:

condemns the failure of the last Government to foster security in retirement for either today's pensioners or pensioners of the future; supports the present Government's objective of a decent income for all in retirement; believes that the best way to achieve this is by developing second pensions building on the foundation of the basic state pension; commends the Government's decisive action on the past mis-selling of private pensions; endorses the measures taken in the Budget, particularly the reforms to corporation tax, which will help to create a climate encouraging higher investment and a higher sustainable growth rate increasing the capacity of the economy to support decent pensions; supports the Government's welfare-to-work proposals, which will improve the employment opportunities for thousands of people, enabling them to save for their own retirement; and welcomes the Government's commitment to review pensions and achieve security in retirement for all. I shall deal in turn with each point of substance raised by the right hon. Member for Hitchin and Harpenden (Mr. Lilley).

The motion mentions misselling. The right hon. Gentleman said at numerous points during his speech that he would come to the subject of the misselling of pensions that took place, to a large extent, while the last Government were in power, but unfortunately he did not get around to addressing that central point. Rather like his right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke)—who is here now, and who said the other night that the business of pensions misselling was something of a "hare in another field"— the shadow Chancellor ignored the fact that misselling is a running sore which, sadly, has yet to be cleared up.

Mr. Peter Brooke (Cities of London and Westminster)

I hope that the Chief Secretary will accept that the point that I sought to make was that his intervention on misselling was not a defence of what the Government were doing, although I acknowledge that it was a fair debating point.

Mr. Darling

I shall return to Government policy, but first I should like to deal with misselling, especially as the Opposition have referred to it in their motion. That reference demonstrates the Tory party's brass neck because, over the 10 years between the start of misselling and the time that they left office, they did little to sort out the problem.

It is ironic that, on the day my hon. Friend the Economic Secretary to the Treasury publishes a further list showing what little progress has been made by many pension companies to solve the problem, the Opposition should choose to use the term "misselling". Many of the 700,000 people who were affected will wonder why the Conservatives, who were in power for so long, did nothing to prevent the problem in the first place and, when it arose, did little to resolve it. It was not until a few weeks before the election that there was the slightest flicker of interest in the Conservative Government in clearing up the problem.

It was obvious to us on taking office that the Conservative Government had done precious little to put pressure on the companies that were guilty of misselling. I wonder why. Perhaps the Opposition could do with a lesson in history. Let us look at Conservative Government policy in the late 1980s. Their hostility to public provision is well documented, and it extended to the public provision of pensions. Their policy was designed to get people out of occupational pensions and into private schemes.

My hon. Friend the Member for Northampton, North (Ms Keeble) drew attention to advertisements—which, I may say, were paid for by the public—which the Government promoted not just in text but on television. They wanted people to believe that the very act of going private was spiritually and materially enriching. People were persuaded that, if they took out a private pension, they would be better off, almost by definition. It is interesting to recall the name of the junior Social Security Minister at the time that policy was promoted—it was the shadow Chancellor. The other Minister, although perhaps now it is a matter of historical interest, was the man who was Prime Minister for some six years.

Mr. Lilley

That is not true. I was never a junior Social Security Minister. I was only ever Secretary of State.

Mr. Darling

It has nothing to do with the right hon. Gentleman. Is that not typical of the Conservative party?

Mr. Lilley

On a point of information, Mr. Deputy Speaker. Is it not customary for someone who makes a false accusation to apologise rather than, after recognising that the person accused is not guilty, letting it be a matter for further derigration?

Mr. Deputy Speaker

That is purely a matter for debate.

Mr. Darling

A former Minister complains that he has been falsely accused of being a Minister. I can understand why he feels guilty about that. If he thinks that it is an insult to say that he was a junior Social Security Minister, of course I am sorry for insulting him. I did not realise that it was insulting to say that someone was a member of a Government.

Mr. Tim Boswell (Daventry)

My right hon. Friend was a junior Minister in the Treasury at that time.

Mr. Darling

He cannot deny that he was a member of the Government when these problems arose, or is that an insult, too? Is it insulting to say that someone was a member of the Conservative Government? It may be; I do not know.

The Conservative Government created the climate in which it was possible for unscrupulous salesmen to go into communities, especially former mining communities, and persuade people to leave their occupational schemes and enter private ones that were wholly unsuitable. People who should never have been allowed to sell pensions were let loose among some extremely vulnerable people and, sadly, the managements of some companies turned a blind eye to the problem.

When we add to that the problem of lax regulation—Tory self-regulation—and the far too many vested interests that were quite happy to turn a blind eye to what was happening, it is not surprising that many people were wrongly sold personal private pensions. The Conservative Government were culpable, collectively and in some cases as individuals, because, during all the time they were in power, they did nothing about that.

It is to the credit of Sir Andrew Large, the outgoing chairman of the Securities and Investments Board, that he brought the matter to public attention in the early 1990s. His battle, along with other regulators, was fought largely by the regulators on their own, without help from the Government, in the new climate that began to prevail in the past three or four years. Despite the misselling over the past 10 years, little progress has been made. My hon. Friend the Economic Secretary today published a report showing a lamentable lack of progress by the 24 firms that have most cases to review. Of course, there are others.

Mr. Geraint Davies

In many cases, the commission charged on pensions was 25 per cent. That is more than the 20 per cent. tax credit about which the Opposition complain. They complain about the withdrawal of the tax credit, which is good for the public Exchequer. Will they condemn the massive commissions that were paid to people who missold thousands of personal pensions?

Mr. Darling

For a long time, I have said that the regulator should look at the impact of commission on selling. It can put undue pressure on people who sell pensions, and that can have unfortunate consequences.

Mr. Campbell-Savours

I was a member of the Committee that examined the Financial Services Bill. Four years before the rows about misselling broke out, we moved amendments about the disclosure of commission and the hon. Member for Bournemouth, West (Mr. Butterfill), who was also a member of that Committee, and some people who have now left the House, opposed such disclosure. The public should know that, if our amendments had been accepted, the great misselling scandal of pensions in the 1980s might not have occurred, because people would have known that they were being ripped off.

Mr. Darling

My hon. Friend is right. If there had been the transparency that now exists, many of the problems that occurred in the late 1980s would have been avoided.

Mr. Butterfill

rose—

Mr. Darling

The hon. Gentleman is desperate to intervene. According to the Register of Members' Interests, he is well qualified to intervene on this matter. No doubt he will draw the attention of the House to that if he makes a speech.

Mr. Butterfill

The hon. Gentleman is right: I advise the Independent Financial Advisers Association and the British Insurance and Investment Brokers Association. However, that is not the point that I wish to make. Will the hon. Member for Workington (Mr. Campbell-Savours) reconsider what he said? I did not at any time oppose the disclosure of commission. In 1986, I opposed purely the disclosure of commission when it was often necessary to disclose all the other costs of direct selling companies. In many cases, such costs were much higher than those incurred by companies that employed independent financial advisers. I urged the Committee to legislate to disclose all the costs of all companies and not single out one area, as the hon. Gentleman wished to do.

Mr. Darling

It is interesting to note that Opposition Members, whether on the Front Bench or the Back Benches, are trying to disclaim all knowledge of what went on in the 1980s. I am intrigued that hon. Members such as the hon. Member for Bournemouth, West, who opposed the disclosure of commission, always said that such opposition was for the greater good and that many other things needed to be known as well. I would not have minded if they had argued at that time in favour of disclosing not just commission but all other factors in the make-up of the sale of a product. That is important.

Mr. Butterfill

Will the Minister give way?

Mr. Darling

The hon. Gentleman should contain himself. I may give way to him later. I was about to be nice to him, so perhaps he will sit patiently. In debates on the Finance Bill and in other debates, he can make helpful suggestions. In debates on a Bill on financial services, which we propose to introduce during this Parliament, I am sure that his comments will be helpful.

Mr. Butterfill

The right hon. Gentleman is completely distorting the facts and what I said. I urged the Committee to disclose all costs, including commission paid to salesmen, but it was the Labour party and the hon. Member for Workington who did not want all costs disclosed—the hon. Gentleman wanted only insurance salesmen's commission costs disclosed. It was precisely because I felt that all costs should be disclosed that I made a principled stand on the entire subject.

Mr. Darling

I can see now why the hon. Gentleman is retained at such generous rates. He clearly does his best for the industry.

Mrs. Teresa Gorman (Billericay)

Will the right hon. Gentleman give way?

Mr. Darling

Perhaps I could deal with one point at a time; at some point, I should like to get on to the matters raised by the right hon. Member for Hitchin and Harpenden.

I was making the point that many people, including the hon. Member for Bournemouth, West (Mr. Butterfill), used to argue against disclosure of commission simply because they did not want that aspect disclosed. The House may remember that we are discussing this matter because my hon. Friend the Member for Croydon, Central (Mr. Davies) raised the impact of commission on the selling of financial products. I think that all of us agree that the regulators need to examine the matter. I am all in favour of giving incentives to sales forces to sell products, but we have to watch the impact of those incentives and their propensity for encouraging the misselling of pensions.

Mrs. Gorman

Is it not a fact that the people about whose plight the right hon. Gentleman is agonising, shedding some crocodile tears along the way of course, are the very people whose individual pension funds are to be raided by the Government—about 5 million of them? They are paying modest amounts of around £1,000 a year, and they will have to find another £100 to £150 a year to keep their savings intact—because of the depredations that the Government are about to inflict on them.

Mr. Darling

The answer is no.

The point that I was drawing to the attention of the House is that many people who were missold pensions have still not received the compensation that is due to them. I say this in response to the point that the right hon. Member for Hitchin and Harpenden made, at which the hon. Member for Billericay (Mrs. Gorman) may have been hinting. Frankly, I have little time for the argument that is now advanced by some pension companies that they could be making great progress, if only there had not been any change to the corporation tax regime. That might have been a statable case had they been making any progress, but many of them have not.

When hon. Members read the parliamentary answer of the Economic Secretary to the Treasury, which will now be published, of course, they will find that the progress has been lamentably slow. In nearly every company, the percentage of cases that has been dealt with is in single figures, and that cannot be satisfactory. I hope that the pension companies that follow these proceedings will understand that the public will not tolerate such lamentable progress, when so many people are awaiting redress and cannot understand why on earth there is a delay.

Mr. Oliver Letwin (West Dorset)

Will the right hon. Gentleman give way?

Mr. Darling

In a moment.

We will continue to publish regularly companies' progress, or lack of progress, because we believe, unlike the Conservative party—presumably, if it had believed that openness was a good idea, it would have done something about it—that openness is essential. I should like to move on to some of the other points raised, but, as the hon. Gentleman seems desperate to intervene, let him do so.

Mr. Letwin

I was merely going to inquire whether, after some 15 minutes of eloquence, the right hon. Gentleman intends to move to the subject of the debate.

Mr. Darling

If the hon. Gentleman had sat quietly, I would have got to the points about which he asks some 30 seconds sooner. I have been asked questions and, as a member of the Government, I thought that it was my duty to answer them. Ministers are accountable to the House, and some important points have been made. The performance so far has been unacceptable, and I hope that the National Association of Pension Funds and the Association of British Insurers can find time, when they are not criticising the Government, to put some pressure on their members to resolve the matter.

The other step that the Government are taking, which the previous Government would not take, despite being pressed to do so, is substantially to reform the Financial Services Act 1986, to ensure that we have a proper regulation system, an end to self-regulation and regulation in the public interest, which will benefit both the industry and the public. We are committed to doing that, and legislation will be introduced during this Parliament, but Conservative Members, despite this debate, still cannot answer this question: why did they so nothing about the problem when they had all the time in the world to do so?

Let me deal with another point to which reference is made in the Opposition motion but to which, although I may be wrong about this, the right hon. Member for Hitchin and Harpenden, the Opposition spokesman, did not refer—the windfall tax. I am interested in this because, when the shadow Chief Secretary to the Treasury summed up for the Opposition at the end the Budget debate, he did not mention the windfall tax either. Over the past year or two, and certainly during the general election campaign, I got the impression that the Conservative party thought that the tax was so bad that it would form the centrepiece of its opposition to us in government, yet, in two major speeches, Opposition spokesmen did not mention the tax.

Mr. Bernard Jenkin (North Essex)

Will the right hon. Gentleman give way?

Mr. Darling

Not just now. I do not want to be accused of taking up the valuable time of the House answering Conservative Members' questions.

It is interesting that, in the Opposition motion—never mind Conservative Members' speeches—the Conservatives are no longer defending the privatised utilities, and no wonder, because they have accepted the Budget proposals. I notice that their shares have increased since the Budget, which suggests that what we are doing is reasonable, but the new line from the Opposition is that the tax is an attack on pension funds.

I want to make a basic point. The reason we have implemented the windfall tax is to fund a programme to get people back into work, which will enable them to make a contribution for themselves and their families, to save for their retirement and to contribute towards their pensions, so the tax is a sensible step. The Government have raised a windfall tax that will get people into work. Instead of paying increased social security bills, about which the right hon. Member for Hitchin and Harpenden certainly knows something, we can give people the opportunity to contribute. The windfall tax is entirely justified for that reason, and is widely accepted to be so. Given the strength of feeling on the Conservative Benches over the past few years, I am surprised that the tax was not referred to, although it was in the Opposition motion.

One matter was mentioned: the allegation that there was an absence of consultation. The Opposition motion contains the words shoddy, hastily prepared and ill-thought-out". I have heard those words before and not too long ago. I heard them in March when the then Government introduced basic pension plus, which I do not remember being introduced with much consultation. In fact, there was not even a statement in the House.

Mr. Jenkin

Will the right hon. Gentleman give way?

Mr. Darling

In one moment.

The right hon. Member for Hitchin and Harpenden, in a sotto voce exchange with the Minister for Welfare Reform, said that the proposal was prepared in secret. If that is true, the Conservative party is in no position to criticise us. I also caution the Conservative party about dressing up in new, ill-fitting clothes as the pensioners' friend. We have to remember what we are dealing with here. The Tories' record as the pensioners' friend does not bear close examination. If one considers the central plank of basic pension plus, one will remember that the tax changes that the then Government were going to make would have cost a person on average income with an occupational pension some £600 extra a year.

Mr. Jenkin

Will the right hon. Gentleman give way?

Mr. Darling

In one moment.

Talking about consultation and openness, I think that basic pension plus was the first pensions policy ever to be announced without a Government Actuary's report, which is unusual in relation to social security, so for the Conservative party to accuse us of doing something that was "ill-thought-out" and without consultation simply does not stand up.

Mr. Iain Duncan Smith (Chingford and Woodford Green)

The right hon. Gentleman is busy comparing the Budget to proposals that preceded a Green Paper from the previous Government. Is he suggesting that this section of the Budget will be pushed out to a Green Paper? If he is not suggesting that, he should stop this ludicrous comparison.

Mr. Darling

I am simply drawing attention to the fact, that just before the election, the then Government—that is what they were, despite sometimes appearing not to be so—put forward major proposals for the reform of pensions. The then Prime Minister and Ministers—I hope that I am not being rude to Opposition Members by accusing them of being Ministers—all gave the impression that that was their policy and that that was what they intended to do. When we are discussing an Opposition motion, I am entitled to draw attention to the fact that they had a proposal that would have cost someone on an average income about £600 extra a year.

In addition, the previous Government could never say how their proposals were to be funded. At one point, over the next 20 to 30 years, the cost was rising to about £7 billion a year.

Mr. Bernard Jenkin

rose—

Mr. Darling

I will give way in a moment.

It was not just we who criticised the Government or got the wrong idea about their policy—if that is what they are now telling us. Many newspapers were critical of it. The Financial Times said: look at the fine print and it is clear that the scheme will involve either higher borrowing or higher taxes for 45 years". In The Times, Graham Searjeant said: Privatising the basic state pension … will raise the tax burden. The Consumers Association pointed out: Young people will be paying for their own pension, to meet their retirement needs, but at the same time they will be paying for their parents pension. My point is that the Conservative Government put forward proposals just before the election which would have hammered pensioners. They cannot stand before us today and pretend somehow to be the pensioners' friend.

Mr. Jenkin

Basic pension plus would have given pensioners a better rate of return on their money than the present basic state pension. Will the right hon. Gentleman bear in mind the fact that we are spending time discussing his Budget proposals on advance corporation tax because the tax raised by that measure makes the windfall profit tax look rather modest by comparison? If we had followed the example that he has set with these proposals, we would have kept basic pension plus a secret until after the election.

Mr. Darling

Some of the hon. Gentleman's hon. Friends may have some sympathy with that point.

Before I turn to the central point raised by the shadow Chancellor, I want to talk about the pensions industry. Despite the fact that we are rightly critical of the performance of some of these companies in clearing up the misselling of pensions problem, it is sometimes easy to lose sight of the importance of the industry as an employer, a wealth creator and a service provider.

Mr. Letwin

Will the right hon. Gentleman give way?

Mr. Darling

Not just now.

It is the purpose of the Government to encourage people to save and invest and to make provision for themselves. We intend to create an economic climate where we have growth and investment that will create the wealth that will enable everyone to enjoy a higher standard of living now and in their retirement. The pensions industry plays an important part in that.

I want to return to our proposals on corporation tax—[Interruption.] Conservative Members are always complaining that we are being high-handed and are not responding to their questions: now they are complaining because I have been answering their questions.

I shall start with an important point. The shadow Chancellor said that when Norman Lamont introduced the changes in his Budget in 1993, it was simply a matter of bringing tax rates into line. I notice that the Opposition motion opens by saying: this House condemns the Government's assault on pension funds through the removal of tax relief on dividend income of pension funds in direct betrayal of their election pledges". It reminded me that that accusation could more properly be applied to what happened in 1993. The shadow Chancellor told us that it was a matter of bringing tax rates into alignment, but I wonder whether he would refresh his memory and see what Norman Lamont said in his Budget speech. When talking about the reforms, Mr. Lamont said: they are central to the strategy of this Budget, and they raise significant amounts of revenue. He went on to say that it would save the Exchequer

no less than £1 billion a year."—[Official Report, 16 March 1993; Vol. 221, c. 185–86.] At that time, the Conservative Government were not proposing to reduce the rates of corporation tax, but were simply taking that money into the Exchequer. We have to rely on the words of the then Chancellor, Norman Lamont, as I do not remember any Minister denying that that was the Government's intention. Therefore, the shadow Chancellor's assertion that all that was happening in 1993 was a minor adjustment to ensure that the rates were the same for corporation tax as for other taxes does not stand up.

Mr. Andrew Tyrie (Chichester)

Will the right hon. Gentleman give way?

Mr. Darling

The hon. Gentleman was not a Minister at the time, but I think he knew something about it. I will give way, as long as he does not accuse me of taking too long.

Mr. Tyrie

Does the right hon. Gentleman have the end of the 1993 speech? He will find that the then Chancellor confirmed that the intention was to align all the rates at 20 per cent., that there was no intention to bring the rate to below 20 per cent. and certainly no intention ever to consider abolition.

Mr. Darling

The point is that the then Chancellor told the House in clear terms that the purpose of his adjustments in the taxation of dividends was to raise money for the Exchequer—£1 billion of it. [Interruption.] I am just about to come to another passage which Opposition Members might find illuminating.

Mr. Caplin

I was not in this place in 1993, but I wonder whether my right hon. Friend can refresh my memory as to whether anyone on the Treasury Front Bench at that time or the now shadow Chancellor criticised the then Chancellor for the tax change.

Mr. Darling

I believe that, at the time, there was great criticism among members of the Government, but it involved Europe rather than tax changes. Two of the Opposition Members on the Front Bench will recall that.

I shall press on in case Opposition Members are in any doubt about what their Government were doing. I know that they were not all on the Committee considering the Finance Bill in 1993, and they may not know what went on. I thought that I would see whether the Government ever threw any more light on why they changed the taxation of dividends. The then Financial Secretary, the right hon. Member for Charnwood (Mr. Dorrell), told the Committee: We needed to raise revenue in a way that did least economic damage … my right hon. Friend decided that to collect extra revenue he would do so from pension funds

from a group of people with taxable capacity, but who are not taxpayers, in a way that does minimum economic damage, recognising the substantial tax benefits available to pension funds as collective savings vehicles. I wonder whether Opposition Members would like me to read that again. It tends to suggest that what the then Government were about was a raid on pension funds and that they were not proposing any other measures to compensate for that. [Interruption.] I see that the shadow Secretary of State for Social Security wants to intervene but is being held back by the shadow Chancellor, and no wonder.

Mr. Duncan Smith

rose—

Mr. Darling

I will let the hon. Gentleman have his moment.

Mr. Duncan Smith

In line with his point about the taxation of dividends, I wonder whether the right hon Gentleman can explain what he said on 31 May 1996. He said: Britain lives in a global economy and the minute you even suggested taxing dividends people would go out and invest in other parts of the world. The right hon. Gentleman has just agreed with his Chancellor that he has taxed dividends. How does he explain his volte face?

Mr. Darling

If I remember rightly, I believe that I was being asked about the taxation of investment income at a different rate. If the hon. Gentleman will allow me to see the article, I will be able to confirm that I made the remark in that context.

The argument from Conservative Members that they were simply aligning tax rates does not stand up. If all I could produce in evidence was the quotation from Mr. Norman Lamont, they might have got by, but the quotation from the Financial Secretary in the comparatively quiet waters of the Standing Committee must be borne in mind. I shall repeat it. He said: We needed to raise revenue in a way that did least economic damage. He said that he was raising money from pension funds

from a group of people with taxable capacity, but who are not taxpayers in a way that does minimum economic damage, recognising the substantial tax benefits available to pension funds as collective savings vehicles".—[Official Report, Standing Committee A, 15 June 1993: C. 377.] It is worth bearing it in mind—although listening to the right hon. Gentleman, one would not have been aware of it—that pension funds have been paying tax since 1993. Our proposed changes will not alter the fact that pension funds will continue to be free of tax on income in the form of capital gains and ordinary shares, as well as on other sources of investment income. That has a net cost to the Exchequer, but one that we feel is justified.

It is wrong to suggest that what we are proposing is new. In fact, the Conservative party started the process. It is equally wrong to suggest that pension funds will be left without tax advantages.

Mr. Campbell-Savours

rose—

Mr. Darling

I will give way, but I want to make some progress.

Mr. Campbell-Savours

Should not my right hon. Friend circulate to all Members a copy of the 1993 quote by Mr. Lamont? Many hon. Members would like to see it, and might wish to use it extensively in their constituencies.

Mr. Darling

I am happy to make arrangements to do that, subject, as always, to the public expenditure implications. I might even pay for it myself and send it to the National Association of Pension Funds and Mrs. Robinson.

I want to explain our proposals. We believe that it is necessary to reform the system of tax credits because it contains a major distortion, under which shareholders are better off if companies pay out profits as dividends than if they retain them for reinvestment. It is right in principle to remove that distortion. The principle that underpins our changes to the corporation tax system is absolutely right. It is for the management of companies and the shareholders to make the decisions, not for the tax system to provide an inbuilt bias.

In the United States, where a similar system exists, pension funds take decisions on their economic merits. An important point to note is that they are as keen on the capital appreciation that then results as they are on dividends. Greater emphasis on capital growth is important. It will help companies and offer them high, long-term growth. It will ensure that they are not starved of capital by the tax system. Indeed, the importance of capital growth is something on which actuaries and others in this country might want to reflect further.

I was pleased to note that, after the Budget, the Daily Telegraph—which I do not think is yet converted to the cause of new Labour; it certainly was not during the election, but it may be about to turn—said in its business section: The quality of life in retirement … depends on the growth in the economy, reflected in the prices of shares where the contributor's money is invested. This is the point of the Brown Budget that the pension funds would do well to grasp. That is absolutely right. I want to emphasise that the reason we have taken this decision is right in principle. I wait to hear whether the Conservative party would repeal it were that party ever to return to power.

