§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Kenneth Carlisle.]11.46 pm
§ Mr. Anthony Coombs (Wyre Forest)
I am pleased to have this opportunity of raising the important subject of the role of friendly societies in encouraging savings, for which they have a long and respected tradition in this country, dating back over 400 years to the incorporation of the Carters in Leith in 1555. In 1973 they were defined asa society of good fellowship for the purpose of raising from time to time, by voluntary contributions, a stock or fund for mutual relief and maintenance of all and every member thereof, in old age, sickness and infirmity, and for the relief of widows and children of deceased members.In encouraging thrift and responsibility and in promoting an active concern for others, particularly among the lower income groups in society, that description of 1793 adequately fits the active citizens of today whom the Government rightly wish to encourage.
Although the friendly societies have a valuable and increasing role to play in a social and financial context today, they face three major difficulties. First, the market for financial services is becoming more concentrated and larger scale. The localised and heterogeneous nature of the societies—whether they be dividing, deposit or Holloway societies—puts them at a disadvantage.
Secondly, the anachronistic legal status of friendly societies and the legal structure within which they operate, which basically dates back to Victorian legislation and, particularly before that, to 1793, has restricted the scope of their activities and their ability to respond to financial trends in the money markets.
Thirdly, the taxation and regulatory regime in which they work, and which they recognise to be necessary in most respects, is not sensitive to their character and the services that they provide. That is particularly the case in their developing a role which is complementary to the welfare state and not swamped by it.
The history of friendly societies gives an insight into the problems that they experience and into their potential. Before 1911, they were basically self-help organisations which mitigated the excesses of the workhouse and the Poor Law of 1834. By 1911, they had 6.6 million members. The great expansion took place after 1911 when, under the National Insurance Act, friendly societies were given approved society status, which meant that they retained their mutual insurance and contributory schemes and used those as a springboard for their own activities, as they took compulsory payments from taxpayers and made distributions to the sick. By 1945, they had 8.7 million members.
After 1945, despite the fact that Lord Beveridge wanted his reforms to leave room for voluntary action and a system that did not stifle opportunity, incentive or responsibility, as the system evolved, benefits were 30 per cent. above the levels recommended by Beveridge.
Their size and scope expanded rapidly, to the extent that, between 1950 and 1987, they increased by more than five and a half times social security benefits—from 4.7 per cent. to 11 per cent. of gross domestic product.
There was no direct role, as there had been prior to 1945, for friendly societies in administering the schemes, and inevitably, because of the size of the schemes, contributory insurance became that in name only, and the 168 scheme was financed primarily by the general taxpayer. The effect of these changes was to erode the friendly societies' traditional market, and, more important, to erode the ethos of saving and of mutual help and mutual responsibility, which has sustained the societies for literally hundreds of years. Now, there are only 462 societies with 7 million members, and their numbers are declining.
It is ironic that over the last few years the greater provision and the good intentions of the welfare state have, in fact, increased the division between those who are financially sophisticated, who have higher incomes and are natural savers, and those who have low incomes, who are dependent upon the state, who, very often, are caught in the poverty trap and therefore have no particular incentive to save. Although there have been recent attempts, via social security legislation, to counteract such trends, I believe that the friendly societies have a principal role in bridging that social and economic gap.
The trends bolstering societies have been boosted by three further factors. First, there are the demographic changes that will take place over the next few years. I am thinking, in particular, of the increase in the elderly population from 9 million now to 10 million by the year 2000. Indeed, the number of very elderly people is likely to increase by 50 per cent., to 1.5 million, by the year 2000. Those changes will supplement the need for an addition to state retirement incomes via pensions and, indeed, the kind of annuities that have been provided by friendly societies.
Secondly, I believe that more people will want to arrange their affairs on a more localised, community basis and will react against the economies of scale that we have seen in the last few years. Thirdly, we have a desire to increase savings for economic reasons, given the fact that the savings ratio now is only 1.7 per cent. of disposable income—back to the 1949 levels—against 11 per cent. in 1985. Of course, it would be unrealistic to expect that all friendly societies will necessarily attempt to meet all these needs. Indeed, there has been an element of concentration already. The chief registrar, in his latest report, which came out about a month ago, said that 90 per cent. of total funds going into the friendly society movement is generated by 37 societies. The five largest are collecting societies that lack many characteristics of friendly societies in the strict sense but, nevertheless, support the arguments that the friendly societies liaison committee put forward.
