HC Deb 11 December 1996 vol 287 cc195-215

[Relevant document: The First Report from the Social Security Committee of Session 1996–97, on Unfunded Pension Liabilities in the European Union (HC 23).]

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Wells.]

9.34 am
Mr. Frank Field (Birkenhead)

I am grateful to you, Madam Speaker, for the opportunity that the House has of taking note of the report that the Select Committee on Social Security published a few weeks ago on unfunded pension liabilities in Europe.

Before I introduce the House to the ideas in the report, I shall make a few prefatory remarks. The first is that it is now clear that it is difficult for anyone to contribute to issues relating to Europe and expect a sensible response from some colleagues.

The report was made unanimously by the Select Committee, whose members comprise people who are sceptical about Europe and people who are pro-Europe. On this particular occasion—it is not always so—everyone came to the Committee wishing to strengthen the report rather than wreck or undermine it. It was published and issued to the House because we thought that this was a national issue in which we had an advantage over the rest of Europe, and we were motivated by a love of our country rather than by any more basic partisan motives stemming from being pro-Europe or anti-Europe.

Both those in the House who oppose Europe and those who are pro-Europe managed to seize on the report and talk about it when it was clear that neither faction had actually read it. That is a great pity, because I think that it is the shortest report that we have published.

We are aware that we move in dangerous times when we discuss dispassionately anything about Europe. But those were my motives in wishing to publish the report to the House. It was a natural feeling about one's affections for one's country; not wishing to see a real advantage be unnecessarily lost. We do not think that putting the interests of one's country first makes one a bad European. Some of us deeply resent those who argue that if one raises anything that is pro-British, one must be anti-European.

Dame Elaine Kellett-Bowman (Lancaster)

Does the hon. Gentleman agree that, in years to come, British pensioners will be far and away the best protected pensioners in Europe, far ahead of the French and Germans, who are having such difficulty in funding their pensions?

Mr. Field

The Committee's approach was that, while one would expect the House to divide on party lines with regard to how well placed all British pensioners are, it is difficult to deny the fact that some British pensioners are now well placed because of the funded pension schemes that are in operation. We also took the view that, as other countries try to make adjustments so that their social security liabilities are ones that taxpayers will meet in future, people across Europe are taking to the streets to try to prevent their Governments making those adjustments.

I shall come to that in a moment, because one of our concerns is how our position may be adversely affected by Governments who cannot make the changes that they may need to make through the normal democratic process, because other ways are open to them if their electorate block them on the streets. I am grateful to the hon. Lady for that intervention.

This is not a report about funded pensions. It would be possible for the Select Committee—and we may wish to do this—to consider how a single currency could both advantageously and disadvantageously affect the extent of funded pension schemes in Britain. Yesterday evening, the National Association of Pension Funds issued a briefing on the issue to hon. Members. I am not, however, concerned with that in this debate, which is about Britain's peculiar position of having more funded pension liabilities than the whole of Europe put together.

I am glad to see the hon. Member for Stamford and Spalding (Mr. Davies). Given his facile comments about the Select Committee's report, I could not believe that he had read it.

Mr. Paul Flynn (Newport, West)

I speak as someone who has read the report. Does my hon. Friend not believe that it is weakened by this statement in paragraph 10: The only sustainable long term solution is to build up the level of personal funded pensions"? Is it not true that, uncharacteristically for my hon. Friend, the report seems to have been presented by a Committee with a closed mind?

Mr. Field

I suppose that, in one way, the Committee did have a closed mind, in that we did not believe that the politics of the 1970s, which my hon. Friend promotes, are sustainable. If I were considering the issue in the early 1970s, I would probably go down his road and say that we could introduce something such as the state earnings-related pension scheme, which could be sustainable. The plain fact is that we now have—certainly on the Government Benches and to some extent on the Labour Benches—agreement that that approach is not sustainable. It is a deceit, therefore, to say to the electorate that we can guarantee, via a state scheme, a pension level that clearly one and perhaps both major parties in the House do not believe is sustainable.

The only way in which we can guarantee the viability of such an approach and that it will not cheat future pensioners, is either to win every future election—and we have had some difficulty in winning the past four or so elections—or to abolish elections. Otherwise, there is no guarantee that a future Government will not undo what we might wish to have in a state earnings-related pension scheme.

