§ 11.50 a.m.
§ Mr. Ted Fletcher (Darlington)
I beg to move,That this House regrets the post-war failure of British industry to invest adequate resources in the formation of new long-term capital and equipment; furthermore, recognising that contractual savings, pension and insurance funds represent the most important source of long-term investment, regrets that these funds, provided by the savings of individual men and women, are not at present subject to effective democratic control; and therefore calls upon Her Majesty's Government to ensure that these funds are properly deployed to provide the productive capacity which is essential to the United Kingdom's future economic prosperity.I welcome this opportunity. I regard this motion as one of major importance for the future prosperity of our country and one which, if implemented, could make a significant contribution to solving the problem of unemployment.
There can be little doubt that the failure of British industry to invest sufficient long-term capital since the war has been a major factor in its decline compared with our major competitors. It is not necessary for me to argue about the crucial importance of investment in producing and maintaining an adequate level of economic growth. Among the many requirements for growth, such as stable market conditions, profitability and incentives to the work force—by which I mean not just financial incentives but a large measure of industrial democracy the most essential is a modern and efficient method for the capitalisation of our industry, an efficient basis for production which so many British companies lack.
Since 1945—many would argue, for longer than that—the level of investment in our productive industries has been much too low, while our major trading competitors has maintained a higher investment schedule. The OECD has reported the gloomy facts year after year in its annual reports. I do not wish to weary the House with statistics, but it is of interest that recent information revealed in the NEDO report has a bearing on what I am saying.
That report says that in the four years 1966–70 gross fixed investment as a percentage of our gross national product 841 averaged 18–6. In West Germany it was 25.4; in Sweden, 24; in Japan, 36. In Australia, Austria, Belgium, Denmark, Canada, Finland, France, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Spain, Switzerland—one could go on—fixed investment was much higher than in this country. We are almost at the bottom of the list of trading nations for capital investment in industry.
When it come to investment in machinery and equipment, the picture is even more depressing. The United Kingdom economy depends on manufacturing industry. We have developed an economy based on high technology and on highly advanced skills, such as electronic and mechanical engineering, machine tools, computers, chemicals and so on. That sort of production is vital to our economy and equally so to our overseas trade, since we depend on selling this sophisticated equipment in order to pay for the raw materials and foodstuffs which we import.
But our investment record in manufacturing industry is depressing. In every country which competes with us in international markets the record is better. The National Economic Development Office, in its report for May of this year, calculated that the average share of investment in manufacturing industry expressed as a percentage of our GNP was 3.8. Figures for our major trading competitors—I quote from a long list here—are France, 6.9; Japan, 8.9; Italy, 6.4; Belgium, 5.5; Holland, 8.4. The report went on to say that there were signs that Britain was actually "de-investing" in manufacturing industry—that is, that funds were being withdrawn from industry, that it was being deprived of capital, because there were other spheres in which a better return could be earned.
These investment records are reflected in the growth rates of the various countries, because capital investment reflects the growth figure. Figures for the period 1960–72 show that West Germany, France, the Netherlands and many other countries had a growth rate almost twice ours. The conclusion is inescapable. Britain is lagging behind its major competitors because its manufacturing in-industry has been starved of capital.
The situation is worsening. Recent figures for the past five years show that 842 manufacturing industry has been losing about 150,000 jobs a year. Part of that period, from 1970 to 1973, was a period of comparatively high world trade. In the same period, imports of manufactured goods rose at twice the rate of the increase in exports.
There are many reasons, of course, why manufacturing industry has been under-capitalised. It has been claimed that the stop-go policy of Governments of both parties since the war has not made it easier for investors to consider long-term investment in productive industry. But even when money was available and optimism was high—for instance, in the period 1971–73—the needs of productive industry were spurned.
One recalls Lord Barber's Budgets and the handouts to private industry, given in the expectation that they would be reinvested. They were not. One recalls the speech of the former Conservative Prime Minister to the bankers at a Lord Mayor's dinner, at which he chided them for the fact that, although the Government were making money available to industry in tax concessions and other ways, it was not being ploughed back into productive industry, but was going instead into property speculation and investment abroad.
The Bank of England Quarterly Bulletin issued two days ago makes the point that industry needs more profits in order to reinvest and suggests the abolition of price controls to enable those profits to be made. This is an echo of the view expressed from time to time by the Confederation of British Industry. Recent history has shown us that if extra profits are made, they are not necessarily channelled into productive industry, so we must look at other ways of financing industry.
I therefore ask what contribution insurance and pension funds can make to supplying new funds for productive industry. I am not suggesting that those funds are not invested at the moment. As far back as 1959, the Radcliffe Committee estimated that they were equal to 19 per cent. of the country's net fixed capital formation. The same report suggested that the insurance companies' life and annuity funds were increasing at £ 300 million a year.
§ Mr. Fletcher
I said 19 per cent., but I was about to say that in 1972 the figure had grown to 23 per cent. I quote these figures to show what formidable funds are available. According to Dr. Carter of Nottingham University in an article published in the Midland Bank Review in 1972, the annual premium income of the insurance companies is equal to over 10 per cent. of the country's gross national product. We are talking about formidable funds. Therefore, we must take a close look at this source of economic and financial power and ask whether the investment policies that have been followed have been in the best interests of the country.
According to Department of Trade figures, the financial assets held by insurance companies increased from £ 17,000 million in 1971 to over £ 24,000 million in 1974. In addition, the assets of the private pension funds amounted in 1974 to £5,100 million. This excludes the superannuation funds of the nationalised industries—the gas, electricity and coal industries—and British aviation, and so on. However, it is estimated that nationalised industry pension funds must total about £3,000 million.
The investment capacity of these insurance companies is expected to increase considerably in the future because of the social security legislation recently passed by the House, with its higher minimum standard, which will require a higher level of funding. Therefore, greater funds will be available by pension funds for long-term investment.
The managers of these insurance pension funds take the view that they must invest to obtain the best possible return for their members. More than 11 million people contribute to pension funds and many millions contribute to insurance funds. The policy of getting the highest return may well be right in the short term. There may be some advantages, although this is not always the case as the recent lesson about speculating in property serves to show.
It is not in the nation's interests that our manufacturing industry should be starved of funds, particularly when millions of these contributors rely on productive 844 industry for their livelihood. It is not much consolation to a man who perhaps has contributed to a pension fund for 30 years and who becomes unemployed in his fifties because his firm is unable to compete and is facing bankruptcy due to being under-capitalised. It does not make sense for those who contribute to pension funds to expect the best return when they are starving the source of those pension contributions, that is, the industry in which they work.
What have the insurance companies and the pension funds done with their money? In the property boom years of 1970 to 1973 there was a dramatic increase in real property investment. Funds were channelled away from industry into property. Available estimates suggest that during this period some £ 4,000 million went into the hands of property speculators and developers. I am not suggesting that this entire sum was contributed by insurance or pension funds, because a substantial amount was contributed by secondary and merchant banks. According to figures produced by the Life Offices' Association, which I understand has sent a brief to many Opposition Members—
§ Mr. R. A. McCrindle (Brentwood and Ongar)
The document suggests that only 16 per cent. of funds were invested in land and property.
§ Mr. Fletcher
I have not been sent a copy but I have obtained one. According to figures produced by the Life Offices' Association, 16 per cent. of its investment funds went into property, but this figure has been disputed and some sources suggest that it was as high as 24 per cent. It is difficult to obtain the actual figure for this investment, but from 1971 to 1974 there was a four-fold increase in insurance companies investing in property.
§ Mr. John MacGregor (Norfolk, South)
Is the hon. Gentleman aware that included in those figures for property there is substantial investment in industrial property? One major firm of chartered surveyors this week told me that of its very large portfolio 25 per cent. was invested in industrial property, which is a direct contribution to industrial investment.
§ Mr. Fletcher
Unless these figures are itemised in a report, it is difficult to know what proportion goes into productive property, into maintaining factories, and what goes into 20-storey empty office blocks, the value of which enhances year by year and produces no doubt a much better return than investment in a factory. Unless figures are presented to us, we cannot know what proportion is being used in a productive sense and what proportion is being used for speculation because the profitability is very high.
§ Mr. Tim Renton (Mid-Sussex)
I have with me an actual breakdown of the investments made by the pension funds in the years 1972, 1973 and 1974. I should be happy to give the hon. Gentleman a copy after the debate. It shows that even in 1974, which was the worst year for many in the equity share market, pension funds were investing £305 million in land and property, which, as my hon. Friend the Member for Norfolk, South (Mr. MacGregor) said, includes investment in industrial property, and £238 million in ordinary shares. Therefore, even in that year, when the equity or ordinary share market had the worst prospects for many a year investment by the pension funds in property was only marginally more than investment in equities.
§ Mr. Fletcher
I shall deal later with investment in shares. I am making the point that there has been—it has not been contradicted—a fourfold increase in insurance funds invested in property. We could debate whether it is effective investment—whether it is investment in property that will help productive industry or investment for speculative purposes because the profits in property are high. I presume that in retrospect, now that the property market has collapsed, many companies wish that they had not so invested. Many speculators got their fingers burned and the Bank of England has had to mount a rescue operation of £500 million to bail out the secondary banks. I am saying that many investment funds are being channelled in the wrong direction—into property and land speculation.
The position of overseas investment is more difficult to clarify and the extent of information is more limited. However, the British Insurance Association's 1974 846 statistics revealed an increase of £125 million in overseas investment. That figure is expected to be even greater in 1975. The nationalised industry pension funds are also far from blameless. For example, the British Steel Corporation's accounts for the year ending 1975 show some £59 million of new property investment out of the sum available for investment of £62 million. In March 1975, 51 per cent. of the superannuation fund of the steel industry was invested in property and the British Steel Corporation went cap in hand to European financiers to raise capital for the industry.
I turn to the purchase of shares. When money finds itself channelled into manufacturing industry it is often of little help to companies in producing new capital. The directors of insurance and pension funds tend almost exclusivly to buy existing shares rather than provide money for new capital creation. The Stock Exchange is no longer a major source of raising capital. Less than 10 per cent. of capital in productive industry is now raised on the Stock Exchange. The day of the private investor is coming to an end. So by and large we must rely increasingly on institutional investors. It is therefore essential that the investments of these funds are channelled and directed to achieve a viable capital base for manufacturing industry, for that is the only way in which we shall solve the problem of securing profitability and full employment.
Another factor concerning investment in equities is the rate at which portfolios are exchanged. Shares are changed from industry to industry at an exceedingly fast rate to capture an extra ½ per cent. on the funds. Millions of pounds of script are changing hands between funds and there is no stability in the money market. The insurance companies claim that profitability must lead and investment will follow. This is the slogan of the Confederation of British Industry and of the City establishment and I have no doubt that Opposition Members opposite support this doctrine.
We are ignoring the lessons to be learned from other countries. In West Germany pension funds are administered jointly by the German equivalents of the Trades Union Congress and the Confederation of British Industry. The benefits deriving from these funds are excellent. 847 Pensions in Germany certainly put our pensions in the shade. What is more, a large proportion of German pensions are paid from the profits of industry in which the pension funds have been invested. In Germany pensions are not fully funded on an actuarial basis, as they are in Britain and, as a consequence, pensions are better and pension funds are steered by the joint committees of unions and management into profitable industry.
Funding superannuation schemes is probably a more appropriate subject for another debate. I believe that we should examine how pension funds are used. There is a letter in The Times this week pointing out the high cost of pensions to the individual and to the employer. The Director-General of the Royal Institute of Public Administration points out in this letter that the Civil Service, by funding its superannuation from current income, charges about 9 per cent. whereas in most private pension schemes the employer pays 18 per cent. of his payroll—6 per cent. from the employee and 12 per cent. from the employer. I was astounded to see from the letter that the latest annual reports of Barclays Bank Ltd. and Commercial Union show that last year those organisationsrespectively contributed 43 per cent. and 30 per cent. of payroll to their pension funds.To sum up, I accuse the managers of pension funds of having been guilty of speculation and of short-term investment policies, with a high turnover of portfolios, leading to instability of capitalisation. They have exercised investment in areas such as property speculation and in overseas funding when priority should have been given to productive capacity in Britain. They have not considered the interests of those who provide the funds—the 11 million people in pension funds and the millions who contribute to insurance funds. Therefore, Government action is needed to ensure that these institutions play a more constructive rôle in the economy.
I wish to set out eight propositions which should receive the Government's consideration. First, there should be a system of planning agreements with the pension funds and insurance companies to link with the planning agreements between Government and industry so that the Government would have power to 848 direct funds to vital areas of capitalisation in productive industry. However, I am not saying at this stage whether such agreements should be voluntary or statutory.
Secondly, there should be a requirement that a certain percentage of new funds is directed into capital creative investment. This might well involve the Government in underwriting some of these funds and would be an added protection for investors in insurance and pension funds.
Thirdly, I should like to see a short-term share-owning tax to reduce the degree of switching—the amount of buying and selling shares that takes place at the moment. Thousands of people are engaged, day in, day out, in transferring insurance and pension funds from one company to another in the elusive search for, perhaps, ¼. per cent. or ½ per cent. extra profit.
Fourthly, I should like to see the creation of a new body to work in parallel with the National Enterprise Board and provide some of its funds from insurance companies and pension funds. Care would have to be taken, as these funds must be viable, to ensure that investment takes place in profitable industries, or in industries that are likely to become prosperous.
Fifthly, I should like to see the development of more comprehensive Government planning to identify the areas where investment is necessary. To give but one example, as a result of the oil that will be coming into Britain there is a scope for a vast petro-chemical industry. If we do not provide the capital to set up a substantial petro-chemical industry, I have no doubt that we shall find that our oil is sent to Holland, Belgium, or elsewhere in Europe and that petro-chemical industries based on our oil will be set up on the Continent. So I want the Government to identify new areas where productive investment would lead to profitability and the creation of new jobs.