The American experience is worth bearing in mind. The central thrust of the Budget is to create a climate in which the level of investment is raised. It is important to keep our eyes on that fact. Currently, the level of investment is lower than it should be at this stage of the economic cycle.

I was interested in the speech delivered by Sir David Cooksey a few days ago, when he looked at some emerging US companies in 1975 and compared their position then with their current position. He noted that they had expanded dramatically, which is a common feature of the American economy. He said: It is also notable that very few of those companies pay dividends to their shareholders who prefer to benefit from growth in capital value as the companies reinvest all of their profits in the business. He said that that contained a lesson which we should learn.

The value of a pension depends, to a large extent, on the value of the fund available when someone retires. Someone retiring at the height of the recession would have done less well than someone retiring now because the value of the stock market has increased; indeed, it has increased quite a bit since we came to power. It is important that those who follow these proceedings bear in mind the fact that, at the end of the day, the value of a pension depends largely on the prospects for the economy.

I very much hope that when actuaries assess the results of our decisions, they will remember that capital growth is an important matter to take into account. When considering our proposals, they should remember that the well-being of the economy as a whole is the most important feature. Not only have we reduced corporation tax for large and small companies, but we have doubled capital allowances.

Our goal is a long-term one—to improve this country's investment performance. For many years, our performance has lagged behind that of our major competitors, and continues to do so despite the current recovery. That may be because, in the past, there was so much concentration on the short term. Investment for the long term and for better growth will greatly benefit companies and, therefore, pension funds, which will gain in the long term. Many of those who have commented on the impact of the corporation tax changes have ignored the long term. Indeed, that is far too common a tendency in Britain. The long term is the central point of the Government's economic strategy.

Actuaries, who often value shares largely on the basis of prospective income and take relatively little account of market values, should begin to think long and hard about what they have been doing. They have tended to inflate the effect of the loss of tax credits. Over the past few weeks, there has been much comment in the press about that. Actuaries should change their approach. In the United States, actuaries pay much more regard to market values. That is beginning to happen with some funds in this country, but it is necessary for both pension schemes and actuaries to sit down and take a long, hard look at the real effect of the loss of tax credits and to understand the Government's strategy in the long term.

Sir Nicholas Lyell

rose—

Mr. Darling

I will not give way, because I have been speaking for too long already. We have had four days' debate on the Budget. We are now having an Opposition day, which is substantially on the Budget. Tomorrow, there will be Second Reading of the Finance Bill, and there are further days of debate in the House next week. No one could say that we are curtailing debate on these matters.

Mr. Lilley

This is an Opposition day.

Mr. Darling

It is an Opposition day, and I am replying to the right hon. Gentleman's points.

The steps that the Government are taking will stand this country and its economy in good stead in the years to come. For the first time in many years, Britain has a Government who are looking to the long term and who will create an environment in which there is growth and investment. That will be good not only for companies and pension funds but for all the people of this country.

5.47 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I am pleased that we are having this debate today. The Chief Secretary was right to say that a great deal of time has been made available, but the issues are extremely important. When I spoke in Friday's debate I expressed my support for the Government's overall strategy, particularly the welfare-to-work proposals. In a continuation of that spirit, I readily acknowledge that the Government are showing proper levels of ambition and determination in the fight against poverty.

I share the view that improving access to employment is the only way to beat dependency and hardship. I repeat my offer of support for the Government's efforts to help the left-out millions get back into the mainstream of society. Anyone who argues against the objectives of the welfare-to-work programme is politically blind, deaf and dumb to the circumstances in this country.

Having said that, there are grounds for strong opposition to the way the Government intend to finance their plans. I am pleased that the Opposition tabled this motion today because it is right to focus on that. How the Government spend the money is one matter but, as this important debate shows, how they intend to raise it is another. I want to concentrate on the latter.

There are, of course, two sources of finance in the Government's programme, and we Liberal Democrats find them both difficult to stomach, primarily because of the heavy penalty that we believe they will impose, both now and in the future, on Britain's pensioners. The first tax is the windfall tax. I share the Chief Secretary's surprise that, both in today's debate and in the debates on the Budget, the official Opposition did not concentrate more on that. The second tax will be raised through abolition of the dividend tax credits reclaimed by pension funds.

Although both sources of funds are distinct taxes, they have been introduced for the same reason and share a common provenance: the Government's almost obsessional timidity over taxation and the revenue raising conundrum that such timidity has inevitably caused. If one cannot use the fairest, most transparent and most progressive tax—which is income tax—one simply must look elsewhere. Unfortunately for British savers and pensioners, the Chancellor has turned his gaze on them.

It is difficult to overstate the importance of the taxation straitjacket that the Government are in. As I said in last Friday's debate, the United Kingdom is faced with a situation in which the Government have become a prisoner of their own pre-election rhetoric. They cling to the vote-winning line: "We can have gain without pain; we can raise billions of pounds without anyone having to pay; and we can magically solve the problems of chronic underinvestment in education and institutionalised unemployment with a few tax increases that are so opaque and complicated that they seem to be entirely cost free."

Such a proposition is nonsense, and the Budget exposes it as such. There is simply no such thing as a tax for which no one must pay—a fact that encompasses both the windfall tax and the withdrawal of dividend tax credits. Together, those taxes constitute nothing less than a smash-and-grab raid on British pensions.

It is now reasonably well documented that the windfall tax is hitting not only the so-called fat cats—I understand Ministers' emotional reaction to their having secured unconscionable and unjustifiable increases in emoluments—in the privatised utilities, but employees or customers or future investment in those industries. In some industries, all three—employees, customers and future investment—are affected.

An equally valid argument is that it is simply not possible to take £5 billion out of the corporate sector without hurting the millions of people whose savings and future incomes are tied up in those utilities. The Government have adopted an unconscionable position on the matter. The tax will have an impact on the millions of individuals who own shares—many of whom arrived on the scene a considerable time after the windfall was gained. It may also impact on institutional investors, such as pension funds, which hold in their hands the future incomes of 19 million people with occupational or personal pensions. In years to come, those people will pay the indirect and hidden, but very considerable, costs of the windfall tax.

The Chief Secretary tried to argue that the windfall tax poses no problems because the welfare-to-work programme will work—hopefully, it will—and enable those entering employment to make proper provision for their pensions. If the tax's objective was to raise money to start such a beneficial cycle, however, why do not Ministers openly raise the money by increasing income tax? If the tax will start such a beneficial cycle from which everyone will gain, why do not Ministers go to the electorate and say, "The most honest way to raise the money to start such a cycle is through income tax?"

Mr. Darling

We went to the electorate and told them that we would introduce a windfall tax. Surely the hon. Gentleman will accept—I know that the Tories do not—that those companies were very rich in cash because they were sold at knockdown values. Privately, even some of those companies will admit that.

Mr. Kirkwood

For a variety of reasons, some of which I have adverted to, it is rough justice. I simply do not accept that attacking the utilities was fairer than going to the electorate and arguing honestly the reasons for raising the money. If the Chief Secretary is right—I hope that he is—that the aim is to create a virtuous cycle from which people will benefit, income tax increases would generate such a virtuous cycle in a manner that is much fairer and more progressive and transparent than the Government's windfall proposals.

I accept and do not complain that the proposals were in Labour's manifesto. The Government were absolutely open and honest about the tax and they deserve credit for it, but their openness and honesty do not persuade me that the tax is right. We have a clear difference of opinion on that.

Sir Robert Smith (West Aberdeenshire and Kincardine)

Would there not be another benefit if the Government had grasped the nettle and raised income tax? If they had, perhaps the Bank of England might not currently be under such pressure to raise interest rates, doing greater damage to the economy and to potential investment.

Mr. Kirkwood

In future, I think that the Government will regret all those indirect and untoward effects. There is an honest difference of opinion between the Ministers and the Liberal Democrats, which I accept.

The Chief Secretary tried to justify the Government's position on withdrawal of dividend tax credits by saying that he wants to discourage companies from paying dividends rather than reinvesting profits. I understand that, and believe that he could have mounted a taxation argument to justify the Government's decision to move in that direction, but I do not think that the way in which the Government withdrew the credits, the short time frame over which they did so or the amount of money that will be raised, enable Ministers to found a sound argument.

If Ministers had said to the House, "We are going to do this. We will have proper consultation and, over time, we will move in that direction," we would have been willing to listen. However, grabbing £5 billion overnight, as the Government have done, might damage the trust that the Chief Secretary and the Government will require if they are to reform pensions in the United Kingdom. They will need that trust in future to work with pension funds. It was a bit thin for him to say that pension funds are flush with cash and that the withdrawal is a mere bagatelle meant to refine the taxation system. I was not persuaded by that section of his speech.

I have also re-read the Chancellor's exposition in which he tried to explain why he withdrew the credits. I was not convinced before, and I remain deeply sceptical of the Government's position. The same types of people, such as pensioners, will be hit by withdrawal of dividend tax credits as will be hit by the windfall tax. I think that withdrawal is another measure suggesting that the Chancellor is determined to avoid deployment of transparent, fair and income-related taxation, concentrating instead on complicated measures that might initially seem to be company taxes but which, in time, will be shown to have a huge negative impact on individuals' savings.

The broad impact of depriving pension funds of £3.5 billion per annum will require each of the 19 million members of active pension schemes to contribute an extra £190 per annum simply to maintain the same growth level. That situation is deeply worrying.

Mr. Andrew Rowe (Faversham and Mid-Kent)

Ministers have said that one of their intentions is to try to move from the short term to the long term. Is it not most likely that someone who sees the flow of dividends from their pension fund drying up will spend their money rather than invest it in a pension scheme that has been shown to be not at all safe?

Mr. Kirkwood

I agree that that is another indirect effect. I agree also with the Chief Secretary's view that we should consider such matters on a much more long-term basis. I will support any earnest attempts by the Government to achieve such a shift in emphasis. The hon. Member for Faversham and Mid-Kent (Mr. Rowe) is absolutely right: withdrawal of credits will not only have the effect that he mentioned but will undoubtedly cause other untoward and unforeseeable changes in people's behaviour.

I have two questions for Ministers, which perhaps the Financial Secretary to the Treasury will deal with in her reply. Is any work being done by Ministers to consider whether the rebate awarded to those who have opted out of the state earnings-related pension scheme will be upgraded to deal with the shortfall? There is a perfectly good case for that being so. If we do not do something along those lines, people may be tempted back into the state scheme, and that would not be sensible. It is an important question, which may well determine whether we support the Opposition motion. I am inclined to do so, but, if I had a positive answer from the Government on this point, I might be tempted to vote for them and increase the congestion in the Government Lobby.

The second question is equally important but slightly different, in that it refers to the impact of the proposals on local authorities. If the Government are to proceed as they have said, to be fair they will have to provide some compensation for local government settlements. The effect of the proposals on local government pension funds will be pretty dramatic and, in some cases, very dramatic.

It will cost my authority upwards of £1 million; that is an employer's contribution of nearly 3 per cent. of payroll, and will come out of capped expenditure in a local authority with a relatively small amount of money to play with in the first place. If the Government are to be fair in introducing a change of this magnitude, the position of local authorities must be dealt with in some way. Even an undertaking to consider the matter at some stage in the future would encourage me to think that the Government were being more responsible about these changes than appears superficially to be the case.

The fact that the official Treasury line seems to be that pension funds will be substantially insulated from the changes because they are "in surplus" worries me, because it assumes four things. First, that the existence of a surplus necessarily justifies a Treasury raid, despite the fact that the surplus belongs to the fund members and companies that have over-contributed. Surpluses are not necessarily a bad thing; they can be quite a good thing, but it is up to the companies and members of the fund to decide what to do when there is a surplus.

Secondly, the assumption is that a surplus is permanent and cannot be reversed or lead eventually to a shortfall whereas, in fact, it could do so in some circumstances. Thirdly, more than half of the 19 million people with occupational or personal pensions are in money purchase schemes. For them, the concept of a surplus does not exist because their ultimate pensions are entirely dependent on the site of the fund on retirement. The Government have not taken proper account of that fact.

Finally, the Government seem to assume that no pension funds are in difficult financial circumstances or under financial pressure. The implication is that no one will be badly hit by the proposed changes. I think, however, that some could be badly, perhaps even fatally, hit.

It appears that the Government have made the political judgment that pension funds are a soft target. They are seeking to raise an amount of money which is very difficult to justify and in a way which we might all regret. It is not fair on the companies involved. The actuarial revaluations that will be required and the higher administration costs and so on will drive a wedge between the Government and the pensions industry. The industry believes that the change is indefensible. There has been little or no consultation, and the industry believes that there is no logic or justice in the proposals. I am worried that that will make it difficult for the Government to make progress in this important aspect of public policy in future.

If we consider the matter in the round, it seems that the changes are premature, ill thought out and unfair, but if the two principal questions that I have asked can he answered tonight, I shall be willing to think again. As things stand, however, the Opposition have the better of the argument in their motion about the source of the money and the way it is to be raised.

6.4 pm

Mr. Terry Rooney (Bradford, North)

I congratulate the shadow Chancellor on initiating a debate on pensions, something that he singularly failed to do in his six years as Secretary of State for Social Security. It is nice to see him initiate a debate on such a vital issue.

When we consider pensions, we have to examine the history of occupational pensions, how they came about and their purpose. There is no doubt that the best type of pension scheme to be in is an occupational pension scheme on a final salary basis—

Mr. Greenway

And which is funded.

Mr. Rooney

indeed—unlike that of the police, I have to say. That is the best scheme to be in, provided someone has a guarantee that they will remain in employment until retirement. Sadly, that is no longer the case for tens of millions of people.

Occupational pension schemes are a relatively modern phenomenon. They grew significantly in the 1950s and 1960s because there was a shortage of labour and such schemes were needed to entice people to work for particular companies and particular industries. There is nothing wrong with that, perhaps, but the decline in occupational pension schemes since the late 1960s and early 1970s in terms of their number and the number of members is significant and something that should worry us.

In the 1970s, there was some recognition of the fact that millions of people are not and can never be members of occupational pension schemes. They are principally women and carers, but they also include many people in low income brackets and people who have many breaks in their employment for many reasons. Recognition came in the form of the state earnings-related pension scheme. SERPS has to be recognised as a valuable, solid scheme for millions of people, but, at the same time, we have to recognise that, during the changes that took place two or three years ago, billions of pounds were taken from the future pension entitlement of members of SERPS without an iota of whingeing from the Conservatives—it was okay, because it affected individuals in a state scheme.

We have heard much hypocrisy today, with talk about a briefing from the National Association of Pension Funds. I have to say that Anne Robinson told a different tale when she was at the Institute of Directors—perhaps it is a case of whoever pays the piper calls the tune. Millions of people will experience a dramatic reduction in their SERPS pension in years to come without an ounce of compassion being shown by the Conservatives.

Much has been said today, wisely, about the misselling of personal pensions, but an issue of financial mismanagement that affected tens of thousands of pensioners in the late 1980s and early 1990s—the infamous home income plans—has not been touched on. Not only did people lose a great deal financially, many pensioners lost their homes because a deregulated system with no statutory back-up allowed people to rip off those who did not know any better and had no access to the right advice. People lost their homes and their investment, and finished up far worse than they ever were before.

Many things affect the value of a pension fund, not least the investment decisions taken by fund managers, the profit record of the companies in which they invest—at this point, I should perhaps mention that the profits declined somewhat in the two recessions that occurred under the previous Government; in fact, they declined significantly—the contributions from employer and employee, and the sort of investments held, whether gilts, bonds or equities, at home and overseas.

It is interesting that, in 1990, the Nikkei index in Japan hit 34,000 and is now down to around 19,000. Is it suggested for one minute that the Government should compensate pension funds for investments in the Nikkei? I think not. The ability of pension fund managers is crucial. There are some very good ones, but many are very bad.

The performance league tables for pension fund managers show the same companies time and again in the top three or four, be it over five, 10 or 25 years, and the same outfits at the bottom, offering a miserable performance and depressing pension fund values, assets and returns. We have had charter marks for many years, but it is noticeable that there has never been one for the pension fund industry. If there had been, very few people would ever have earned one. We now have the minimum funding requirement, which is no bad thing, but perhaps we need a minimum performance requirement of pension fund managers, because some of them have been getting money under false pretences for far too long.

In general, if a company is a mutual or non-commission paying, the investment is safer and will do better. In addition, if the company's title includes the adjective "Scottish", it tends to be one of the better ones—and I do not say that just because of the identity of the Minister on the Front Bench tonight. Certain institutions have a long history of being sound, solid investment vehicles, but there are far too many who are doing nothing for pensioners or investors and they should be weeded out. The sooner we have a regulatory authority that acts against incompetence, the better off pensioners will be.

Before I came to the House, I had the privilege of being the chair of the investment board of what I believe is the largest local government scheme in the country—the West Yorkshire local government superannuation scheme, which had about £2.5 billion of assets. In the six years I was there, the fund grew, we were fairly successful in the investments we chose, and the benefit could be seen in the employers' contribution rate dropping from 11 per cent. to 5.5 per cent. for manual workers and to 4.5 per cent. for white collar workers. Those were significant gains.

At the same time, some of the previous Government's worst anti-public sector attitudes were on display in that, in the late 1980s, when bus companies were deregulated and local authority bus services went into the private sector, we were instructed that bus workers could no longer be members of the local government scheme. They had been in the scheme for years and had a good, well funded final salary scheme, with low employers' contributions. By diktat of the Government, new bus workers were told that they had to make their own pension arrangements, so immediately we had a two-tier pension scheme in the bus industry.

Of course, the Conservative Government were well known for having two-tier schemes throughout the public sector, so they probably thought nothing of it. Now, however, about two thirds of those working in the bus industry have a good scheme, but the other third are at the mercy of the sharks and charlatans about whom we have heard so much today.

The Government had other attitudes towards pension funds and their assets—one remembers their raid on the assets and surpluses of the National Coal Board, the National Bus Company's BEST scheme, British Rail and many others. Not only did they do that: they then spent Government money on behalf of the new trustees, defending them against claims that the money should be paid back. In short, they raided the money and then provided the costs of the legal defence to justify the decision being made in the first place. Many, many thousands of pensioners who worked in those industries will be far, far worse off as a result of that than of anything that might—I stress, might—emerge from the Budget decisions taken last week.

When considering pension values and the rights and living standards of pensioners, there are two sides to the equation. It is like any accounting practice—there is the income side and the expenditure side. We well remember the savage attacks on pensioners in the 1980s: the increase in prescription charges, the introduction of charges for eye tests and dental checks, value added tax on fuel and various other measures, all of which had a disproportionate effect on those on small occupational pensions. Some Conservative Members are looking aghast—they thought pensioners were exempt from those charges, but they must have been given the wrong brief.

Mr. John Hayes (South Holland and The Deepings)

Would the hon. Gentleman care to enlighten us as to which pensioners pay prescription charges?

Mr. Rooney

Any pensioner who is not on income support. If the hon. Gentleman nips very quickly to the Library, he will see that I am right, and he might get back before I sit down.

So far, this has been an interesting debate, although there seems to have been an attack of collective amnesia among hon. Members on certain Benches. It is important to remember that pensions are a long-term equation and all sides need to be considered. We cannot simply allow the debate to continue as it started, with the words of the shadow Chancellor.

6.14 pm

Sir Nicholas Lyell (North-East Bedfordshire)

I am glad to follow the hon. Member for Bradford, North (Mr. Rooney), not least because I listened to his speech with great interest for 10 minutes and noticed that it did not contain a single word of justification for what the Government have done in respect of pensions in the Budget—not a single word.

In the light of the Budget, people are rightly concerned about their pensions. The whole cast of this gravely mistaken Budget is wrong. In two short months, the Chancellor has allowed the living costs of the average mortgage payer to rise by about £12 a month, and has cut that individual's prospective pension—if he is around 30 years old and paying the modest enough sum of £100 a month—by some 20 per cent.

In order to provide equally for himself and his family in future retirement, that same citizen will have to increase his contributions by some £20 per month, if he can. That is a combined increase in mortgage and pension payments of £384 a year for a fairly modest earner, and the country should realise that.

That is profoundly wrong. The Government came into power purporting to set a high moral tone, yet they are willing to pretend that taxes can be raised painlessly by so-called windfalls; and, hoping that no one will understand the complexities of advance corporation tax, they have robbed future pensioners—pawning the future to pay for the present. I see that the Chief Secretary does not like to listen to this, and is about to depart the Chamber.

The £5 billion per annum taxes raised from the advance corporation tax changes to pension funds is the equivalent of an extra 3p in the pound on income tax, taken from people's savings. I mean people's savings, not "the people's money", which is how the Government like to refer to public money. We are talking about money taken from real people's savings every year, and millions of pensioners and probably as many as 20 million families will suffer as a result.

Britain can pride herself on having, over the past 18 years under the Conservative Government, increasingly funded pensions, so that, now, not only do we have the largest funded pensions in Europe, but our funding of pensions exceeds all others put together. We have put money by and saved it so that it can grow for the future.

With a constantly aging population, that is the only way to prevent our old people—that means ourselves in the years ahead—from becoming an intolerable burden on our children and grandchildren. At one greedy, misguided stroke, the Chancellor has severely limited that benign process. He has cut our savings and increased the need to save, but has cut the incentive to save. He is spending now what should be saved up for the future.

I am sorry that the Chief Secretary has left the Chamber, because, at the end of his speech, he tried to give some justification for what he had done by saying that the fact that companies would be taxed on the dividends they pay out would make them more likely to invest. I have never heard such a wafer-thin argument, which was rightly cut to ribbons by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley). The Chief Secretary had not thought of that argument when he was skewered on "Newsnight" the other night, and I suspect that it was dreamed up, either in the Treasury or the Department of Social Security, to provide some sort of fig leaf for this gravely mistaken policy.

We look forward to asking the Government some detailed questions. For example, how much of the money of companies that would have paid dividends is to go into investment, and therefore by how much has the £5 billion tax take been reduced to allow for the increased investment that is to give rise to the compensating bonanza, which was the substance of the Chief Secretary's argument? I do not believe that the figures will add up.

Moreover, by taking his tax increases from these largely unnoticed funds, not from current earnings, the Chancellor is doing nothing to cut current spending, which is feared to be leading to overheating, thus causing the Bank of England to continue to increase interest rates. Hence we are moving from the benign downward spiral in costs and interest rates that has stimulated the remarkable economic recovery in the past four years and left the Chancellor with his unrivalled inheritance, into a vicious upward spiral.

The pound rises, hitting at our competitiveness—the effect on manufacturing orders was dramatically demonstrated yesterday. Companies that increase payments into their pension schemes to replace what the Chancellor has taken out will have correspondingly less for investment; so much for his talk of under-investment. Private citizens with personal pensions who already prudently pay the maximum permitted for tax relief have nowhere to go. If they wish to save more, they must do so without the same tax relief.

Now we hear that the Chancellor has designs on personal equity plans. What will ISA, the individual savings account, have to offer? It seems hardly likely to be better, but we wait with keen anticipation.

Government supporters should realise what their much-vaunted new Labour Government are up to. They are up to hype and deceit, robbing the future to pay for the present. They pretend that money can be raised painlessly by windfalls, when they know that today the principal investors in the companies that they have just taxed are the very pension funds that they are already robbing by abolishing ACT.

Before the general election, one of the aims of the Labour party was to persuade the country that it had changed—that, in its approach to business and to the personal ambitions of ordinary people, it was now more like the Conservatives, only nicer. [HON. MEMBERS: "Hear, hear."] We now know that that is not true.

Two key Conservative principles—principles that apply to the millions of ordinary families who work hard and save hard—are thrift and self-help. By this Budget, Labour has hit both principles in the teeth. New Labour has turned its back on the pensioners of the future. Wake up Britain, and see these deceivers for what they are.

6.21 pm

Mr. Geraint Davies (Croydon, Central)

The Opposition motion is a rambling mish-mash of ideas, cobbled together by the fag end of the previous Government. It is couched in the language of guilt and betrayal, to scare the British public into supposing that they are at risk.