When we compare like with like, we must be careful not to have a closed mind to attacking funded schemes because, as a result of action by Treasury Ministers, the pensions of people in SERPS have been halved and their pension expectations halved again. We did not have a closed mind, therefore, in suggesting that taking the state option is not a viable or sustainable possibility. We have a closed mind only to the extent that we do not believe that we should shut out what happened in the 1980s, when the consensus between the two parties for a state approach disappeared.

We further believe, with our closed mind, that the only way in which we can stop future Governments disrupting people's pension expectations is for those people to own their own capital, so that, if future Governments try that, they will be treated severely at the ballot box. In one way, therefore, my hon. Friend the Member for Newport, West (Mr. Flynn) is right. We have a closed mind. We have a closed mind to the state option, which the Committee does not believe is viable.

If we were having the debate in the early 1970s, I would probably be putting out the line that Barbara Castle and her cohorts then put out and continue to put out, although I now believe that to be dangerous nonsense.

Mr. Flynn

It is suggested not that SERPS should continue in its present form, but that it should be in a new form that will be independent and funded, which will invest some of its funds on the stock exchange, and where the money will be linked to the person paying in. I am sure that it is not beyond the wit of the next Government to devise a scheme that can survive possible Governments of a different colour. If we can sell the idea of SERPS as a good-value pension, it can continue and be unassailable to political change.

Mr. Field

My hon. Friend gives the game away because he says "funded". That is the very antithesis of what SERPS is—a pay-as-you-go scheme, where Governments of both parties have only too willingly pushed pension liabilities into the future for future taxpayers to meet. That is the reason why the report was published: to draw attention to the relative strength of the British position vis-à-vis Europe.

I am grateful to my hon. Friend for the line that he is beginning to take, but five years or more ago, there was not much support for my proposal to give people in the national insurance scheme stakeholder rights. I now believe that the debate has moved on so quickly that no one in his right mind thinks that it is safe to leave his pension funds with the state as guardian. We hear lots of talk about how dangerous it is, about Maxwell and so on, but the Maxwell theft pales into insignificance compared with what the Government have done to SERPS. They have halved it and halved it again. I am pleased therefore that my hon. Friend is talking about funded schemes; even in his constituency and even with his leadership on the issue, his electorate will not choose an option whereby we allow the Government to get their sticky fingers on our funds.

Mr. Andrew Rowe (Mid-Kent)

The hon. Gentleman has, I am sure, been approached by Maurice Oldfield of the Pre Retirement Association, which, anxious about the unscrupulous selling of private pension schemes, has tried to evolve a system whereby, as in the National Savings system, there is some state involvement in the creation of such funded private schemes. Would the hon. Gentleman care to say anything about that?

Mr. Field

When I reintroduce a Bill for National Savings pension schemes run through the Post Office, I must approach the hon. Gentleman for a bi-partisan report on that. I do not claim that it is a new idea. Mr. Gladstone introduced the proposal, which some powerful insurance companies managed to destroy, so I do not underestimate the power of the market when it feels that it is challenged. What I am in a sense disappointed about in relation to the intervention of my hon. Friend the Member for Newport, West is that we could have agreed because, although we are talking about success here—the hon. Member for Lancaster (Dame E. Kellett-Bowman) raised the point that some pensioners are in an advantageous position—we have far too many very poor pensioners. Another Select Committee report will consider how one might deal with spreading the success that many pensioners experience to all pensioners. There I am in total agreement with my hon. Friend.

The nature of the report is simple. We have considered the extraordinary position that Great Britain is in, having more funded pension assets to meet future liabilities than the whole of Europe put together. We were concerned about how, within a new single currency arrangement, that position might be undermined. We found three possible ways in which that might occur.

First, if Governments find it difficult to balance their budgets to allow for adjustments, perhaps because of violence on the streets, they may seek to raise money by issuing bonds. We know perfectly well that Governments make those bonds more attractive by raising interest rates. Britain would not have to do that as we do not face the same unfunded liabilities as other countries, but we might be affected by higher interest rates abroad. Even if we did not join a single currency, the British economy would not be immune to the trend in interest rates elsewhere. It is not a simple matter. The single currency will affect us directly or indirectly.

