§ 3.26 p.m.
§ Lord Burnhamasked Her Majesty's Government:
Whether they have calculated the consequences of the decisions on advance corporation tax on the minimum funding requirements for private pension funds.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)My Lords, the decision to abolish the tax credit on equity dividends for pension schemes must be seen in the context of the Government's long-term strategy to encourage investment and future returns. It is part of a package of changes which will encourage investment and longer-term capital growth. What matters is the long-run performance of investments and the health of companies, including the companies providing occupational pensions. It is the long-term rates of return on pension fund investments which are reflected in the minimum funding requirement.
§ Lord BurnhamMy Lords, I am glad to hear the Minister's confidence about the long term, but what steps will Her Majesty's Government take on behalf of pensioners to remedy the fact that the average yield of the £300 billion-worth of pension funds in UK shares will now drop from an average of 4 per cent. yield to an average of 3.2 per cent.? Further, can the Minister give an estimate of the number of schemes which, as a result of the actions of her right honourable friend the Chancellor of the Exchequer, will fall into deficit, laying particular emphasis on local government pension schemes?
§ Baroness Hollis of HeighamMy Lords, I should have thought that what matters is the total return to pension funds, including the capital growth of the companies whose shares are held. Since 1992 the yield from UK equities has been some 107 per cent.—it has more than doubled—and about three-quarters of that growth has been capital gain, not dividend yield. Had the tax credit not been in existence for those years, the total gain would still have been over 100 per cent.—indeed, it would have been 100.4 per cent. even without the distortion of the tax credit.
The second point raised by the noble Lord related to the number of schemes that will be affected. We do not yet know that, but it is right to remind the House that at the moment about half of all schemes are in surplus and are enjoying a full or partial holiday. Something like £50 billion-worth of assets are currently held in surplus in pension funds.
The noble Lord's third point related to the effect on local authorities. It is nonsense to suggest—there has been some speculation in the press—that council taxes are about to rise. Although the loss of tax credits will have some impact on the income of local authority pension funds, the extent to which those changes feed through to local authority budgets will depend on the 726 overall judgments made by the fund actuaries. There will be no effect on local authority budgets at least until the funds are revalued sometime next year. Contribution rates will not feed through until the millennium at the very earliest. I apologise to the House for the length of that answer, but the noble Lord asked me three important questions and I thought it right to do my best to answer them.
§ Lord MarshMy Lords, does the Minister accept that many people who respect the great contribution that she has made to this House on the subject of pensions will be saddened and surprised by the answer that she has just given and her defence of an outrage? Does the noble Baroness accept that pension funds are concerned primarily with yield and not capital gain, which is the main reason why many fund managers will withdraw investments from companies when dividends cease to be paid or are reduced? Further, does she accept that it is a three-pronged abomination in that not only does it take £5 billion out of pension funds—the late Mr. Maxwell, whether he has gone up or down, must be laughing—but it also has a deleterious effect on the solvency of existing schemes, including the 50 per cent. that are already insolvent? Does the noble Baroness also agree that the impact on gilt yields is hound to have another deleterious effect on those who are forced to put their pension funds into annuities? I am surprised that the noble Baroness can remain in office and defend this monstrosity.
§ Baroness Hollis of HeighamMy Lords, I expect the National Association of Pension Funds to talk up the problems effected by this change, but I do not expect that from someone with the experience of the noble Lord, Lord Marsh. I am sure that many noble Lords agree, including the late financial adviser to the previous Chancellor, Kenneth Clarke, in his recent article, that the abolition of tax credit is a change long overdue. "whose time has come." The effect of this tax distortion in this country over the years has produced greater reliance on dividend yield than capital growth. The noble Lord does not need me to tell him that in the late 1970s in the UK and its closest analogue the United States—most European funds do not have funded private pension schemes analogous to the UK—2 per cent. of GDP went into dividends. Today, 3 per cent. of US GDP goes into dividends and the figure for the UK is 6 per cent. As a result, this country has not had the investment in economic health and growth that it should. That was what the Budget was designed to alter. Together with the reduction of corporation tax by 2 per cent. we believe that we will have a sound economy on which the ultimate health of pension funds rests.