In reality, the aim of the Budget was to confront the country's endemic legacy of economic problems. That legacy consists of gross under-investment in physical and human capital, increasing debt costs—the annual cost of paying our debts is now £25 billion a year more than the cost of schools—and emerging overheating in an economy that is disabled by under-capacity and under-investment.

The Budget was designed to confront those problems head-on, and it did, by reducing corporation tax, reducing tax on small business and investing in the skills stock of UK plc, so that we would be strong again to fight and win in the global economy.

The Leader of the Opposition has said more than once that there is no such thing as a free lunch—although we know that there is free champagne in the Conservative leadership contest—but he does not realise that the Budget means growth and higher profitability for British industry and a simultaneously faster reduction in the country's debt. That must mean UK plc moving into balance much more quickly, and that must mean that the returns and values of pension funds appreciate more quickly.

It was no surprise, therefore, that, on the day after the Budget, the stock market rose 80 points. Since we were elected, there has been an upward cycle of share values, which has helped pension funds.

The shadow Chancellor, who has now left the Chamber, seemed to imply that growth did not matter, and the next moment he started talking about pension holidays, which is proof that, if industry grows because the Government provide the right environment for growth, that will compensate for the reductions in tax concessions that are given for dividends. The conditions that we have created will help pension values.

It has again been asserted—incidentally, it was asserted by the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell)—that pension values simply rely on dividend flows. That is obviously not the case: I have previously described that idea as a quaint, eccentric actuarial practice. Real pension values also depend on overall equity growth and projections of that growth.

We find that to be so elsewhere on the globe, and in the case of other financial products, such as unit trusts. Actuaries and the Department of Social Security need to think carefully—especially with respect to minimum fund requirements—about the definition that we now use, which we very much need to revisit.

I want to bring to the Floor the issue of the level of dividends as a share of operating surpluses in Britain compared with that of our major trading competitors. In Britain, that share is much higher than in the United States of America, Japan or Germany, suggesting that there is an opportunity for reinvestment from retained profit to increase research and development, and to increase long-term profitability to a more globally competitive level. That is implicit in the thinking of the Budget.

We must consider the Budget in the context of the new culture of stability that was introduced by the delegation to the Bank of England of responsibility for setting interest rates—a change which, overnight, reduced the long-term borrowing costs of British industry by changing long-term interest rates. That change reduced costs and this change increases returns, so collectively we see an increase in the expected return and profitability of British industry. That means jobs and prosperity for Britain.

The changes are good news for pensions. They are good news for pensioners, for workers and consumers, and for Britain.

6.26 pm

Mr. John Greenway (Ryedale)

It was obvious to all hon. Members who were in the House before the general election that, whoever won, the House would find itself debating pensions fairly soon. I doubt, however, that any of us anticipated that we would be doing so in circumstances such as those that we are in tonight—the robbery of about £5 billion a year from our pension funds by the proposal on advance corporation tax in the Budget.

Listening to some of the earlier exchanges about the proposals for basic pensions plus made by the previous Government—which, I seem to recall, were favourably received by the current Minister for Welfare Reform and by the Prime Minister—I was reminded that, before the general election, it was understood on both sides of the House that there was a need for long-term reform, to encourage more people to provide for themselves for their retirement. That recognition appears to have flown out of the window in the present Government's proposals.

I remind the House of my many interests in insurance and financial services. I have worked in the insurance industry since 1970. I am a director of what is now a very successful insurance brokerage, which also includes an independent financial services company, both based in North Yorkshire. I am an adviser to the Institute of Insurance Brokers, and have been throughout its 10-year history.

As the Under-Secretary of State for Social Security, the hon. Member for Southampton, Itchen (Mr. Denham), knows, in the past seven years we have had a thriving insurance and financial services group, in which we have considered in a non-partisan way some of the issues that we are debating tonight. I have one other curious interest, in that I am, and have been for six years, an elected member of the Insurance Brokers Registration Council. We are regulators. We are the authorised bodies for insurance brokers. In that role, I have hands-on experience of why the problem of the misselling of personal pensions is taking so long to resolve.

In view of these interests of mine, hon. Members are bound to wonder whether any of them might influence what I have to say. But in fact the Budget was not bad for the company of which I am a director: the lower corporation tax and the 50 per cent. on capital allowances benefited our company. The removal of the ACT credit from pension funds will inevitably mean more new business for companies like mine—so the measure is beneficial from that point of view. The real issue, however, as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) said, is the fact that we are robbing the future for tax revenue today, which is a gross mistake.

The pensions transfer review is complex. It has been said this evening that the former Government did nothing about it, which is not true. The Economic Secretary, to be sure, has injected some urgency into the review, and that is good. Very few people in insurance or financial services fail to recognise the need for the review to be completed. I remember saying at the Chartered Insurance Institute's conference in Aberdeen, held in 1995, that insurance and the financial services industry cannot expect to regain the trust of the public until this matter is resolved. There is no shortage of willingness to resolve it, but certain problems remain.

The IBRC authorises roughly 1,200 firms' financial services regulation. We have identified about 200 cases, involving 80 of those firms, which hinge on the opt-out and non-joiner part of the problem. As the hon. Member for Southampton, Itchen (Mr. Denham) knows, that is critical. Very few of these cases have been settled, but we have set as a target for their settlement the end of 1997. We believe that about half the cases will result in compensation.

We have also identified about 2,800 cases involving pension transfers. A great many of them are not a problem, although I suspect that there may be some over-optimism in that regard. We have identified, furthermore, about 11,500 non-priority cases which are not yet part of the review and which still await a decision about when the industry should consider them. If the IBRC, covering 1,200 insurance firms—each one of which has a large general insurance business; this is not the main part of their business—has so many cases, we can only guess at the scale of the problem throughout the rest of the industry.

The Government would therefore be wise to defer a decision on when the non-priority cases should be reviewed until the first phase, the priority cases, is out of the way.

Why is it taking so long to complete and settle the reviews? Gathering the information is a slow and complex business. It was not until the autumn of last year that the software was produced to allow a loss assessment to be done in a standardised form. It would be a hugely complex task to do case by case. It should also be remembered, as against the allegations that the previous Government did nothing, that the Securities and Investments Board simplified the information that had to be asked for only as recently as January of this year.

I have seen a letter on file from one occupational scheme that we are reviewing, answering the request for information using the latest, simplified form recommended by the SIB, as follows: You will have to learn to wait. I urge the Government to get on the backs of the financial services and pension providers, and to chivvy along the occupational schemes. Unless they provide what are often simple scheme details, we cannot calculate precisely what the losses may be. They must be encouraged to get on with the job. The country is entitled to expect progress, and progress is precisely what the great majority of people in the industry want.

The next huge problem concerns the feeding in of the removal of tax relief on dividend income to the calculation of what it will cost to go back into an occupational scheme, and of the likely value of the personal pension policy that was sold instead. If such an equation has to be drawn up, any prospect of resolving the problem of misselling at an early date will go out of the window. Any such idea is bound to hit the buffers.

If an occupational scheme does decide to recalculate what it will require for a person to rejoin it, it will in effect have a blank cheque: it can require whatever it wants before someone can rejoin. Yet existing members will still be subject to the same regime, governed by the tax credit removal on ACT; so current members will be worse off. It is expected throughout the industry that many occupational schemes will ask for more—but why should they?

The Government ought to send a strong message to the industry that no allowance should be made for the tax change in any of the reviews. We should not move the goal posts because of that tax change. The calculations should be carried out as if the tax change were neutral; otherwise, the pensions transfer problem will not be solved as quickly as we would like.

The scenario I have described would be a double whammy when it came to compensation costs. Some people might ask why an increase in compensation costs is a cause for worry. I can tell the House three reasons for that. First: who will pay? Perhaps the money will come from professional indemnity insurance or the resources of the firms concerned, if they are still in business—many of them are. But the value of the policy benefits to many policyholders in mutual companies will fall as a result of compensation payments—an issue with which the House has yet to come to terms.

I long for the day when a non-executive director of one of the mutual life offices says, "I have had enough of this. People who did no wrong are having their benefits curtailed so as to pay for compensation to people who may have been missold personal pensions but who were at least a party to that transaction." Ultimately, the problem will have to be tackled.

My second reason is a question of equity. Any assessment of the advice that preceded the misselling of pensions can surely be made only in the light of what were thought at the time to be the likely consequences of such advice.

It may be argued that advisers should have paid attention to possible tax changes, such as the one under debate this evening—although there was certainly no clear warning of it. We have to make a firm judgment at some point as to the knowledge on which such advice was based. If we do not set the cut-off date for such knowledge at the time a policy was sold or the time someone was advised to leave or not to join a scheme, then we should at least settle for the time when the SIB review was announced.

Without such a cut-off, who knows what changes to tax laws or benefits the next couple of years may hold? We shall find that, every time a change is made—it will be a long-drawn-out process for several years—we shall have to rehash the matter.

A precedent has already been set of which the Minister may be aware. Some independent advisers have asked the SIB and the PIA whether, in calculating compensation, they can take into account the fact that the company with which the personal pension policy was arranged produces windfall shares for members. Some, such as the Norwich Union, have, and there are strong rumours about what might happen to others like the National Provident Institution and Friends Provident.

The PIA has come down firmly and said that under no circumstances should those additional benefits be taken into account. If we apply the logic of that argument, we should say that the ACT tax credit change should influence neither the calculation of the cost of returning to an occupational scheme nor the value of the pension policy that was sold. The comparison between the two is how the required compensation is calculated.

The third reason for concern about compensation costs is that the Government's role in this matter was undoubtedly a major factor. Earlier in the debate, the hon. Member for Northampton, North (Ms Keeble) produced some advertisements with which we are all familiar. I urge the new Government to tread carefully when giving advice: whether it was right or wrong, many people thought that buying a personal pension was the right thing to do because the climate that was created encouraged that.

Mr. Duncan Smith

It was right for some people.

Mr. Greenway

It certainly was, but it was not right for everyone.

My hon. Friend makes the very point that I was about to make: the fact that there was a climate in which personal pensions were regarded as attractive exonerates no one from giving bad advice on whether to opt out or not to join an occupational pension scheme. The pensions industry has agreed to take all this firmly on the chin, because it knows in its heart of hearts that people were put into those schemes, and that policies were put on to the books and accepted, when they should not have been.

The Chancellor's decision to remove ACT tax credits from pension funds is a monumental misjudgment. For the background to this matter, one need only look at The House Magazine of 30 June—published on the eve of the Budget—in which the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) had an article about pensions.

In another article, Allan Evans of Pearl Assurance made two telling remarks about the scale of the under-investment in pensions. In spite of the record that my right hon. Friend the Shadow Chancellor outlined at the start of this debate in comparing our record with that of other countries, the potential for more to be done could not be clearer from Mr. Evans's two comments. The first is:

Only 1 in 100 occupational scheme members will receive their maximum entitlement of two-thirds of final salary. It is no good saying that pension funds are awash with money and that everyone is on some great gravy train once they retire. That is simply not true, because only one person in 100 will get the maximum. One has only to look at the insecurity of being a Member of Parliament and at how many hon. Members, when they eventually retire, will get the maximum pension entitlement under our scheme. In the fleeting moments during the count, when even I wondered whether I had survived, the pension that I would lose was one factor for my wanting to return to the House—but it certainly was not the only one.

Mr. Evans's second point, which is even more telling and even more important in terms of the removal of the ACT tax credit, is: the majority of people with a personal pension are making wholly inadequate levels of contribution. That is why the misselling scandal arose. It was not wrong to encourage people to make provision for their own future; the problem was that they merely invested their national insurance rebate, which should have been just the first building block.

One of the reforms on which I hope for some cross-party consensus is that, if people decide not to join an occupational scheme, any employer's contribution that would have been made to an employer's scheme should be available for them to invest, as of right, in a scheme of their own. We should have done that in the late 1980s. The fact that we failed to do so is one reason why we have this problem today.

The hallmark of the new Government's first weeks in office is to blame the previous Government's shortcomings for unpopular and difficult decisions. I make no complaint about that; if the roles were reversed, we would doubtless do the same. However, the decision on advance corporation tax credits is entirely of the Government's making. All Governments make mistakes, but it is hard to imagine a worse one, even by this Government's standards.

6.45 pm

Yvette Cooper (Pontefract and Castleford)

The House will welcome the sudden apparent interest shown by Conservative Members in the plight of pensioners. However, I fear that the 15,000 pensioners in Pontefract and Castleford will be a little cynical about the former Government's new-found concern for their plight. After all, it was the Conservatives who put VAT on fuel bills up to 17.5 per cent. whereas the Labour Government have cut it to 5 per cent. and abolished the gas levy, which means that pensioners in my constituency will be considerably better off this winter than they would have been had Conservative Members had their way.

The Conservative party did little to ensure that the poorest pensioners get their full entitlement to the money that they are owed after working hard all their lives. An estimated 1,500 pensioners in my constituency do not get the income support top-up to which they are entitled, having worked so hard, which means that they lose on average £14 per week. That sum goes a long way when one does not have much money to play with in the first place. Nevertheless, the Opposition now say that they are concerned for the plight of pensioners in the future; it is worth considering their arguments in detail, if only to show that they do not add up.

The Shadow Chancellor raised the subject of a 30-year-old now saving for her pension. She has most of her working life before her and hopes to be in work during that time to save for her retirement. What questions does she face when considering the security of her retirement? Her security depends first and foremost on her pension fund's long-term performance, which means the performance of the companies in which the pension fund invests. She will be pleased to see how well the stock market has done since the Budget—an 11 per cent. increase has done wonders for the capital value of pension funds—but she will be more interested in the long-term performance of pension funds and companies, which depends most of all on the economy's long-term performance.

The 30-year-old is also interested in whether she can stay in employment for the next 30 years, which means that she has a strong interest in not being pushed out of her job by another recession—by more of the same boom-bust cycle with which the economy has been plagued for decades, and certainly severely for the past 20 years. Her security in retirement thus depends on her ability to stay in employment and on the long-term prospects for growth in the economy.

What would that 30-year-old have had to expect from the Conservatives for her retirement? Not very much. The former Chancellor was preparing to make exactly the same mistake in economic management as his predecessor, Nigel Lawson, made in the 1980s, fuelling another boom. No, he would not have raised taxes. No, he would not have cut borrowing. No, he would not have given the Bank of England control over interest rates. And no, as we know, he would not have been half so keen to raise those interest rates himself.

Had the Conservatives been re-elected, we would have been on the verge of another round of disastrous economic mistakes, taking the risk that we were fuelling inflation, triggering recession once more and weakening the very companies on which that 30-year-old's pension depends. We can assume from what the shadow Chancellor has said that he would agree that he, too, would not want to cut borrowing at this stage, would not want to raise interest rates and would certainly not have given control of interest rates to the Bank of England.

In contrast, my right hon. Friend the Chancellor has done more to promote stability in economic management than any Government since the war. He has also done more to promote the long-term rate of economic growth in the past few months than the Opposition did in their time in government.

Let us consider the real problems for the long-term rate of economic growth, which matters for the pension funds and for long-term company performance. Low investment and skills shortages are huge capacity constraints on the economy, stopping our economy growing and preventing businesses from expanding as much as they could otherwise do. The United Kingdom's investment record is pitiful compared to that of our competitors. In 1995 we invested only 15 per cent. of our national income, leaving us 13th in the European Union league. We know that we also face persistent skills shortages, which the previous Government did little to tackle when they were in power.

The new Government, however, have introduced new measures for investment, not just by cutting corporation tax, but by increasing capital allowances. Such measures will promote the prospects of pension funds which are so important.

That brings me to the tax credit about which Conservative Members are so exercised. Would they have introduced that credit if they were starting all over again? Will they reintroduce it, once it is abolished? Would they really want to introduce a distortion in the tax system that encourages pension funds to demand a short-term dividend from the companies in which they hold shares, rather than encouraging those companies to put their profits into investment? The tax credit directly encourages that. It is a distortion that is short-termist in its impact and probably does much to explain why we have such an abysmal investment record in the UK.

For example, in the late 1970s dividends as a share of gross domestic product were about 2 per cent. in the UK and about the same in the United States. Over the past 20 years, dividends have risen to about 3 per cent. in the US. In the UK, dividends have soared to an almighty 6 per cent. of GDP. No wonder we have capacity constraints, if so much money is being poured out in dividends rather than being invested in the long-term future of our companies. It is madness to allow such a distortion to remain when we have the chance to do something about it.

Mr. Letwin

The hon. Lady describes a gap of 4 per cent. of GDP. Can she tell the House where she imagines it to go? Does she accept that it may be redistributed into the industries that most require it for investment?

Yvette Cooper

Opposition Members have a problem—they think that there is a zero sum going all the time. They do not think in terms of resources going into investment in the long term, and of allowing companies to make a fair decision without its being distorted by a tax incentive that sends the money back to the pension funds. Conservative Members have been so keen to advocate market forces in order to allow companies to make fair decisions and to send the money where they think that it will have the best return; yet the hon. Gentleman is advocating a tax credit that specifically distorts the financial decisions made by companies and by pension funds because they have an incentive to send the money back in dividends instead.

Even honest Conservative Members know that that tax credit should go. More than 10 years ago the right hon. Member for Henley (Mr. Heseltine) told journalists that the system of subsidies for pension funds did not promote wealth creation. The remedy, he suggested, was to

take pension fund incentives away. If Conservative Members were genuinely concerned about the plight of pensioners in future, they would have done more to tackle the misselling of pensions. Theirs is the party which, when in government, encouraged hundreds of thousands of people to opt out of their work pensions into private personal pensions, and then sat back and did nothing about the scandalous misselling that took place.

About 2,300 people in Pontefract, Castleford and Knottingley have been missold personal pensions. Fewer than one in 100 have received any compensation. More of them have died before receiving any compensation than have received compensation. I find those figures shocking. I am amazed at the gall of the Opposition when they refer to the misselling of pensions in their motion, after their irresponsible behaviour and the little that they did to tackle that misselling.

On behalf of my constituents I welcome the determination of my hon. Friend the Economic Secretary to take tough action against companies which have not yet compensated their unlucky victims. Pensioners in my constituency and savers for future pensions will be relieved to know that their prosperity and their future pensions are now in the hands of a Labour Government.

6.56 pm

Mr. Nick Gibb (Bognor Regis and Littlehampton)

I begin by refuting the point made by the hon. Member for Pontefract and Castleford (Yvette Cooper) about the imputation system. We would have created the imputation system if we were starting from scratch, because it avoids double taxation of company profits, first in the hands of the company and then in the hands of shareholders. The current method avoids distortion in the capital market. We have equilibrium in the capital markets through the system. The system that the Government are trying to create distorts the capital market.

As the details of the Budget begin to sink in, the irony of it all begins to rise to the surface. The Labour party ran a general election campaign based on a promise of no rise in income tax, a promise to generate more investment in industry and, most disgraceful of all, a scare story that pensioners risked losing their pensions if a Conservative Government were re-elected. Now we see the reality—a Budget which does colossal damage to the interests of pensioners and pension funds, which will reduce investment in industry and which introduces a reduction in people's disposable income which, in all but name, is a rise in income tax.

The ending of tax credits on dividends vandalises British pension funds to the tune of a diminution in value of about 11 per cent. At a time when the developed world is confronting the challenge of how to fund an ever aging population, and when we have in prospect a huge competitive advantage of meeting that challenge with £650 billion of pension fund assets, the Government decide to launch an unprovoked attack on those funds. That tax change will cost the average person who contributes to a personal pension £20 a month extra in pension contributions to make up the shortfall.

For example, the tax change will result in a 30-year-old's pension fund that would have been worth £250,000 on retirement suddenly losing £50,000 in value—a reduction of 20 per cent. in the value and a consequent £20 a month extra pension contribution to make up the shortfall. For many millions of people with personal pension schemes, the shortfall will have to be made up by the individual.

Mr. Piers Merchant (Beckenham)

While my hon. Friend is examining the effect of that tax increase on individuals, will he also consider the cost for council taxpayers and the extra that they will have to pay to ensure that local authority pension funds are topped up? Is he aware, for example, that in the borough which covers my area—Bromley—the council estimates that the tax rise will cost it £750,000 per year, which means an increase of £6 for every council tax payer in that area on band D?

Mr. Gibb

I thank my hon. Friend for that intervention. I agree with him, and I have similar figures from my constituency to which I shall refer later.

Returning to pensions, the company will have to make up the difference in most—but by no means all—final salary schemes. As a result, more and more companies are likely to switch from defined benefit and final salary pension schemes to defined contribution schemes. That will shift the risk from the companies to the individuals.

The Chancellor of the Exchequer would have us believe that this is a no-cost Budget—a Budget for the people—but it is not a Budget for the people: it is a Budget that the people will pay for. The Chancellor described it as a Budget for the long term, but the truth is that the Budget will raise cash in the short term while creating enormous problems and increased state dependency in the long term.

Before the Budget, the pension fund regime allowed funds to accumulate tax free. The Government have effectively removed that tax exemption. They will tax pension funds at a time when they were talking about encouraging more savings and the possibility of compulsory third tier pensions. I wonder whether the Labour Government are fully aware of all the consequences of this measure. I doubt whether the Government thought through the changes fully in their rush to legislate.

It is odd that, while higher and basic rate taxpayers will keep tax credit on dividends, non-taxpaying individuals—the poorest in society—will lose the ability to retain tax credit on any small dividend income that they might have. That will particularly hurt pensioners, most of whom do not pay tax. The Government have surely not thought through that measure.

Have the Government considered what will happen to the self-employed or to those in non-pensionable employment who are paying the maximum 17.5 per cent. of their net earnings into a private pension fund? As a result of the Budget, those people will find that they must increase their contributions in order to rebuild their pension funds to their pre-Budget values. However, as they are already paying the maximum amount, those people cannot increase their contributions. Why did the Government not decide to raise the limit from 17.5 per cent. to 25 per cent. of net earnings in those circumstances? Did the Government reject the idea or, as I suspect, have they not even considered it?

What extra incentives do the Government intend to introduce to make maintaining an opt-out from SERPS worth while in the light of Budget changes that make private and occupational pensions less attractive? Have the Government proposed any new incentives? Will they provide additional expenditure to fund the extra demands on the public purse? Have the Government considered those points, or is that another aspect of the Budget that they have overlooked in their rush? Perhaps the Government do not want people to opt out of SERPS—after all, the heroine of the old Labour party introduced SERPS in the first place.

The Budget's effects on local government were mentioned earlier. Have the Government allowed for extra spending provision to make up the revenue support grant in order to fund the extra cost on local government? Have they considered that issue? For example, West Sussex county council has calculated that, as a result of ending tax credits on dividends for tax-exempt funds, its pension fund will be an additional £3.4 million in deficit. That will necessitate increasing the employer contributions, which are currently 17 per cent. of salary, to a staggering 23 per cent. of salary.

We must then ask: how will West Sussex county council fund that extra contribution since it is already spending up to its cap? Will the Government allow the council to allocate the extra expenditure necessary? Will they relax the cap? Have the Government considered that issue? I noted earlier this afternoon that the Prime Minister had considered the matter relatively recently. He excused the mess by declaring that local authorities do not need to revalue their pension funds for another two years. Is the Prime Minister recommending that councils act in an imprudent manner and do not start making up their deficits immediately?

If West Sussex county council is allowed to spend beyond its capping limit, it will mean a 2.5 per cent. increase in council tax. A similar problem faces Arun district council. As a result of this Budget measure, its pension fund will be in deficit by £400,000—which translates to an extra £8 a year that residents of Bognor Regis and Littlehampton must pay. Combined with the county council and police authority, that amounts to an increase of £20 a year. People will have to pay an extra £20 a month in pension contributions and an additional £20 a year in council tax. The Government were elected on the pledge that they would not increase income tax—but these are income tax increases by the back door, and the people will notice. They will know that they were misled on 1 May.