Secondly, Governments can opt for what was historically considered to be the easy option. When they are faced with liabilities that they cannot meet, they can print money. We can assume that that will not happen through the new European central bank. However, the chairman of the Bundesbank has expressed his anxiety in that respect. He is fearful that when he has to share responsibility for issuing the currency affecting Germany with bankers from other countries who may take a different line on inflation—often for the simple reason that those countries have not suffered the same terrible history of inflation—the decisions will not be as strong as those taken by the Bundesbank to ensure that the currency is not devalued by printing money.

Thirdly, Britain may be asked to share the cost of other countries being less careful about meeting future pension liabilities. It was not mentioned in the report, so I mention it now. The European Community is not static. It is rightly an evolving organisation. It is quite possible that, in future, countries will acknowledge publicly what they have clearly acknowledged privately—that they have serious financial problems in meeting future pension liabilities—and declare it to be a new European issue that requires a European strategy. Although that would be good for many of our European colleagues, it would not be a sensible approach for Britain to take, as we might have to carry some of the costs.

Mr. Tim Rathbone (Lewes)

The hon. Gentleman has raised an important point. Does he accept that each member country of the European Union is protected from any requirement to meet the national debts of other countries? Britain or any other country, therefore, would be protected should another country experience the difficulties that he has just described.

Mr. Field

Article 104 of the Maastricht treaty covers that eventuality. My concern is that the convergence criteria for the single currency are inadequate. They take into account only the smallest part of public debt and exclude the largest part. As a result, Britain may end up in the extraordinary position of being the only country that could enter the single currency without having fiddled the balance sheet, but we are the most restive about it. The countries that are most keen to enter will be those that have not met even the limited convergence criteria on public debt and have behind the scenes significant public debt that does not come into the present equation. The third and most controversial recommendation of the Select Committee relates directly to the point that the hon. Gentleman made.

Before concluding, let me draw attention to two reports that have been published since the Select Committee report. The first is the briefing by the Institute of Directors on unfunded pension liability. One of the headings in that report is, "The unfunded pensions fudge". It expresses the opinion that we should not consider joining a single currency until we have examined more comprehensively the problem of public debt.

The other report—which one would not expect to be particularly sympathetic to the Select Committee report—is that produced by the Kingsdown Enquiry, which examines all aspects of the single currency much more comprehensively. I draw the attention of the House to the section on pensions and the comments of Professor John Kay. He makes a powerful case for joining a single currency and submits that monetary union would produce not only lower inflation, but more stable inflation rates.

The Select Committee does not attempt to suggest that our report should be the basis of any decision as to whether Britain enters a single currency, but says that it should be part of the debate as to what is in the national interest. Let me quote Professor John Kay. After he had set out the advantages of the single currency, The main risk that he saw in monetary union was that the very large government budget liabilities of unfunded state pensions schemes in other European countries could turn out to be a time bomb that would put the stability of the whole system under strain. The Select Committee made precisely the same point. Given all the fuss that we made, hon. Members might find our conclusion inadequate.

Our conclusion was threefold. First, we recommended that the Government should publish the relevant information in the Red Book, so that we could look comprehensively at our unfunded public sector pension liabilities. Secondly, we recommended that the Government should propose to the Council of Ministers that other countries should publish similar accounts.

Our third and most controversial recommendation relates to the comments made by the hon. Member for Lewes (Mr. Rathbone). We drew attention to article 104c of the Maastricht treaty and asked whether it would apply if countries' unfunded pension liabilities were destabilising any future single currency. Although I consider that to be a controversial recommendation, it merely asked whether we would be protected by the Maastricht treaty.

I am sorry that I have spent so long introducing a short report. That is partly because of the interest expressed by my hon. Friend the Member for Newport, West and because of our commitments in respect of the poorest pensioners in Britain and how to enable them to share the prosperity enjoyed by an increasing number of pensioners. That prosperity results from our funded pension scheme. I am sure that the House joins me in wishing to spread that success to all pensioners. However, that is not the basis of our report. The Select Committee will be producing a report on that subject, but we find it sensible to limit ourselves to manageable topics rather than taking the whole world as our canvas.