Sixthly, there should be greater accountability by insurance company and pension fund managers to the owners of the funds. In particular, we should work for the establishment of boards of trustees containing representatives of trade unions, fund managers and employers so that we can get democratic control over the way in which these funds are invested. I again remind the House that these funds 849 are the product of the investments of millions of people who make weekly contributions from their pay packets, and they should have a say in how their money is invested.
§ Mr. McCrindle
I apologise for interrupting the hon. Gentleman in full flight. Before he leaves his sixth point, will he make quite clear to the House, given that he wants the Government to identify areas where investment is required, and given that he would like trade unionists and others—policyholders, presumably—to be involved, whether he is going on to suggest, because so far he has stopped short of this, direction by the Government to the managers of pension funds and insurance companies as to what they should do with policyholders' money?
§ Mr. Fletcher
I suggest, first, that the trustees of the funds should include representatives of trade unions, employers and the Government so that they together could discuss the possibilities for investment in new areas of industry. Then there would be, as there will be with the National Enterprise Board, a three-way flow of ideas between management, work-people and Government. This is what I regard as democratic control of what happens to contributions to insurance and superannuation funds.
§ Mr. McCrindle
I am sorry to press the hon. Gentleman, but let us assume that there is no agreement among those three parties. In whose hands does the final responsibility lie to decide where the policyholders' funds are to be invested?
§ Mr. Fletcher
Let us consider where the responsibility lies at the moment. It lies with the pension fund manager. His only responsibility is to get the best return that he can from the investment of his funds. It often happens that the best investment may be in the interests of his funding but not in the interests of the community. That is to say, scarce investment is channelled into areas which do not help us as a nation and do not help our economic position. Consequently, we must get away from the concept that investment must always lead to the best possible return. This can be achieved through discussion between the contributors to pension funds, the managers of the schemes and the Government. That 850 system would be preferable to that now in existence.
My seventh point is that there should be stricter control on the export of long-term capital funds overseas. This does not apply particularly to insurance and pension funds, because I think this strict control should be exercised on all funds leaving this country.
My last point is that there should be more direct Government intervention. For example, the Bank of England requested institutions to restrict their property lending in 1971–72, but the institutions completely ignored this advice and the Bank of England had no authority to compel them to follow it. As a result, at the end of the day the Bank of England had to mount a rescue operation to stop many of these fringe banks from becoming bankrupt. The Bank of England must be given greater powers to enforce its requests to the institutions.
A lot of thought has been given to the proposals which I have put forward, by the Labour Party which has had a special committee considering this question, and by the trade unions and in particular my own union, APEX, the Association of Professional Executive Clerical and Computer Staffs. This union has a very wide knowledge of these problems. Not only does it negotiate superannuation agreements with employers but it recruits clerical and administrative staff from the engineering industry. It has submitted certain proposals, I understand, to the Chancellor of the Exchequer embodying many of the suggestions made by its members. The TUC, too, is considering this matter and is urging the Government to channel insurance and pension funds into productive industry.
I believe that we could make a great contribution to lessening the frightening unemployment figures if we could channel more capital into production in this country. When I first became aware that I had the opportunity to move a motion this morning, I wanted first to talk about unemployment, which is the greatest problem facing this country, but I then understood that the Government had agreed to allow the House a day in which to debate this issue. I therefore thought that the next most important subject was the revitalisation of British industry.
851 What is there to stop British industry from expanding over the years? It is because vast sums of capital, much of it tied up in pension and insurance funds, have been used to obtain the biggest profit from property speculation, or high rates of profit from abroad, that our industry has lacked the necessary capital to expand. Therefore, today the German worker has twice as much capital equipment behind him, at his bench and at his place of work, as has the British worker. As a consequence, we shall not be competitive unless we do something about ending the starvation of capital in our own industry.
I hope that my remarks will at any rate stimulate my right hon. and hon. Friends on the Front Bench to start thinking deeply about this subject. I hope that when the Minister replies he will be able to say that these matters are under consideration, that he recognises that there is a tremendously powerful case that is now being deployed to him by the trade unions, the Labour Party, and other interested people, and that we can expect shortly a review of these problems and a statement from the Government that at least some of the suggestions I have made may be translated into law.
§ 12.26 p.m.
§ Mr. Paul Dean (Somerset, North)
I am glad that the hon. Member for Darlington (Mr. Fletcher) has given the House an opportunity in the calm atmosphere of a Friday to discuss these very important matters. It is an interesting accident of time that we should be discussing these matters and putting a certain spotlight on institutions in the City of London on the very day on which a Labour Prime Minister is receiving the freedom of the City.
I declare an interest in insurance and pension matters. As a former pensions Minister, I have tried to encourage better communications between the members of pensions schemes and those who run them. I believe that more active involvement is a good thing and, in so far as the hon. Gentleman was suggesting that, I agree with him.
I also agree with the hon. Gentleman that we need more investment in industry in this country. Why is it, though, that we have not been getting that? I suggest 852 that it is not primarily because the institutions have failed to invest but because industry has not had sufficient confidence to expand and to modernise. That is the primary reason.
I part company with the hon. Gentleman, however, when he suggests control. I am strongly against political direction and politically motivated investment. We are dealing with the modest savings of millions of people. I can think of nothing more damaging to the security of these people's savings than politically motivated investment. Further, I can think of nothing more likely to undermine foreign confidence and to dry up the very substantial foreign earnings which are involved.
I am encouraged to note that the Prime Minister has repudiated some of the proposals which have been made by his right hon. Friend the Secretary of State for Industry and by certain sections of the Labour Party in this context. I should like to place on record what the Prime Minister said in a letter, which was published, to Mr. Macdonald, the then Chairman of BIA, on 27th April this year. In referring to the proposals which have been put forward by a sub-committee of the National Executive of the Labour Party, the Prime Minister said:The proposals contained therein have not been put to the Government and I see no likelihood that, if they were, they would be adopted as official policy by the Government.That is reassuring so far as it goes. One can only hope that the Prime Minister will stick to his guns.
It is also reassuring to note what has been said on these matters by the Chancellor of the Duchy of Lancaster. The Chancellor of the Duchy, dealing with the security of the savings of large numbers of people, made an interesting speech on 1st May this year. I want to quote one of the criticisms that he made of some politically motivated investment. He said:It is not the great financial institutions who are being coerced but those whose savings for pensions have been entrusted to them. It is the pensioners, not the institutions, who will suffer if the funds are coerced into unprofitable channels. I say unprofitable channels because you do not need coercion to persuade these experienced investors to accept profitable opportunities. Why select the savings for pensions as the prime target from which to exact this compulsory sacrifice? I wonder how Trade Union members would feel about the 853 impact of all this on their pension funds. I wonder how the shareholders and depositors in the Co-operative Bank would react. Avant garde theorists may think they are lunging at finance capitalists but it is the small saver who will get the black eye.What wise words. One can only profoundly hope that they have won the day and will continue to win the day with the Government.
The Chancellor made another point of considerable substance in that speech when he pointed out the difficulty of effective control which could result from this sort of proposal. He said:It will not be to our advantage to create by this coercion a financial hybrid—half private/half public—which escapes both the commercial profitability tests of the private sector and the traditional accountability of the public sector.I submit that in these two points the Chancellor has given effective reasons of considerable substance against some of the suggestions put forward by the hon. Member for Darlington. The magnitude of the savings involved and the importance to our balance of payments can hardly be exaggerated. Life and general premiums written by United Kingdom insurance companies exceeded £7,000 million in 1974. More than 40 per cent. originated from overseas business written in more than 100 territories. London is the biggest international insurance market in the world and United Kingdom insurers account for about 10 per cent. of world premium volume.
The United Kingdom insurance industry had net invisible earnings of £360 million in 1974—half the total invisible earnings of the City. We are dealing with world-wide confidence in the expertise, prudence and reliability of the British insurance industry. We must be careful that we do not undermine that by political interference.
Another factor is the significance of the ordinary individual saver in this country. Life assurance is the most important medium for long-term saving in Britain, with more than 80 per cent. of all households having life policies. A total of 17 million ordinary branch life policies and 85 million industrial policies were in force at the end of last year. More than 8 million people were members of insurance company-administered pension and life assurance schemes with total prospective pensions per annum of 854 more than £2,400 million. How wrong we would be to gamble with the savings of millions of families in this country. For them it means ownership of the most important type for families, security and peace of mind.
We must also be careful that we do not undo all the good done in pensions policy in recent years. For many years, there was political controversy over long-term pensions policy, but we have now reached the relatively happy state of broad political agreement in the Act put on the statute book earlier this year. The success of this Act depends, among other things, on the partnership and mutual trust between those who run occupational pension schemes and the Government. It would be a great pity if the controversy over investment matters spoiled the good work that has been done in reaching an agreed policy. Pension schemes are already facing considerable problems. This is not the time to go into the question of negative return, but if we impose more burdens on funds at this time, we shall make life even more difficult for them.
Why is there a lack of investment in industry? Is the institutional investor to blame? I doubt it very much. I do not accept the points made by the hon. Member for Darlington and a few figures, which I promise will be the last in my speech, will illustrate the point that he has not substantiated the case he was making. A total of 22 per cent. of the assets of insurance companies last year was invested in public sector securities, supporting government and local authority borrowing requirements, 35 per cent. was in company securities—ordinary shares, preference shares and debentures—13 per cent. was in mortgages and loans for industrial mortgages, house purchase and the like, 16 per cent. was invested in land, property and ground rents providing shops, warehouses, factories and offices, and the remaining 14 per cent. was in the form of cash, short-term assets and agents' balances. These figures prove that the hon. Member for Darlington has not substantiated his case. It would be a strange irony if we forced insurance funds into taking political gambles just after we have put the Policyholders Protection Act on the statute book.
855 The main reason for the low level of industrial investment is lack of confidence. This is illustrated quite dramatically in an article in the Economist on 26th April this year. It said:The plunge into property and short-term securities is a mere reflection of uncertainties which drive any prudent fund manager, especially of an industrial company's pension fund, into any investment providing it is not in an industrial company, ridden with debt and union monopolists.There is something in that argument.
One can also say that at least some of the blame lies here in Westminster and Whitehall. The hon. Member for Darlington referred to the disturbing effect of the "stop-go" policies of successive Governments and there is little doubt that the many changes of policy in recent years have had a substantial effect on industry.
The very high level of tax and price controls is making self-financing difficult. There are the problems of inflation, which are compounding these difficulties, and the Government borrowing requirement, which is pre-empting a substantial amount of savings. There is the lack of productivity, the record of strikes and the constant propaganda that "profits" is a dirty word. Most important of all, the threat of nationalisation and planning agreements is hanging over industry. When we criticise the record of British industry it is like the pot calling the kettle black, because much of the uncertainty is caused by Government policy.
I am not suggesting that the institutional investors do not have a responsibility. I believe that they have a very substantial responsibility, particularly in view of their vast size. They cannot just look for a secure base and a good return. They are so large that they cannot, and should not, ignore management performance. They should exercise some of the questioning functions of ownership and be concerned with the overall prosperity of the nation. I admit that there are gaps, particularly, perhaps in medium-term financing and in financing for the smaller firms.
We must recognise that these are very deep waters and that the institutions are stepping into them. There are many recent examples to show that, such as 856 Finance for Industry, through which the clearing banks, insurance companies and pension funds have committed £1,000 million in medium-term loans for industry. There is the Benson-Bigland equity bank concept, with a working party seeing what gaps there are in the existing corporate fund-raising structure. It has been backed by city institutions, insurance companies, pension funds, and investment and unit trusts. I believe that this welcome new concept will have a rôle to play. I hope that before long it will suggest action.
Then there is the National Economic Development Council's committee on finance for investment, bringing together Government, industry, trade unions and the City into a high-powered advisory body. There is no lack of activity and no lack of response to new problems. There are also the more traditional methods of fund-raising. This year has seen a flood of rights issues amounting to over £1,000 million. The hon. Member for Darlington will admit that about half of this has been supplied by life and pension funds.
I turn to occupational pension schemes and participation in them. These days most of us regard pension schemes as deferred pay and part of the remuneration package. I will consider them under three heads—negotiation, information and participation. I prefer a voluntary rather than a statutory approach in all three cases, a code of practice rather than the statute book. This is for two main reasons. First, we have in recent times put substantial new obligations on occupational pension schemes in legislation. It is only right that they should have the opportunity of doing the work involved and of adjusting themselves to the new situation before we put new obligations upon them. Secondly, we need a variety of approaches to this problem, rather than a rigid structure imposed from the centre.
On negotiation, I rejoice that the trade unions are taking a growing interest in pension matters and I hope that will be developed. The momentum behind it is so strong now that I am certain that it will develop. Perhaps pay policy and restrictions will give it further impetus. I also agree with the consultation that must take place under recent legislation with the members of schemes on whether 857 they are to contract in or out of the new pension arrangements. This is a wholly desirable and encouraging development.
The information provided to members of pension schemes is improving, but much has yet to be done. I am delighted that the CBI, with the pension interests, produced a code of practice on this subject in July 1973. I am also glad that the Occupational Pensions Board was asked to produce a report, and it published a valuable Report in February this year. These are the things that will assist in ensuring that more effective information is available to members of occupational pension schemes. This is something which I have warmly welcomed and which, as a former pensions Minister, I tried to encourage.
Participation is a more difficult matter. The Occupational Pensions Board recommended against a statutory requirement at this stage. The trustee concept is very important in the management of occupational pension schemes and is a great safeguard for scheme members. The trustee is required by law to act in the best interests of all the scheme's beneficiaries. But there are differing interests between those who are pensioners in the scheme and those who are paying members of it—between older members, who are more interested in pensions, and younger members, who are more interested in death benefits, so that if they die early there will be more benefits for their wives and families. These conflicts of interests have to be reconciled, and in participation for members of schemes we should proceed slowly. We should let it develop naturally, rather than impose new obligations.
I welcome the progress being made in these areas of negotiation, information and participation, but we are more likely to make progress on a voluntary basis than by trying to force these things down unwilling throats.