On the other hand, one third of friendly societies are not actually taking any new business, and I believe that there will be an inevitable division between those that do a lot of taxable business in the mass market—I am thinking, for instance, of collecting societies, which collected some £190 million in contributions in 1987—and those smaller, more socially orientated, more traditional friendly societies, which concentrate on more philanthropic and local activities.
Nevertheless, in order to facilitate the adoption of these new roles, and given the speed and competitive pressure of financial markets at present, there are two areas of reform that need to be addressed urgently. The first is the need to widen the scope of the potential activities of friendly societies. The present scope, under schedule 1 to the Friendly Societies Act 1974, is outdated and, indeed, in many respects nonsensical. For instance, friendly societies can provide life policies for married couples, but not for couples who are living together; they can insure tools of the trade against fire, for the princely sum of £15, but not 169 against any other kind of loss; and they are prevented from writing any non-life assurance business, whether on an agency basis or direct.
Subject to the necessary regulations, I believe that the friendly societies ought to be allowed to manage, not merely to invest in their own unit trusts through subsidiaries and without sacrificing their mutual status. They ought to be able to set up their own personal equity plans. That would increase share ownership among the lower income sectors of society. They ought to be able to write their own reinsurance, especially on the risks of other societies. They ought to be able to engage in non-life assurance, at least on an agency basis, and they ought to be able to make loans to their members that are slightly greater than the present totally outdated level of £200. Finally, they ought to be treated consistently, by the Inland Revenue, in particular, as between the powers of those societies that are sui generis, rather than be discriminated against on the basis of when they were set up.
It is a sad fact that, while these powers are not available to friendly societies, some—like the Family Assurance Society—have already opted to go, with the consent of 75 per cent. of their members, for plc status or for mutual life office status, which will mean leaving the friendly societies movement and many of the advantages that that gives.
By widening the scope of services, they ought to be able to provide, through the friendly society movement, effective competition to other financial institutions and more effective and efficient services for their members. They ought to be able to increase their access to markets which at present are dominated by insurance companies and pension funds, particularly by those which corner the market by means of tied intermediaries. They get one and three quarter times the recommended commission rates and the disclosure rules for commission are not so rigorous for independent financial intermediaries, upon whom friendly societies have to rely.
Equally, however, it is unrealistic to think that every friendly society will wish to engage in this kind of activity. It is estimated that only the 40 largest will do so. Others will try to fulfil the more local social and philanthropic aims that are traditional in friendly societies. However, in order to do so—and this applies especially to those friendly societies that do not benefit from economies of scale because of their small size—it has been estimated that the financial burden of complying with the Financial Services Act will mean a 30 per cent. increase in annual costs. They have been deprived of a volunteer sales force because of the expertise now required by the Financial Services Act of those who sell financial products. Tax exemption of their products, particularly life assurance, has been crucial and, I believe, will become even more crucial for the small friendly societies, and for their big brothers, too.
It is a sad fact that, since 1987, for all societies, whether they do taxable business or not, the tax-exempt limit has been set at £9 per month per premium, which is just over £100 a year, and £750 for sums assured. That represents only four weeks' average wages now. Just before the war those same tax-exempt figures represented two years' average wages. Therefore the case for a substantial increase in the tax-exempt limits for friendly societies is very strong.
To increase tax-exempt limits is consistent with the tax relief available for occupational pension schemes or with 170 the tax exemption that is available, up to certain limits, on certain national savings deposits or on the tax-free benefits available from investments in gilts, in certain circumstances. That contrasts strongly with the increase in this year's Finance Bill from £2,400 to £4,800 in the annual payments to personal equity plans, the proceeds of which can be tax-exempt and which, ironically, so many societies want to be able to market themselves.