The Select Committee has made a limited contribution to an important debate about whether Britain should enter a single currency. Despite the Chancellor of the Exchequer's enthusiasm immediately to reply to our report by way of a planted question, we know that the Secretary of State for Social Security will reply before the House rises for the Christmas recess. We look forward to hearing the comments of our colleagues, the line taken by my hon. Friend the Member for Southampton, lichen (Mr. Denham) and the Minister's reply to the debate.

9.59 am
Mr. David Shaw (Dover)

I thank the hon. Member for Birkenhead (Mr. Field) not only for introducing the subject but for its prominence due to the way in which the Select Committee has approached its work under his chairmanship.

I first raised the issue in a written question in 1991 because I began to sense that serious liabilities in Europe were not being included in national accounts; they were being left out. I asked the Treasury not only about unfunded pension liabilities but about the effect of French nuclear reactor decommissioning costs and liabilities which might be incurred in the repair, maintenance and rebuilding of public buildings throughout Europe.

To my way of thinking as an accountant, those categories represent three of the largest potential liabilities of any set of nation states that is contemplating a single currency and—possibly—ultimately putting national accounts together in one form, however loose or tight that form may be, under single currency arrangements. The liabilities could be truly horrendous. The French nuclear reactor decommissioning costs are estimated to be £200 billion. No one has thought how that will be dealt with in the next century when such costs come on line and no one, so far as I am aware, has made any estimate of capital building, repair and maintenance cost liabilities in Europe.

The Treasury considered the question that I asked in 1991 a little eccentric, and did not have any detailed information on the issues. I did not receive a full reply with detailed figures and estimates and it has been very difficult since then to get some figures that the House could discuss. In the intervening period, I was pleased that the matter was taken on board elsewhere and that estimates of liabilities were produced by the Organisation for Economic Co-operation and Development, the International Monetary Fund and ABP, the Dutch pensions fund. Some quite respectable organisations in the City are also now producing estimates. Although they range widely because they concern some very broad figures that can change in certain circumstances, a pattern is beginning to emerge.

I drew the pattern to the attention of the House on 5 June at column 573 and I am pleased that, as a result, the hon. Member for Birkenhead ensured that the Social Security Committee investigated the matter. Other members of the Committee and I also visited Brussels to talk to European Commissioners. That was especially significant because we found that the European Commission was about as advanced in its answers in 1996 as the Treasury was to the same questions in 1991. The European Commission was not very advanced in its consideration of the issue and did not welcome the fact that we were asking a series of questions. In many ways, it seemed to prefer not to be asked questions and wanted decisions to be left to the European Commissioners.

Dame Elaine Kellett-Bowman

Does my hon. Friend agree that so often when we are trying to lead the way into uncharted and difficult waters, we are castigated as being the awkward squad, when in fact we are taking a lead and trying to get Europe to behave in very much better ways, such as on pensions, as the hon. Member for Birkenhead (Mr. Field) said?

Mr. Shaw

My hon. Friend is correct. Here we are trying to get a discussion out in the open and trying to show that, as in British democracy, the issue can be tackled in open public debate. Yet the emphasis elsewhere in Europe seems to be on not having open discussion and debate as the British do. In Europe they seem to want to close the discussion down and quietly sort it out in due course if they can, but the horrendous nature of the liabilities makes that impossible. The fundamental point is that just because the liabilities are called unfunded pension liabilities does not mean that they will not become real cash liabilities at some stage in the future. They may not be real cash liabilities tomorrow, but in a few years' time they may be, and by the turn of the millennium they certainly will be.

The IMF has made some substantial estimates. I do not want to quote large chunks of its May 1996 world economic outlook, but I shall refer to one or two relevant passages. For example, it says: Future generations of workers will face either much higher tax burdens to maintain such levels of transfers or sharply reduced benefits levels … For the German pension plan's net asset position in 2050 to be the same as the initial net asset position in 1995, for instance, a sustainable contribution rate of 13.7 per cent. will be required each year. Assuming average contribution rates remain unchanged at just 10.3 per cent. of GDP over this period, Germany would appear to face a contribution gap of 3.4 per cent. of GDP. My hon. Friends will realise the significance of such a gap, given that one of the Maastricht criteria requires member states' annual deficits to be within 3 per cent. of gross domestic product. One item alone—pension liabilities—could blow the German budget right through one of the Maastricht criteria from 2000 or 2004 onwards.