I hope that the hon. Member for Darlington will feel that his purpose has been served by opening this interesting debate and that he will not press the motion. In my judgment, the institutions are responding to the needs of the moment, and it would be unfortunate if this all-important sector were to get involved in party political battles.
§ 12.50 p.m.
§ Mr. Arthur Palmer (Bristol, North-East)
I join in the expressions of gratitude to my hon. Friend the Member for Darlington (Mr. Fletcher) for raising this subject for debate. It is a matter that is of concern to millions of wage and salary earners who have a stake in occupational pensions schemes. Those schemes are not confined to any one sector or section of industry and commerce but embrace many small and large enterprises, both privately-owned and nationalised. Therefore, it is not a subject to be taken lightly, and my hon. Friend certainly did not do so in introducing the motion.
I should perhaps declare my interest at the outset of my remarks. As the House knows, I am closely connected with the electricity supply industry, and the Electrical Power Engineers Association—a body that organises its technical, scientific, engineering and supervisory staffs. For this reason I should like to say a word or two about the position of the schemes with which I am most familiar.
There are in total five pension schemes in the nationalised electricity supply industry in the United Kingdom. The majority of those schemes comprise general schemes embracing all employees, but in England and Wales, under the Electricity Council, there is one scheme for staff members and another scheme for industrial employees. These schemes—and this is typical of the nationalised industries—cover all grades from board chairmen to power station attendants or typists—or, if one prefers it, the other way round. Therefore, everybody in the nationalised electricity supply industry has a close interest in pension funds in regard to contributions and benefits and control of those funds. They also have a close interest in investment policy and certainly in returns on investment.
Now I want to say that I have genuine difficulty in understanding the wording of my hon. Friend's motion. It speaks of "effective democratic control" of pension funds. That phrase is good as far as it goes, but it does not take us very far if left in isolation. Who is to exercise democratic control? If my hon. Friend means the contributors to the fund who put up part of the money, I agree with him. If there is to be confidence in pension funds, the contributors should 859 elect at least half the members of the management committee of the fund. We already adopted that course in the electricity supply industry; we have done so since the nationalisation legislation of 1948.
However, I should like to take the matter a little further. In these days—and here I perhaps part company with the hon. Member for Somerset, North (Mr. Dean)—I do not believe that that limited instalment of democratic control goes far enough.
I should like to quote the views of my union, set out in a document which has already been given wide circulation. The document sets out the view that themanagement committee of the pension fund should be given effective power to administer the scheme recommending changes in its principles and appointing professional advisers.That would be a big step forward.
We also say in our document that the present nationalisation statutes should be amended to include pensions as part of the mandatory provisions for settling terms and conditions of employees. It is remarkable that in the nationalised industries, even now, after a quarter of a century of nationalisation, pension matters that affect the standard of living of employees are still not included among the official subjects for collective bargaining. It could be said that some of the large private enterprise concerns are more progressive on this score than are the nationalised industries.
The hon. Member for Somerset, North mentioned the interesting Report of the Occupational Pensions Board entitled "Solvency, Disclosure of Information and Member Participation in Occupational Pension Schemes". As the title illustrates, that document also dealt with the subject of solvency, which is another important consideration. The document has been out for some time, and I understand that the Committee was appointed in 1974. However, its work seems to have been rather lost. We have not heard yet of proposals flowing from its activities.
Although the Report is disappointing in its main conclusion, it offers some interesting suggestions in other directions. It rejects legislation for membership participation, and does so on rather 860 formalistic grounds. It states something that we all know—namely, that trustees have a primary duty to make the most favourable investments and that this duty should not be tampered with. I agree with that of course but the Report goes on to argue that membership participation should be undertaken through collective bargaining. Surely there is nothing incompatible with a statutory requirement for participation and the concept of collective bargaining? The two go side by side. Indeed, collective bargaining is more likely to be strengthened if within the management and running of pension funds there is proper provision for participation. Incidentally, among the list of over 100 bodies which gave evidence to the Occupational Pensions Board on this issue I noted the Conservative Women and the Prudential Old Boys' Association.
§ Mr. Palmer
There might be some relationship. As for the Prudential Old Boys' Association, I do not know whether its members were at some school and became old boys, or whether they are just old and boys.
Out of the 100 bodies which gave evidence, including the TUC, the Co-operative Union and the National Federation of Professional Workers, there were only five trade unions, as far as my check goes. That is regrettable in view of obvious trade union interest. It might have been possible for the National Executive of the Labour Party to give evidence, because some members of the Executive have as we know rather positive ideas on this subject.
As to the second leg of my hon. Friend's motion, I listened very carefully to what he said but I was not too clear about his final intention. His motion also calls upon the Government to ensure that pension and insurance funds are properly deployed to provide the productive capacity in industry which is essential to economic prosperity. I suppose that most, if not all, trustees of pension funds would agree that investment and economic prosperity should go together, but I want to come back to what is meant by "democratic control" when that idea is taken in association with the requirement that there should be more effective national investment by pension funds in productive industry.
861 If my hon. Friend means democratic control of pension funds by the members, I am with him. If by democratic control he means some kind of national direction in the interests of an external view of community needs then there may be an argument for it in the national interest. But it is not democratic. It is not the same thing at all.
If, for instance, the National Enterprise Board, under the leadership of Lord Ryder, takes a closer interest in the way in which institutional funds are deployed in this country—I understand that conversations are taking place—this is probably a good thing, but I do not think we should at the same time confuse that with democratic control by the members of schemes. It might be more positive, it might be more profitable, but, as I say, it has very little to do with democratic control. I suggest very respectfully to my hon. Friend that his motion is defective in this respect, because it does not define what is meant by democratic control.
Concerning the investment of pension funds, as I see this from my somewhat limited experience, all trustees of pension funds are anxious in principle to make profitable investments. The investment that gives prosperity to the country and to the pension fund is usually at the same time a profitable investment; therefore one can get a wide measure of agreement about this in theory. It is a self-locking argument. But the theory and the practice are not always the same.
It must be accepted, I think, by hon. Gentlemen opposite—who are so quick to defend all institutional investment—that in recent years there have been some shockingly bad investments made by pension funds and their managers. Money has been placed in property because these managers thought that such investments would yield a greater return to the funds than straight industrial investment. They have often been disappointed. The difficulty is that there is not only bad judgment—we are all subject to error—but often a rather mistaken doctrinaire approach as well.
I should like to mention the investment by the electricity supply industry's staff fund, because this will illustrate what I have in mind. That fund has recently been investing money in property—some of the investments have not worked out too 862 well—while at the same time the electricity supply industry has been borrowing overseas at very high interest rates. Money is paid out of its own electricity supply revenues by the industry into the pension fund which is invested elsewhere. Yet surely if there is a basic interest industry in this country requiring ample funds, it is obviously the electricity supply industry.
The reason for this kind of contradictory practice is that the idea has got about that one should not invest within one's own industry. This practice of investing electricity supply industry funds in other directions, while at the same time the industry is borrowing abroad, though I am not biased against borrowing abroad as such, seems to me to be foolish. Therefore, we should not accept that in all these matters the received wisdom of pension fund managers is necessarily the only point of view. They have their doctrines like everybody else.
§ Mr. Paul Dean
Will the hon. Gentleman not agree that there is a danger in his argument, of having too many eggs in one basket? Is not one of the reasons for a reluctance to have too much self-investment of pension funds in the firm concerned that, if that firm gets into difficulties, not only are the wages and salaries of the staff under threat but perhaps their pension rights as well?
§ Mr. Palmer
I accept the hon. Gentleman's argument to the extent that in the case of a firm or enterprise in perhaps a highly competitive area of business, where there is a risk of bankruptcy, it is very desirable to have a separation, but that argument could hardly apply to the nationalised electricity supply industry, because electricity is obviously quite basic to any modern advanced industrial economy. The danger of the industry going bankrupt is non-existent in any real sense of the term.
It is no good saying, in the case of electricity supply industry's pensions fund—this is typical of a number of other large-scale industries—that investors have done better outside. The real rate of return in the nationalised electricity supply industry's staff fund from 1948 to 1973 was 3.7 per cent., and it is now a negative rate of return to date. Yet the industry is paying 10, 11 or 12 per cent. for money I believe. Therefore, although I accept that we do not want to put all 863 our eggs in one basket, this theory should not be taken too far.
This kind of thing has led some commentators to doubt the wisdom of funding. The pamphlet of Mr. Raymond Nottage, of the Royal Institute of Public Administration, pointed out that the cost of pensions as a proportion of the salary bill is much lower in the Civil Service than it is in most of the funded schemes outside it, including the nationalised industries. The Civil Service schemes are not funded at all. I am not arguing against funding because it is so much with us but in times of inflation it will be considered with an increasingly critical eye.
Therefore, I suggest that those who argue and accept that pension funds, apart from their value as an expression of free democratic, economic organisation, are also extremely valuable and profitable as national capital-collecting instruments, are not necessarily correct. There may be far less expensive ways of financing industry, such as self-financing, leaving enterprises to put aside more for their own development, more skilful use of banking and, of course, State investment. Hence, my hon. Friend the Member for Darlington must not make the mistake of accepting all his opponents' arguments about the money which is available from this kind of source and then turning them on their heads suggesting that all that is needed is a change of direction.
The difficulty about getting capital into productive industry, whether publicly-owned or privately-owned, is that the return can be small because of the low efficiency of industry. It is a chicken-and-egg situation. More investment is needed to achieve greater efficiency, but without greater efficiency the investment is not made, and a balance must be struck between the two.
The motion and my hon. Friend's speech have been valuable because they have given us an opportunity to adduce arguments, but in the end the National Enterprise Board must be the main instrument for solving the problem of low investment in industry. I do not think that it can or should be solved by creating another body of the kind my hon. Friend suggested. If, as we are told, there is to be closer consultation between the institutional investors and the NEB, 864 that will be all to the good. We should like to hear some news fairly soon about what is to be done.
An Act has recently been passed to bring about a partnership between State and occupational pension schemes. If the motion were carried, it might create doubt and uncertainty at a time when stability in pension fund management is essential. Also, as I have said, the motion has some flaws in the logic of its drafting, and about what is meant by democratic control in relation to the direction of pension investment.
§ 1.15 p.m.
§ Mr. R. A. McCrindle (Brentwood and Ongar)
I shall resist the temptation to exploit the clear division between the hon. Members for Darlington (Mr. Fletcher) and Bristol, North-East (Mr. Palmer), judging by what the latter has said.
Many of my sympathies are with the hon. Member for Bristol, North-East, but I shall confine my remarks to congratulating the hon. Member for Darlington, first, on coming out top of the ballot for Private Members' motions—a feat which has elluded me for as long as I have been a Member—and, secondly, on choosing to give us the opportunity to discuss this important topic. I know that the hon. Gentleman will forgive me for saying that he gave me the impression of being something of an Old Testament prophet. As I allowed my mind to wander during his speech, I recalled the words of the Old Testament prophet Nahum. The hon. Member will remember that in the Book of Nahum it is said:Woe to the bloody city! It is full of lies and robbery".I hope that I am not guilty of unparliamentary language, but it seems to me appropriate to describe in that fashion some of the hon. Gentleman's comments. I have long believed that Nahum was one of the more obscure prophets. It now seems that he was one of the founder members of the Tribune Group.
I came to the House today expecting the hon. Member for Darlington to move the motion in a mood of political malice or economic naivety, or a combination of both. In fairness, I must acquit him of those charges, because he tried to put his proposition in a fairly measured and 865 balanced sense. That is different from saying that I agreed with many of the points he made, but he spoke in such a sober fashion that few of us could challenge him on the ground of extremism. Nevertheless, at the end of the road upon which he asked us to embark there would undoubtedly be a situation in which the vast investment funds of the pension funds and insurance companies would lend themselves to an experiment in what I could only call Socialist engineering of the economy dressed up as being in the national interest. We should think long and hard before embarking on the course recommended by the hon. Gentleman.
I declare a multiple interest. I am associated with an insurance company, but, in particular, for all of my working life before I became a Member I was involved with pension provision and life assurance. I have seen many hundreds of examples of richer and more prosperous retirements for people as a result of payments from life assurance policies and pension funds, and I have seen many personal emergencies, sometimes personal catastrophes, mitigated by the products of an endowment or life assurance policy.
Therefore, before the hon. Member for Darlington can have his way, he must prove failure on the part of the insurance companies and pension funds to provide what they are in existence to provide. It is incumbent on us to ask what is the dual purpose of the insurance company and the pension fund. I believe that it is simply to produce the bonuses which attach to a life or endowment policy, and a pension at retirement to provide some prosperity and comfort for people who have invested their savings, sometimes for most of their lives.
On the other hand, an insurance company has to accept the social responsibility to invest the funds entrusted by the policyholders—certainly so as to get reasonable benefit for the policyholders but at the same time to help oil the wheels of industry. I do not believe that anything that has been said this morning goes anywhere close to proving that there has been a failure on the part of the institutions in this respect.
I listened with care to what was said by the hon. Member for Darlington about the greater involvement of members of pension schemes in what is happening to their pension contributions. I wholly 866 endorse the call he made for closer association. But he is a little behind the times in that the Social Security Pensions Act 1975 moves considerably towards requiring that to be the order of the day in future. The hon. Member talked of the desirability of consultation with the Government as to where the money was to be invested. I pressed him on this in interventions and I think that it must be concluded that he was admitting that if at the end of such discussions about where the money should go, there was a disagreement, the answer was that the Government should have the freedom to direct the investments of the institutions.
§ Mr. Ted Fletcher
May I clarify this point? When I talk about democracy in this context I mean the right of the individual contributor to know what is happening to his superannuation funds. A lot of trade union members, for example, have been appalled to find that some of their trade union funds were invested in South Africa. Because of the attitude they took towards the policy of apartheid, the unions have forced the withdrawal of such funds. But they have little notion of what is happening to their money. I suggest that the Government should have the authority to say to the funds "We are restricting your avenues of investment. We are saying that there are certain types of investment, property speculation for example, in which you must not invest." There will still be a vast area of investment in productive industry remaining and in which management and workers can jointly decide to invest.