It could be argued that organisations with quaint names such as the Nottingham Oddfellows, the Sons of Scotland Temperance or even the Hearts of Oak, and with the even quainter values of self-responsibility, thrift and mutual help, founded on their mainly Victorian origins, should either join the ranks of, or be absorbed by, the legions of financial supermarkets. That would be a mistake. Time will prove that, as organisations for the lower income groups, supplementing the provisions of the social security system and improving the incentives arid opportunities for lower income groups within the welfare state, to save, and as organisations that cope sensitively with demographic changes in a local way, the friendly societies have an enormous contribution to make.
Given the constraints on legislative time, the societies do not expect an immediate commitment by the Minister to a new friendly societies Act—they appreciate how complicated and wide-ranging that would be. But they would like a commitment by the Government to the principle of a healthy friendly society movement. They would like to hear of the imminent arrival of a package of measures, including fiscal changes, that would help there fulfil their role of encouraging saving in Britain today.
§ 12.2 am
§ The Economic Secretary to the Treasury (Mr. Peter Lilley)
I congratulate my hon. Friend the Member for Wyre Forest (Mr. Coombs) on his success in securing this Adjournment debate and on his characteristic lucidity in explaining the role of the friendly societies and putting his case tonight. I found his analysis of the historic antecedents of the societies fascinating, as was his examination of the problems that they now face.
Friendly societies are an important part of our social and economic fabric. They have supporters in all parts of the House—sadly, those among the Opposition have not turned up—and enemies, as far as I know, in none. For that reason they are rarely the subject of debate in the House, and I welcome the opportunity which my hon. Friend has provided us with tonight to discuss and consider them further.
Friendly societies have a distinguished history of encouraging thrift and mutual self-help. That has changed as the years have gone by, and as my hon. Friend has said, their role has become more difficult in some ways and they have had to adapt to changing circumstances. There are signs that they are doing so. The Government have sought, without going as far as major new primary legislation, to help the societies to adjust to these conditions in a number of ways.
For example, we have implemented the European Commission life directive, and brought the solvency basis of the largest societies into line with that of the insurance companies, and removed restrictions on investments for authorised societies. I recognise that my hon Friend feels that the Financial Services Act 1986 placed considerable burdens on many societies, but it did enable the 171 establishment of an investor protection scheme, of which the societies with assets and members representing over 90 per cent. of those who benefit from the friendly society movement have taken advantage.
Finally, the Financial Services Act provided relief for small societies under the transitional provisions of schedule 15 to the Act, treating them as exempt if they decide to do no new regulated investment business or are already doing no new business.
The friendly societies' liaison committee published a memorandum last year which it sent me and with which my hon. Friend will be familiar. I met the committee in September to discuss it. It set out its case for a new friendly societies Act which would grant extended powers to those societies capable of exercising them. Like my hon. Friend, it requested a new tax regime that recognised the special status of friendly societies.
At my meeting with the liaison committee, I agreed to undertake a comprehensive study of the legislative framework of friendly societies. This is, as my hon. Friend recognised, a long and complex task, and it is still under way. Only when it is complete will the Government be able to decide whether and what new legislation is warranted and, more important, the priority it should be given in relation to other claims on parliamentary time.
It may assist the House in understanding the time taken to consider the friendly societies' proposals if I set out some details of the problems faced in preparing the report I commissioned.
First, the nature of friendly societies is such as to make the situation far from straightforward and simple. As my hon. Friend recognised, there is a restriction on the powers of societies in schedule 1 of the 1974 Act, which is essentially a consolidation of the legislation laid down in the 19th century. It is undoubtedly possible to amend and extend that in some ways analogous to those suggested by my hon. Friend. If one were to go further and try to give the societies powers to set up subsidiaries to undertake a number of activities that he and the liaison committee suggested the friendly societies ought to be allowed to undertake, that would mean a fundamental restructuring of the nature of friendly societies. At present they are not corporate bodies, and consequently they cannot possess subsidiaries. It would need a very fundamental change in the legislative nature of friendly societies to enable them to become corporate bodies and possess subsidiaries. That would be quite a daunting and difficult task, to say the least.
Of course, societies have the possibility at present to convert themselves into mutual insurance societies. My hon. Friend mentioned that one society was considering doing that, and a number of societies have done so in the past.