The Government billed last week's Budget as a Budget for investment. A Budget that will tax the investing sector of the economy—the pension funds—to the tune of £5 billion a year is not a Budget that will encourage investment. A Budget that will tax the biggest spenders on plant and machinery—the utilities—to the tune of £5.2 billion will not encourage investment. A Budget that reduces the tax credit available to overseas investors, so that it is less advantageous for a corporate investor from the United States, for example, to invest in the United Kingdom, will not encourage investment.

A Budget that proposed initially—I do not know whether the measure is still on the books—to abolish foreign income dividends, which threatens to drive out of the United Kingdom many British-based multinationals, will not encourage investment. A Budget that amends the finance leasing legislation, the consequences of which will be higher capital costs, will not encourage investment. A Budget that doubles the rate of stamp duty on property to 2 per cent.—we should note that stamp duty applies not only to houses and real property, but to any property that is sold or transferred by document, including the sales of businesses, good will and so on—will impose a significant cost on dynamic and changing businesses, and therefore will not encourage investment. They are only six measures from the Budget, which was billed as a Budget that would encourage company investment, which will reduce such investment.

A Government who said that they would consult widely on tax legislation and who have proposed the novelty of green Budgets, are rushing ahead and pushing through legislation, the consequences of which they have not considered fully. The Government have already announced changes to the Budget: first, altering the calculation of the value of utilities for windfall tax purposes; secondly, the possible withdrawal of their ill-considered decision to abolish foreign income dividends.

It was interesting to hear the Paymaster General's response during Friday's debate on the Budget to criticism of the Government's decision to abolish foreign income dividends. He said that international headquarters companies would remain and could continue to pay dividends free of tax. However, the international headquarters companies regime is available only to non-UK owned groups.

We have before us ill thought out and rushed legislation. The timetable for debate allows for too little consultation, which is why mistakes are being made. It is time that the Government paused to consider and to consult. It is time that they gave up their high-handed approach. The Finance Bill will not increase investment, as the Government claim, but reduce it. The Finance Bill will not create jobs, but cost jobs. It will not make pensioners more secure, as the electorate were told that a Labour Government would, but less secure.

7.9 pm

Mr. Tony Colman (Putney)

Thank you, Mr. Deputy Speaker, for calling me to speak in the debate. I declare an interest as a councillor for the London borough of Merton and chair of the United Kingdom Standing Committee on Local Government Pensions. I am also chair of the Local Authority Mutual Investment Trust, director of Church Charities and Local Authorities and chair of Greater London Enterprise Development Capital.

The United Kingdom Steering Committee on Local Government Pensions represents the 99 pension funds in local government. Between them they invest assets of some £60 billion under the local government pension scheme. We have 1.6 million current and deferred pensioners and 1.25 million contributing members. Our funds constitute 10 per cent. by value of all UK pension funds.

Local government pensions are unique within the public sector in being funded rather than pay-as-you-go. We also represent teachers, the fire brigade and the police, but, of course, the previous Conservative Government had not grasped the nettle in ensuring that those schemes are funded, so council tax payers, through various levies, have to pay ever increasing costs for the police and fire brigade. I hope that the Under-Secretary of State for Social Security, my hon. Friend the Member for Southampton, Itchen (Mr. Denham), will take account of that in his pensions review.

I particularly wished to speak in the debate because the right hon. Member for Wells (Mr. Heathcoat-Amory), in the Budget debate on Monday, and the Leader of the Opposition, in Prime Minister's questions today, quoted from a letter that I sent, before the Budget, to the Chancellor. It was dated 26 June and was acknowledged by the Treasury on 30 June. It concerned the then potential abolition of tax credits to pension funds. It said that that

?would add at least 3 per cent.—or £300 million—to employers' pension costs and compensation would be needed, otherwise there would be further cuts in local services unless there was an increase in the revenue support grant.? I hope that the following comments will be helpful to the House. No local government pension beneficiary is affected in any sense by the proposals in the Budget, which I support. It is important to remind hon. Members that the local government pension scheme is extremely well managed and is very much a model for the private sector. The hon. Member for Mole Valley (Sir P. Beresford) previously represented Croydon, Central. I wonder why he moved. Perhaps the excellent speech from my hon. Friend the new Member for Croydon, Central (Mr. Davies) was a clue.

The hon. Member for Mole Valley gave the local government pension scheme a clean bill of health and supported its continuance. The fact that Opposition Members could not find any holes in it shows that it is an extremely good scheme. Thousands of people who are waiting to come back into those schemes were missold pensions. I assure the hon. Member for Ryedale (Mr. Greenway) that there is no hold-up in the information being made available from the pension funds that I chair.

Local government pension funds have returned extremely good, high returns. I particularly commend their ethical and environmental investment. I hope that other hon. Members who speak in the debate will pick up on that point, as it is important.

I should comment on local government pension funding, which is already below 100 per cent. Hon. Members may ask "Why?" In 1990, I regret to say that the previous Government encouraged funding for local government pensions to drop from 100 per cent. to 75 per cent. to massage the poll tax bills. The reduction overall, as a result of that change, was some 6 per cent. The Lamont reduction in tax credits increased that figure further.

The hon. Member for Beckenham (Mr. Merchant) outlined the possible impact on the funds for Bromley, but each fund varies. Some are funded at 105 per cent.; the lowest, I believe, is funded at about 75 per cent. It depends, perhaps, on the prudence of the decisions of the officers and members of each of those authorities and whether they felt that they had to support the Thatcher Government.

It may be helpful to the House if I explain the valuation of the Essex fund, which was conducted in 1995. The Essex fund is extremely well run by Keith Neale, the borough treasurer. I particularly picked this example because the Chief Secretary, in his reply to the debate on Monday, accurately pointed out that the 3 per cent. mentioned in my letter paled into insignificance compared with the 5 per cent. that results from ill health and early retirement.

Much of the reduction took place because of the reorganisation of local government, which was encouraged and pushed through by Conservative Members. There are further reductions to the 100 per cent. funding level. Some 1 per cent. comes from salaries, which are ahead of inflation. A further 1 per cent. comes, I am glad to say, as a result of pensioners living longer. The funding level of the Essex fund, which was 97 per cent. in 1992, dropped to 84 per cent. in 1995. I say this in terms of it being an extremely well run fund. Thus the 3 per cent. that I mentioned in my letter needs to be taken in the context of the 13 per cent. drop between 1992 and 1995.

Having written my letter, I received advice that the chair of the Chartered Institute of Public Finance and Accountancy pension panel, Peter Scholes, who is chief executive of the London Pension Funds Authority, takes the view that the removal of the tax credits would add some 1 to 2 per cent. to costs, which is significantly lower than the figure in my letter. He has commented in public about what he felt was a very overrated knee-jerk reaction from the media.

I very much support the proposition made by the Chief Secretary earlier in the debate, that we need to look at the valuation of funds. The valuation needs to change. The largest local authority fund—if I can call it that—is American, the Californian local authority fund, which is very much looking for growth from good management. I thank my hon. Friend the Member for Pontefract and Castleford (Yvette Cooper), who, in an excellent speech, pointed out the difference between the American and British system. We have, perhaps, seen an inflation of the cost of the loss of tax credits by many actuaries. They need to rethink the basis on which they would look at actuarial valuation in the future.

The Chief Secretary quoted from certain newspapers. I shall quote Anthony Hilton from last Friday's Evening Standard, who said: If the actuaries valued funds on the basis of their total return, and therefore took account of the capital appreciation in funds, a quite different picture of pension fund solvency would emerge.

Mr. Butterfill

Surely the hon. Gentleman appreciates that the action that the Government are now taking will drive more and more pension funds out of investments and equities, so the capital appreciation that he desires is much less likely to happen.

Mr. Colman

It is for every fund manager to take his or her decisions. I personally believe that the package presented in the Budget offers real hope and opportunity for businesses in this country to develop and expand. I would certainly not wish to see any of the local authority pension funds disinvest in the equity market. Perhaps Opposition Members will give different advice, but that is certainly the advice that I would strongly give.

I echo the information that my right hon. Friend the Prime Minister gave at Question Time, that the next actuarial review is not due until April 1998. The recommendations from that will not come forward until late 1998. The impact—if there is any impact—on local authority budgets will be from 1999 to 2000 onwards. I assure the House that the impact will not be seen immediately in terms of council tax bills or an effect on services. The strength of the funds may mean that local authorities will not need additional revenue support grant. That is possible, given the mood of the country and, as my hon. Friend the Member for Pontefract and Castleford said, a strong rally in the stock market, notwithstanding the past two days of speculation about potential changes in the interest rate.

I have received a letter, however, from the Minister for Local Government and Housing, which plainly states that when the actuarial figures are given following revaluation or the fresh look in 1998 and if it is found that there is a problem, the Government will take such factors into account in determining local authority provision for 1999–2000 and subsequent years. It is a matter of taking a view of the situation at the relevant time.

Mr. Merchant

I have listened to the hon. Gentleman's many comments with great interest. I believe that it will be easily demonstrated that local authorities are out of pocket as a result of advance corporation tax changes. Will he join me in pressing Ministers to ensure that the authorities receive full compensation for the costs of the tax change?

Mr. Colman

As I said, under the previous Government there was a 7 per cent. reduction in funding without a penny coming to local authorities. I made it clear in my letter, to which I referred, and I make it clear again, that it is important that there are no cuts in services. In the light of the letter that I received from my hon. Friend the Minister, I believe that there is not a problem to take forward. Her letter contained important assurances. It is for us all to ensure—again, I support my hon. Friend the Member for Pontefract and Castleford—that we reassess the way in which pension funds move forward. The future looks better with the changes that were announced last week, not with the bizarre approach that has been taken in the past.

Mr. Lilley

Will the hon. Gentleman give way?

Mr. Colman

No. I shall continue.

Officials of the Department of the Environment, Transport and the Regions have met local government officials today to consider those matters. I believe that there is no need for additional revenue grant, but we shall see what happens with the revaluation in 1998.

I shall summarise. I believe that additional funds may not be needed to deal with the abolition of tax credit. The 3 per cent. consideration, which is mentioned in my letter, must be seen in the context of the 13 per cent. change between 1992 and 1995.

Mr. Lilley

The hon. Gentleman is delivering the best informed and most interesting speech that we have heard from Government Benches, including the Front Bench. He has made an important point and I think that I have grasped it. Do I understand that he has received an assurance from the Minister for Local Government and Housing that extra finance will be available in the next financial year to meet the cost to pension funds in local government? Will the hon. Gentleman confirm that I am correct in that understanding? Will he comment on what appears to be a pledge to break a promise that the Government would remain within the established guidelines for money for that Department?

Mr. Colman

There has been no proposal to break that pledge or to move outside the guidelines. The letter clearly states that factors will be taken into account in determining local authority provision for 1999–2000 and subsequent years.

As a business man and chair of the UK standing committee, I believe that the Government's proposed reforms are good for UK companies. I believe also that we shall see real investment through fiscal neutrality. Companies that have been driven to having higher and higher dividends will be able to reinvest to improve their net worth. We are talking of a good proposal that will be good for the UK and good for pensioners.

7.24 pm

Mr. Howard Flight (Arundel and South Downs)

First, I should disclose that I have spent 25 years in the investment management industry. I spent the past 12 running a business and I remain a director of a company that manages a number of pension fund portfolios.

I believe that the new Government will come to rue the day that they abolished advance corporation tax refunds for pension funds. It would have been a sufficiently major change without introducing it so shortly after the general election, the Labour party having not set out the proposal in its manifesto. It was, of course, challenged about it. I certainly challenged my local Labour candidate. It is a mistake, and it will be seen by the many people affected as a betrayal. From your point of view as a Government, the one thing I hope of you is that the Minister for Welfare Reform will produce a thorough review and reorganisation of our social security system. I think that you are prejudicing a major element of that—

Mr. Deputy Speaker (Mr. Michael Lord)

Order. The hon. Gentleman is using "you" and "your". The Chair is not responsible for the matters that he is discussing.

Mr. Flight

Thank you for correcting me, Mr. Deputy Speaker.

With the minimum funding requirement coming in this April, it is unwise to change the playing field, there being a need for things to work themselves out.

My right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), the shadow Chancellor of the Exchequer, began by highlighting the contribution to the economy that has been made by the deliberate giving of tax incentives for pension fund accumulation. It is known that about 62 per cent. of pensioners already have occupational pension schemes, and I have discovered that the distribution from private sector funds is approaching about £40 billion a year.

If we think about that in another way, if that degree of distribution had to come through the tax system, as it does on the continent, there would have to be about 14 per cent. higher taxation. If that burden fell entirely on income tax, there would have to be about a 40 per cent. increase in income tax. The distribution from occupational pension schemes is overwhelmingly the reason why the UK has a much lower rate of taxation than the various rates in continental Europe.

Why is it that continental European economies are suffering from what I would call Maastricht stagnation stability? It is because their tax takes are far too high. I hope that the Government's deep wish for stability, as expressed by the Chancellor of the Exchequer—we all support it—is nut in reality the appalling Maastricht-encouraged stability of stagnation that the rest of Europe has been experiencing.

We are talking of material change. About 70 per cent. of UK dividends go to non-tax-paying institutions that receive rebates, of which the overwhelming majority are pension funds. The amount per year has been cited, but it will be more than £5 billion by the 1999–2000 tax year. It will be about £50 billion over the next 10 years. The Government's proposals will bite on those who have their own personal pension schemes. If they do not up their subscriptions, they will have pensions that are about 20 per cent. less than they expected. In that sense, there is a dangerous retrospective element in the proposed changes.

People took out personal pensions having contracted out of state earnings-related pension schemes on the expectation that there would not he such material tax changes affecting the pensions industry. Various figures have been cited for the cash-flow consequences for the standard mid-30-year-old. In the main, the figure would seem to be between £150 and £250 per annum, depending on how well he or she was providing for a personal pension. That is equivalent to a rise in his or her tax bill of about 7 per cent.

The shadow Chancellor cited the extraordinary remarks of the Financial Secretary. I heard the Chancellor argue in the House that the changes would not have consequences such as the ones that I mentioned, because equities would appreciate as a result of the wider impact of the Budget. The track record of British companies shows that the pattern of capital investment is affected by a variety of factors, the most important of which is the exchange rate. A second factor is self-evidently a company's cash position: companies have had extremely strong cash positions. The rate of return on investment is a third factor.

There is no evidence that retaining earnings rather than paying out dividends has any material effect on capital investment. The misplaced obsession of Will Hutton, which is based on a misunderstanding of what goes on in Germany, seems to have crept into Government thinking rather too strongly. I refer the Chancellor to the recent work of Dr. Laster and Professor Taffler at the City of London business school. They found that companies paying dividends were more likely to invest, particularly in research and development, and that those dividend-paying companies had a higher rate of such expenditure.

The rise in dividend pay-outs has not been called for or encouraged by pension funds. It has happened largely because, with tax-free flows of money, we have had a good clearing market for the most efficient investment of returns.

I am mainly concerned about the responses of companies and the impact on pension portfolio investment strategy. I believe that both will be negative. The ACT impact reduces scheme funding by 10 per cent. or 11 per cent., which brings many close to the 100 per cent. minimum funding requirement level. Companies are bound to shift: indeed, almost half have already shifted to money purchase schemes rather than final salary schemes. Money purchase schemes contain the cost, put the risk on to the pensioner and, at the end of the day, are pretty certain to produce a lower pension. I have seen in the industry an acceleration towards such a shift, and I believe that it will increase.

The Government seem to have forgotten that they have created a tax distortion in favour of interest. Dividends are taxed and interest is not, so there is no logic in that. The change in strategy will produce a rise in domestic and foreign bond holdings, and interestingly a commensurate rise in emerging market equity investment, thus keeping the overall risk portfolio fairly similar, although it will be at the expense of investment in mainstream UK equities. The bond element, even though it may be prudent in some senses, is an asset that does not have the power to appreciate in capital value. Moreover, I would argue that it is not a particularly wise time in the economic cycle to be increasing bond investment, given that we have had a bull market in bonds for 17 years.

If the Chancellor has genuinely been persuaded by the Will Hutton school of economics, he risks taking measures that will turn out to be as ill conceived as Harold Wilson's old selective employment tax. It is irresponsible to attack pension fund accumulation, which is an area of proven UK success. Moreover, for many investors there will be a retrospective element.

The point has already been made about those who have contracted out of SERPs. Will they have their rebate upgraded, or will they go back into SERPs, which would be undesirable for the nation? Their decisions were taken on the basis of a playing field that has now changed.

Unless the Government increase funding, my estimate of the bottom line for local authorities is that council tax bills will increase by between £10 and £20 per person.

The figure that has been quoted for the number of people with personal pension plans is between 5 million and 6 million. The latest information that I have obtained is that the figure is approaching 7 million people. They will be hit directly. The Government will lose the support of those 7 million people, and the support of the 62 per cent. who already receive pensions will be questionable. This issue is fundamental to the people of middle England, whom the Prime Minister is so keen to keep on side. It is a mistake from the Government's political point of view, and a grave mistake for the nation.

7.35 pm

Mr. John Cryer (Hornchurch)

I should first like to comment on the discussion about misselling, which is a euphemism for conning. In the 1980s, people were conned. It is extraordinary for Conservative Members to say. "It was nothing to do with us, it was all quite innocent. It arose out of the general atmosphere at the time." They created the atmosphere that gave rise to people, such as the 25,000 miners, being conned out of their occupational schemes. It is a bit like the Kray twins saying, "All right, we murdered a few people, but it was the sixties and everyone else was at it."

I want to focus on the Opposition's motion, especially its reference to security in retirement, which is of concern to us all. In late 1995 and early 1996, there were strikes, stoppages and mass protests throughout Germany, France, Italy and Spain because of the attacks on their state pensions. That action resulted from the ludicrous attempts by those Governments to fit into the Maastricht straitjacket: cuts in public expenditure led to strikes and protest rallies. We have not had protests rallies, strikes and stoppages in this country, yet there has been an enormous reduction in the value of the state pension.

Mr. John Bercow (Buckingham)

For the benefit of the House, will the hon. Gentleman tell us in which year the previous Government failed to increase the state pension in line with the retail prices index?

Mr. Cryer

I shall come to that in due course, so the hon. Gentleman will have to be patient.

In 1979, our state pension amounted to 29 per cent. of average male earnings. By 1995, the figure had dropped to 22 per cent., and at the same time the wealthiest 20 per cent. of pensioners became increasingly well off in relation to the poorest 20 per cent., who became increasingly poor. That was largely a spin-off from the casino economy of the 1980s. As interest rates went up, richer pensioners who depended on investments did a great deal better. The economic policies that were pursued put pressure on public spending, so there was more pressure to cut the state pension. The clearest way to cure poverty among pensioners is to reinstate the link between increases in the state pension and the average increase in earnings rather than prices. That link was done away with in 1981 by the previous Government.

Mr. Butterfill

I am sure that the hon. Gentleman does not want to mislead the House, but he will remember that the link with prices was abandoned by the previous Labour Government. Inflation had become so high that they could not afford to maintain the link with prices, so only the link with earnings was maintained. It was the increase in earnings under the Conservative Government that created the anomaly to which the hon. Gentleman referred. We maintained the purchasing power of the pension.

Mr. Cryer

That is wrong. The link with earnings was done away with by the Conservative Government in 1981, and as a result the pension has increased, but not in real terms. The link with prices was maintained during the 1980s.

All sorts of bogus arguments are flying around about the state pension and the state earnings-related pension scheme. It is said that, with an aging population, we cannot afford the state pension. In fact, if the link with earnings were restored, by the middle of the next century the cost of the state pension would be £66 billion rather than £45 billion, the cost that would result from the present rate of increase. That could be covered by an increase in employer and employee combined national insurance contributions by less than the rate of increase during the 1980s under the last Government.

Restoring that link would also be a star move because it would remove the means test that faces many pensioners. Hundreds of thousands of pensioners depend on income support, but hundreds of thousands who are entitled to claim it do not. That is because people who have worked all their lives, have paid into national insurance funds and feel that they are independent and capable find it deeply patronising that they must go to the DSS office, fill in a pile of forms and be patted on the head and told, "Well done—you are entitled to the money that you should have had anyway." Such people should not have to go through such a tortuous rigmarole.

I have received many complaints from constituents about a related issue—the allowance for those over 80, which is 25p a week and has not been increased since its introduction. A number of people aged over 80 have told me that they would prefer the allowance to be abolished, because they find it so patronising to receive an extra 25p a week for turning 80. I think that the allowance should be uprated to a decent level, so that we can view it with some pride.

That brings me to the subject of the state earnings-related pension scheme, on which there has been considerable debate. It has even been suggested that SERPS should be abolished and replaced with personal pension schemes. I speak from experience when I say that that would be a grave mistake. For a while during the 1980s, I worked as an underwriter. It may surprise hon. Members to learn that a raving firebrand like me was a yuppie for a few years, but it is true—although I could not get out of the job fast enough.

My experience as an underwriter tells me that the idea that private pensions can replace state pensions—which provide for so many disadvantaged people—is fantasy. The private pensions and insurance industries are not going to pay out for people in straitened circumstances who cannot afford to contribute the increased premiums that will undoubtedly result if SERPS is done away with.

SERPS should clearly he rescued from the Tory attacks of the past 18 years. There was a deliberate attempt to undermine the scheme. That is where the conning came in: the aim was to persuade people to leave SERPS and sink the money into other schemes. I remember going to seminars—within the insurance industry, not public seminars—in the 1980s, in which people were told as a matter of fact that Barbara Castle had made an enormous mistake in introducing SERPS, and that they should not stick with the scheme because it would not exist in 20 or 30 years. That was a lie, but it was a lie that was put around—not just to the public, but to people working in the insurance industry. That tells us something about the atmosphere that prevailed during the 1980s, when the casino economy was in full swing.

Another issue with which I have been involved—especially in the run-up to the election—is that of war pensions. The con that the last Government attempted to perpetrate on war pensioners stands alongside the attack on the miners and the butchery of the mining communities, and the fiasco of the exchange rate mechanism, as one of the most shameful episodes of the past five years. There was an attempt to rob war pensioners and their widows of £50 million.

Someone with whom I worked for some years was a victim of that. In 1945, in Bremen, he was in a tank that received a direct hit. His comrade fell across him, covered in blood, and died. He is buried in a war cemetery near Bremen. My friend, who happens to be a journalist, wrote an article in The Guardian about what had happened. At the end of that article, he asked this question: "Did I fight, and did he die, so that others could come back and be robbed by a Government who are so cheap and cynical that they are prepared to listen to actuaries who, no doubt, have said, 'There are fewer war pensioners around, so you can get away with it if you sneak it out after the Budget??" That is exactly what the Government did.

I hope and believe that the new Government will try to build the welfare state and the public services for which my friend and his comrades who died were looking in 1945, and for the sake of which they fought for freedom.

7.44 pm

Mr. John Butterfill (Bournemouth, West)

The Chief Secretary to the Treasury—who, unfortunately, is no longer present—reminded the House that I am an adviser to the Independent Financial Advisers Association. I did not intend to say anything that related to the association until the hon. Member for Workington (Mr. Campbell-Savours)—who is also no longer present—raised the issue of the Financial Services Act 1986, and the views that were expressed when we both served on the Standing Committee.

First, I must point out that I was not an adviser to the association, or to anyone else, at that time. Secondly, I must tell the hon. Gentleman that his recollection is completely wrong. I did not suggest that commissions should not be disclosed; I said—as some Labour Members who are familiar with such matters will doubtless appreciate—that the costs of selling a pension or insurance policy are numerous. They do not just comprise commission. Many companies spend most of their money on advertising and on their own direct sales forces, and do not pay commission to independent financial advisers.