§ Mr. McCrindle
To a large extent I agree with what the hon. Member said about the individual contributor knowing what is happening to his contributions. We should encourage those who will benefit from the investment of their pension funds to be involved and to have something of a say wherever that is practical.
The hon. Gentleman has substantially watered down the approach that seemed to be implicit in what he said earlier about Government intervention. My worry is that, while it may be acceptable to say that the Government should have the power to indicate areas of investment which would not be welcome, I dare say that all history shows that that is the beginning of a slippery slope. It would 867 not be long before the negative type of intervention which the hon. Gentleman now seems to be suggesting became a much more positive form of Government intervention. If he is honest, the hon. Gentleman will concede that—his political philosophy being what it is—such a move would not be entirely alien to him.
Before it can be proved that the institutions have failed, we have to ask what it is that the hon. Gentleman is suggesting. Is he suggesting that they must be held to be guilty because they have not been and cannot be prepared to invest in what I might call lame ducks? If this is the case, the institutions would plead guilty. By the nature of the funds entrusted to them, and knowing the purpose for which they are to be used at a later date, it is unrealistic and unreasonable to expect the institutions to invest in anything with an above average level of risk. If there is to be bailing out of lame ducks, I respectfully suggest that that is clearly an area for Government intervention and not for the intervention of the institutions entrusted with private funds.
Is it suggested that the institutions are guilty of some failing with regard to industrial investment and the purchase of shares? We have heard statistics showing that the total percentage of pension and insurance funds so invested is 33. I would have thought that that represented a considerable oiling of the wheels of industry through the purchase of equity shares. Is it suggested that there is no preparedness on the part of the institutions to invest in commercial and industrial mortgages? Here I speak with some experience. I can tell the House that 13 per cent. of all funds invested is invested in this way. That enables factories or warehouses to be purchased or extended. If that is not a contribution to the prosperity of industry, I do not know what is.
If it is suggested that the institutions are guilty of not lending money to the Government, let me remind the House that 22 per cent. of total investment is in Government securities.
§ Mr. Palmer
Ought not the hon. Gentleman to deal with what is a fair criticism of much institutional investment, made by Nottage and others; 868 namely, that it is far too expensive, money passes through too many hands, and too much goes in expenses?
§ Mr. McCrindle
I shall be dealing with something close to that, but I want to ask the rhetorical question: If investment is lacking in industry, if it is alleged that the institutions are not investing where they ought to invest for the benefit of industry and employment, is it entirely fair to acquit the Government of all responsibility? By "the Government" I do not mean any particular Government but Governments of all political complexions. Could it not be said that since the institutions require an atmosphere of stability and long-term promise of return, the existence of such things as excessive company taxation, considerable Government interference, sometimes in the day-to-day running of businesses, and, most of all at present, the imposition of price controls, are at least equal factors in dissuading the institutions from investing in the areas to which the hon. Gentleman has referred?
There is no doubt that there is a social responsibility on the institutions to invest their funds so as to help create employment. I contend that that has largely been done over the years, consistent with the desire of the pension fund managers and others to obtain a reasonable benefit and reasonable security for policyholders and pensioners. If this idea of progressive Government interference were to be carried forward, the result would be that international confidence in the City of London as a financial centre would quickly evaporate.
The foreign investor, envious of the reputation of the City over many centuries, would recognise that no British Government could bring the same expertise to bear. For as long as Government intervention and direction of funds were the order of the day, international confidence in the City--which enables it to make such a maior contribution to the balance of payments—would disappear. We must be careful before moving in that direction. If the hon. Gentleman claims that there should be Government involvement in what the institutions do with policyholders' money, why should we not turn—now I am being thoroughly provocative—to consider the involvement by the institutions in the running of the companies?
869 There have long been suggestions that the size of the institutions' involvement should allow them to have at least a closer look at day-to-day management of companies in which they invest. Many of us have thought that that might be a dangerous approach. Nevertheless, the hon. Gentleman must recognise that if Government involvement suddenly becomes respectable, so, too, perhaps, should pension scheme and insurance company involvement in the companies in which they hold large shareholdings.
Finally, I turn to the two criticisms directed by the hon. Member for Darlington at what has been happening to investment recently. First, I refer to his suggestion that too much investment is going abroad. In passing, I hope that we shall not adopt such a little England attitude that we shall regard any money going out of this country as money lost. In my judgment, that is not so. We should be engaging in a retrograde movement if we were to adopt that attitude.
Over the past five years total United Kingdom private sector investment overseas has averaged £1,200 million a year, the vast majority being direct investment. That is often overlooked. Direct investment is investment by British companies in existing subsidiaries, branches, or associated companies abroad. Moreover, most of that direct investment comes not from fresh funds sent abroad, but from the redeployment of profits earned and retained overseas. If that is to be deplored, I believe that we are approaching the matter from the wrong angle.
Last year, private sector profits and dividends from abroad exceeded £2,900 million. The City's invisible exports amounted to over £900 million. At £3,800 million, the overseas earnings of the private financial sector were three times plus the £1,200 million which is the average annual sum being invested or reinvested abroad. That shows a balance of gain in favour of continuing the investment abroad which the hon. Member for Darlington seemed to be deploring.
The hon. Gentleman's second major criticism was directed towards the substantial part, as he put it, of the institutions' investments which went into commercial property. I admit straight away that, with the benefit of hindsight, much investment in 1973 and 1974 in commercial 870 property could and should have been directed elsewhere. I say "with the benefit of hindsight". In order not to get the matter out of perspective, I should like to quote a few more figures for the enlightenment of Government supporters.
In 1973 the insurance companies' investments were as follows: 12 per cent. in short-term investment; 19 per cent. in Government securities; 26 per cent. in equity, preference and debenture stocks; 16 per cent. in loans and mortgages, mostly to industry or to private individuals for house purchase; and 18½ per cent. in land and properties. As has been mentioned, land and properties include industrial projects, offices and shopping centres, which in themselves are a contribution by the institutions to investment in industry. I do not wish for more than a reasonable minimum investment in property, but I honestly believe that Labour Members have been prone to exaggerate the effect by taking the figures for one or two years–1973 and 1974—when their argument can best be demonstrated, and overlooking the fact that over many years preceding those two years that was not the situation.
If the hon. Member for Darlington were to have his way and the motion were to be carried by the House and accepted by the Government today, that would be to do something for which there was no mandate from the British people. Therefore, if for no other reason than that, the Government must indicate that at least they will defer acceptance of the motion. However, I hope that they will go further than that, because confidence at this time is important in both the City and the country.
I hope that the Government will say that they reject the motion, that they understand the considerable part that has been and will be played by the City institutions in maintaining industrial prosperity, and that they will recall the "treaty", if I may so describe it, that was signed by the two Front Benches when the Social Security Pensions Act was going through, whereby there was an understanding that we should not press too much for the extreme of our policy and they in turn would do as little as possible to interfere with the satisfactory functioning of the private pensions market.
871 We are grateful to the hon. Member for Darlington for giving us the opportunity to discuss these matters, but I hope that, for the reasons I have given, the Government will firmly reject the motion.
§ 1.35 p.m.
§ Mr. Ernest G. Perry (Battersea, South)
First, I should like to congratulate my hon. Friend the Member for Darlington (Mr. Fletcher) on winning a place in the Ballot for Notices of Motions. However, my congratulations do not extend to the terms of the motion relating to the insurance and pensions industries, because I do not think that we should spend a lot of time on those matters at the moment. I think that my hon. Friend's first thoughts, which were to discuss unemployment, would have been more appropriate today.
This House has had a surfeit of knowledge about the insurance industry during the last nine months. We have spent day after day discussing it. We spent many hours upstairs in Committee on the Policyholders Protection Bill. Many of us thought that we had seen the end of discussions of the insurance business—at least for this year—but, no, my hon. Friend brings it forward and we are discussing it again today. I recall the events of 7th March when I moved a motion on the insurance industry, but today we have given birth to a new debate on insurance.
Insurance and pensions are the biggest industries in the country. They are of vast magnitude. The documents and briefs which are sent to hon. Members by different organisations present us with a welter of figures which are difficult to comprehend. The insurance and pensions industries are the backbone of this country's industry and prosperity.
I disagree to some extent with my hon. Friend's motion, because it implies that the insurance and pensions industries have failed this country in the past. That is not so. In my opinion, the insurance industry in particular has provided the seed corn for industry and for other developments in this country.
The insurance industry has developed to such an extent that its investments throughout industry are to be admired. It has not been as selective in the past as it is now. Some of its investments 872 have not produced the results which it hoped. Therefore, I am glad that both the insurance and pensions industries are going into this matter very carefully.
My hon. Friend said that he was alarmed at the amount of foreign investment which the insurance and pensions industries make. I should point out that 40 per cent. of the insurance industry's income comes from foreign policy holders. The Governments of many countries from which the industry gets money have a say in what goes on. They say, "If you want to transact insurance business in this country, you must invest in our companies in order to provide assets and capital from which to pay any claims which may arise." It is obvious that if the insurance industry is to take a lot of money out of a country, the Government of that country will make regulations for investment of a certain amount in order to provide assets and capital to pay any claims which may arise. For example, if the industry is to take money from the United States, West Germany, France, South Africa and Australia, it must have certain investments in those countries to pay any claims which may arise. It is as simple as that.
I do not intend to dilate for long on this matter, because I had a fair innings to make my views known about 12 months ago. It is essential that the insurance companies should be ever conscious of the needs of their policyholders. They are entrusted with thousands of millions of pounds upon which their policyholders expect some return.
An insurance company that is deciding to invest has to consider whether it will put the money into ICI, EMI or Chrysler. Where will it put the money? If it has any common sense and is thinking of its policyholders and the bonus to be paid to them, the money will not go to Chrysler, It will go to EMI, ICI or one of the other companies that are producing a fair profit and making a fair return to the investors.
An insurance company is responsible to its policyholders. We have heard a lot about policyholders and about insurance companies failing them and causing them to lose their money. We ought to congratulate the industry on making sure that the money of its policyholders is safe and that they get a fair return on it. That is the basis of the industry.
873 I will next deal with the pension industry, and here I declare an interest. It hon. Members study the little "bible" concerned with the interests of hon. Members they will see that I am in receipt of a pension, but I have been told by the powers-that-be that I should not have included that detail. I have been told that it is not the kind of knowledge that the House should have, and that such information should remain with the individual concerned.
Most trade unions and staff associations nowadays have arranged pension schemes with their firms. Representatives of the policyholders, or pension holders, are on the management board to take part in decision making, but they have enough sense to make sure that if the company itself does not have the necessary ability specialist people from outside are employed to advise the company on investment matters, and that is a good policy.
My union, the General and Municipal Workers' Union, has been negotiating a number of pension schemes for its members and it is now in the process of having its own pension booklet to explain to its members what pensions mean and how they, the members, are protected. Every year pension schemes are negotiated so that employees get a good pension after a number of years' service. This is what we want.
Surely we want to see everyone in a pension scheme. Surely we want to see how the money is invested and make sure that we get the best return on that money. Surely we want people to receive a pension at 65 and not have to rely on supplementary benefit. Is not that the ideal for which we are striving? To all trade unions that are negotiating pension schemes on behalf of their members, I say "More power to your elbows". Let us hope that pension schemes continue to improve and that union organisers and people connected with trade unions are able to negotiate pension schemes for their members.
We have been given many examples of the benefits provided to this country by the insurance and pension industries. I do not want to go into details about how many millions of pounds are invested and how much of the assets belong to which policyholders. All that is well 874 known to everybody, and the matter has been discussed in the House on many an occasion. I do not reject the motion, because I think that it has a number of valuable points, but in view of our economic situation I do not think that we want to press for this kind of control.
§ Mr. Deputy Speaker (Mr. George Thomas)
Before I call the Front Bench speakers, let me give them a gentle reminder that there are at least four hon. Members who are yearning to put their views before the House.
§ 1.44 p.m.
§ Mr. Kenneth Clarke (Rushcliffe)
I have your warning ringing in my ears, Mr. Deputy Speaker. The fact that you made it when you saw that I was about to get to my feet may have a special significance.
My intervention on behalf of the official Opposition will start on a note with which I hope the Minister of State will be able to agree. I congratulate the hon. Member for Darlington (Mr. Fletcher) on providing us with the opportunity to discuss this important subject. The motion begins by saying that the hon. Gentleman's prime intention isTo call attention to the need for the investment of pension and insurance funds in industry.No one doubts the importance of that as an aim, but I beg to differ from almost all the hon. Gentlemen's eight propositions to which the motion goes on to lead him, and I am glad that the hon. Members for Bristol, North-East (Mr. Palmer) and Battersea, South (Mr. Perry), who made such a forceful speech, share all the reservations that my hon. Friends and I shall express.
Let us try to see where we can get agreement. No one doubts that a major problem of the British economy is the lack of investment now and past years. Let us consider the history of British industry since the war. Not only the level of investment, but the quality of it and the wisdom of investment decisions have often seemed to be lacking, and there is now an urgent need to stimulate the level of investment in order to provide the new equipment and capital that is needed.
We have had a problem with the low level of investment. I am not sure that 875 one can go on to attribute blame to the various institutions. A lot of the fault, as my hon. Friend the Member for Somerset, North (Mr. Dean) said, has lain with the economic policies of successive Governments, and much of the fault has lain in Westminster and Whitehall. The need for some increase in the level of investment in industry is of overriding importance, but before we get down to the subject matter of this motion, which deals with the institutions which might provide that investment and how the investment might be channelled, it is important to see the whole matter in context.
We are talking about making adequate resources available for investment and how those resources should be channelled. If we are to make adequate resources available for investment, the Government must ensure two things. In our present circumstances, for the next year or two the Government will have to restrain growth in private consumption, particularly by restraining the increase in the level of earnings, and they will have to cut public spending both by the central Executive and by local authorities. If the Government fail in their present efforts to restrain private consumption, or if they refuse to cut public spending by the necessary amount, in some ways the subject matter of our debate will be an irrelevant footnote, because there will not be adequate resources for any investment policy that makes a great deal of sense.