The IMF report goes on to say: Countries such as Japan, Germany and France, however, face contribution gaps of nearly 3.5 per cent. of GDP a year. To avoid a further build up of pension debt over the next 55 years, these countries need either to permanently increase social security tax collections by roughly 3.5 per cent. of GDP or scale back benefits by a similar amount or implement a combination of tax increases and pay-out reductions of this magnitude. In countries like France, and especially Italy, where retirement often takes place at a relatively early age, raising the retirement age to 67 could completely close large contribution gaps". In France, however, the recent French lorry drivers' blockade was settled not by raising the retirement age to 67 but by lowering it to 55. The French are under social pressures that are causing them to move in the opposite direction from that suggested by the IMF and every sensible economist in the world.

I have made some back-of-an-envelope calculations on what unfunded pension liabilities might mean in pounds. Countries such as France, Germany and Italy might face liabilities in excess of 100 per cent. of their gross domestic product and the total liability in Europe could be as high as £10,000 billion. That is an enormous liability to contemplate. The fact that it is not shown in any of the accounts that have been drawn up for the next two years in order to decide whether countries meet the Maastricht criteria represents one of the biggest fudges ever concerning the single currency. It is horrendous to contemplate such a large item being left out of national accounts and nobody having a sensible debate on it other than in the United Kingdom Parliament.

What does the liability represent? It represents past politicians' promises and weaknesses in countries such as France, Germany and Italy during the 1960s, 1970s and to a certain extent the 1980s. It would appear that even in 1996 France is still making decisions and giving people benefits that will not have to be paid for a few years, but when they are, someone will have to meet the cheque. Many hon. Members' concern is that Britain could end up meeting that cheque despite what the Maastricht treaty says. I shall return to that.

It is worrying that, having established how serious the liabilities are, the European Commission does not seem to want to get to grips with them and there appears never to have been a discussion about their impact either at the Economic and Finance Council or in the European Council. In my view, it should be taken up not only by Finance Ministers throughout Europe, but by Prime Ministers and leaders throughout Europe.

The pension position will have an enormous effect on the international competitiveness of Europe. Throughout the 1980s, we in the United Kingdom had the highest proportion of pensioners of the major economies in Europe. We had to pay for those pensioners through raising higher taxes than we might otherwise have raised on British industry, business and individuals. In the next couple of years, France will have a higher proportion of pensioners than we have and, in the next decade, Germany will have a higher proportion. Because of those countries' pay-as-you-go schemes for pensioners and because they have no substantive pension funds, they will have to raise extra taxes from industry or business or individuals to meet that pensions liability or will have to undergo enormous social change that, so far, they have shown they do not want to undergo. The consequence will be that, in the next 10 years, British industry and business will have a unique competitive position in relation to pension liabilities compared with France, Germany and Italy. We should not do anything to damage the opportunities that will result from that competitive position.

Article 104—the so-called no-bail-out clause—is, as was mentioned earlier, relevant and important. Article 104b states: A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. In other words, there is a let-out in article 104b, because a member state has only to come up with a specific project, such as dealing with member states' unfunded pension liabilities, and immediately article 104b would not apply. The Europeans have already got a let-out which could mean that if we joined a single currency, we might have to meet their pension liabilities.

It is also inconceivable that even if article 104b were watertight—even if the no-bail-out clause were absolutely copper-bottomed—it would be applied in practice. If Germany or France or Italy started to get into severe financial difficulties as a result of past pension commitments, it is inconceivable that the European Commission would not organise some bail-out. That is like saying that Washington would not organise a bail-out of California, if California were in enormous difficulties. We cannot suddenly say to Germany, France or Italy, "Sorry you are in difficulties, but although you are a member state of the European Union we are going to have nothing to do with you." We would have to get involved. We would have no choice but to get involved whether we were inside a single currency or outside and that is the danger that we must face. Those countries will have enormous problems as their pension liabilities come due for payment in the next decade and we, in some way, will find ourselves involved in trying to sort it out.