What I told the Committee in 1985–86 was that we ought to disclose all the costs, or it might appear that a product through an IFA who was paid commission was giving worse value than a product sold by a direct seller who was employing a huge internal sales force and massive television advertising. It was necessary to identify the costs of each method of sale. Unfortunately, my view did not prevail, although I argued strongly in favour of it. Had it prevailed, we might not have seen the level of misselling that ultimately occurred.

The hon. Member for Workington mentioned the Coopers and Lybrand report, but did not mention that the report showed that there was considerably less misselling of products sold through IFAs than of products sold by direct sellers such as banks and some building societies. There would have been a good deal less misselling if more people had employed the services of IFAs. Here ends the plug. I was provoked into that statement, and it has nothing to do with the main thrust of my speech.

The Labour patty likes to pretend that it is the great party of pensions, and that pensions derive from its activities. A little history lesson might be worth while. During the last century, people such as the Rev. William Blackley and Charles Booth were active in stirring the public conscience in regard to the plight of the elderly poor, but in many respects we have followed New Zealand and Australia. It was the New Zealand Government's introduction of a non-contributory pension scheme in 1899 that led a Select Committee in the House of Commons to recommend the introduction of a means-tested scheme in the following year. It took a while for the House to get around to it, but the result was the Old Age Pensions Act 1908, which provided a means-tested pension at a maximum of five shillings a week for all those aged 70 and over.

Similarly, it was the example of Australia and New Zealand that led to the Old Age and Widows' Pensions Act 1940, which reduced the pensionable age of women from 65 to 60. Subsequent Governments may have had cause to regret that. The example of what has happened in Australia and in other countries such as Singapore, Chile and Argentina has led to the productive all-party debate about the ways in which pension provision can be reformed and improved.

I am the first to salute some of Labour's ideas, in particular those from the Minister for Welfare Reform, about the way that we might move forward in pension provision. In the all-party group which I have the honour to chair, there has been much discussion about how to ensure that future generations have a better deal than the present generation.

Our current system derives principally from the post-war Beveridge report and the consequent National Insurance (Industrial Injuries) Act 1946. It is often forgotten, especially by Labour Members, that Beveridge argued that it would be prohibitively expensive to proceed with an old-age pension that would subsidise people to the point at which they did not need to make their own savings. He envisaged that the best that the state could do would be to supplement savings. He said that it would be impossible to pay pensions immediately, because it would require at least 20 years to build up a fund sufficient to start paying them. The post-war Labour Government decided to ignore that advice and to proceed on a pay-as-you-go basis whereby current taxation funded current pensions.

Britain has provided no state fund to allow an accumulation of funds to guarantee future payments. That is why successive generations of pensioners have depended on the good will of the Government of the time rather than on an accumulated fund. It should be remembered that the Labour party, to its credit in some ways, had a scheme whereby the Government paid the higher of earnings or inflation. However, because inflation was so high in 1978, the Government could not keep up with uprating pensions in line with inflation and that system was effectively abandoned, to the fury of some of their Back Benchers.

As the hon. Member for Hornchurch (Mr. Cryer) said, the Conservatives restored the link with prices in 1981, but they did not restore the link with earnings. Since that time, successive Governments have recognised that there is a need to improve the way in which saving is carried out for retirement. In 1958, the Conservative Government introduced graduated pensions and there were, subsequently, state earnings-related pensions. Both had significant disadvantages, which led to their effective abandonment.

The great debate today in much of the rest of the world is whether there can be a scheme under which people will have to save to build up a fund out of which pensions can be guaranteed without the need to rely on state munificence. There have been many reports on that. There has been a series of seminars and a "Panorama" report, and the Adam Smith Institute produced proposals for "fortune" accounts. Probably the most notable work was Sir John Anson's retirement income inquiry under the auspices of the Institute for Fiscal Studies. All those studies have contributed greatly to the debate, and I hope that they will contribute to future Labour proposals.

Belatedly, we have recognised that none of our present arrangements will address the scale of the problem that will address our society in the next century. In 1960, our working age population was 32.5 million and it supported a pensionable age population of 6.1 million. That is a support ratio of 5.3:1. By 1991, the pensionable age population had grown to almost 9 million and the support ratio had fallen to 4:1. It is predicted that by 2050 the working age population will have remained fairly constant at about 33.8 million, but that the number of people of pensionable age will have grown to 13.5 million, which gives a support ratio of only 2.5:1.

Even those figures, which are fairly dramatic, underestimate the true scale of the problem because they relate only to people of working age and not to the percentage of the population who are in work. If they were so related, the support ratio would be even more alarming. Clearly, without some urgent action to encourage future funded provision for retirement, the burden on the future working population will be unsustainable.

I have spoken about the actions of some Governments to reduce their liabilities. It is true that the old-age pension has fallen relative to average gross male earnings from 20 per cent. in 1950 to 15 per cent. today. If nothing is done, it will fall to about 9 per cent. by 2030. The cost of restoring the purchasing power to 20 per cent. would be £6.6 billion a year immediately, and almost £50 billion a year by 2030. Plainly, we need an alternative strategy.

These problems have been considered by my own committee, the all-party group on occupational pensions, and in some detail by the Select Committee on Social Security, which produced an interesting report on unfunded pension liabilities throughout the European Union. That report is worth reading because it shows the scale of the problem. By 2030, if nothing is done in the rest of the European Union, the net present value of pension schemes relative to gross domestic product in European countries will be 98 per cent. in France, 113 per cent. in Italy and 139 per cent. in Germany. It is because we have such a large provision of personal pensions that our position is significantly better at only 19 per cent. of GDP. However, even here, unless we take some dramatic action in the near future, the problem will be entirely unsustainable.

Given that scenario, one might have thought that the Government would take steps actively to encourage personal pensions and the provision of pensions by employers. However, their vandalism in relation to advance corporation tax is precisely the reverse. That is not just the opinion of the Opposition. I am sure that Labour Members will have received press releases from almost everybody who has any interest in these matters. Writing of the Government, the Pensions Management Institute states: it is very disappointing to see them introducing measures which … will have a negative effect on long-term pension provisions. Oxfordshire county council says that the Government's proposal will cost it an extra £2 million a year and Sainsbury says that it will have to double the amount that it contributes to its pension scheme if it is to avoid loss. The list goes on.

The Association of Consulting Actuaries is even more critical, and says, as we have heard, that abolishing ACT credit will reduce pension funds and pensions by up to 11 per cent. The amount that will have to be saved by those who have made private provision will go up and up, because it is not just those who are saving for a long time for the future who will be affected, but those who are about to retire.

The switch which is already taking place from investment in equities to investment in gilts, which is necessitated by the measure, has meant that the yield from gilts, and therefore from annuity rates, has fallen. People who are retiring now and buying annuities with savings from their pension schemes will immediately get smaller annuities than they expected. Therefore, the Labour party has robbed a generation of people of decent pension provision that they thought they had provided for themselves. It has taken that from the most prudent people in society—those who have bothered to save. What sort of message does that give, when we all know, as I have tried to demonstrate, that we need to encourage more saving?

Moreover, requiring companies to make enormous additions—and we have heard what Sainsbury thinks of the proposal—to their final salary schemes will mean the death of such schemes. They have already been declining. There are fewer than 5,000 in the UK with more than 100 members and 16 per cent. of smaller companies have closed their final salary schemes as costs have risen.

That process will continue. I predict that, unless the Government reverse their policies, final salary schemes will, effectively, be abandoned by employers throughout this country. Many major employers are already openly saying that, for new employees, they will not have a final salary scheme; it will only be money purchase. The people who will suffer are future pensioners.

I could go on much longer, but I realise that many other hon. Members wish to speak. However, I urge the Labour party to return to the consensus that I thought was beginning to be built before the last general election. We should consider ways of not just encouraging but perhaps even requiring people to save for their future—to build up for every individual a fortune account, a rainy day account, something that people can access when they become terminally ill or irreparably sick, or when they retire.

If we do that together, we will have fulfilled our duty to the retirement population. However, if we gone down the road that the Labour party has gone down—of believing that, by subterfuge, it can take money away from pensioners and pretend that it is not happening because most people do not understand how ACT works—we face disaster.

8.1 pm

Kali Mountford (Colne Valley)

In recognising the number of declarations of expertise and interest that have been made in the debate, I feel forced to declare that my only interest is that of my constituents. When even my hon. Friend the Member for Hornchurch (Mr. Cryer) makes a declaration of interest, I find myself surprised and disadvantaged in that regard. I hope that my contribution is none the worst for that. After all, it is my pensioners' experiences that should he informing the debate.

The shadow Chancellor of the Exchequer pointed out that there are only two sources of income for any pension revenue: that of the individuals who make a contribution to their own pension plan and that of individuals who make a contribution in their working life to their state pension. I would not disagree with that. Nor would I disagree with the fact that we have a growing, aging population and that we face challenging demographic changes, but is that not why this is the right time to have a proper pension review and to examine everything that informs how we decide our security in retirement?

It does not seem logical that taking those two things on board—how we bring revenue together and how we stack that up so that we can afford to pay for a proper retirement for our aging population—should lead us to accept the basic pension plus scheme because, as we have to accept, pensioners are already struggling. For example, about a third of them are already on means-tested benefits and there was nothing in the scheme to help those pensioners. This is the right time to say to our poorest pensioners that we need to do something to help them and that we will talk to them about what it is exactly that they need.

It seems to have been suggested, certainly by the hon. Member for Bournemouth, West (Mr. Butterfill), that people have to be prudent and to save. Let us remember that many of our constituents are not in a position to do that. In setting up my pension arrangements, I was advised that I had to invest at least 10 per cent. of my salary to get a good return and to have a good basic pension. Many of my constituents are not in a position to make a contribution of 10 per cent. of their salary, if they have one. Many of them are low-paid and make some provision for their old age.

I am concerned that, when those people draw that private pension, which they have prudently saved for, they will be disadvantaged by the anomalies in the means-testing system. I hear many complaints—I am sure that all hon. Members do—from constituents who have made investments and who find that they do not enjoy any advantage because they are precluded from means-tested benefits.

Would it not be more sensible to consider the whole package of arrangements for the elderly in our communities to ensure that a review takes account of those matters? Basic pension plus did not seem to provide for that. Indeed, it seemed to place an extra burden on my youngest constituents. During the election campaign, many 20-year-olds were concerned because they would rightly be required not only to pay for the pensions of the elderly who have already paid their national insurance contributions and rightly expect to receive a state pension—the most common complaint among pensioners in my constituency is that, in making their NI contributions all those years ago, they felt that they were making an investment and they now find that those contributions have been eroded—but to pay for their own pensions in private schemes, to the tune of perhaps 10 per cent. of their income.

That is a big burden for young people at a time in their lives when they might be buying a house on a mortgage or repaying a student loan. There is a heavy burden on them already. It does not seem fair that my constituents should bear that burden. For that reason, I was not impressed with basic pension plus, and nor were my constituents.

Mr. Duncan Smith

I suggest that, if the hon. Lady is that interested in basic pension plus, she should read it properly. The whole process was bound around rebates over the lifetime of people's contributions to guard against just the problems to which she has referred. She also has to address the other point: that the Minister for Welfare Reform is bound to consider the issue and that he will then have to take into account the process of the national insurance fund never having been a fund for people in the future.

Kali Mountford

It seems that the hon. Gentleman accepts the fact that this is the right time for a review. That is exactly what I am saying. We have to review the whole pension situation. To come up with a plan without proper consultation—certainly my constituents were not consulted—and to pre-empt the decision—

Mr. Duncan Smith

There was to have been a Green Paper.

Mr. Kevin Hughes (Doncaster, North)

Keep going.

Kali Mountford

I shall keep going. I thank my hon. Friend for that advice. This is the right time for a review, and my constituents will welcome it.

Pension misselling caused some of my young constituents to be concerned about whether private pension provision was a sound investment. For example, the constituent I mentioned earlier lost nearly £7,000. He took his case to the ombudsman and is still waiting for a reply. He is dissatisfied with the way in which he has been treated. It will seem a little rich to him for Conservative Members to talk now about pension misselling. He will want to know—certainly I want to know—why they have waited until now to discuss pension misselling.

Why was it not dealt with a long time ago? Is this not the right time to have proper regulations? In fact, it is not the right time: it should have been done at the beginning. It is wrong to have a financial market that is not regulated properly, with the result that my constituents, who have small sums of money available to invest, lose a lot of money. It there was any robbery going on, it was of my constituent, as he would tell hon. Members.

My constituents and I feel strongly that change is necessary and I think that the whole House agrees with that. The question is whether we will get the balance right between the contributions made to the pensions system from the state sector and the contributions made in the private schemes. We need to have regulations and proper thought in place to ensure that all our pensioners are dealt with fairly and properly.

8.10 pm

Mrs. Eleanor Laing (Epping Forest)

The Chief Secretary to the Treasury said this afternoon that the Government's Budget plans are plans for the long term. In fact, they are the exact opposite; they are short-term plans designed to raise money to satisfy the appetite of the new Government for immediate public spending. It is a perfect example of that old adage:

You can fool all the people some of the time, and some of the people all the time, but you can not fool all the people all of the time. I must tell the Chief Secretary that he has not fooled Conservative Members because we know what his plans for changes to ACT and the windfall tax really mean to the people of Britain.

The Government want the country to believe that the windfall tax is a tax that nobody has to pay. That could not be further from the truth. It hits the very people who should not be hit by any taxes. If the Government were really planning for the long term, they would be encouraging people of all ages and all financial capabilities to invest for their retirement.

In fact, the Budget discourages investment in pension schemes because it reduces people's confidence in them. My constituents have, quite rightly, been putting their money into pension schemes year after year, believing that at the end of their investment time they would receive a certain sum. The new Labour Government come along and simply take money out of the schemes, thereby reducing the amount of money that will be available for all our constituents when they need their pensions and reducing confidence in pensions as a safe form of investment. That is happening at the very time when we most need to encourage investment in pensions.

The hon. Member for Pontefract and Castleford (Yvette Cooper) who, sadly, is not in her place, said that Conservative Members have a new-found interest in pensions. That is simply not so—it could not be further from the truth. In fact, we recognised many years ago that, for various reasons, it was essential to encourage people to make investments in pension schemes to look after themselves and their families when they no longer worked. We recognised that because we read the simple sign—what is sometimes referred to as the demographic time bomb.

Mr. Paul Flynn (Newport, West)

That is a myth.

Mrs. Laing

It is not a myth.

Mr. Flynn

I refer the hon. Gentleman—[Interruption.] I apologise. I refer the hon. Lady to a splendid volume by the hon. Member for Havant (Mr. Willetts) called "The Age of Entitlement?. It contains a chapter on the myth of the demographic time bomb. It describes how previous Governments have exaggerated the effect of the baby boomers reaching retirement age in order to impose on the country a system of private pensions rather than national pensions.

Mrs. Laing

I am afraid that the hon. Gentleman is wrong on two points. I thank him for apologising for his first mistake and recognising that I am an hon. Lady. However, I am afraid that the hon. Gentleman is wrong on his real point.

Mr. Flynn

Read the book.

Mrs. Laing

I understand what the hon. Gentleman is saying about the book, but even if there has been an exaggeration, there is still a demographic time bomb. There is no doubt about that. Currently, the ratio of people in work to those drawing a state pension is about 3.3:1. When I and other people who have recently become Members of the House reach retirement age, that ratio will be about 2.4:1. Even if some of the stories about the demographic time bomb are slightly exaggerated, there is still an issue that must be addressed. The previous Government were addressing it and the new Government are doing the exact opposite.

My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) gave us some salient figures on this. I will not attempt to repeat them, but they can be read in tomorrow's Hansard. My hon. Friend's analysis was right. Because we have recognised the extent of the burden that would fall upon public expenditure in 20 or 30 years in providing for pay-as-you-go pensions, we have taken steps over many years to encourage investment in private pensions. That has been done by providing incentives, and it has worked. Although the hon. Member for Newport, West (Mr. Flynn) does not recognise this point, the Minister for Welfare Reform does recognise it and he has taken up the recommendations of the Anson report, which was also referred to in detail by my hon. Friend the Member for Bournemouth, West.

The Anson report, backed by the Minister, recommends that it is necessary to impose a second pension on most of the earning population of this country. The attitude of the previous Government, which I thoroughly supported, was that imposition of that sort was unnecessary and that there should be encouragement rather than imposition. Therefore, incentives were put in place and the encouragement worked. As a result, the United Kingdom has more than £600 billion invested in funded pension schemes, which is more than the rest of the European Union put together.

I was most amused when the hon. Member for Hornchurch (Mr. Cryer), who is also not in his place, spoke about the fact that in recent years we have seen strikes in France and Spain because their Governments were cutting state pensions. That is not surprising.

Mr. Bercow

We will see them in Britain now.

Mrs. Laing

I would not be at all surprised.

Matters were dealt with differently in France, Spain and other European countries because those countries failed to take the necessary steps early enough to create funded pension schemes which would produce a real level of income for their populations on retirement. It is not at all surprising that there were riots in France and Spain, and we would not be surprised if the Government's lack of financial planning brought about such a result in this country, although none of us would want that. Because of the incentives to invest in pensions, in 20 or 30 years' time, when many of us will be in need of pension provision, the state pension fund will not have to support so many people, so the burden on public expenditure will be very much less.

If the Labour Government were really interested in planning for the long term rather than for the short term, they would not have been so critical of the basic pension plus plan proposed by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) when he was Secretary of State for Social Security. That plan was the right answer to the problem.

The hon. Member for Colne Valley (Kali Mountford) misunderstood what the plan was all about. I can forgive her for that—indeed, I have every sympathy with her—because she probably listened to the misinformation put out by the Labour party last April. It is not surprising that she misunderstood it—so did millions of others who were made afraid of what would happen in their old age, when exactly the opposite was the truth.

It does not matter what the Labour Government say now: the basic pension plus plan will have to come in at some time. Demographic developments over the next few decades will prevent the pay-as-you-go scheme from continuing. It will not be sustainable, so basic pension plus, or something similar, will be introduced. My hon. Friends and I will not be surprised if, in a few years' time, the Government publish a Green Paper which they will call by some other name, but which in fact will be basic pension plus. It will have to happen.

The difference in attitude between the Opposition and the Government is that we believe in encouraging saving and investment and in changing the culture of state dependency by giving people the opportunity and the incentive to save and provide for themselves and their families. We want to help people to look after themselves and to encourage families and family life. The Government simply produce policies that do the opposite.

There is great disappointment in my constituency with what the Government are doing. Those who have worked hard and put their money into pension schemes or some other form of savings, or who are small shareholders in the privatised utilities, are very disappointed that, having tried to provide for themselves, the first thing the new Labour Government do is take their money away from them and diminish their savings. Of course, it comes as no surprise to Conservative Members.

The hard-working people of Epping Forest want to know what the Government intend to do about funding their future pensions. Unless there is some sort of plan that encourages even more private investment in pensions than to date, in 20 or 30 years' time the burden on the public purse will be very heavy. Instead of continuing with Britain's advantage over the remainder of the European Union—indeed, the rest of the western world, as no country has such well funded pension schemes as Britain—and the benefits built up by the Conservative Government over the last decade and more, the people will be disappointed, and Britain will suffer the same problems as France and Spain.

8.24 pm

Mr. Paul Flynn (Newport, West)

During the dying days of the Conservative Government, they introduced three wheezes designed to win the election. One was basic pension plus; another was the plan to privatise residential homes so that elderly people would have no choice other than to go into private homes; and the third was to buy a new royal yacht with public money.

That prompted me, at the time, to ask a Government spokesman whether there was truth in the old saying that those whom the Gods wish to destroy they first make mad. Those three proposals did a great deal of damage to the Conservative party, and resulted in it being wiped out in my country of Wales, in Scotland and in Cornwall, leaving only a small number of Members on the Conservative Benches.

Those of us who are old lags in these debates will remember that, on 12 March, we discussed basic pension plus, when the Secretary of State announced, in all its glory, that, when it matured, a man on average earnings retiring in 2040 would get a total pension of 18.1 per cent. of earnings. That is a disgracefully poor level—something to which we have not descended over the past 50 years. It was a very poor scheme.

I am not trying to be wise after the event on the question of the misselling of personal pensions. I will not quote the question I asked Baroness Thatcher in 1989 and 1990 on that issue.

I took Barclays bank to the Advertising Standards Authority for what I thought was a wickedly deceptive advertisement. To sell its personal pensions, Barclays gave away two free tickets to the cinema. I also complained to the relevant authority about the advertising by Midland bank. If one wants to destroy something, one gives it a bad name. A serp was an oleaginous creature that looked thoroughly repulsive—not something anyone would want around his home. The advertisement said, "Don't be a serp, when you could get yourself the sum of £5,000."

The Conservative party has no sense of guilt about what it did at that time. It was not offering a gift, just a refund of the contributions people had paid. It was an unjustifiable incentive—popularly known as a bribe—through the national insurance scheme, and was entirely inequitable for those who did not take out personal pensions.

I commend to hon. Members not only "The Age of Entitlement", but "Ruling Britannia" by Andrew Marr, which examined two laws passed which demeaned the House. One set up the Child Support Agency, and the other brought in personal pensions. If we want to modernise our procedures, it is important to look at those failures.

Only one Member who served on the Standing Committee foresaw the dangers of personal pensions. All through the mad years of misselling, the Conservative party was made aware of what was happening, but did nothing about it. Many Conservative Members would cheerfully declare an interest before speaking in debates, because they were profiting either directly or indirectly from the bonanza of misselling. About 2 million people were involved. We know the derisory number of people who have since been compensated. I am very happy that Ministers are taking on pension companies, as the previous Government should have done but never did.

Beveridge has already been mentioned in this debate. It is worth remembering the point behind the Beveridge reforms, and the words of Beveridge himself. He talked about the "gross inefficiency" of contemporary pension schemes—particularly industrial pension schemes, in which a man from the Pru or the Wesleyan and General came round houses to collect 1s 7d a week.

Beveridge said that, for every pound saved in those schemes, 10 shillings—one half the amount, for those hon. Members who are so young that they do not know or remember—was lost in commissions and because of the inefficiencies and multiplicity of the companies involved. It was a hugely wasteful system, which was why Beveridge argued for a national insurance scheme.

The hon. Member for Epping Forest (Mrs. Laing) referred, presumably to people who are not in private schemes, as "dependent". They are, however, making contributions to the state pension and to the SERPS scheme, and their pension is not a handout, a gift or welfare, but part of an insurance scheme. Beveridge said that, if we ran the scheme as a national one, we would cut down on administration charges.

Mrs. Laing

I certainly did not mean to imply that there is dependency. I was making the point that we have a pay-as-you-go scheme, which is a perfectly reasonable scheme for those who have worked hard all their lives and paid into it. They paid for the previous generation, and the current generation is paying for those who are now retired. They worked hard and paid into the scheme.

The point is that, in future, there will simply not be enough working people to pay for retired people. I entirely accept the hon. Member's point that that is not dependency, and that people are simply drawing money that they have paid in.

Mr. Flynn

That is based on the assumption that our working life will remain as it is. Someone who is aged 62, such as myself, may feel that he or she is approaching the peak of life and intends to work for a very long time. Most people of my age feel that way. Some people presume a very static life style, and assume that things will not change, but things will change enormously. Elderly people such as myself feel very patronised when we are told that we will have to retire at 60 or 65. In the next century and possibly before, people will make worthwhile contributions way beyond the age of 60 or 65.

I should, however, reinforce the point made by the hon. Member for Havant (Mr. Willetts) in his book. He supported the previous Government's exaggeration of the myth of a demographic time bomb, because he was not in favour of SERPS, which he thought was inequitable as a system.

There is no doubt, however, that the Government have worked on the "time bomb". We have long been aware of a demographic time bomb, and of baby boomers—one of whom is now President of the United States—who would fill the school system when they were teenagers. We know that there will be such a time bomb. We also know when it will start and when it will finish. It will, however, last for a finite period, and we cannot allow it to distort all our policies.