We have to stress that we are talking about a worthwhile subject only if the Government will produce a workable successor to their present crude incomes policy of a £6 limit. We hope that we shall see an end to the disgraceful delay in announcing public spending cuts, which have been awaited for some time by the House and by most of those who are concerned with the state of the British economy. If national resources are to be made available for investment, we can look at the subject matter and the means of channelling that investment into the right places.
The hon. Gentleman is right in that he identified the most important source of new funds, particularly in present circumstances. In the past, there were other sources. Over the years, one of the major sources of investment in British industry has been retained profits ploughed back 876 into successful companies. Unfortunately, the level of profitability in British industry has declined, particularly over the last decade, to a point where now, with high taxation, high labour costs, high material costs and fierce price control by the Government, the level of profit is exceedingly low and retained profits as a major source of investment are in danger of drying up.
Secondly, as the hon. Gentleman said, the individual shareholder is becoming a less important part of the investment scene. High levels of tax have stopped the individual from retaining wealth and income which in the past might have been turned into job-creating investment. The individual investor is obviously deterred by the low rate of return and the bad security of industrial investment that has all too often proved to be the case over the past few years.
So we are now reaching the situation in which the major sources seem to be, first, the Government, using the taxpayers' money on behalf of the taxpayer, believing that they know better than the individual taxpayer where to invest, and investing in industry through agencies such as the new National Enterprise Board. The other major source is private financial institutions, important parts of which are the insurance and pension funds.
The Government seem to have just about reached the limit, and probably gone far beyond the limit, of the taxation revenue that can conceivably be used for this sort of purpose. Their use of taxation revenue for investment in industry has been of a kind that has squandered money on such investments as the Meriden Co-operative, the Scottish Daily News and the unnecessary nationalisation of the shipbuilding and aircraft industries. None of these gives any encouragement for believing that the Government will have an investment policy of great assistance to the better parts of British industry. Therefore, in present circumstances, all the greater is the burden and responsibility which should fall on the major institutions, and especially on insurance and pension funds.
Certainly we on this side of the House are not complacent in every way about the working of the City of London and the history of private investment. We accept that there is a need to continue to give attention to the best ways of ensuring that investment goes to the right places.
877 It is hardly a secret, as the hon. Member for Darlington said, that the Heath Government did not always see eye to eye with the City on its investment performance. That Government became impatient about the slow rate of investment in industry which seemed to be forthcoming from the City when the Government were trying to break through to sustained economic growth in 1971 and 1972. But I think that the institutions themselves are realising their obligations to provide Rinds to manufacturing industry and that the hon. Member might have dealt with some of the activities of recent months, with the institutions trying to demonstrate their concern and co-operate in producing the necessary investment in industry.
One of the major objects of the City of London as I, as an outsider, have always understood it, in addition to managing funds prudently and successfully, has been to try to make a positive contribution to the growth of other wealth-creating sectors of the economy. I think that most people in the City, and certainly in the insurance and pensions world, realise the obligation on them to provide a proper flow of investment to worthwhile industry.
Still considering the insurance and pensions industry, especially pensions, I should like to echo what my hon. Friend the Member for Somerset, North said—that at the moment we have a particular interest in trying to boost the prosperity of pension funds and a common interest, I hope on both sides of the House, in trying to develop them further as a source of investment for many other purposes in future.
The Social Security Pensions Act of this year, which brought in the so-called "Castle Plan", has been accompanied by an unprecedented truce between the two parties, because we realised that continual warfare over the future of pensions policy was likely to lead to a diminution of thriving occupational pension funds and a contraction in the level of private pension provision. The Opposition have pledged not to repeal the provisions of the new Act. We have said only that we shall improve the terms for contracting out, if circumstances should prove that the terms are becoming unattractive to the pensions industry and those making 878 the decisions on contracting out in the next year or two.
But we warmly join the Government in urging the pension funds to contract out into thriving occupational schemes which will come up to the requirements of the legislation and we look forward to at least 8 million people contracting out in that way. Both sides should be trying to reduce uncertainties about the future of pension funds and pensions investments and trying thereby to encourage, the overall size of the funds as a source of possible investment.
However, given that we are trying to maximise the amount of money for funded pensions and also encourage a strong and healthy insurance industry, we must get certain ground rules straight before we start examining their investment policy and deciding what legitimate interest the Government can take in that. The first essential ground rule that we must get clear is that it will do no service to the British economy or the general well-being of the nation if we try to direct the resources of these major financial institutions into loss-making industries, lame-duck industries, or industries with some bogus political appeal for the time being to the Government of the day.
The diversion of State resources into those areas now is fairly disastrous. If we divert one of our major sources of private investment into those areas, we shall simply produce a sick and uncompetitive economy which will sink behind the rest of the world, even if we are sheltering behind import controls and tariff walls, as the believers in a Socialist siege economy would have us accept.
Secondly, when considering the investment policy of these funds, we must not act in such a way as in effect to steal from the savings of those who have put their money into the pensions industry or into the insurance fund concerned. We must realise what we are talking about and what the proper interests of the managers of those funds are when we start considering the way in which they are placing their investments.
What we are talking about with, for instance, pension funds is the savings of working people who are preparing for their retirement and their future by putting their money into a strong occupational fund. It is security for their 879 retirement and, for most members of pension funds, their actual pension entitlement represents the biggest single item of savings that they acquire during their working lives.
The investment on which those pension rights depend, or on which the bonuses of someone with life insurance depend, of course, needs to be honest, secure and profitable. The Government are entitled to look at the honesty and security of the investment and to put down tight rules to ensure that there is no speculative investment or cutting of corners. As other hon. Members have said, that has been done very much in recent pensions and insurance legislation and there is no objection to the practice from the institutions.
But the Government are not entitled to order the diversion of funds from profitable but perfectly honest and secure investments which the managers would wish to make to less profitable investments thought desirable by Socialist Ministers looking at the interests, as they see them, of their Government. That is tantamount to theft from savings. We are grateful to my hon. Friend the Member for Somerset, North, who used most of my planned quotations as well as most of my planned points, for reminding us that at least the Chancellor of the Duchy of Lancaster, in his speech on the opening of the City branch of the Co-operative Bank on 1st May, in very strong terms spelled out the damage which would be done to the savings of people in pension funds if diversion into less profitable from profitable and otherwise perfectly worthwhile investment were ordered.
How, within those two ground rules, can we get investment into industry? The first problem is that it is more profitable and safer at the moment to divert a large proportion of funds into the Government's own gilt-edged securities, into local authority bonds and into short-term fixed-interest deposits in the banks. That is because of the unattractive state of much potential investment in industry.
But even then, the problems facing the industrialist who might receive the investment are, if anything, even worse. At the moment, it can be argued, there is no real lack of available funds which could be channelled into industry. There is rather a lack of eager takers. The 880 stock market is opening up again now, but the low level of demand is caused by the high cost of the funds because of the level of inflation, which is producing high interest rates, and also by the very low rate of return—which takes me straight back to the question of high labour costs, high material costs and rigid price controls, matters about which the Government might do something and which are making industrialists, for reasons which should surprise no politician, not overeager to come rushing forward for the institutional funds which are on offer.
If one puts the matter in that context, it is nonsense to talk, as the hon. Member for Darlington did, of failure by the institutions to invest, or by industry to attract investment, as if there were some sort of moral blame involved. We have to accept that the climate, to which the Government in some way have contributed, is not favourable either to producing great funds for investment or to making industry very ready to take them.
We are not entirely complacent and I am not saying that the whole situation would be cured completely by a revival of the economy. We cannot rely on any assumption that all the institutions are working with absolute perfection or that there is no room for development and increased sophistication of the City's rôle in the use of pension and insurance funds. One good thing that has come out of the present economic crisis and even out of the threat of direction of pension and insurance funds, which has been canvassed for many months and which has been encouraged today by the hon. Member for Darlington, is that it has been a valuable stimulus to new ideas in the City and it has caused the institutions to look at themselves and see how best to answer these critics. It has to be conceded that it has answered them pretty effectively.
The hon. Member for Darlington made no mention of Finance for Industry, with £1,000 million worth of institutional money being put into Finance for Industry for the purposes that he was urging. He made no mention of the NEDO Committee on Finance for Industry, which is under the chairmanship of Sir Eric Roll, and did not deal with the Benson Bank that is now being set up to fill a gap in the equity market.
881 All these new ideas are emerging in the pension and insurance world. Finance for Industry has now been in operation for some time. We have some experience on which to judge it. I trust that the Minister will confirm that it is the Government's assessment that it has been a reasonable success. This £1 billion worth of money has been produced on an entirely voluntary basis by the institutions. There has been some flow of borrowers, although it is by no means cheap money that FFI provides. One encouraging factor is that so far there has been no pressure from the Government upon FFI to lend contrary to commercial judgment. I hope that the Minister will confirm that that remains the case.
The Benson Bank is in the process of being set up and will probably valuably supplement the rôle of FFI because, as I understand it, it will operate principally in the equity market. I ask the Minister to comment on these institutions and to say whether the Government regard them as playing a continuing rôle. Do the Government agree that these are not just stop-gap measures pending the opening up of the stock market and more cheap money becoming available? We believe that they have a continuing rôle to play so long as we keep that rôle in proportion and realise that in the end other factors are much more important, perhaps, in producing worthwhile investment. For instance, we must not imagine that a period of inflation and recession provides the fairest possible climate in which to expect dramatic quick results and an outflow of investment from any of these institutions. We must also ensure that these institutions are not used by the Government or anyone else as a kind of window-dressing exercise, which some people feared they were when they were first proposed.
In judging the performance of our economy in investment terms, we must not use institutions of this kind to produce improvements in investment statistics and assume that that necessarily means that there is an improvement in the quality of investment. Therefore, the quality of investment depends very much on the value of the commercial judgments that must continue to be made in times of recession just as much as in times of success.
882 This is where the real division of opinion lies in the House. I hope that the hon. Member for Darlington remains isolated and I hope that there will be an agreement between the Minister and hon. Members who have spoken that it is contrary to the opinions of the Secretary of State for Energy, Jack Jones, Roy Grantham of the hon. Gentleman's trade union and the left wing of the Labour movement. We hope that other hon. Members will agree that there must be no question of direction of institutional funds into politically inspired investment in either the public or the private sectors.
I hope that the Minister will take the opportunity to deal another blow to the "Benn Plan", submitted to the industrial policy sub-committee of the national executive committee of the Labour Party earlier this year. That plan contemplated £6,000 million worth of investment funds being put at the disposal of the Government and thought that £3,000 million worth would come from taxation revenue and the remaining £3,000 million worth from private funds.
I shall not detain the House by reading from the pamphlet issued appropriately enough by the Institute for Workers' Control to illustrate Mr. Benn's point of view. The raison d'être behind that plan seems to be that £3,000 million is about the limit of what any Government could conceivably raise from taxation revenue and that, therefore, the other £3,000 million had to come from "somewhere" if we were to fulfil the pre-chosen purposes of the Secretary of State, who believed that the Government should direct that huge sum of investment and control it themselves.
Such an approach would be a disaster. There is absolutely nothing in history or present intention to indicate that this or any Government are any better judges of good investment than are the institutions. All the evidence, particularly on the performance of the present Secretary of State for Energy when he was in a position to control investment, is totally to the contrary. I trust that that remains the Government's position?
§ Mr. Palmer
Does the hon. Gentleman include in these strictures proper consultation between the National Enterprise 883 Board and the institutions about the direction of investment, because, if he condemns that, he condemns much continental practice?
§ Mr. Clarke
Consultation between the Government and the institutions, by whatever agency, is entirely desirable. We wait to see whether the National Enterprise Board retains a commercial rôle and what consultations will take place. Whatever the agency may be, no one will object to the possibility of the Government consulting the institutions about likely patterns of investment and ways in which they might be able to help. That took place when we were in office, it is taking place now and it should continue. We are not talking about consultations. The Secretary of State for Energy continues to talk about direction.
My hon. Friend the Member for Somerset, North has read the Prime Minister's letter of 27th April 1975. I hope that the Minister of State will firmly put on record that the position still remains that there will be no likelihood of such proposals being adopted as official policy by the Government. Events have moved on. That letter did not prove to deter either the Secretary of State for Energy or, for instance, Mr. Jack Jones—a powerful figure in the Labour movement—who, at the Trades Union Congress this year, put forward a two-part plan. One part was that a portion of pension fund cash should be forcibly diverted to the National Enterprise Board. The other was to take a share of corporate finance and divert the money into capital investment. Only this week the home policy committee of the national executive committee has been in action again. I read from the Scotsman of 9th December 1975.Proposals for nationalisation of banking and insurance are to have priority in Labour Party policy making next year. The home policy committee of Labour's national executive decided last night that a statement on public ownership of financial institutions should be prepared in time for the 1976 Labour conference.Policy documents advocating nationalisation of corporate banks, channelling pension funds into industrial investment, reforming the Bank of England, and nationalising life and motor insurance will be given wider circulation within the party over the next few months.The Minister of State should deal with that. This is an opportunity to do so. 884 There is a complete divergence of views between, on the one hand, the Prime Minister and the Chancellor of the Duchy and, on the other hand, the Secretary of State for Energy, Jack Jones and the NEC of the Labour Party. Which view is this divided Government going to choose?
I trust that in the interests of certainty, proper investment and some encouragement of growth in the pensions and insurance industries, the Minister of State will put firmly on record that the proposals put forward earlier this year to the NEC are dangerous and unworkable nonsense and that the Government will continue to refute any suggestions to go down those alleyways. If the Minister does that, there will be a wide measure of agreement among most hon. Members. We should also agree that this country's record of investment is poor and that no worthwhile purpose is served by attributing some kind of moral blame for that to our institutions or our industrialists. We all agree that the present climate is unfavourable to industrial investment. There is also uncertainty about the continuing inflation of costs and rigid price controls.