In conclusion, I emphasise that the figures involved are very large. The liabilities are real. They may not exist today, although we have already seen the strains in the French social security system that have resulted in strikes and demonstrations on the streets in France.

Mr. Rowe

My hon. Friend is a member of the Select Committee on Social Security and he is right to point out the fact that nowhere else in Europe appears to take the matter seriously. Will he consider consulting his colleagues on the Select Committee about whether it would be possible for it to host some kind of European seminar at a level that would have an impact on the entire debate?

Mr. Shaw

My hon. Friend is correct. That would be sensible and we have discussed it in the Select Committee. We would like to invite people from member states' Parliaments to London, because we think we have a unique piece of research. We have the benefit of the City of London and an increasing number of people in the country are aware of the subject. We wish to contemplate running a seminar and my hon. Friend has raised an interesting point.

The liabilities are real money liabilities and they will have to be paid in real cash amounts to pensioners in Germany, France, Italy and other countries in the European Union in due course. That time is not far away. Within the next decade, the liabilities will start to build up and, by about 2010, France, Germany and Italy will be paying out a much higher level of pensions each year than they pay out currently. We do not want to become involved in meeting that liability. We have good pension funds, as my hon. Friend the Member for Lancaster (Dame E. Kellett-Bowman) pointed out earlier. We have a solid pension base with around the same total that everyone else in Europe put together has. We have some £600 billion of pension funds to protect our pensioners. Some of those pension funds are invested abroad, and some are even invested in the far east, so in many cases we will have the benefit of the young workers of the far east paying our pensions in the next 50 years. The aging populations of Germany, France and Italy, however, will not have pension funds invested elsewhere in the world. We are in a strong position and fortunately will not have to make the painful decisions that those countries will have to make. They have those painful decisions ahead of them, but they are not even having a debate about how they will meet those liabilities.

10.15 am
Sir Russell Johnston (Inverness, Nairn and Lochaber)

In a way, the only surprising aspect of the Select Committee's report, which caused a considerable stooshie, is that it has come late to the subject. The hon. Member for Dover (Mr. Shaw) remarked in his speech that he raised the matter in 1991 and my noble friend Lord Taverne was the rapporteur for the Federal Trust on a pamphlet entitled "The Pension Time Bomb in Europe" two years ago. So this is not a new issue. It is also true, despite the rather harsh approach of the hon. Member for Dover, that the Governments in Germany, Italy and France are endeavouring, albeit slowly, to address the problem and have been for some years. I start on that basis.

The connection between the Select Committee's report and economic and monetary union hit the headlines with the suggestion that somehow we would end up paying for the lot, which was underlined by the hon. Member for Dover. The Chairman of the Select Committee, the hon. Member for Birkenhead (Mr. Field), was his normal patient and cautious self—not great characteristics of the hon. Member for Dover. I have no pretensions whatever to being a expert in the complex world of pensions and I am far too prudent to contemplate crossing swords with the Chairman of the Select Committee, because that would be foolish of me. I admire what he does and I read, in so far as I am able to understand them, the articles that he writes. I endeavour to do my best. All I can do is to call witnesses.

Fortunately—or perhaps unfortunately, but certainly usefully—there was a debate on this issue on 20 November in the other place. It was introduced by my noble friend Lord Taverne and it was an interesting debate. I am sure that hon. Members have read the report. Contributions were made, for example, by Lord Taverne himself, of course; by Lord Ezra, the former chairman of the National Coal Board; by Lord Barnett, the former Labour Treasury Minister; by Baroness Ramsay of Cartvale, who was a distinguished diplomat in her time and also a foreign affairs adviser to the late John Smith; and by the Government Minister, Lord Mackay of Ardbrecknish. All said the same thing and rested their case on article 104b of the Maastricht treaty.

The hon. Member for Dover put a good argument when he said that if California were going bust, it could not be ignored in Washington. I take that point, but there is a difference to draw. I shall not keep the House long, but I want to approach the issue in two ways.

The European Commission has been referred to at length. It so happens that I have in my hand, hot from the press, a press release issued by the Commission this morning. It is not particularly long and the Commission clearly intended to make a contribution to the debate, so hon. Members may be interested to hear what it says. It refers to the claim in the Select Committee report that UK taxpayers could face increased bills to meet the pension fund liabilities of other EU member states. This was a serious misrepresentation of the intentions of the European Union.