My questions are mainly for Ministers. I should, however, like to remind Conservative Members who were Ministers in Conservative Governments for all those long years of the promise made, in June 1979, by their then spokesman, Lord Jenkin, when he was defending the proposal to break the link between pensions and average earnings. He said that he wanted to ?make it clear … that it remains the Government's firm intention that pensioners and other long-term beneficiaries can confidently look forward to sharing to the increased standards of living of the Country as a whole.?—[Official Report, 13 June 1979; Vol. 968, c. 439.] That is a significant promise. The next day, he commented on a proposal to retain the earnings link in a modified form, and claimed that the Government's proposal would have the "same broad effect". That was a very clear promise on retaining the tie.

Far from having the "same broad effect", however, breaking the earnings link has resulted in today's pensioners losing more than £20 a week. I asked the Library to provide me with the latest figures, and was told that the basic pension is now £62.25. The Library estimates that, had pensions increased in line with earnings, that figure would be £87.

Ministers argue that, on average, pensioners in 1997 are better off than pensioners in 1979. The reason, of course, is that most of those who were pensioners in 1979 are no longer with us, because they have died, and many current pensioners are benefiting from the previous Labour Government's pension legislation, receiving a combination of SERPS—which is now a considerable sum if people have been paying into it since the late 1970s—and increasingly valuable occupational pensions.

The picture is very different for those who are now in their 80s and were over pension age in 1979. Since 1979, there has been no increase in their living standards, although average earnings in real terms have increased by at least a third. Even people retiring today are not that well-off. They need an occupational or SERPS pension of at least £20 a week simply to make up for what has been lost in the basic pension. Under the Tories, unemployment among older workers deprived many of them of an opportunity to contribute to any type of second pension.

The promise in the Labour manifesto is now in early-day motion I, which I recommend that all hon. Members read, because it will be referred to many times in the next 12 months. The manifesto promised: We believe that all pensioners should share fairly in the Increasing prosperity of the nation. There are many ways in which some pensioners can share in increasing prosperity.

Mr. Letwin

Does the hon. Gentleman agree that it is slightly odd to begin a programme enabling all pensioners to share in the nation's prosperity by taking £5,000 million a year from those pensioners?

Mr. Flynn

Does the hon. Gentleman think that it is equitable that tax advantages were enjoyed by some pensioners but that there were no tax advantages on SERPS contributions? Does he think that it is equitable that a sum was taken out of the national insurance fund, which is the property of everyone, to benefit a small number of pensioners who joined personal pensions?

That is what happened. One group of pensioners—those who were bribed to leave decent occupational schemes, or unwisely advised to leave SERPS—gained advantages that other pensioners did not receive. As it turned out, many of them suffered because they were badly advised in that. The system is already inequitable for those who contribute to SERPS.

Mrs. Gorman

Is it not a fact that state earnings-related pension schemes are not funded, that they come within the group of pensions that are forked out for by current taxpayers? What is so wrong and wicked about what the Government propose is that they are taking money from people who are setting aside something from their net income for their old age. That is the trick which the Government are playing on people.

Mr. Flynn

I am shocked by the hon. Lady's immoderate language. Tomorrow I shall send her a copy of a pamphlet entitled "Our Pensions", written by Tony Lynes, which has a splendid forward by the hon. Member for Newport, West. I am sure that she will enjoy it greatly. It maps out ways in which SERPS should be reformed; the main suggestion is that it should become at least a partly funded scheme.

If we are to continue with a pension for the next century, SERPS should be funded. I am sure that, having read the pamphlet, the hon. Lady will join us in our enthusiasm for SERPS. It is also suggested that SERPS should be managed independently of the national insurance scheme, and run by managers who will be responsible for maximising and investing much of the fund.

The basic advantage of SERPS and other state schemes is that the total cost of administration—the wasted money—is only 2 per cent., or, in many years, even less. Someone investing in a private scheme now will lose a minimum of 25 per cent. in commission, charges and administration. Someone who does not contribute to the scheme for a long time could lose 90 or 95 per cent.

How could Conservatives talk about the advantage of money purchase schemes without saying what a gamble they are? They encouraged people to join such schemes, but, if they study what happened to annuity rates between 1990 and 1994, they will find that someone who was to retire in 1990 but put off his retirement until 1994 and who was a customer of Norwich Union—the position is the same with other, similar companies—would have lost 35 per cent. of his pension. A third of his pension would have gone because of changes in the annuity rates and what they could buy.

Money purchase schemes are a gamble, far worse than any other scheme. The previous Government deliberately encouraged 6 million or 7 million people, or however many it was, to join such schemes, even though no one can say what the annuity rates will be in a month's time, let alone in 20, 30 or 40 years. The precise figures of the terrible losses are only wild estimates, and could be miles out. The Opposition are taking a cynical view of what the Government are doing.

Mrs. Gorman

The Government are talking about the surpluses of the invested pension funds, but these are sums or money built up by wise investment by the people who operate the funds. The money belongs to the people who invested, and it is that money which may mean that, by the time they come to draw them, their pensions are often much higher than they expected. It is that money—the so-called surpluses—which the Labour party is seeking to plunder.

Mr. Flynn

The Government are removing an unfair advantage that people contributing to some schemes have. If the advantage is spread to SERPS, it would be equitable. It has never been enjoyed by people contributing to SERPS. Why on earth should one favoured group enjoy it simply because the previous Government wanted to unload what they saw as the burden of the state pension?

Mr. Letwin

Will the hon. Gentleman give way?

Mr. Flynn

I was going to conclude, but I shall certainly give way to the hon. Gentleman.

Mr. Letwin

I am doubly grateful to the hon. Gentleman for giving way again.

I fear that it is necessary to repeat the question asked by my hon. Friend the Member for Billericay (Mrs. Gorman), but perhaps I can put it a little more clearly. Does the hon. Gentleman agree that, if SERPS were an unfunded scheme, as it has been until now, it would not have made a jot of difference to the entitlement of those in it had they had received or not received the tax credit, because the money would have been absorbed in the Consolidated Fund without any increase in the entitlement?

Mr. Flynn

The hon. Gentleman is tempting me to go over what happened under the previous Government with the Treasury supplement. I do not know whether he is familiar with the supplement, which was paid for a long time and removed by the former Leader of the House when he was at the Department of Social Security. That was the chief loss to the national insurance scheme in that period.

The previous Government played fast and loose with the national insurance scheme by raiding it. That is why we all agree that we need reforms and new schemes. Instead of the complications, waste, huge commissions and inefficiencies of the private pension industry, we would be better of with one national scheme that was run very efficiently.

I shall conclude by speaking about my party's approach to pensions. My hon. Friend the Minister listed in awritten answer on 30 June ways in which all pensioners could share fairly in the increasing prosperity of the nation. He said that it would be through contributory pension entitlements, through other benefits, or through the income derived from savings.?—[Official Report, 30 June 1997; Vol. 297, c. 65.] However, the only means that anyone has so far suggested by which all pensioners could share in increasing prosperity is to restore the earnings link for the basic pension.

We are aware of the problems involved, but that is what my party—now the Government—should be aiming at. Even if we do that, we shall not be helping those dependent on income support above their basic pension, so we also have to increase the earnings link for them. I believe that this splendid, magnificent, reforming Labour Government will do that, and we look forward to a golden age of pension reform.

8.44 pm

Mr. David Prior (North Norfolk)

I represent a constituency to which many people retire. Pensions are a key consideration, as they were throughout the general election campaign. The withdrawal of the advance corporation tax credit has come as a complete bombshell to my constituents, and to all those other thousands of people who are saving now to be self-reliant when they retire. I want to know whether the Labour party planned the abolition of the ACT credit before the election, and, if so, why it was not in the Labour manifesto. I hope that that question will be addressed in the Minister's winding-up speech.

Hon. Members on both sides of the House accept that, over the next 40 years, the proportion of the population aged over 60 or 65 will grow significantly, and that the elderly will be supported by a static or declining working population. The support ratio, referred to by my hon. Friend the Member for Bournemouth, West (Mr. Butterfill), which measures those of working age as a proportion of those of pensionable age, is predicted to worsen from 3.3:1 in 1990 to just over 2:1 in 2030.

As medicine continues to advance, that position will deteriorate further. It is anticipated that the number of over-75s will increase from 3.9 million in 1990 to 6.3 million in 2030. The consequences, not only For pensions but for community care, health provision and long-term nursing, are enormous.

How is that to be financed? There is a limit to tax-financed public spending, which even the Government seem to recognise. Today, public spending on old people amounts to half the total social security budget, or some £40 billion per annum. The current pay-as-you-go unfunded state pension will become increasingly expensive for future working generations as the population ages. The Government Actuary has calculated that, at current prices, spending on retirement pensions will be £55 billion in 2030, compared with £29 billion in 1994–95. That increase will have to be funded by fewer working people.

Like all Conservative Members, I had hoped that there was a growing cross-party consensus that private pension provision, as a supplement to state provision, was a crucial part of the answer to the problem. The problem will not go away: just as one cannot buck the markets, one cannot buck the demographics. Even the European Commission has cottoned on to that, as can be seen in a Green Paper published on 10 June this year, called "Supplementary Pensions in the Single Market".

Those in continental Europe are in a far worse position that we are and I shall quote some statistics to illustrate that. Pension fund assets as a percentage of gross domestic product were 3.4 per cent. in France, 5.8 per cent. in Germany, 1.2 per cent. in Italy, 2.2 per cent. in Spain and 80 per cent. in the United Kingdom. UK pensions investment is some £650 billion—more than the rest of Europe put together. Our pensions industry has been one of the great success stories of the last Conservative Government, and it would seem that the Commission has started to see the light just as the Labour Government begin to close their eyes.

The Commission's Green Paper concludes: Improved returns on pension fund investments are in the interests not only of workers, who have to contribute out of earned income to their pension schemes, but also of employers who also contribute. Reducing the costs of supplementary pensions for employers cuts the cost of employing a person and so directly contributes to creating jobs and to economic growth". To most people, that is a statement of the blindingly obvious, but not to the Government, who have just increased the cost of pensions by abolishing the ACT credit. It is bad for investment, for jobs, for competitiveness, for the public finances, for pensioners and for future pensioners. The National Association of Pension Funds said that the Budget had been

the biggest attack on funded pension provision since the war. It will affect not only companies, but millions of ordinary people. The Chancellor believed that he had found the perfect way to raise money without anyone noticing. This was to be the perfect crime, because there was no apparent victim. Attack personal pension funds and companies with defined benefit schemes, and, it might be thought, no voter will notice—but of course they will. The 28,000 employers with final salary schemes, with 11 million members and 7 million existing pensioners, will notice, as will the 7 million individuals who have taken out their own personal pension plans.

There can be few worse examples of short-termism than raiding people's long-term retirement savings to finance today's Government spending. If this is, to use the Prime Minister's elegant phrase, "long-termism in action," Lord help us.

The long-term funding of pensions is one of the great issues confronting all developed countries. Self-provision for long-term savings must play an important role. Surely the Minister for Welfare Reform, at least, will agree with that.

The removal of the ACT credit is opportunist and short-term. It is robbing tomorrow to pay for today. It is penalising millions of people who were taking responsibility for their old age. In its first Budget for 18 years, Labour has shown that it cannot be trusted with the nation's pensions.

8.51 pm

Liz Blackman (Erewash)

If I had not come to the House as a result of the general election of 1 May, and had stayed in my job, give or take a few days I would have taught young people for 25 years. I invested a great deal of time and energy in those young people, but for many years I knew that their prospects of equipping themselves properly with skills that the country needs and of obtaining secure and rewarding jobs had been capped by the performance of the economy. I knew that the boom-bust pattern that we came to expect from the previous Government, and the appalling lack of investment in the productive capacity of the economy, would have an impact on their future.

Our manifesto commitment to the electorate was to reverse that position, and undeniably it was overwhelmingly endorsed. Often, on doorsteps in my constituency, I found that older people were worried that we were not giving those young people a future.

The Government will definitely be judged on our ability to sustain and increase economic growth, which means taking tough decisions—no one is denying that—and building an infrastructure on firm ground, not on shifting sands as in the past.

Labour Members have rehearsed reasons why forecasts of the impact of advance corporation tax on pension schemes have been skewed by the way in which actuaries value those funds. We have been presented with evidence that dividend growth in the United Kingdom is high compared with that in the United States of America, where a much more conducive investment climate has been created. The distortion of the tax credit and its short-term impact have been highlighted, as has the inability of management to take unfettered decisions about pension funds.

I have been extremely interested in some of the historical evidence with which we were presented at the start of the debate, showing that Conservative Members, past and present, have justified their approach to removing money from pension funds a few years ago, but have somehow now developed selective amnesia.

There is no denying that we need a root-and-branch pensions review; and that we shall have, with plenty of good discussion. But the people of this country voted for a change this time: they voted positively for a Labour Government who, they knew, would invest in the future and would be fair. Our proposals offer fairness.

8.54 pm

Mr. John Bercow (Buckingham)

I listened with interest to the hon. Member for Erewash (Liz Blackman) because I wondered, when she was talking about the mandate and the basis on which the British public had decided to opt for a change, whether she would have the audacity, and possibly also the intellectual power, to be able to demonstrate that in the course of making that judgment the British public had the ability to detect—weeks in advance of the general election—that the Labour party, if elected, and despite the absence in the manifesto of any such commitment, would abolish the ACT credit on dividends. Of course the hon. Lady could not demonstrate that, for the simple reason that there was not the slightest indication for several months before the election campaign, during the campaign or even in the period immediately after it, that that the Government's intention.

This debate is an excellent opportunity to compare and contrast the records of the former Government, whom I was proud to support from outside the House, and the present Government. We may compare the records of a Government who served this country for 18 years and of an Administration who, to date, have served—or perhaps I should say mis-served—the nation for 69 days. By any yardstick—even if I were not a partisan contributor to the debate—it would not be difficult to arrive at the conclusion that our rhetoric was matched by reality and that Labour's rhetoric to date has been contradicted by reality.

I am sure that the Minister will not deny that the Conservatives set out over a period a three-pronged strategy. We said that we would uphold the value of the state pension as the foundation of pensioners' incomes in retirement—that was the first prong. The second prong was to encourage individuals, not just by exhortation but by practical incentives, to provide for themselves in their retirement. Thirdly, as a party that believes it is a responsibility of Government to look after those who are unable to look after themselves, we said that we would provide through the taxpayer additional assistance for the poorest pensioners. On all three counts we manifestly succeeded.

The effect of that success is plain for all with eyes to observe. It is plain by virtue of the fact that pensioners today are, on average, 60 per cent. better off than in 1979. It is obvious by virtue of the fact that 90 per cent. of pensioners have recourse to funds other than the state pension. It is plainly obvious by virtue of the fact that 62 per cent. of pensioners have occupational pensions; and by virtue of the fact—this should be the subject of cross-party pride—that the proportion of pensioners who are in the bottom 10 per cent. of income earners has fallen from 35 to 18 per cent. Finally, it is plain by virtue of the fact that by all agreed measures of reasonable living and basic decency, the number of pensioners enjoying the basic elements of a decent standard of living—consumer durables, reasonable incomes, and so on—is far greater than it ever has been. By all those yardsticks the Conservative Government were successful.

The plan of my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), the former Secretary of State for Social Security, to build on that success in pension provision was widely applauded. It received support from the Association of British Insurers and from Legal and General; it also received support from an enormous variety of people with professional expertise and competence in pension provision, because they recognised in the plan the seed corn of a far greater provision for the multiplicity of pensioners today—and, more particularly, tomorrow—than the efforts of any previous Government had been able to devise. So we came up with something that received support not only from the Conservative Benches but from people outside who knew that a time bomb was ticking and that a solution was required.

In the past 69 days, all that the Government have contributed are two policies, the effect of which has been to damage the prospects for tomorrow's pensioners. The first is the abolition of the tax credit on dividends. In simple terms, stripped of jargon and technicalities, what matters and is, I presume, indisputable, is that, as a result of that policy, the amount of tax that pension funds can reclaim will be cut, as sure as night follows day. The consequence of that must be clear for all to see. It means that companies will be obliged to top up contributions to company schemes, which will necessarily impact on the sums that they can devote to other purposes. It seems reasonable to conclude that investment in the company's future will therefore suffer.

I found it extraordinary that, although the hon. Member for Pontefract and Castleford (Yvette Cooper), whom I am delighted to see back in her place, paid close attention to Conservative Members' arguments, which was much appreciated, she seemed determined to deny to herself even the possibility of a reduction in the short term, let alone the long term, of industrial investment by companies as a result of the tax change introduced by the Chancellor. It must logically follow that, if companies must busily top up funds depleted as a result of that policy, something else will have to give. In a sense, there is a cake, and however it is divided its total size, does not change. It is therefore not credible to argue that there are no consequences. An opportunity cost is involved in all those decisions and judgments.

Similarly, the damage in respect of the imposition of the windfall tax is clear. One must reflect on the number of shares held in those utility companies by or on behalf of pension funds. It is flippant and unworthy of serious political debate for the Government, with a smugness that ill befits them only 69 days after their return to office, simply to prate in response to our objections that the stock market is doing thoroughly well. If they are so drunk on the temporary enjoyment of their newly acquired power to believe that that state of affairs will obtain for any length of time, they deserve to suffer. Those utilities will be hit and their investment plans threatened. They will be obliged to borrow, which will have implications for the infrastructure. In each and every case, damage will be inflicted.

I challenge the more fiery intellectual powers in the Labour party, of whom some of us have been informed that the hon. Member for Pontefract and Castleford is a prominent example, to dispute and repudiate the arguments that Conservative Members have advanced against what they have done.

The Chancellor of the Exchequer has been masquerading, not just for the past few weeks but for several months, as a long-term visionary. He has been aided and abetted in his task by the Minister without Portfolio, the hon. Member for Hartlepool (Mr. Mandelson). The objective has been to convey to the electorate, especially through the mass media, the impression that the Government are thinking strategically, that they have big ideas and that they possess a concept of a long-term future that will be beneficial.

I regret to say that the reality is very different: the Chancellor has been exposed as a fraud—as a manipulative short-term opportunist, driven by the immediate needs of the moment as he embarks on a smash-and-grab raid on Britain's pension funds and pensioners' interests.

Mr. Deputy Speaker (Mr. Michael J. Martin)

Order.

Mr. Bercow

I give way.

Mr. Deputy Speaker

The hon. Gentleman is not giving way; he is sitting down. As he is a new Member, may I tell him that the term "fraud" is not a term that I would like to be used about any hon. Member.

Mr. Bercow

Mr. Deputy Speaker, I apologise unreservedly: I certainly would not want to accuse the Chancellor of the Exchequer of anything ignoble. Perhaps it would be correct to say—and perhaps I will return to your good books, Mr. Deputy Speaker in so doing—that the Chancellor of the Exchequer has been guilty of some bad judgment, and that entirely inadvertently he has given credence to untruths. That might be a more satisfactory description of the way in which he has operated. The effect, I suggest to the House, is the same: the Chancellor gave the impression of long-term provision, but the reality is not only that long-term provision will not best be served by the policies that he has advanced, but that it will be undermined.

My party has long struggled under the disadvantage that historically people have thought that Labour is the party of the pensioner and of pension provision. The truth is proving rather different. We, in a quiet, practical, piecemeal way, have devised policies that will serve the next generation of pensioners. In their first two months in office, the Labour Government have massively damaged the prospects of that effective future provision, which should be the subject not of partisan debate, but of all-party agreement. That is a source of regret.

I invite the Government to reconsider their position, to recognise the dangers of non-consultation and to show some humility in the face of the overwhelming objection to their policies that the affected parties have expressed. If, as a result of that, the Under-Secretary of State for Social Security, the hon. Member for Southampton, Itchen (Mr. Denham)—not tonight, for that would smack of panic, but over a period of weeks—would say to the House, "We were wrong; we made an error of judgment; the Opposition had some valid objections; we have taken them on board; we will introduce different proposals," I and the country would be as delighted as we would be amazed.

9.6 pm

Mr. Oliver Letwin (West Dorset)

I should begin by declaring an interest of two kinds—first, as the director of a bank, and secondly, as an individual living in the United Kingdom.

The Budget was announced as a Budget for jobs—a matter of great rejoicing for all who live in the UK. Members on both sides of the House would agree that the generation of sustainable employment is one of the great objectives of the state and society.

Conservative Members understand the logic that was applied by the Chancellor when he proposed the great change in the administration of ACT credits and their removal. That was the logic of managerial economics. The Chancellor told us on Budget day that he envisaged that by removing the tax credit on ACT, he would encourage firms—perhaps even force firms—to redirect the application of their cash now from paying dividends, an item that the Chancellor may regard as evil, improper or dubious, and instead to direct their cash flow into an item that the Chancellor regards, and which I and Conservatives generally regard, as noble: investment, because only investment in capital machinery and in research and development can keep the UK in the forefront of the industrial world.

That was the language of managerial capitalism, for which Conservative Members are profoundly thankful. For us to be facing a Labour Government who speak the language of capitalism is a state of affairs vastly preferable to that which we might have faced under previous Labour Administrations, had they been returned to office. However, the move that has been made on ACT tax credits—an ostensibly obscure subject—reveals that it is purely the language of capitalism that the Chancellor and his colleagues have learnt, without in the least understanding the way in which the capital markets in this country and around the world operate, or the way in which industry operates in a capitalist economy.

I hope that the House will forgive me if, in the next two or three minutes, I try to illustrate the grotesque error—based on absolute and profound ignorance of the operations of industrial companies—that the Chancellor has made. When large companies—most of the gross domestic fixed capital formation and investment in this country comes from large companies—take investment decisions, their managers have been trained in business schools to apply the test of a threshold rate. They look for a rate of return on their investment that matches the weighted average cost of their capital. In so doing, they make a judgment about the return on investment compared with the cost to them of raising capital.

The ostensibly small change that the Chancellor has introduced will have a clear effect to which many of my right hon. and hon. Friends have alluded: it will lead that great bulk of British funds that currently invest in equities—and which occupy, between them, shareholdings about equal to 75 per cent. of the total equity portfolio of listed stocks in this country—to redirect their investment from this country's equity into fixed debt and equities overseas. That will reduce the supply of funds for equity in this country.

The Chancellor may have advanced to that stage of Samuelson's invaluable work on economics that tells us that, if one removes part of the supply without affecting the demand, one will increase the price. In this respect, capital is no different from any other commodity: if the supply of equity funding is reduced and the demand remains constant, the price of equity funding will rise. The required return on equity capital in this country will rise inevitably and substantially as a result of the Chancellor's current manoeuvre.

There will be no equivalent reduction in the cost of debt financing because—pace Mr. Hutton, who I fear has not reached the first page of Mr. Samuelson's book and who would do well to attend even the modestly socialistic courses in advanced economics offered by the university of Cambridge, let alone the rather better courses available at other universities in this country—the redirection of funds into the debt markets will have not the slightest effect on interest rates for debt because the Chancellor has handed control of those interest rates, rightly or wrongly, to another body: the Bank of England, which will use its efforts in the interest rate domain to control macro-economic considerations and the development of inflation and to manipulate the exchange rate to a degree by setting interest rates.

No amount of increase in funding for debt in this country will reduce short-term—and even, to an extent, long-term—interest rates by any significant degree. The Chancellor's moves will result in an increase in the cost of equity, with no corresponding decrease in the cost of debt. Therefore, the weighted average cost of capital of British industry will rise substantially and permanently. As a result, many investment projects that managers are allowing through the net because they pass the hurdle rates will fail. Power stations that would have been built, will not be built. Telecommunications switches and large transmission lines that would have been installed, will not be installed. A whole range of large-scale investments in this country will be wiped off the slate.