We are also witnessing the development of new institutions on a voluntary basis. These seem likely to fulfil a worthwhile function. As long as they are allowed to exercise commercial judgment and direct their resources to industries likely to use them in a productive and worthwhile way, we may see some improvement in the present situation.
I think that in the end commercial judgments have to be overriding. I do not have the time to go into the fact that much of the clamour about investment policy is based upon false assumptions as to the desirable future pattern of the economy. I am not convinced, as the hon. Member for Darlington seemed to be in every word he uttered, that the level of manufacturing industry in Britain vis-a-vis service industry and other sources of income should remain fixed. For instance, by the turn of the century, the obvious countries in which to manufacture cars may be second division countries such as Algeria and Brazil and not in Western Europe. It would be dangerous for any Government to seek to intervene and to halt such trends by exercising a non-commercial judgment, by 885 trying to freeze present employment patterns, by trying artificially to bolster up an industry.
Any Government who tried to conduct such a window-dressing exercise in the midst of grave economic difficulties would be interfering with the healthy development of the economy. If the advice of some members of the Labour Party, who are urging the Government to engage in a type of modern Ludditism, were to be followed, the country would be plunged into an economic decline because of an adherence to rigid State Socialism.
I will conclude on that note because, fortunately, nobody today seems to be supporting what the Left of the Labour Party has been advocating in recent months. I hope that the Minister of State will deal the death blow, if not to the motion, at any rate to some of its implications and some of the wilder policy proposals within the Labour movement.
§ 2.12 p.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
I will not follow the hon. Member for Rushcliffe (Mr. Clarke) into a wide discussion of general economic policy. In view of the brief time that I have at my disposal, it would be inappropriate for me to do that.
I add my congratulations to my hon. Friend the Member for Darlington (Mr. Fletcher) on having been lucky in the Ballot and on having chosen this very important topic. He mentioned the subject of unemployment. That and the question of investment more or less go together, and the two rank equally in importance for discussion. I also congratulate my hon. Friend on the moderate way in which he presented his case. Those of us who have the privilege of knowing him knew that he would present his case moderately.
The first part of the motion deplores the decline in manufacturing investment. Ever since the war, and possibly before the war, there has been a lack of adequate investment in manufacturing industry in Britain. A number of figures have been mentioned. I hope that I shall not bore the House if I go over some of them again, for they vividly illustrate the problem.
Since 1960 our investment in manufacturing as a proportion of our gross 886 national product has been roughly between 3.3 per cent. and 4.3 per cent. The proportion in Japan has been roughly 9 per cent. in the same period and in Germany about 5 per cent. Other Common Market countries fall somewhere between these figures. The difference between us and Germany is especially large in absolute terms, because Germany's gross domestic product is 80 per cent. higher than ours. Therefore, the percentage figures do not show the wide disparity that exists between us and Germany.
When we consider the figures for the decline in employment in manufacturing industry, the contrast becomes even clearer. Between 1955 and 1973, manufacturing employment in the United Kindom fell by 13 per cent., while in France it rose by 11 per cent., in the United States of America by 19 per cent., in Germany by 31 per cent., in Italy by 57 per cent. and in Japan by 155 per cent.
We should also remember that these figures to a large extent reflect each country's performance in foreign trade. In all countries since the war the proportion of manufactured imports in domestic consumption has risen very fast; and in that respect we are not in a different position from other industrial countries. However these other countries have been able to match their fast increases of imports with equally fast increases in their manufactured exports.
In this respect we have failed. While imports have been increasingly substituted for home-made goods in the British market, we have not been able correspondingly to increase the penetration of British goods into foreign markets. It could then be said that it is the inability of our manufacturers to increase their exports at an adequate rate which to some extent is responsible for the inadequate investment and for a low growth of productivity in manufacturing industry.
The case, therefore, which my hon. Friend makes in the first part of his motion is, to my mind, a compelling one. There has clearly been a massive failure of investment to contribute the necessary capital and equipment to enable us to compete in the markets of the world with our industrial competitors.
Again, I agree with my hon. Friend that institutional funds represent a most important source of long-term investment. 887 Indeed, from the figures just for the years 1973 and 1974 it is clear that the pension funds and insurance companies in particular invest an enormous amount of money every year. In 1973, there was a net new investment by insurance companies in company securities of £430 million. In 1974, the net new investment in company securities had fallen to £38 million.
If we look at net investment in land, property and ground rents, we find a net new investment in 1973 by the insurance companies of £307 million, and that figure had gone up in 1974 to a net figure of £353 million. If we look at the total holdings of these insurance companies in company securities, we find that at the end of 1973 this came to £8.9 billion and then had fallen by the end of 1974 to £8.1 billion and the net holdings in land and property were £3.4 billion in 1973 and £3.9 billion at the end of 1974. I do not think that these figures will be contested.
§ Mr. McCrindle
No one who spoke from this side of the House contended that during the two years which the Minister of State mentioned the trend was other than as he stated. However, he will recall that I suggested that the contrast should be taken over a much longer period and that, instead of singling out 1973 and 1974, he should contrast the figures for property investment in the preceding 10 years. If he were to do that, he would come to a rather more muted conclusion.
§ Mr. Davies
Perhaps the hon. Gentleman did not follow my figures sufficiently closely. I said that by the end of 1974 there was a much greater investment in company securities than in land. I was referring merely to 1973 and 1974, when there was a movement away from company securities into land and property. The hon. Member said that there was a figure of 33 per cent. for investment in company securities. Such investment covers a wide range of securities. We have not been able to break down the figures to show the proportions of the investments between the various types of companies. No doubt some money is invested in property companies, some in financial companies and some in manufacturing 888 companies. We must, therefore, try to arrive at some breakdown between the different company securities. I should say in all fairness that some investments in, for example, loans and mortgages will be of assistance to industry in its creation of new assets.
Another change which took place in 1973 and 1974 was an increase, especially in the case of pension funds, and probably also in the case of insurance companies, in the amount of money which was invested in short-term assets. In 1973 pension funds' investment in short-term assets represented only 19 per cent. of total net investment, but by the end of 1974 that figure had gone up to 61 per cent. and that represented a flow of money from ordinary shares into bank deposits and various other short-term investments.
There are a number of reasons for this. I am not criticising the pension funds or the institutions. Among the reasons were the economic policies of the last Government. Another reason was the liquidity crisis which occurred at that time and which caused a shortage of working capital for industrial companies. This crisis came about mainly because of the rapid increases in production costs, especially the costs of raw materials and fuel. Companies wanted short-term money, and this money found its way on a short-term basis into the banks and then into the companies.
When there is high inflation, institutions, quite understandably, are reluctant to lend their money in medium-term or long-term loans, because they can see the value of their money, and of course the value of benefits which they can pay to the members, depreciating. They then tend to leave their money in short-term assets. But, of course, we know industry cannot usually plan ahead if it has to rely on short-term funds.
The control of inflation, therefore, should assist the provision of funds for industry on a medium and long-term basis. If we have a high rate of inflation, people are reluctant to invest their money medium and long term. They prefer to invest only in short-term assets.
§ Mr. Anthony Nelson (Chichester)
With regard to the increased investment in short-term assets, would not the hon. Gentleman agree that if the demand for 889 investment funds were present in manufacturing industry, a substantial amount of that money would be picked up from the banks with which the funds were deposited?
§ Mr. Davies
I am not saying that this is wrong. I am only trying to show what happened in 1973 and 1974. Because of economic conditions at the time, partly the responsibility of the last Government, there was this movement towards short-term investment. I am not criticising the institutions for this, but we have to reduce inflation, for otherwise we shall not get the medium and long-term investment in industry that we need. So much depends upon the general economic climate at any particular time. As my hon. Friend will appreciate—and, indeed, as he has accepted in his motion—these institutions have a primary responsibility to those who have invested their savings with them and very often these savings are the savings of ordinary men and women living in industrial constituencies such as those he and I have the privilege of representing. It seems to me that the main contribution that Governments can make towards channelling these funds into manufacturing industry is to establish the right climate through their economic policies to revive and regenerate manufacturing industry. With a revived manufacturing sector, further investment will be encouraged.
We should also remember that when these institutional funds pay out income, especially in the case of pension funds, to those who have deposited their savings with them, the Government through taxation recoup some of those savings. It is then for the Government to decide their own priorities and how they use their taxation revenues and it is a major priority of this Government to channel the funds into productive industry.
Many people have drawn attention—although it was not raised in the debate—to the way in which countries on the Continent of Europe seem to have been able to provide more funds for investment in their industry than we have. It is always difficult to draw meaningful comparisons between countries with different historic and economic backgrounds, but I believe that we may have something to learn from the way in which these matters are dealt with especially in countries like France, Belgium and West 890 Germany. As I understand it, in these countries most private savers tend to dislike long-term investment and the financial institutions have, therefore, adapted themselves to collect savings held in cash on short-term assets and divert them to borrowers in the form of medium and long-term loans.
A large part of the financial assets of ordinary savers, therefore, are within the banking system. There are very few financial institutions offering facilities for private contractual savings, and in Western Europe such institutions take only about 10 per cent. of savings, whereas in the United Kingdom savers make half their financial investments through insurance companies and pension funds. In most countries of the Common Market, except Holland, there are powerful State institutions which assist this movement.
Whether the higher rate of investment enjoyed by these European countries can be directly ascribed to their different financial set-up is not clear. I would not wish to say that this is the main reason, but at least it seems to me that we could have much to learn from their experience in this field. One of the tragedies in this country is that while we have been very successful in diverting funds—in theory, short-term funds—through building societies into house-building and house purchase, we seem to have been unable for a diversity of reasons, to establish institutions which could operate in the same way in regard to industrial investment. On the Continent of Europe, on the other hand, facilities for channelling funds into housing do not seem to me to be as comprehensive or as sophisticated as ours, but it would appear, at least on the surface, that the Europeans have been correspondingly more successful in securing the use of personal savings for the benefit of their industries.
§ Mr. Paul Dean
I am obliged to the hon. Gentleman for the interesting point that he is making in drawing analogies with Europe. I hope that in drawing those analogies he has in mind the future Finance Bill. Much of the contrast comes back to the taxation policies, which impinge on various types of savings. I hope that the hon. Gentleman will follow up his analogies and will realise that there is a real message here for the Treasury and for our taxation policy.
§ Mr. Davies
The Treasury always receives a diversity of messages from time to time. One message which the Treasury could send back is to point out that pension funds already have considerable taxation exemptions, and it is right that that should be so. Therefore, we ought to balance taxation against whatever the European position is. I do not know enough about the European taxation system to be able to comment. I accept that there are different economic frameworks in Europe and we cannot transplant institutions from one country to another, but we can see what is happening in Europe and learn from the experience of other countries.
While it is relatively easy to pinpoint the lack of investment as one of the reasons for the decline of our manufacturing industry, I am sure that my hon. Friend would agree that it is much more difficult to come up with clear solutions to this problem. Although the question of financing investment is important, it is not the only problem that we have to face.
If we are to restore and improve our economic prosperity, we need also an improvement in industrial performance, not just more new investment, but increased productivity from our existing capital assets. We seem to have been unable ever since the war to make the best use of our investment, existing as well as new. Nevertheless, I think that it is agreed that the lack of new investment has been one of the major constraints on the growth of our economy.
It has been suggested elsewhere—I do not think my hon. Friend went as far as this—that the Government should in some way divert the funds of institutions into productive industry. If by that is meant that we should forcibly direct institutions to invest funds in manufacturing industries, I am afraid that I cannot go along with that suggestion. The main difficulty, as my hon. Friend has appreciated, is that such a large proportion of these funds is derived from the savings of ordinary men and women. These institutions hold these funds, as it were, only in trust for them. They are the beneficiaries of the funds and I do not think that it would be right for us to direct where their money should be invested, 892 especially since the return on investment in manufacturing industries has been comparably so low.
Private industry and market forces have failed, and it is the responsibility of the Government to ensure that there is investment in manufacturing industry. That is why we have devised an industrial policy which is based upon positive investment by the Government in manufacturing industry. The NEB will have an important part to play in concentrating investment especially in key sectors of industry. Planning agreements will ensure that those who invest in industry and who produce so much of the wealth of this country are directly involved in decisions that affect their livelihood.
The Government are already facilitating investment, which would otherwise be abandoned or postponed, through the selective accelerated projects scheme first launched at the time of the Budget. The loans and interest relief grants offered by the Government are generating five or six times their value in actual investment and £70 million of investment is already going ahead. We are confident that the whole £200 million earmarked for this and for the industry schemes, such as ferrous foundries and wool textiles, will be allocated over the next few months and we stand ready to add more where it can be shown that the money can be used effectively.
Although, as I have said, the Government reject any scheme whereby savings invested with the institutions are forcibly directed into certain areas, I should make it clear that we recognise the need to consider ideas as to how some of these institutional funds could be utilised on a voluntary basis for the benefit of industry. The Government have received a number of suggestions about the financing of industry. Some have been designed to channel institutional funds into industry; others to increase the investment levels of companies themselves. Others, which have been addressed primarily to the problem of the remoteness of United Kingdom companies from their shareholders, examine the extent to which institutional investors, in particular, might be encouraged to take a more direct interest in the long-term prospects of companies in which they are major shareholders.
893 Because of the importance we attach to stimulating investment in manufacturing industry, the Government have assisted in the establishment of a new NEDC committee on finance for investment under the chairmanship of Sir Eric Roll. As hon. Members will know, this committee represents a departure from the usual NEDC tripartite practice, in that not only are the Government, industry and unions represented, but the City. My hon. Friend has mentioned his Union APEX and I have no doubt that APEX and other trade unions will be able to use this committee to put forward the sort of suggestions proposed by my hon. Friend. These and other ideas will be urgently considered by the committee.
The aim of the committee will be to keep under review problems connected with the demand for funds for investment by manufacturing industry, the mobilisation of the investment required, the channels through which it moves, and the related rôles of financial institutions. I hope my hon. Friend will agree that we are urgently looking at this problem. The main task of the committee will be to see how we can channel more funds into manufacturing industry.