Miss Kate Hoey (Vauxhall)

Most of us, if not all of us, have not seen the press release. Does the hon. Gentleman have a special hotline to the European Commission?

Sir Russell Johnston

Would that I had. A kindly person brought the press release to me in an envelope while I was sitting innocently here minding my own business.

The press release continues: It is written in the Treaty on European Union (Article 104b) that Member States will not be responsible for each other's liabilities in EMU. There will be no common fiscal policy, so the UK could not be called upon, under a single currency, to pay for the possible profligacy of any other country.

Mr. David Shaw

Will the hon. Gentleman give way on that point?

Sir Russell Johnston

If the hon. Gentleman does not mind, it would be easier if I finished quoting the press release. It is not very long. I will certainly give way after that. It continues: Nor is there any possibility of this issue having an effect on interest rates. If a Member State borrowed heavily to fund its pension liabilities, thereby forcing a rise in European interest rates, it could be faced with heavy fines. That refers to the stability pact. It continues: This is because all Member States which participate in Stage III of EMU will be required to keep their public sector deficits at less than 3 per cent. of GDP. This will put a clear limit on the total amount of borrowing permissible by governments. It is this commitment to avoid excessive deficits which will be underpinned by the Stability Pact to be further discussed in Dublin. The Pact is intended to act as a form of mutual self-discipline backed by heavy fines. European governments are increasingly aware of the future problems they may face unless pension funding arrangements are addressed. That is why, regardless of the Maastricht Treaty and the moves towards EMU, many European governments have embarked on strenuous efforts to overhaul their public finances.

Mr. Shaw

Does the hon. Gentleman concede that, as a minimum, the issue puts into question the ability of Governments to come within their annual deficit requirement of 3 per cent. under the Maastricht criteria? Does he also accept that paragraph 1 of article 104b ends with the words: without prejudice to mutual financial guarantees for the joint execution of a specific project"? A specific project could be to share out Europe's pension liabilities.

Sir Russell Johnston

It is difficult for me to interpret the phrase, "a specific project", but I should have thought that pensions were more than a specific project; it is a massive area of policy. The words, "a specific project" suggest something of manageable size rather than the enormous problem that we are facing.

Mr. Bill Walker (North Tayside)

rose—

Sir Russell Johnston

Before I give way to the hon. Gentleman, I should like to add that we all know that we are talking not about present debt but about projected debt if we are operating on the basis of pay-as-you-go. Unless the Germans, the Italians and the French reform their systems in the meantime, 10 years hence they will be faced with an unbearable amount of money to pay. The hon. Member for Dover and the Chairman of the Select Committee have properly asked whether the Governments of those countries have the guts and the political determination to take such action in the face of undoubted unrest. There is nothing extraordinary about people protesting if their benefits are cut. I hope that the Governments will take action, but there is no certainty about it. So far as I can tell from all the evidence, including that from the Commission, the fear expressed by the Select Committee is not accepted by the European Union.

Mr. Walker

I thank the hon. Gentleman for his usual courtesy in giving way. Does he accept that the article that has been referred to is a fact of life? It exists and has been agreed. The hon. Gentleman is proposing something that has not yet been agreed in defence of his position. We can address only the known—not hopes and aspirations, but reality.

Sir Russell Johnston

In European matters, it is always difficult to separate the reality from the aspiration in the simple way that the hon. Gentleman has just done. There is always an element of aspiration. The social chapter, about which some hon. Members get so furious, is composed largely of aspiration rather than reality. However, I must not lead myself away in that direction.

There is nothing further that I wish to say. What I had intended to say in conclusion I have already said in response to the hon. Member for Dover. There is a very big and real problem. It can be solved, but it will be hard. People are entitled to question whether the necessary political rigour exists. The problem is certainly fully recognised. As we know, considerable efforts are already in train in Germany and, notably, in Italy.

