TABLE (Hansard, 13 June 1974)

Mr. Clark

I am not necessarily wedded to the wording of the clause. It refers to a pension fund, but what I mean is a superannuation fund approved by the Board of Inland Revenue under Section 208 of the Income and Corporation Taxes Act 1970. I am sure that the Financial Secretary will not argue with me on the wording. What I want from him is an undertaking that the spirit behind the clause will be accepted by the Government.

Much of the criticism of building societies is made in ignorance of what they do. I hope I shall not bore the Committee by saying that building societies can lend money to would-be house purchasers only if people invest in building societies. In 1951 31 per cent. of the houses in this country were owner-occupied. The figure today is just over 50 per cent. That is because over the past 25 years building societies have lent a tremendous amount of money to owner-occupiers. There are 15 million investors in building societies, the total investment is about £17,000 million and there are more than 4 million borrowers from building societies.

People should recognise that over the years building societies have rendered sterling service to owner-occupiers. Those who criticise building societies seem to think that they have a responsibility to lend to all and sundry, but they can lend only investors' money, and it would be irresponsible of them not to take proper precautions when lending money to ensure that it will be repaid.

As a digression, house owners are suffering from a high rate of interest. Building society interest is running at the rate of about 11 per cent. overall. I regret that the Government have set their face against the tax credit system, under which there would have been a 30 per cent.—now a 33 per cent.— reduction in the interest rate on a building society loan. With an automatic 33 per cent. reduction, the effective rate of interest on a building society loan would be 7 per cent. or 7½ per cent., which 1955 would be a great boon to the building society movement.

I should like to explain the technicalities of the clause. To put it in a nutshell, under Section 343 of the Income and Corporation Taxes Act 1970 a building society is unable to repay tax to an investor. That means that for someone who invests £1,000 or £2,000 in a building society and gets 7½ per cent. interest tax-free there is no further tax liability. However, a person who invests in a building society may not be liable to tax at the standard rate. Such a person receiving dividends would get a tax repayment but, because of building societies' peculiar arrangements with the Inland Revenue, which have been built up over the years and have stood us in good stead, no repayment is allowed. The building societies have special arrangements with the Inland Revenue whereby they pay tax on behalf of their investors. It is called a composite rate, which is now running at 23.5 per cent. That rate is subject to negotiation, but I guess that it will be set at about 26 per cent.

We must always remember that building societies borrow from the general public and the general public invest in the building societies. The institutions do not invest in the building societies. Investors in building societies can withdraw their money at very short notice— within seven or 14 days, or in some cases within a month. The building societies —and this has been at the bottom of their liquidity problems in the past two or three years—have suffered considerably from the fact that they borrow short from the public and then lend that money on a 20-year or 25-year basis. This amounts to the economic nonsense of borrowing short and lending long. I hope the clause will eradicate this state of affairs.

When I originally thought of the provisions of the clause, the country was about to have a State reserve pension scheme. That scheme aimed at building up a fund to give everybody a pension at the age of 65 in addition to the ordinary retirement pension. I calculated that the amount of money which the State would have collected in contributions amounted to £260 million per year. This is long-term money, and it might be an idea to channel some of it into the 1956 building societies. One pays a contribution on an actuarial basis, and by the time one draws it one is 60 or 65. This is the only really long-term investment there is.

The right hon. Lady the Secretary of State for Social Services has shelved the State reserve scheme, but no doubt will come forward with a further proposal. I trust that next time she will get her arithmetic right, for in past years the Labour Government have got their arithmetic on pensions wrong three times. When the right hon. Lady introduces some sort of State reserve scheme, it will be for the State to collect the superannuation contributions.

I turn to a wider aspect relating to the position of pension funds. The occupational pension schemes and private pension schemes, which are admirable schemes, involve funds amounting to £1,400 million per year. The institutions must somehow invest those sums. Any institutional investor does not always invest in long-term securities. He may put some of the money on a short-term basis and may have some of the money on call, some of it in equities, but he will have some long-term money at his disposal. I believe that it would be desirable if we could get pension funds to invest in building societies. Why do they not do so at the moment? Pension funds are exempt from income tax. But I am sure, Mr. Murton, that you would not want me to go into that, and, in any case, it does not help my argument about lending by pension funds.

Pension funds do not lend to building societies simply because if a pension fund lends £100 million or £200 million, for example, to a building society it will get its 7 per cent. tax free but, alas, it will not be able to reclaim the tax that the building society has paid on that investment. I am saying only that I do not want the repayment of tax from building societies to be extended to anyone but pension funds—approved superannuation pension funds, or whatever the definition may be.

If the composite rate of tax is 26 per cent. and the going rate is 33 per cent., obviously, from an accountancy point of view, it is easy to keep investment of pension funds absolutely separate, and 1957 the building societies can pay the going rate on behalf of the pension fund. Presumably that rate will be 33 per cent., so there will be a repayment of 33 per cent. Compared to the ordinary investor paying 26 per cent., the pension fund paying 33 per cent. will be worse off. The pension fund will not necessarily get 7½ per cent. tax-free return. It will be more like 6¾ per cent or 6⅞ per cent. Grossed up, this will mean that pension funds will be able to invest in building societies and get a gross return of 10 per cent. or 10¼ per cent. By accepting the clause the Government will be able to channel more resources to the building societies.

If the Financial Secretary accepts my formula of a special rate of 33 per cent. for money invested by pension funds it will cost the Revenue nothing. We have now reached the stupid position where the only long-term investors in the country are the pension funds—and the size of those funds will increase when the State reserve scheme gets going—and the only long-term lenders are the building societies. We should marry the two groups together. I hope the Financial Secretary has taken that on board. There is no party point in this. I want to ensure a continuous (low of funds to building societies so that the building societies can continue the work of helping owner-occupiers. That help will dry up if there is a cash flow problem if the interest rates go up too much or if the societies cannot compete with outside interest rates.

We cannot continue to have the Government subvention to the building societies and that is something the Government should take on board. I hope that the Financial Secretary will give sympathetic consideration to the proposal. I would commend this proposal to a Conservative Government as much as to a Labour Government because it is logical and helpful to owner-occupiers. It will not cost the taxpayer a farthing but will do a tremendous amount of good.