This latest NEDC committee includes representatives from banking, the insurance companies and Finance for Industry as well as representatives from the trade unions and major manufacturing firms. The Treasury, the Department of Industry and the Bank of England are also represented.
It would not be right to discuss the rôle which the financial institutions should or could play in financing industrial development without a reference to the proposed scheme for equity investment by the institutions, which I understand is currently being examined in the City. A wide range of financial institutions—the Life Insurance Association, the National Association of Pension Funds, the Association of Investment Trust Companies, the Association of Unit Trust Managers and Finance for Industry—are involved in the formation of proposals for the establishment of an equity fund with an authorised capital of about £500 million.
It would of course be premature and wrong for the Government to comment on the details of this initiative before the work has been finalised. That will be 894 the job of the new committee. But, of course, we welcome this as a sign of the City's recognition of the need to develop this better and closer relationship with industry. I hope, therefore, that my hon. Friend will believe that we are urgently considering how best these institutional funds can be utilised for the benefit of productive industry.
Whatever arguments there may be about the relationship between manufacturing and service industries, we shall not live as an industrial nation unless we can produce goods to compete in the markets of the world with other industrial countries such as West Germany and Japan. We urgently need more investment and I hope that with the assurance that the Government regard this as a matter of priority my hon. Friend will feel that he does not need to press his motion.
§ 2.34 p.m.
§ Mr. Tim Renton (Mid-Sussex)
I am sure that all my hon. Friends and a number of hon. Members opposite will feel the Minister has made a reassuring speech. I was delighted to hear his categorical assurance that there would be no forcible direction of pension and insurance funds into industry.
However, he raised a new hare—the question whether the way in which industry is owned leads to a greater allocation of funds for investment in other countries than it does here. One of the disadvantages of coming into the debate at a late stage is that all the tables and statistics to which I intended to refer have been quoted in full by other hon. Members, and particularly by the Minister. However, there is one article to which no one has referred because it was written by me in The Banker magazine in March or April. I wrote an article on finance for industry and tried to deal with the question of the ownership of industry in West Germany and Japan. I pointed out that although, as the Minister has said, most of the deposits with British financial institutions, particularly the banks, are of a short-term, or even a demand, nature, bank advances to manufacturing industry between 1962 and 1972 rose proportionately very much faster than our gross domestic product. Outstanding advances rose during this period, in current terms, by more than 200 per cent., while the GDP gap of 895 manufacturing industry went up by only 93 per cent.
I am sure we are all grateful to the hon. Member for Darlington (Mr. Fletcher) for giving us the opportunity of debating this matter. He diagnosed a disease, but his remedy was rather like a doctor applying leeches to a patient suffering from a shortage of blood and leaving them on until the patient bled to death. It is ironic that on Wednesday the Chancellor of the Exchequer spoke about a possible increase in the proportion of secured medium-term lending to British industry by this country's banks and on the very next day the Bank of England in its quarterly report said that the rate of profits in Great Britain appeared to have fallen so low as to leave little incentive for new investment.
This is the heart of the matter. Industry will not borrow for new investment unless it believes that it can invest that money profitably in the United Kingdom with the security and a reasonable rate of return. Criticisms have been made in the debate of the amount of money being invested by British industry abroad. It is important to remember the reasons for this. British companies have had confidence that they could get a more reasonable rate of return abroad than in this country. They have been proved right, and companies with a large proportion of earnings from abroad now see their shares rising on the Stock Market, and that makes it easier for them to raise more capital. Thus the circle is completed.
Nobody in this debate has denied that United Kingdom industry has spent less on new capital equipment, modernisation and expansion in recent years than have our major international competitors. I declare an interest as a director of a bank which does most of its business overseas, particularly in the Pacific basin.
We have gone over the reasons why United Kingdom industry has invested less—lack of incentive because of the insistence on low profit levels in this country, penal rates of taxation, unpredictability of the market for the product, often because of changes in Government policy and so on. Government intervention has produced a yo-yo effect on the market. This is particularly noticeable in the construction industry where plans have been 896 laid for new capital equipment and then demand for the product has diminished because of the effect of Government policies.
There is the question of the much slower rate of capital generation available to private investors. It is not only a case of high tax; above all, it is due to the low amount of net new savings in this country. This is borne out by a table, from which I believe no other hon. Members have quoted, which shows that total personal savings, as a percentage of net disposable income after deductions, in Japan has regularly been at a rate of 20 per cent., in West Germany 15 per cent., in the United States about 7 per cent. and in this country only about 5 per cent. Yet savings are the most important source of funds for capital investment.
There is the question of the much higher percentage of gross national product in this country which is now being absorbed by public expenditure—60 per cent. here, compared with around 40 per cent. in Canada. Finally, completing the circle, there is the lower rate of growth in productivity. That is caused by a lower rate of capital generation and also makes inevitable that this trend of lower capital generation will continue.
Industry has not invested in the United Kingdom because it could not be sure it could do so profitably. That is the reason. There is no evidence that it was because funds were not available for investment purposes. There is one possible exception to that—the period between autumn 1973 and autumn 1974. Beyond that period I would challenge hon. Members opposite to give one instance where an industrial company, with sound management and good growth, came with a reasonable project to one of the sources of finance in this country, and failed to get it. I do not believe that such a company exists. It is not that funds have been lacking but that the economic, fiscal, political and often the psychological climate has been wrong.
The hon. Member for Darlington would like to introduce direction of these funds, but this would not create one penny more for investment purposes. What is needed is a lower rate of tax, less public expenditure and higher savings. If funds were directed in the way suggested, there would be more bureaucrats, who would absorb 897 investment money in wages and administration.
If we look at the past, there is no reason whatever to believe that civil servants would take the right investment decisions. The motion refers to "effective democratic control" of these funds. I find it very odd that a supporter of the Labour Government, who brought in the Policyholders Protection Act because they were concerned that insurance companies were not making their investment in a safe, well-balanced, spread of commercial ventures, should suggest that the State should interfere in how these funds are invested.
If there are representatives of work forces on the boards of insurance companies or trustees of pension funds, I see no objection in principle to that, but they will be the first to object if they find their pension funds being directed into one of Benn's bucketshops. As the hon. Member for Battersea, South (Mr. Perry) said in one of his usual trenchant speeches, if we look at the opportunities where the trustees of pension funds will be putting their money, it will be with ICI or Beecham's and not with Chrysler.
The thought that worker directors—representatives of the work force—would aid direction of funds for which they are responsible into supporting ailing industries is totally illusory. They would be the first to object and wish that pension funds in these circumstances were managed by another insurance company, and moved into a safer harbour. The answer lies not in State direction, but in constant searching by the financial institutions to improve their existing mechanisms and the way in which they invest the funds for which they are responsible.
I am glad that the financial institutions, pension funds and clearing banks are looking hard to see where there are gaps in the spectrum. My hon. Friend the Member for Rushcliffe (Mr. Clarke) and other of my hon. Friends have mentioned Finance for Industry, the new institution which is lending money for up to 15 years to bridge the gap. This period is longer than the clearing banks used to wish to lend for. I understand that by Christmas this year they will have approved a portfolio of about £200 million in new advances on this long-term basis. The clearing banks themselves are now becoming more keen to 898 lend for longer periods, from 10 years up to 15. We wish to encourage this healthy competition within financial institutions.
The Equity Investment Bank has been mentioned. The underlying thought in that bank is that it will be responsible for raising new equity for big corporations that might themselves find difficulty in doing so because of temporary problems—for example because their shares are standing very close to par value and to offer a rights issue they would have to offer shares below par value, which is not permitted under company law. They also have an intention to build up a management force within the bank that could, where necessary, act as a catharsis to change the organisation into which it is proposed to put the equity.
This is an interesting project. But it has found some hostility within the City, primarily on the ground that money is already available from one institution or another. It is also worrying because many people say that the fiduciary responsibility of lending institutions is only to the policyholder and the depositor.
It is thought that one institution could take these decisions much better than a committee or a collective body. But I ask the detractors of this new institution to pause and think again, because I am certain that there is a need for financing institutions to be innovators of their own cause—always to be looking around to see how they can improve their methods. They should seek a lattice in their crystal, which may be hardly visible now but which will open itself as demand and opportunities occur in the future.
I recommend to institutional lenders that they build up an expertise in one industry or in a series of related industries, just as there are the oil banks in the United States and the wool banks of the specialised international trade in wool, and the old county banks of the past which knew everything about the textile industry or the steel industry.
There is a case for financing institutions to have more in-house knowledge at least about a spectrum of industry. They may have been too modest in the past when they said it was not their responsibility to say to industry where to 899 invest. Already, because of their increasing ability and willingness to take on tentative lending, their knowledge of industry is being built up—and this is one case where they could look for guidance in the experience of the French Banque d'Affaires. This is surely a way in which lending into British industry could be improved.
These free and vital institutions should be teaching themselves by competition all the time the best course for savings for which they are responsible on behalf of policy holders related to the growth of British industry. The two matters are intimately connected. If, instead, we were to have State direction of pension funds, there would be less ability to provide any inflation-proofing for pensions. If the Secretary of State were to lay down the way in which a life insurance company should invest, it would turn a with-profits policy into a no-profits policy.
The hon. Member for Darlington, in a very temperate motion, put forward the proposition that it is more democratic for the State to lose money for the small saver than for financial institutions to invest money with a view to making savings grow profitably. It is a proposition that millions of policyholders will join me in rejecting with an emphatic "No".
§ 2.52 p.m.
§ Mr. John MacGregor (Norfolk, South)
I should like to express my thanks to the hon. Member for Darlington (Mr. Fletcher) for giving us the opportunity to debate a subject on which there is a degree of unanimity and on which many misconceptions have been corrected.
I wish to declare my interest as a director of a bank. I am not directly involved in this area of activity, but certain sister companies are concerned with the investment management of pension funds, in giving advice to pensions funds managers and also in trying to improve communication in terms of the employment of future beneficiaries of pension funds.
I wish to take up the point mentioned by my hon. Friend the Member for Mid-Sussex (Mr. Renton), who asked why investment had not taken place and why City funds had not gone into industry. I remember the situation clearly since I was an executive in a bank during the 900 period 1971–73. Because of the encouragement of easy credit by the then Government, there was an enormous amount of money, both long-term capital and short-term bank money, available to go into industry. However, that did not happen as the then Government would have wished because there was not the demand from industry.
I agree with my hon. Friend about the importance from an industrial point of view of making sure of a return on investment to cover costs. We should look in terms of comparison at European countries. For example, in Germany, the Horst Company arranged for long-term issues over a period of 10 years, whereas ICI had no such arrangement. It is true to say that ICI could easily have borrowed in the United Kingdom capital market at any time it wished to do so, but that company did not wish to go for those funds.
It is clear from what happened that the real impetus comes from industry rather than from the financial institutions. Long-term capital indications show that new issues to date this year amounted to £1,234 million, much of which went into industry. That proves that there is no reluctance on the part of the City to invest its funds. Similarly, there are many banks who would be willing to lend more to industry if industry wanted the money. But when there is liquidity in industry the banking system is under-lent to industry—not of the banks' own choice but because the demand does not exist.
We must ask why there has been such a low demand for investment and investment funds. Many reasons have already been given in this debate.
My hon. Friend the Member for Mid-Sussex was right to concentrate on the question of low return. A skilled actuary who has spent many years in the investment and management of pensions told me that the relationship between returns on new investment in the industry and the true assets of the industry throws up a return of 4 per cent. That is different from the yield because the yield relates to market values. I am trying to look at the underlying asset situation. When inflation is running at 25 or 26 per cent. a figure of 4 per cent. is totally inadequate. Because of a lack of return and lack of profitability and of confidence in 901 industry, the markets will be affected. We may return to the situation of 1971–73 when the then Government, for good reasons, over-inflated money supply. They were trying to instal some confidence in the industry. The oil crisis caused a reversion of the process, but we saw in 1974 the effect of the policies undertaken in the period 1971–73. We were committed in 1974 to the fact that we had the highest investment in British industry since the war. We also had to face a poor industrial relations record, manning problems, and in many cases poor management. Furthermore, price controls and an over-swollen public sector had their effects.
What came out of all this is now well known, and only a small part of the blame can be placed on the banking institutions. Just as there is no point in pumping money from an industrial point of view into investments that will not earn a proper return, there is no point in banking institutions pumping out money when there is no demand.
The Minister of State said that the financial institutions were trustees of the beneficiaries of funds. They are trustees, and that must never be forgotten. If anything, we have underestimated the number of men and women who are involved in these funds throughout the country. The figures issued by the Royal Commission on the distribution of income and wealth in the second report show that up to 11 million people are covered by occupational pension schemes. In addition there are 2,250,000 taxpayers receiving pensions who are covered by these funds, and there are also 14 million taxpayers who save through life assurance. Admittedly, there is some overlap, but it is clear that we are talking of well over half the ordinary employees of this country.
This is absolutely critical to the present debate. If there were political or Government direction of these investment funds it would mean that the Government would dictate to managers of pension funds to put their money into specified forms of investment which would give a lower return than those managers are seeking. That means that the pensions funds would either be unable to meet their liabilities or the contribution rates of both the companies and 902 the existing employees would have to be increased.
If a pension fund is forced to invest totally at 4 per cent., when its actuarial requirements are well above that, there are two possible options. Either the employees and employers will have to dig more deeply into their own pockets or the company itself may very well find that it must reduce its overall pension scheme—or even, in some cases, go bust. Therefore, I believe that the importance of thinking always of the beneficiary is overriding.
Concerning the flow of funds, although, as the Minister of State correctly said, it is impossible to analyse exactly what proportion of the institutional funds go into industry, I believe that it is very much more than the hon. Member for Darlington tried to make out.
The money from pension funds themselves cannot go abroad directly, because of the application of the investment dollar premium. It may be that some will go indirectly, by direct investment from the industries into which pension funds have invested, but fundamentally pension fund investors can invest only in the United Kingdom. If they have invested abroad through the dollar premium, someone else has had to liquidate the pension funds' own investments to enable the pension funds themselves to invest.