This is supposed to be a Budget for jobs, but when investment in this country is thus reduced it will have two effects on jobs. First, it will have the direct effect of substantially reducing jobs in civil, mechanical and electrical engineering and in a whole range of construction activities. Secondly, it will have an indirect effect: by reducing the level of investment in this country, firms will be made less competitive, less able to match the activities of their competitors overseas and hence less able to continue to employ people in this country.

In that way—and beyond the issues raised by Conservative Members in many eloquent speeches in the past few hours—the Budget, by changing ACT tax credits, will have an effect on pensions and, through them, a wholly negative effect on jobs. That must be regretted by everyone in this country—not only pensioners, but those who are yet to become pensioners and who would like to have jobs.

9.14 pm

Mr. John Hayes (South Holland and The Deepings)

It is with slight trepidation that I follow my hon. Friend the Member for West Dorset (Mr. Letwin), who gave such a lucid and clear explanation of the problems in the analysis that the Chancellor is using in making these changes, but I shall attempt to do so none the less.

A number of my hon. Friends mentioned the background to these changes—a background of British success. The change in the past 18 years in pension provision by individuals and in pensioner incomes has been profound. The difference between the situation in Britain and Europe was also mentioned by a number of hon. Members.

I do not claim to have the expertise of my hon. Friend the Member for Ryedale (Mr. Greenway) in these matters, but I understand the difference between money purchase schemes and final salary schemes. The real growth in pension investment has been in company-based money purchase schemes and in private pension plans.

My hon. Friend the Member for Epping Forest (Mrs. Laing) mentioned that the transition from public to private responsibility provided a foundation for well funded pensioner incomes into the long term which simply will not be matched by a reliance on the state pension, or even on an amended version of SERPS, as suggested by the hon. Member for Newport, West (Mr. Flynn). The simple fact is that the transition from public to private was necessary and is recognised as desirable not only by Opposition Members but by more enlightened Members on the Government side of the House.

The pension plus proposals, which were mentioned a number of times in the debate, would have accelerated that change. They would have accelerated the evolution, which is why they were welcomed during the election campaign by many experts, by the industry and, indeed, by some Labour Members. I mention in particular the Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field), who in an article in The Daily Telegraph in February welcomed the proposals outlined by pension plus and was silenced, or at least muted, by his right hon. and hon. Friends on the Front Bench for so doing. The truth is that the recognition of the need to transfer that responsibility to individuals is clear and profound.

The second change I wish to mention is the change in pensioner incomes, which have grown over the past 15 years even more than the average income of non-pensioners. A significant part of that growth has been because of the fact that new pensioners now have more than one income. Their extra income is clearly a personal pension plan or company pension. The number of pensioners who have dual incomes—new pensioners, as people are becoming pensioners every day of every week—is growing all the time. That has to be attributed to the success of the policies, which were mentioned by my hon. Friend the Member for Buckingham (Mr. Bercow), of the Conservative Government over the previous 18 years.

The encouragement of people to make provision for their old age has been highly successful and has led to pensioners enjoying a higher standard of living over the past 18 years than they had previously, and one that is higher than that of their contemporaries in other countries across Europe.

It is precisely because of the difference between us and Europe that my right hon. Friend the shadow Chancellor, when Secretary of State for Social Security, pointed out that, if we threw in our lot with Europe, we would be absorbing a significant burden from across the water, from which we had freed ourselves. He also pointed out that France in particular and Germany to a lesser extent have pay-as-you-go pension schemes and have not made the changes that we have made and would have created a burden on the British taxpayer, which he identified and warned us against.

The consequences of the abolition of tax credits has been well explained already. The net effect is bound to be a diminution of the size of funds and damage to the prospects of those who were hoping to enjoy the benefits of those funds on their retirement. As if that were not enough, we have the double effect of the proposed changes with the impact of the windfall tax, which was well illustrated by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood).

The impact of the windfall tax will bear upon the customer, the shareholder and the consumer. Most significantly, it will bear upon funds that invest in utilities that will be affected by the windfall tax. That is a double whammy. We are talking of a double effect. The abolition of advance corporation tax credits and the impact that the windfall tax will have on investment funds are bound to lead to a less rosy picture for pensioners.

If that is so, why have the Government gone down such a road? They have done so because it will bring them immediate financial benefit. There can be little doubt that the argument that the consequences will be invisible, that individuals will not realise that they are affected, thinking that this is some harmless and technical change, is based upon deception. It is a devious political manoeuvre, instead of confronting people with open and honest tax rises. That is the cynical political argument for attacking pension funds. It is an attack on people's futures. They will not know what is going on and, therefore, they may not react politically and oppose the changes that are being made.

Mrs. Gorman

Will my hon. Friend give way?

Mr. Hayes

No, I understand that I need to speed up rather than give way. I apologise to my hon. Friend. I would normally be happy to give way.

In conclusion—I am moving seamlessly from page three of my notes to page 33—a considerable number of people will be affected by the Government's proposals. A conservative estimate of the numbers involved in the schemes that I have defined is about 7 million. They will be directly and detrimentally affected. I ask Opposition Members, including those on the Front Bench—

The Parliamentary Under-Secretary of State for Social Security (Mr. John Denham)

We are the Government.

Mr. Hayes

I still think of those who sit on the opposite Benches as the Opposition because they still behave in a slightly amateurish and shambolic way, as they did in opposition.

I ask the Government: are their measures fair? Are they appropriate? Are they wise? Are they measures that in the long term will attract criticism, approbation or the condemnation of those directly affected and of all those who care about Britain's future, including the future of Britain's pensioners?

9.22 pm

Mr. Iain Duncan Smith (Chingford and Woodford Green)

We have had a fascinating debate, partly because so many hon. Members who contributed to it seemed to know what they were talking about. During my period in Parliament over the past five years, that is something of an exception to the rule. I shall tread carefully on this one, so as not to upset those hon. Members who clearly did not know what they were talking about.

We seemed this evening to run out of Labour Members who wished to contribute to the debate. This is not the first time that that has happened. It happened last week on Friday during the Budget debate. I say that only in passing and not as a partisan point.

I wish to refer to many of those who have contributed to the debate, and I shall do so as quickly as possible, given the time, in the form of a list. My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) made it clear that his expertise continues. He continues to illustrate the important points that relate to the issues that we are discussing. My neighbour, my hon. Friend the Member for Epping Forest (Mrs. Laing), made a powerful speech in describing the problems for future pensioners when they come to retire. Her points were well made.

My hon. Friends the Members for North Norfolk (Mr. Prior) and for Bognor Regis and Littlehampton (Mr. Gibb) and my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) spoke about the success of our policies and pointed out that the Government seem intent on attacking ordinary pensioners. They said that the key to our future economic success is the fact that we have so many funded pensions.

My hon. Friend the Member for Ryedale (Mr. Greenway), with his expertise and knowledge, explained the difficulties of sorting out the problem of misselling and why they continue to exist. It is well worth re-reading his speech.

My hon. Friends the Members for Arundel and South Downs (Mr. Flight) and for West Dorset (Mr. Letwin) showed their financial expertise. Their short speeches bear re-reading, because they explained why the Chancellor seems to have misunderstood the way in which markets will invest, particularly the pension fund market. Many of those funds will move into fixed debt or even equities overseas, which is hardly what the Chancellor needed. My hon. Friend the Member for Buckingham (Mr. Bercow) spoke of the Government's smugness and the way in which this measure was presented.

The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) made a good speech. Obviously, I did not agree with all of it, but I particularly agreed with his attack on the withdrawal of ACT dividend tax credits. He made a straightforward point: how can a £5 billion raid on the economy help to increase the trust of pension companies that the Government must have if they are to reform the pension system? That was a powerfully made point, and the hon. Gentleman seemed to agree with us that, as my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) said, we require a Green Paper so that we can discuss this matter. I am glad that Liberal Democrat Members agree with that.

Many Labour Members made interesting speeches. A number of them wanted to restore the earnings link. I hope that the Minister will tell us whether the Government will succumb to the blandishments and pressure from various Labour Members, especially the hon. Member for Hornchurch (Mr. Cryer). Many of us remember his father, who sat in a similar position in the Chamber, although on the other side. He gave us a hard time, but we respected him for his great skill and knowledge, and I welcome the hon. Gentleman to the House.

Some Labour Members even spoke of moving the goalposts. Many of them attacked the way in which actuaries now calculate the funds, as though, having raided them, this could make it all better by having yet another great Government review. No doubt they will come back to that.

I want to correct the Chief Secretary to the Treasury, because he did not complete the quotation from the former Chancellor of the Exchequer, Norman Lamont. In the final part of his speech, he said:

when the basic rate is eventually brought down to 20p, tax reliefs for basic rate taxpayers will, of course, be worth 20p in the pound, too. In this Budget, I have brought forward that change by restricting three specific tax reliefs to 20 per cent., not just for basic rate taxpayers, but for all taxpayers."—[Official Report, 16 March 1993: Vol. 221, c. 195.] It was interesting that, in its green budget, the Institute for Fiscal Studies commented on the adjustment to tax reliefs to match the tax. It said: By cutting the rate of income tax on dividends to 20 per cent. to be in line with the cut in ACT, the Government of the day ensured that 'most ordinary shareholders' were unaffected by the change. I am sure that the Chief Secretary wanted to have that corrected before we continued.

The debate has shown that the Budget is a return to Hutton. The Chancellor has put up this screen—that the Government have made these changes for ideological reasons. In abolishing ACT, taxing pension funds, driving down yields and reducing the equity base of British industry, the Budget was structured around that ideology. The Chancellor's critique was clearly flawed, but he has built the Budget around it.

Two points undermine that thesis. First, it is claimed that the majority of United Kingdom companies, particularly pension funds, are short-termist in their stockholding—in other words, in their total investment policy. A range of evidence undermines the credibility of such claims: WM Co., which is one of the most respected companies monitoring fund performance in the marketplace, has found that the opposite happens. Its recent survey found that funds typically hold individual stocks for between eight and 18 years. That is hardly what anyone could describe as a short-term holding.

The Government claim also that, if the pressure on United Kingdom companies to pay high dividends to institutional investors can be reduced, the number of companies spending on research and development will naturally increase—insinuating that it is low as a result of the present position. However, recent research by the City university business school demonstrated that companies that pay dividends are more likely to invest in research and development, and that the R and D expenditure of dividend-paying companies is significantly higher than that of non-dividend-paying companies. That rather blows that one out of the water. My hon. Friend the Member for Arundel and South Downs (Mr. Flight) put that point very well in his speech.

Even given their own ideas, however, rather than increasing long-term investment, pension funds may now ask the companies whose pension scheme they administer to make good the shortfall that will result from increasing the total contributions of their work force. They could even demand bigger dividends from the companies in which they own shares. Both outcomes would reduce, not increase, resources for investment. The Government seem to be hiding behind a smokescreen in claiming that their proposals will change the way in which the market works, and the way in which businesses invest in the future. That is completely untrue.

The most obvious victims of the abolition of dividend tax credits on ACT are the UK's 6 million personal pension holders, and its 750,000 members of company money purchase schemes.

Dr. George Turner

I sat here all evening waiting to hear an argument from an Opposition Member that was worthy of a speech, but I decided not to use the time to which I understood I might be limited.

Will the hon. Gentleman consider the position of a pension company that owns an important manufacturing firm in my constituency? Bespak has just reported a 26 per cent. jump in profits; its dividend is up by 13 per cent., and it has an eight-week investment programme in King's Lynn, in my constituency. As a result of its ownership of that company, the pension company's ACT will be 0.5 per cent. of its capital value. Are we not ignoring the main arguments and dwelling on minor issues, given that the capital value—[Interruption.]

Mr. Deputy Speaker

Order. The intervention is far too long.

Mr. Duncan Smith

I suggest that the hon. Gentleman should go out and argue with all the pension fund managers and the pensioners who will experience a heavy loss as a result of the Budget, rather than trying to score points.

Pension Store has found that, for example, a 30-year-old whose fund would have been worth some £258,000 on his retirement at the age of 65 can now expect only £206,000, some 20 per cent. less. He would have to pay an extra £20 a month to make up the shortfall. The young will be hit hardest by the changes, because they have not had the opportunity to accumulate a large fund at the higher rate of return. They also need to invest a higher proportion of contributions in UK equities, the only securities hit by tax changes, to achieve high capital growth at relatively low risk.

The National Association of Pension Funds estimates that approximately 50 per cent. of all occupational pension schemes are in deficit, which lends falsehood to the Chancellor's statement at the time of the Budget. Those funds will be plunged further into deficit by the pensions tax, and many just above the surplus line will join them in deficit. My hon. Friend the Member for Bournemouth, West made that point when he referred to the Sainsbury fund, which I believe will go from a surplus of some £200 million to a deficit of about £30 million.

As many hon. Members pointed out, local authorities will also be in difficulties, because they will find it necessary to raise council tax. The Post Office is now even talking of putting a penny on the cost of a stamp. Local authorities, the Post Office and many others will find that this is a retrogressive tax. The authority in Kensington and Chelsea is talking about an extra cost of £1 million a year. What do the Government propose to do to sort some of this out?

The hon. Member for Putney (Mr. Colman) said that he had received a letter from a Minister in what used to be the Department of the Environment—it is now a new multi-ministry. The letter stated that the problems of financing would be taken into account in the new settlement. Does that mean that there will be extra money? How will this be sorted out?

Employers could be pushed into devolving responsibility for pension provision, and future savers could lose because, in effect, they will have to take a pay cut. It seems that employers will move towards money purchase schemes, which will mean that their contributions will be lower. As a result, employees will suffer a pay cut. Further evidence from the United States shows what happens when savers have to set up money purchase schemes with companies. They were given the opportunity to choose their investments and, of course, they chose conservative investments, particularly government bonds. As a result, the final yield was lower than it might otherwise have been, and they lost yet again.

The main point of the Budget change seems to revolve around SERPS, about which my right hon. Friend the Member for Hitchin and Harpenden asked some questions. He questioned the Government during the Budget debate and today, and I hope that the Minister will return to those questions. My Government encouraged people to opt out of SERPS. As we know, that was done through a rebate system. The amount of the rebate was calculated by the Government Actuary in accordance with the cost of occupational and personal pension schemes that provided benefits equivalent to SERPS. The abolition of the ACT credit will make it more costly to provide benefits that are equivalent to SERPS.

Unless there is an out-of-sequence review, the current rebates will remain in force until 5 April 2002. That means that a rebate order that is made now to redress the balance would not come into effect until 6 April 1999. Obviously, the rebates should be increased to take account of the loss of valuable investments. Can the Government estimate the cost of operating the rebates? When do they plan to announce a new rebate order? Any adjustment in the amount of contracting-out rebates would affect the overall funding of the national insurance fund and the contributions that are needed to meet fund outgoings.

Was that all taken into account in the Red Book? Presumably that was one of the acknowledged outcomes of the abolition of ACT, on which, the Government told us, they consulted. Therefore, there must have been costings. Could they be made available to the House?

Of course, there is an alternative strategy. It is simply to leave the rebates unaltered, which would drive people into a decision about returning to SERPS. The tax on personal pensions has reduced the incentive to opt out, and many people will look again at SERPS with a view to opting in. [Interruption.] Many Labour Members welcome that. If that is the Government's intention, they have made a political decision to move people back into SERPS and increase the level of unfunded pensions. If that is what they intend, perhaps the Minister will make it clear. Do the Government intend to leave the rebates as they are and encourage people back into SERPS?

The Minister for Welfare Reform has said: Failure to close SERPS will mean substantial tax bills for generations". He is obviously at odds with his Government. The Minister has now taken his place on the Treasury Bench. Perhaps as the Government have gone back to the drawing board on tax changes, the Minister has gone back to the drawing board on SERPS, and possibly on his position.

Furthermore, the future of stakeholder pensions is at risk. An interesting point to follow is where that leaves Labour on the position for future generations at which we have said we want to look carefully with the Government. It seems that their plans to introduce second-tier stakeholder pensions have already been undermined.

The stakeholder pension is designed to be run by approved private pension companies which rely on the market place, on dividends, to increase funds. However, under Labour legislation, any return will be diminished, because the Chancellor has abolished the tax rebate that pension funds claim on dividends received. Therefore, the Government's new ideology, as evidenced in the Budget, will ensure that the stated objective of security in retirement is increasingly difficult, if not impossible, to meet. I remind the House what was in the Labour party manifesto: The provision of adequate pensions in old age is a major challenge for the future?. Labour was right. It has made the challenge even more difficult, particularly for the Minister for Welfare Reform, who will now have much difficulty working this little conundrum out.

Labour has gone back to Hutton and back to SERPS, and the Minister for Welfare Reform is going to have to go back to the drawing board. The people have a new tax with which to cope, and so has the Department of Social Security. It is all about firing at the Chancellor's false target—somehow to correct this so-called short-termism. In firing at that target in the Budget, the Chancellor has hit a load of innocent bystanders, members of the ordinary public who will have to pick up the pieces and pay the price for what is clearly a return to old Labour ways.

This new tax, for tax it is, will be a levy not just on the corporate sector. The Government thought that they could pass it off as a secret tax, and they have made a mistake. Where in Labour's election manifesto did it say that Labour would attack pension funds and raise taxation? Labour denied that endlessly everywhere. Where in the manifesto did it say that Labour would push the public back into SERPS? It did not say that.

The Prime Minister said that he and the Government would govern as new Labour, having been elected as new Labour, yet when we look back at the way in which they have behaved, far from governing as new Labour, the Government intend to govern as old Labour, hiding tax changes from the public, sneaking them in and forcing the public to pay up in due course. [Interruption.] The hon. Member for Hove (Mr. Caplin) knows all about it; that is why he is agreeing with it. To take £5 billion out of the economy and try to pretend that the public will not suffer is absurd and a deliberate attempt to mislead them. If that is new Labour, bring back old Labour.

Let me give the final confirmation that Labour intends to govern just like that. Until now, the Prime Minister and new Labour have been long on wonderful visions, but the public will now have to wake up to the fact that, far from visions, it is just one long tax-and-spend nightmare.

9.42 pm

The Parliamentary Under-Secretary of State for Social Security (Mr. John Denham)

This has been a well-informed and good-humoured debate, starting with the discussion about whether it is an insult to claim that a Conservative Member was a Minister in the previous Government. I understand that the shadow Chancellor of the Exchequer wishes to point out that he was not a junior Minister in the Department of Social Security when advertisements were published encouraging people to leave their personal pensions; he was a junior Minister in the Treasury, which was responsible for the regulation of personal pensions.

What is striking is how, despite it being an Opposition day debate, each argument from Conservative Members has collapsed in response to their record in government, their lack of concern and their inaction on the very issues that they sought to raise. The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) raised the question of local authority pension funds, but my hon. Friend the Member for Putney (Mr. Colman) pointed out how, to fund the poll tax disaster, local authorities were forced into underfunding, and how the previous Government's other measures, such as those encouraging early retirement, caused financial difficulties for the funds. However, we heard not a word from Conservative Members about those damaging consequences.

The hon. Members for Arundel and South Downs (Mr. Flight), for Epping Forest (Mrs. Laing) and for West Dorset (Mr. Letwin) spoke about investments, and the hon. Member for Ryedale (Mr. Greenway) spoke of having 20 years' experience in investment, yet I was left none the wiser as to why this country's investment performance has been so poor over those 20 years. In contrast, my hon. Friends the Members for Pontefract and Castleford (Yvette Cooper) and for Erewash (Liz Blackman) stated, quite rightly, the central importance of investment to the British economy if we are to build for the future and be able to pay for pensions. They talked about the importance of building up the value of the capital investment in British industry, which we have set out to achieve by the moves that we have been discussing today.

I apologise for missing the speech of the hon. Member for Bournemouth, West (Mr. Butterfill), but I understand that he spoke about occupational pensions in his usual well-informed and thoughtful manner. However, my hon. Friends have reminded us of the damage that would have been done to such pensions by the proposals for basic pension plus and the tax changes that were involved.

The hon. Members for Buckingham (Mr. Bercow) and for South Holland and The Deepings (Mr. Hayes) gave us a rosy view of the lives of pensioners in Britain today. My hon. Friend the Member for Hornchurch (Mr. Cryer) reminded us of many of the attacks on pensioners that took place under the previous Government.

The hon. Member for Ryedale—I welcome this—commended what he called the wholly appropriate action of my hon. Friend the Economic Secretary to the Treasury in tackling pension misselling. I thank him for what he said. The right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) said that he looked forward to the introduction of individual savings accounts.

My hon. Friend the Member for Newport, West (Mr. Flynn) added his name, partially at least, to the list of Labour modernisers by advocating a funded SERPS for the future. The hon. Member for North Norfolk (Mr. Prior) returned to the question of ACT credits. I must say that, for all the dire consequences that have been forecast tonight, we did not hear a word of them in 1993 when the process was set in train by the previous Government. That leaves me feeling that we have heard arguments of convenience rather than of commitment or principle.

Mr. Letwin

When ACT relief was reduced previously, ACT was reduced to the same level. Will the Minister tell the House whether on this occasion the Chancellor proposes, in contradiction to the Budget, to reduce ACT to zero, having reduced the relief to zero?

Mr. Denham

The hon. Gentleman knows that the measure was introduced in 1993 to fund the crisis caused by the ERM debacle. We heard none of the criticisms then that we are now hearing.

The shadow Secretary of State for Social Security talked about the manifesto. What Conservative Members do not like but the people of this country do like is that we have kept our manifesto promises, in contrast to the Conservative Government after the 1992 election.

The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) asked a couple of important questions.

Mr. Bercow

Will the hon. Gentleman give way?

Mr. Denham

I shall give way when I have dealt with the points raised by the hon. Member for Roxburgh and Berwickshire. He asked about the position of local government pension schemes.

We believe that pension funds should benefit from improved company performance as a result of the moves that we have taken to encourage quality long-term investment, which will be reflected in long-term share values. The reduction in corporation tax will greatly assist company performance. Although the loss of tax credits will have some impact on the income of local authority pension funds, the extent to which the changes feed through to local authority budgets will depend on the overall judgments made by the funds' actuaries as they undertake the revaluations due next year. Their conclusions will not be reflected in contribution rates before the financial year 1999–2000 at the earliest. The Government will take all those factors into account in determining the level of local authority provision for that and subsequent years.

Several hon. Members

rose—

Mr. Denham

I must deal with some further points.

The hon. Member for Roxburgh and Berwickshire also asked about national insurance. What matters is the long-term performance of investments and the health of the companies providing occupational and personal pensions. It is the long-term rates of return on pension fund investments that are reflected in the national insurance rebates. The Budget is designed to create a better climate for investment and long-term growth. Any Government will always consider carefully representations made about the need to ask the Government Actuary to look at the long-term assumptions underlying the national insurance rebates for contracting out of SERPS.

Mr. Bercow

Will the Minister tell the House on which page in Labour's manifesto is the commitment to abolish the tax credit on dividends? It appears to have escaped the notice of Conservative Members.

Mr. Denham

We promised to produce a Budget for investment, for skills, to get people off welfare and into work, to safeguard the health service and to raise standards in schools. That is what we are doing. That is why the people of this country are pleased and proud that they voted Labour at the general election. We have honoured our manifesto commitments.

I welcome tonight's debate. The future of pensions is a major political challenge. It should not be—after 18 years in power, the Conservative party should be able to claim that nothing needs to be done. That cannot happen. Conservative Members spoke as if pensions were a triumph of the previous Administration. That would bring hollow laughter from the pensioners hit by value added tax on fuel; from those whose pension planning was undermined when the Conservative Government destroyed the cross-party consensus on SERPS; from the one in three pensioners who today have to rely on means-tested benefits; from the 1 million or so of the poorest pensioners who do not receive the income support to which they are entitled; and from the hundreds of thousands who read the Government's advertisements telling them that they could leave their occupational pensions—and did so and were missold personal pensions. That scandal was followed by inertia and inaction.