I am also looking into the supervision and regulation of friendly societies. The Government have in recent years revised the regulatory regime for banks, building societies and those conducting investment business. Investors expect and should receive reasonable protection for their savings. There is now a voluntary investor protection scheme in place and societies have in general responded well to becoming members. However, the regulatory regime for friendly societies has lagged behind that of other financial institutions.
172 The friendly societies movement has long provided encouragement to the small saver and those who are relatively poor. Although the amounts invested in friendly societies tend to be lower than many other forms of saving they nevertheless represent significant amounts for the individual. When I met the friendly societies liaison committee I told it that any extension of societies' powers would go hand in hand with an improved regulatory regime. I am sure it will accept this.
My hon. Friend also mentioned the tax position of friendly societies, as did the liaison committee. There is a distinction between the traditional social and philanthropic role of societies and their more commercial investment business. It is right that the latter should be taxed in broadly the same way as life offices. The current tax rules are therefore designed to favour the more traditional societies, writing longer-term policies for funeral expenses or retirement, as against more commercial societies selling 10-year endowment policies for pure investment purposes. The change in 1987—rather than 1984, as I think my hon. Friend said—from a limit on sum assured to premiums, setting that limit at 100, helped to secure that objective. The limit is kept under review, but I see no need for art increase at present.
One measure that friendly societies have suggested in particular is that they should be able to issue tax-exempt policies up to an annual subscription equal to that for unit trusts within personal equity plans, and my hon. Friend endorsed that proposal. Since the improvements to PEPs in this year's Budget, that would entail raising the present £100 limit to £2,400 a year. As my right hon. Friend said, the essential purpose of the tax arrangements for personal equity plans and the changes he made in the Budget is to encourage and widen share ownership and strengthen popular capitalism. Therefore, there is no case for an increase in the £100 annual limit on tax-exempt life assurance policies because that would not be geared to achieving that widening of direct share ownership. In practice, it is likely to do little more than divert business from other forms of savings—including diverting it from PEPs and taxable life insurance.
A related issue is whether registered friendly societies should themselves be allowed to act as plan managers. I shall certainly bear this suggestion in mind when I look into the broader issues concerning the regulation and supervision of societies. As to whether any of the other tax provisions should be changed—for example, the rule that limits the extent to which friendly societies can issue new tax-exempt policies—the time to consider such issues will be when the regulation and supervision of societies have been settled. At that stage, the representations that my hon. Friend has made will, of course, weigh with me.
While I am on the subject of tax, I should mention that one type of policy which some friendly societies issue will benefit from the new tax relief for retired people announced by my right hon. Friend the Chancellor in the Budget. I am sure that friendly societies that offer such policies will welcome this relief and will market their policies more vigorously to those who can benefit.
The Budget also introduced changes in the taxation of life companies. Friendly societies which issue policies that are not tax-exempt may be concerned about the effect of the reforms of tax rules for life assurance proposed in the Budget. It is clearly appropriate that societies which carry on business of this nature should receive tax treatment 173 comparable with the mutual life assurance companies so that they will continue to compete for business on a broadly equivalent basis.
A policyholder with a typical society will benefit from the reduced rate for policyholders' income and gains as suggested by the liaison committee in its response to the Inland Revenue's consultative document on life assurance taxation. New policyholders will benefit from the abolition of life assurance policy duty. Such policyholders will be unlikely to be affected by the proposal to ring-fence pension business expenses, or by the measures that change the calculation of pension profits. The revised treatment for expenses of acquiring new life assurance business will lead to some acceleration of the payments against tax, but taken together with the reduction in tax rate, the effect is expected to be broadly neutral.
174 I know that there is much sympathy for the friendly society movement and a desire to see it continue to prosper and perform its essential role in encouraging savings and mutual self help. My hon. Friend expressed those matters most eloquently. Many hon. Members would back my hon. Friend's call for speeding up the fostering of friendly societies but we must not try to do that more rapidly than may be possible. Rightly, my hon. Friend did not dwell on legislation, and you, Mr. Deputy Speaker, would not have permitted that in an Adjournment debate. I think that I have demonstrated that I am considering whether there is scope and need for legislation, and during the current review I shall certainly bear in mind my hon. Friend's interesting comments.
§ Question put and agreed to.
§ Adjourned accordingly at fourteen minutes past Twelve o'clock.