It means, fundamentally, that the funds are all going into the United Kingdom somewhere. They can go into the banking system to a limited extent—and, if so, the funds are then transmitted either to the Government or to industry—or the funds can go direct to Government through gilts. That means that they are being directed partly again to industry, through the various grants, but also to the many desirable things to which the hon. Member for Darlington would like them to be applied—social services and so on. Or again, they can go to industry through rights issues—we have seen many of these this year—or into property, but only a small proportion of the funds has gone into property, and much of that is industrial property. I believe that a very much larger proportion of the pension funds than the hon. Member thinks in fact finds itself in one way or another going back into industry or commerce.
Next I come to political direction, which I think is at the back of much of the 903 thinking which leads to motions of the sort we have had today. I believe that it is much better to have diversity of decision making in the investment of funds. I am equally concerned if there is too much concentration of decision making in the hands of the Government.
Are we to say that there is a superiority of skills, a greater collective wisdom, in the Government? Are they, with their Civil Service advisers, with all their experience in other directions, the best equipped to make many of these investment decisions? Are the skills in this House superior to the judgment of thousands of professionally skilled people, who spend their lives exercising their commercial judgment on behalf of the pensioners whose funds they are advising, and who accept responsibility if they go wrong?
In my experience the vast majority of them weigh each of their investment decisions very carefully and exercise their responsibilities in a wholly responsible and concerned manner. If they do not on some occasions commit their funds to industry, it is not because they do not believe in the importance of investment. It is either because of the lack of demand to which may of us have referred because they do not consider the investment viable, or because there are better returns to be had elsewhere.
Of course, mistakes are made, as by a number of investors and banks during the 1971–73 property period. But let us be quite clear that, equally mistakes can be made on a very big scale by Government investment. We need only look at the situation at the present time. Investment decisions are being taken on what most people in the City would regard as overinflated ideas of the future demand for cars. Vast sums of money are being committed on grounds equally as mistaken as those on which the property investment was based two or three years ago.
If the rumours of a £200 million investment in Chrysler are correct, we have a clear example of why we do not want Government direction of vast funds on this scale. If I believed that the Government were directing pension funds of which I am a beneficiary into Chrysler on the scale of the suggested £200 million, I should feel that that was a gross mismanagement of my own savings.
904 I have two points to make in this respect. The first is that I do not believe that the skills which exist in this House and in Whitehall for investment into profitable industry are any greater—they are probably a great deal less—than those that exist collectively in the financial institutions.
Second, I believe that the investment will be subject to short-term political pressures at the expense of long-term economic benefits and the interests of millions of people in their capacity as pensioners or prospective pensioners.
However, I accept that there are problems, and I believe that, rather than publicly-directed investment in pension funds, there must be greater public accountability. I agree with the remarks of my hon. Friend the Member for Somerset, North (Mr. Dean). I should like all pension funds to publish their accounts so that we can see the areas in which they are invested.
I wish to make a few remarks on the Equity Investment Corporation and the objective of instilling a degree of better management into ailing but not completely defunct companies to which public funds are directed. I greatly welcome this development. I hope that it will be one of the objects of the Equity Investment Corporation. In the past individual pension funds and life companies have resisted the temptation to do this because of the difficulties, but we should not underestimate the difficulties which the corporation will face in doing it as it will require people of high quality and great skills to get it right. That indicates the difficulty of working for Government direction of investments, because one is dependent on the same small pool of high quality people.
I wish to deal with two points which have not been made today but which, to my mind, constitute the real problem facing pension funds. The first is the impact of inflation on pension funds and the beneficiaries, and the second is the importance of dividend control. I am glad that the Minister of State is present because I hope to make a case to him on behalf of the pension funds about dividend control.
Let me deal first with the question of pensions and inflation. The hon. Member for Darlington said that some companies 905 are setting aside 43 per cent. of their wage and salary bills for pension purposes. The hon. Gentleman was slightly amazed at that figure. Many companies are contributing between 25 per cent. and 43 per cent., partly because they are good employers and are trying to ensure that their employees receive the best pensions possible, and partly because of the effects of high inflation.
In the past few months, Lloyds, National Westminster and Barclays Banks have had to put an extra £10 million into their pension funds to meet actuarial requirements because of inflation. The National Commercial Bank has had to increase its pension provision from £11.4 million a year ago to £17.6 million today because of high inflation and the pensions it is likely to have to pay. The discussion in the House about rates of inflation usually concentrates on the situation of housewives, local authorities and others, but there is equally great danger for pension funds if inflation continues at the present rate because either they will not be able to meet their actuarial requirements or the contributions from current profits which they will have to make will be such as to reduce those profits very substantially.
I conclude with making a few remarks on the question of dividend control. I have asked many pension fund managers, when the market value of many of their capital assets was low, to what extent did this worry them. Usually I am told that the removal of dividend control is much more important, because what matters to the pension fund is the income. If the income from dividends is substantially held back, they will inevitably have to look to investments other than industrial investments and equities to keep up their income to meet their commitments.
Report No. 2 of the Royal Commission on the Distribution of Income and Wealth is peppered with strong arguments for the abolition of dividend control. I do not wish to go into detail on them because of the lateness of the hour, but perhaps I shall be allowed to quote paragraph 313 in the Report which states:The National Association of Pension Funds said in evidence that the greatest element of risk to future pensions was that investments would fail to produce the income yield expected of them.906 In a period when the yield from dividends over the past 10 years has risen by just over 40 per cent., when the retail price index has risen by more than double that, and when incomes have risen by an amount approaching 150 per cent., it is clear not only that the dividend holder has had a raw deal but that there is here a dangerous situation for the pension funds. It will be seen that the arguments about dividend control are completely different from those about price and pay control. I hope that the Minister will look seriously at the impact of dividend control on pension funds in the next two or three years.
In short, we must look for reasons other than those which the hon. Member for Darlington gave as to why industry does not invest and why funds are not put forward. The problems of inflation and dividend control are the key problems for pension funds at the moment. I warmly support the hon. Member in his desire to see greater accountability of pension funds but I believe that the trend towards Government direction of those funds is wholly misconceived.
§ Mr. Frederick Willey (Sunderland, North)
On a point of order, Mr. Deputy Speaker. I wonder whether I could appeal to the House to try to accommodate the hon. Member for Newcastle-upon-Tyne, North (Sir W. Elliott) and myself, who hope to speak on the second motion. We appreciate that hon. Members who wish to speak on the current motion have been here just as long as we have. I wonder whether you could call to their minds that it would facilitate the hon. Gentleman and myself, and the Minister, if we could reach the second motion.
§ Mr. Deputy Speaker (Mr. Oscar Murton)
That is not really a point of order, as the right hon. Gentleman knows. Perhaps hon. Members who still wish to speak on this motion will have taken note of what he has said.
§ 3.12 p.m.
§ Mr. John Wakeham (Maldon)
My hon. Friend the Member for Newcastle upon-Tyne, North (Sir W. Elliott) has been looking at his watch approximately every 30 seconds during the last contribution. I had a feeling that there was a message getting across to me. I will certainly restrict my remarks. I join in the 907 congratulations offered to the hon. Member for Darlington (Mr. Fletcher) on his good fortune in the Ballot. We should congratulate ourselves, too, on the measure of agreement we have achieved in discussing this important subject.
If I may say so with some humility as a relatively new Member, one thing that distresses me from time to time is that we seem to stress the points upon which we disagree to the extent that we are not able to build on the common ground between us and make progress on that foundation. In stressing the points of agreement today we have performed a service to the country. The importance of this subject, involving vast sums of money, is acknowledged by all hon. Members. There is agreement that over the post-war years under all Governments there has been a failure to invest sufficiently in manufacturing industry.
I agree that the Government have an important rôle to play here. The point has been sufficiently well made that the Government would be wrong to become involved in the direction of investment funds. Many hon. Members have made the point that there is not so much a shortage of investment funds as a shortage of demand for them. In the interests of brevity, I will not discuss those points, but talk instead of the rôle of Government in these circumstances as it affects us in the House.
The rôle of Government is critical to this issue. Their rôle is the creation of confidence. Investment will follow if there is confidence. But confidence is a fragile plant. By and large, one of the factors that are causing and have caused a lack of confidence is a certain distrust of politicians and what they are getting up to. In particular, there is concern about a political system that can bring about a complete change of economic direction every four or five years. That is not to say that the political system does not have many other advantages. However, we should recognise that disadvantage when it comes to considering investment plans and proposals for industry and commerce.
We in this country, compared with our major trading competitors, suffer substantially from having two political parties with such widely separated beliefs. For example, a change of Gov- 908 ernment in both the United States and Germany would not bring anything like the upheaval in economic policies which would take place here. Such upheaval is bad for investment. Both political parties would do well to keep their excesses under control.
Offhand. I can think of very little good to be said about the National Enterprise Board, but I can think of nothing worse for it than that it should become half public and half private. It would then suffer from the worst of both worlds—having neither the incentive and discipline of making profits nor the strict public accountability of the State sector.
The investment of vast amounts of the savings of the nation is a vital subject. Therefore, this is an important motion. I firmly believe that these sums would be best invested in a free enterprise competitive economy. I should like the millions of people whose pensions come from these investments to be more aware than they are of how much their future depends on the profitable use of those investments. I should like pensions funds and their managers to be more accountable to present and future pension holders and to explain their policies more than they do. Therefore, I agree with the word "democratic" in the sense of control by those whose pensions are at stake. However, I should not support the motion if direction of investment were to be made by the State.
§ 3.17 p.m.
§ Mr. Anthony Nelson (Chichester)
I share many of the views expressed by my hon. Friend the Member for Maldon (Mr. Wakeham), particularly on the greater disclosure of information by financial institutions, and I reiterate his congratulations on the measured and temperate way in which the motion was presented by the hon. Member for Darlington (Mr. Fletcher).
I am greatly reassured by the opinion of hon. Members on either side of the House, but particularly the Minister, that there should be no involvement or redirection of the investment funds of both the institutions mentioned in the motion. In this context I should declare an interest. For the whole of my working life in the City I was particularly involved with investment fund management and the 909 application of the moneys of a number of major insurance and pensions funds.
I should like to take up some specific points. One of the main thrusts of the recommendations by the hon. Member for Darlington seems to be that in some way the direction of investment moneys should be tied to planning agreements. I should emphasise, first, that planning agreements under the Industry Act are voluntary. Secondly, little information has been made available on how they will work. Thirdly, there is no indication that they will get any response from major manufacturing companies, which are alarmed by the lack of information about how they will operate. Fourthly, there is very little indication that they are anything to do with commercial institutions.
Planning agreements are intended to be made only with major manufacturing industries that have a significant contribution to make to the economy. My understanding from the Committee stage of the Industry Bill and the debates in the House is that there is no indication that planning agreements should be made with or linked to financial institutions such as those mentioned in the motion.
There has been a great deal of discussion about the proportion of finance going into property or speculative investment. I do not wish to detract from the argument that there has been a certain amount of overheating, but it is worth noting that the value of what we might traditionally regard as speculative items—commodities, property and, indeed, the share market itself—relies in the long term on the prosperity and dynamism of our productive industries—that is, property investments which have rental values, the share market which reflects the net asset and earnings value of companies, and, indeed, commodities the demand for which is a function of the generation of manufacturing industry. Therefore, while there may be a process of readjustment not tied to manufacturing industry's progress, nevertheless it is true that in the long run the dynamism and the amount of money that can be made out of these markets is not independent of the success of manufacturing industry.
A large amount of money has been flowing into these sectors, but it is worth pointing out that pension funds and insurance companies should have a large and 910 perhaps inordinate proportion of their funds invested in property for leasing, for it is not the business of companies in the manufacturing sector to be involved in buying up assets or putting their capital into property. It is far better that they lease it or rent it and that institutions concerned with longer-term views and lower returns than manufacturing companies are seeking to obtain themselves undertake this property investment.
The second and final point that I wish to raise arises out of the comments of my hon. Friend the Member for Mid-Sussex (Mr. Renton), who said that there had not been a failure of the financial markets to provide capital for those seeking to set up new manufacturing plant. Although to a large extent I agree with that, I want to make an important qualification that has arisen out of my studies on the Select Committee on Science and Technology.
I believe very firmly that for the future of this country it is necessary to generate a far accelerated rate of technology transfer. The Government are constantly involved with trying to operate industries producing products that people do not want, industries based on demographic and real resource histories which are nothing to do with the future or the industries that we should be providing to make the most use of the relative sophistication of our manpower resources.
Let me quote two examples where we have been successful. The first is the EMI brain scanner. Today's Financial Times says that about 6,000 people will be involved in the manufacture of this outstanding high technology project. A couple of days ago in Cambridge I visited a company called Laser Scan, a small company involved in storing computerised information on graphic subjects. This is a new departure that has tremendous potential in the export markets. It is that sort of industry that we should do well to concentrate on and finance, not those that have a disappointing record of production, productivity and profit.
One of our biggest problems is that of encouraging people with ideas to set up new companies. While we continue to support a system whereby the security offered to an individual, whether he be an inventor or an ordinary business man, to go into an existing business unit and 911 exploit his ideas there is far more attractive than the prospect of return that he will get through risking some capital of his own to set up his own productive resources, we shall not get the dynamism of investment that we require. It is vital, particularly in taxation policy, that we encourage people to borrow money to finance their ideas. In technology this is overly important.
I welcome the comments this afternoon, with those two exceptions, and hope that they will be noted by the Minister of State.
§ 3.19 p.m.
§ Mr. Ted Fletcher
We have had a wide-ranging debate. I have noted the assurances from my Front Bench that these matters will be kept under review, although I am not very optimistic about the outcome of that review. The purpose of the debate was to ventilate what I regard as an important subject. We have done that and so, with your permission. Mr. Deputy Speaker, and that of the House, I beg to ask leave to withdraw the motion.
§ Motion, by leave, withdrawn.