We have heard that more people have died a few months ago than have been compensated. The figures revealed by the Economic Secretary tell their own story. Yet the party that masterminded that disaster had the nerve to call this debate tonight. We have heard many speeches about occupational pensions, but we did not hear a word of concern from Conservative Members as membership of occupational schemes declined steadily under the previous Government, especially among men. We never heard a word of concern as the coverage and quality of some occupational schemes declined under the previous Government. The number of active members of occupational schemes fell from 11.6 million in 1979 to 10.7 million in 1991.

Mr. Butterfill

The hon. Gentleman obviously did not hear my speech, as he acknowledged. I said that occupational schemes were declining. However, I also said that the Government's action on advance corporation tax was likely to make that decline accelerate.

Mr. Denham

I shall come to the hon. Gentleman's point later, if I do not take many more interventions.

Today, 12 million people are outside occupational pension schemes, many in low-paid or modestly paid work. What is their choice after 18 years of Conservative government—SERPS, worth far less than it once was, or personal pensions? Personal pensions may be all right for some, but for too many it means that their savings and taxpayers' contributions are eaten up in fees and charges. Up to £1 in every £4 of savings can be eaten up by the time they retire. The cumulative effect of charges on a 25-year plan with monthly premiums of £60 can be as high as 30 per cent. If someone has a period out of work, even more of their savings will disappear.

I have never heard so many speeches from Conservative Members about personal pensions as I have heard tonight. I have been present at every pensions debate for the past five years, but I never heard a word about the people for whom personal pensions were inappropriate and the extent of savers' and taxpayers' contributions eaten up in fees and charges. Not a word was said, not an action taken, as taxpayers' and savers' money was poured down the drain. The concern of Conservative Members this evening for those with personal pensions has been fascinating. It has certainly not been in evidence in the past. We have heard arguments of convenience, not arguments of commitment or principle.

The previous Government's record has left behind not only poverty for many of today's pensioners, but similar poverty facing many of tomorrow's pensioners. The Conservative Government got their strategy wrong. They failed to ensure that people's money was used to invest for the future; they failed to regulate properly to protect savers and savings; they failed to ensure that people could get access to a decent second pension to meet their needs in the modern labour market.

In the dying days of their Administration came an admission of failure. The previous Government introduced a scheme—basic pension plus—the boldness of which was matched only by the damage that it would do. They would have abolished the basic state pension and imposed an ever larger bill—rising to £300 billion over the next 40 years—on today's working population and on our children and grandchildren. They were warned that basic pension plus would consign occupational pensions to history. They were right to admit that their policies had failed, but they were wrong in the remedies that they proposed.

That is the background to today's debate, and that is why I welcome it. I should now like to explain how we should move forward. We should first be absolutely clear about the conditions that make an effective pension policy possible and affordable. The ability to achieve security in retirement depends crucially on the health and success of the wider economy and on the opportunities for all to share in that health and success. The long-term performance of the economy and the ability of everyone to participate in economic success are the key to future pensions.

If we have a low-wage, low-skill and low-investment economy in which millions of people are in and out of work, it will always be difficult to develop a successful pensions policy to meet the needs of all. Too many people will slip through the net, as they have in the past, retiring without decent pensions. An economy that fails to be competitive in the global economy will always struggle to meet the competing demands of today's retired people, of tomorrow's pensioners and of today's working generation.

Mr. Duncan Smith

On the basis of a long-term concern for future generations and the debt requirement, will the Minister tell the House whether the Government's policy is that SERPS should continue and be expanded or whether, as the Minister for Welfare Reform maintains, it should be wound up?

Mr. Denham

The hon. Gentleman may have just used the 30 seconds that it would have taken to cover that point, but I shall do my best to deal with it. The Government's priorities and the Chancellor's Budget are all about tackling those deep-seated problems.

Mr. Duncan Smith

Answer the question.

Mr. Denham

Stop interrupting and I shall answer it.

The Government had to establish—and we have—the correct fiscal regime for investment. We also had to commit ourselves to the conditions for stable and sustainable growth, and we have done so. In doing so, we are not only aiming to build a stronger economy, but providing the essential underpinning for decent pensions. By opening up, through the new deal, new opportunities to leave welfare, to enter work, to earn an income and to join a pension scheme, we shall enable more people who currently have no pension to enjoy one in future.

Investment, skills and the opportunity to work and saveare the platform on which our economy and our pension policy will be built. Before the general election, we made it clear that a wide-ranging review of pensions would be a necessity for the Government because of the legacy that we would inherit. Some of the issues that we shall have to address arise directly from the failures of the previous Government.

We shall have to—and we want to—talk directly to pensioners and to their organisations. The Chancellor has already taken action to cut VAT on domestic fuel and to make available better and cheaper insulation. [HON. MEMBERS: "SERPS"] That action will be supported by the new deal for young people. He has also taken action to make further cuts in some fuel bills. All those actions will help older citizens to keep their homes warm in the winter.

Unlike the previous Government, we shall retain the basic state pension as the foundation of pension provision and ensure that it is increased at least in line with prices. [HON. MEMBERS: "SERPS?"] We are already commissioning research to establish why so many pensioners do not claim the income support to which they are entitled. We are committed to examining ways of delivering more automatic help to the poorest of today's pensioners.

For most people, security in retirement depends on two pensions—the essential foundation of the basic state pension and an adequate second pension. Occupational pensions are one of the best ways of providing the second pension that people need in retirement. [HON. MEMBERS: "SERPS"] Unlike the previous Government, who were prepared to say goodbye to occupational pensions, we shall work with the pensions industry to examine ways in which the framework for occupational schemes can be strengthened and made more effective.

We shall of course retain SERPS for those who wish to remain members of it. [HON. MEMBERS: "Hear, hear."] I got there, and I am sure that it was worth waiting for. We must continue to value the contribution that employers can make to their employees' security in retirement.

The Government's aim is not to abolish the basic state pension but to establish the right balance between public and private provision. However, too many people, particularly those on low and modest incomes, find it difficult to find a second pension that gives good value for money, flexibility and security. There are many who cannot contribute to second pensions because of caring responsibilities. They contribute immensely to our society, but too many retire as a result on means-tested benefits. Our framework of stakeholder pensions will extend the opportunities to belong to a pension scheme that is flexible, secure, gives value for money and does not hit people's savings if they have a period out of work.

We shall examine ways to use the structure of SERPS to provide better support for carers through a citizenship pension. Many of those without decent second pensions are women. Our action on pension sharing at the time of divorce is just one step—

Mr. James Arbuthnot (North-East Hampshire)

rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly, That the original words stand part of the Question:—

The House divided: Ayes 190, Noes 353.

Division No. 51]	[10 pm
AYES
Ainsworth, Peter (E Surrey)	Goodlad, Rt Hon Alastair
Allan, Richard (Shef'ld Hallam)	Gorman, Mrs Teresa
Amess, David	Gorrie, Donald
Ancram, Rt Hon Michael	Gray, James
Arbuthnot, James	Green, Damian
Atkinson, David (Bour' mth E)	Greenway, John
Atkinson, Peter (Hexham)	Grieve, Dominic
Baldry, Tony	Gummer, Rt Hon John
Ballard, Mrs Jackie	Hague, Rt Hon William
Beggs, Roy (E Antrim)	Hamilton, Rt Hon Sir Archie
Beith, Rt Hon A J	Hammond, Philip
Bercow, John	Hancock, Mike
Beresford, Sir Paul	Hawkins, Nick
Blunt, Crispin	Hayes, John
Body, Sir Richard	Heath, David (Somerton & Frome)
Boswell, Tim	Heathcoat-Amory, Rt Hon David
Bottomley, Peter (Worthing W)	Horam, John
Bottomley, Rt Hon Mrs Virginia	Howard, Rt Hon Michael
Brady, Graham	Howarth, Gerald (Aldershot)
Brake, Thomas	Hunter, Andrew
Brand, Dr Peter	Jack, Rt Hon Michael
Brazier, Julian	Jackson, Robert (Wantage)
Breed, Colin	Jenkin, Bernard (N Essex)
Brooke, Rt Hon Peter	Johnson Smith, Rt Hon Sir Geoffrey
Browning, Mrs Angela
Bruce, Ian (S Dorset)	Keetch, Paul
Bruce, Malcolm (Gordon)	Key, Robert
Burnett, John	King, Rt Hon Tom (Bridgwater)
Burns, Simon	Kirkbride, Miss Julie
Burstow, Paul	Kirkwood, Archy
Butterfill, John	Laing, Mrs Eleanor
Campbell, Menzies (NE Fife)	Lansley, Andrew
Cash, William	Leigh, Edward
Chapman, Sir Sydney (Chipping Barnet)	Letwin, Oliver
	Lewis, Dr Julian (New Forest E)
Chidgey, David	Lidington, David
Chope, Christopher	Lilley, Rt Hon Peter
Clappison, James	Livsey, Richard
Clark, Rt Hon Alan (Kensington)	Lloyd, Rt Hon Sir Peter (Fareham)
Clark, Dr Michael (Rayleigh)	Loughton, Tim
Clarke, Rt Hon Kenneth (Rushcliffe)	Luff, Peter
	Lyell, Rt Hon Sir Nicholas
Clifton-Brown, Geoffrey	MacGregor, Rt Hon John
Collins, Tim	McIntosh, Miss Anne
Colvin, Michael	MacKay, Andrew
Cormack, Sir Patrick	Maclean, Rt Hon David
Cran, James	McLoughlin, Patrick
Curry, Rt Hon David	Madel, Sir David
Davey, Edward (Kingston)	Malins, Humfrey
Davis, Rt Hon David (Haltemprice)	Maples, John
Davies, Quentin (Grantham)	Mates, Michael
Day, Stephen	Maude, Rt Hon Francis
Donaldson, Jeffrey	Mawhinney, Rt Hon Dr Brian
Dorrell, Rt Hon Stephen	May, Mrs Theresa
Duncan, Alan	Merchant, Piers
Duncan Smith, Iain	Michie, Mrs Ray (Argyll & Bute)
Evans, Nigel	Moore, Michael
Faber, David	Moss, Malcolm
Fabricant, Michael	Nicholls, Patrick
Fallon, Michael	Norman, Archie
Feam, Ronnie	Öpik, Lembit
Flight, Howard	Ottaway, Richard
Forsythe, Clifford	Page, Richard
Forth, Rt Hon Eric	Paice, James
Foster, Don (Bath)	Paterson, Owen
Fowler, Rt Hon Sir Norman	Pickles, Eric
Fox, Dr Liam	Prior, David
Fraser, Christopher	Redwood, Rt Hon John
Gale, Roger	Rendel, David
George, Andrew (St Ives)	Robathan, Andrew
Gibb, Nick	Robertson, Laurence (Tewk'b'ry)
Gill, Christopher	Roe, Mrs Marion (Broxbourne)
Gillan, Mrs Cheryl	Rowe, Andrew (Faversham)

Ruffley, David	Townend, John
Russell, Bob (Colchester)	Tredinnick, David
St Aubyn, Nick	Trend, Michael
Sanders, Adrian	Tyler, Paul
Sayeed, Jonathan	Tyrie, Andrew
Shephard, Rt Hon Mrs Gillian	Viggers, Peter
Shepherd, Richard (Aldridge)	Walter, Robert
Simpson, Keith (Mid-Norfolk)	Wardle, Charles
Smith, Sir Robert (W Ab'd'ns)	Webb, Professor Steve
Smyth, Rev Martin (Belfast S)	Wells, Bowen
Soames, Nicholas	Whitney, Sir Rayrnond
Spelman, Mrs Caroline	Whittingdale, John
	Widdecombe, Rt Hon Mss Ann
Spicer, Sir Michael	Wilkinson, John
Spring, Richard	Willetts, David
Stanley, Rt Hon Sr John	Willis, Phil
Steen, Anthony	Wilshire, David
Stunell, Andrew	Winterton, Mrs Ann (Congleton)
Swayne, Desmond	Winterton, Nicholas (Macclesfield)
Syms, Robert	Woodward, Shaun
Tapsell, Sir Peter	Yeo, Tim
Taylor, Ian (Esher & Walton)	Young, Rt Hon Sir George
Taylor, John M (Solihull)
Taylor, Matthew (Truro)	Tellers for the Ayes:
Taylor, Sir Teddy	Mr. Oliver Heald and
Temple-Morris, Peter	Mr. Nigel Waterson.
NOES
Abbott, Ms Diane	Casale, Roger
Adams, Mrs Irene (Paisley N)	Caton, Martin
Ainger, Nick	Cawsey, Ian
Allen, Graham (Nottingham N)	Chapman, Ben (Wirral S)
Anderson, Donald (Swansea E)	Chaytor, David
Anderson, Janet (Rossendale)	Chisholm, Malcolm
Armstrong, Ms Hilary	Church, Ms Judith
Ashton, Joe	Clapham, Michael
Atherton, Ms Candy	Clark, Rt Hon Dr David (S Shields)
Atkins, Charlotte	Clark, Dr Lynda (Edinburgh Pentlands)
Austin, John
Banks, Tony	Clark, Paul (Gillingham)
Barnes, Harry	Clarke, Charles (Norwich S)
Barron, Kevin	Clarke, Rt Hon Tom (Coatbridge)
Battle, John	Clarke, Tony (Northampton S)
Bayley, Hugh	Clelland, David
Beckett, Rt Hon Mrs Margaret	Clwyd, Ann
Begg, Miss Anne (Aberd'n S)	Coaker, Vernon
Bell, Stuart (Middlesbrough)	Coffey, Ms Ann
Benn, Rt Hon Tony	Colman, Tony (Putney)
Bennett, Andrew F	Connarty, Michael
Benton, Joe	Cooper, Yvette
Berry, Roger	Corbett, Robin
Best, Harold	Corston, Ms Jean
Betts, Clive	Cousins, Jim
Blackman, Liz	Cranston, Ross
Blears, Ms Hazel	Crausby, David
Blizzard, Bob	Cryer, Mrs Ann (Keighley)
Blunkett, Rt Hon David	Cryer, John (Hornchurch)
Boateng, Paul	Cummings, John
Borrow, David	Cunliffe, Lawrence
Bradley, Keith (Withington)	Cunningham, Jim (Cov'try S)
Bradley, Peter (The Wrekin)	Cunningham, Rt Hon Dr John (Copeland)
Bradshaw, Ben
Brown, Rt Hon Nick (Newcastle E)	Curtis-Thomas, Mrs Claire
Brown, Russell (Dumfries)	Dalyell, Tam
Browne, Desmond (Kilmarnock)	Darling, Rt Hon Alistair
Burden, Richard	Darvill, Keith
Burgon, Colin	Davey, Valerie (Bristol W)
Butler, Christine	Davidson, Ian
Byers, Stephen	Davies, Rt Hon Denzil (Llanelli)
Caborn, Richard	Davies, Geraint (Croydon C)
Campbell, Alan (Tynemouth)	Davies, Rt Hon Ron (Caerphilly)
Campbell, Mrs Anne (C'bridge)	Davis, Terry (B'ham Hodge H)
Campbell, Ronnie (Blyth V)	Dawson, Hilton
Campbell-Savours, Dale	Dean, Mrs Janet
Cann, Jamie	Denham, John
Caplin, Ivor	Dismore, Andrew

Dobbin, Jim	Johnson, Miss Melanie (Welwyn Hatfield)
Dobson, Rt Hon Frank
Donohoe, Brian H	Jones, Barry (Alyn & Deeside)
Doran, Frank	Jones, Ms Fiona (Newark)
Drew, David	Jones, Jon Owen (Cardiff C)
Drown, Ms Julia	Jones, Dr Lynne (Selly Oak)
Dunwoody, Mrs Gwyneth	Jones, Martyn (Clwyd S)
Eagle, Angela (Wallasey)	Keeble, Ms Sally
Edwards, Huw	Keen, Alan (Feltham & Heston)
Efford, Clive	Keen, Mrs Ann (Brentford)
Ellman, Ms Louise	Kemp, Fraser
Ennis, Jeff	Kennedy, Jane (Wavertree)
Etherington, Bill	Khabra, Piara S
Fatchett, Derek	Kidney, David
Field, Rt Hon Frank	Kilfoyle, Peter
Fisher, Mark	King, Andy (Rugby & Kenilworth)
Fitzpatrick, Jim	King, Ms Oona (Bethnal Green)
Flint, Caroline	Kumar, Dr Ashok
Flynn, Paul	Ladyman, Dr Stephen
Follett, Barbara	Lawrence, Ms Jackie
Foster, Rt Hon Derek	Laxton, Bob
Foster, Michael John (Worcester)	Lepper, David
Foulkes, George	Levitt, Tom
Fyfe, Maria	Lewis, Ivan (Bury S)
Galloway, George	Lewis, Terry (Worsley)
Gapes, Mike	Liddell, Mrs Helen
Gerrard, Neil	Linton, Martin
Gibson, Dr Ian	Livingstone, Ken
Godman, Dr Norman A	Lloyd, Tony (Manchester C)
Godsiff, Roger	Love, Andrew
Goggins, Paul	McAvoy, Thomas
Golding, Mrs Llin	McCabe, Stephen
Gordon, Mrs Eileen	McCafferty, Ms Chris
Grant, Bernie	McCartney, Ian (Makerfield)
Griffiths, Jane (Reading E)	McDonagh, Siobhain
Griffiths, Nigel (Edinburgh S)	Macdonald, Calum
Griffiths, Win (Bridgend)	McDonnell, John
Grocott, Bruce	McGuire, Mrs Anne
Grogan, John	McKenna, Ms Rosemary
Gunnell, John	Mackinlay, Andrew
Hain, Peter	McNamara, Kevin
Hall, Mike (Weaver Vale)	McNulty, Tony
Hall, Patrick (Bedford)	MacShane, Denis
Hanson, David	Mactaggart, Fiona
Harman, Rt Hon Ms Harriet	McWalter, Tony
Heal, Mrs Sylvia	McWilliam, John
Healey, John	Mahon, Mrs Alice
Henderson, Ivan (Harwich)	Mallaber, Judy
Hepburn, Stephen	Mandelson, Peter
Heppell, John	Marek, Dr John
Hesford, Stephen	Marsden, Paul (Shrewsbury)
Hewitt, Ms Patricia	Marshall, David (Shettleston)
Hill, Keith	Marshall, Jim (Leicester S)
Hodge, Ms Margaret	Marshall-Andrews, Robert
Hoey, Kate	Martlew, Eric
Home Robertson, John	Meacher, Rt Hon Michael
Hood, Jimmy	Meale, Alan
Hoon, Geoffrey	Merron, Gillian
Hope, Phil	Michael, Alun
Hopkins, Kelvin	Michie, Bill (Shef'ld Heeley)
Howarth, Alan (Newport E)	Milburn, Alan
Howarth, George (Knowsley N)	Mitchell, Austin
Howells, Dr Kim	Moffatt, Laura
Hoyle, Lindsay	Moran, Ms Margaret
Hughes, Ms Beverley (Stretford)	Morgan, Ms Julie (Cardiff N)
Hughes, Kevin (Doncaster N)	Morgan, Rhodri (Cardiff W)
Humble, Mrs Joan	Morley, Elliot
Hurst, Alan	Morris, Ms Estelle (B'ham Yardley)
Hutton, John	Morris, Rt Hon John (Aberavon)
Iddon, Dr Brian	Mountford, Kali
Illsley, Eric	Mudie, George
Ingram, Adam	Mullin, Chris
Jackson, Ms Glenda (Hampstead)	Murphy, Denis (Wansbeck)
Jackson, Helen (Hillsborough)	Murphy, Jim (Eastwood)
Jamieson, David	Murphy, Paul (Torfaen)
Jenkins, Brian (Tamworth)	Naysmith, Dr Doug

Norris, Dan	Smith, John (Glamorgan)
O'Brien, Bill (Normanton)	Smith, Llew (Blaenau Gwent)
O'Brien, Mike (N Warks)	Snape, Peter
O'Hara, Edward	Soley, Clive
Olner, Bill	Spellar, John
O'Neill, Martin	Squire, Ms Rachel
Organ, Mrs Diana	Starkey, Dr Phyllis
Osborne, Mrs Sandra	Steinberg, Gerry
Pearson, Ian	Stevenson, George
Pendry, Tom	Stewart, David (Inverness E)
Pickthall, Colin	Stewart, Ian (Eccles)
Pike, Peter L	Stinchcombe, Paul
Plaskitt, James	Stoate, Dr Howard
Pollard, Kerry	Stott, Roger
Pope, Greg	Strang, Rt Hon Dr Gavin
Pound, Stephen	Straw, Rt Hon Jack
Prentice, Ms Bridget (Lewisham E)	Stringer, Graham
Prentice, Gordon (Pendle)	Stuart, Ms Gisela (Edgbaston)
Prescott, Rt Hon John	Sutcliffe, Gerry
Primarolo, Dawn	Taylor, Rt Hon Mrs Ann (Dewsbury)
Prosser, Gwyn
Purchase, Ken	Taylor, David (NW Leics)
Quin, Ms Joyce	Taylor, Rt Hon John D (Strangford)
Quinn, Lawrie (Scarborough)	Thomas, Gareth (Clwyd W)
Radice, Giles	Thomas, Gareth R (Harrow W)
Rammell, Bill	Timms, Stephen
Rapson, Syd	Tipping, Paddy
Raynsford, Nick	Todd, Mark
Reid, Dr John (Hamilton N)	Touhig, Don
Robertson, Rt Hon George (Hamilton S)	Trickett, Jon
	Turner, Dennis (Wolverh'ton SE)
Robinson, Geoffrey (Cov'try NW)	Turner, Dr George (NW Norfolk)
Roche, Mrs Barbara	Twigg, Derek (Halton)
Rogers, Allan	Twigg, Stephen (Enfield)
Rooker, Jeff	Vaz, Keith
Rooney, Terry	Vis, Dr Rudi
Ross, Ernie (Dundee W)	Watts, David
Rowlands, Ted	White, Brian
Roy, Frank	Whitehead, Dr Alan
Ruane, Chris	Wicks, Malcolm
Ruddock, Ms Joan	Williams, Rt Hon Alan (Swansea W)
Ryan, Ms Joan
Salter, Martin	Williams, Alan W (E Carmarthen)
Savige, Malcolm	Williams, Mrs Betty (Conwy)
Sawford, Phil	Wills, Michael
Sedgemore, Brian	Winnick, David
Sheerman, Barry	Winterton, Ms Rosie (Doncaster C)
Sheldon, Rt Hon Robert	Wise, Audrey
Shipley, Ms Debra	Wood, Mike
Simpson, Alan (Nottingham S)	Woolas, Phil
Singh, Marsha	Wray, James
Skinner, Dennis	Wright, Dr Tony (Cannock)
Smith, Rt Hon Andrew (Oxford E)	Wright, Tony D (Gt Yarmouth)
Smith, Angela (Basildon)	Wyatt, Derek
Smith, Rt Hon Chris (Islington S)
Smith, Miss Geraldine (Morecambe & Lunesdale)	Tellers for the Noes:
	Mr. Jim Dowd and
Smith, Jacqui (Redditch)	Mr. Robert Ainsworth.

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith, pursuant to Standing Order No. 31 (Questions on amendments), and agreed to.

MR. DEPUTY SPEAKER forthwith declared the main Question, as amended, to be agreed to.

Resolved, That this House condemns the failure of the last Government to foster security in retirement lot either today's pensioners or pensioners of the future; supports the present Government's objective of a decent income for all in retirement; believes that the best way to achieve this is by developing second pensions building on the foundation of the basic state pension; commends the Government's decisive action on the past mis-selling of private pensions; endorses the measures taken in the Budget, particularly the reforms to corporation tax, which will help to create a climate encouraging higher investment and a higher sustainable growth rate increasing the capacity of the economy to support decent pensions; supports the Government's welfare-to-work proposals, which will improve the employment opportunities for thousands of people, enabling them to save for their own retirement; and welcomes the Government's commitment to review pensions and achieve security in retirement for all.