Mr. John Butcher (Coventry, South-West)

I am grateful to the hon. Gentleman for giving way because I know that he is about to conclude. I should like to ask him about political will, set against what is currently asserted perhaps by some public relations person at the Commission. A huge row is going on between France and Germany on the extent of the rigour to apply on the convergence criteria and the pact. The French want a political approach with majority voting in the bank, while the Germans want a mechanical approach that would be totally impartial and utterly ruthless. They are falling out over that central issue. How can a press release from the Commission make any assertion in those circumstances? I suspect that we are being expected to base an argument on the word of a junior official. This House, more than any other institution in Europe, should not depend on such arguments.

Sir Russell Johnston

If I attempted to answer all the issues raised by the hon. Gentleman, I should delay the House far too long. I shall say only that to describe the on-going discussion between France and Germany, which progressed the other day in Nuremberg, as a "huge row" is typical of the way in which our European debates are conducted. With respect to the hon. Gentleman, I am aware that others want in and I will terminate.

10.28 am
Mr. Quentin Davies (Stamford and Spalding)

One of the great values of parliamentary debate is that it provides us with a wonderful opportunity to expose nonsense for what it is. In that spirit, I greatly welcome this morning's debate.

As the prospects of monetary union and of our being a part of it advance, it is only natural, given the strong emotions that exist on the subject, that its opponents should clutch at ever weaker straws. We have today a very weak straw indeed. I do not in any way resile from, or apologise for, the comments that I have made on the Select Committee report, which I have seen. I hope that, by the time I have sat down, the hon. Member for Birkenhead (Mr. Field) and other colleagues will understand why I held it to be entirely justified to make those remarks.

It is true that the level of unfunded pension liabilities on the continent—except in Holland—is higher than the level of unfunded pension liabilities in this country in the national insurance scheme and in public sector superannuation schemes. That is perfectly true—there is no question about that. I am happy to acknowledge also that nothing could be more disastrous than any suggestion that anybody should borrow now to pay pensions. On the whole, the pension debate in this country and on the continent has proceeded on the basis of a potential choice between funding pension liabilities and pay-as-you-go schemes. The idea that one might borrow to pay current pensions introduces an entirely third model—one that is horrific in its financial irresponsibility.

The third option is not to fund nor to pay as you go, but to disfund—to accumulate continuing financial liabilities to meet current pensions so that one places a bigger burden on future generations to pay back the money that one is paying out in pensions now plus interest, plus future pensions. Clearly, that is a horrific scenario. The only thing is that no one has ever suggested it, for precisely the reasons that I have set out. This is a windmill at which some colleagues are choosing to tilt in the best Cervantean tradition—it is an enemy that does not exist. The windmill might look like a fearsome animal advancing on us, but it does not exist. It is a figment of the imagination of some colleagues in the House.

Mr. David Shaw

Surely the report from the IMF, which has been prepared by IMF staff, is not a figment of anyone's imagination. There have been numerous reports, including reports from the OECD and that on the Dutch pension fund. A lot of people outside accept that this is not "nonsense", as my hon. Friend puts it, but a real situation that we must face. All three major parties in the House seem to accept that, and it is only my hon. Friend who seems to disagree.

Mr. Davies

I am sorry to have to inflict this on the House, but I must briefly recapitulate what I have said. There are two perfectly responsible and classic methods of approaching the payment of pensions. One is the pay-as-you-go system, the other is funding—or placing certain amounts of money aside from current income and investing those moneys in assets that are expected to yield a future return in the hope that that future return will meet pensions when they need to be paid. That is perfectly clear, and the argument in this country ever since Lloyd George at the beginning of the century, and on the continent since Bismarck, has been between those two systems.

What has been suggested this morning is that there might be a third system, under which we do neither of those things but simply borrow money and accumulate debt when we need to pay pensions. That is not saving for future pension liabilities—it is dissaving—and there is no question but that it would have horrific economic consequences. However, it is such a mad idea that no one has seriously suggested it. Nor do I believe for a moment that anyone would, or needs to, suggest it.

Another element of unreality in the picture that has been painted this morning is that, although it is true that there have been, and remain, substantial unfunded pension liabilities on the continent, that has in fact been the case for many years. It has been the case in all of the countries of the present EU since 1945 and, in many of them, for longer. It is also true that, for a long time, very little was done to match actuarially the potential liabilities of the pension schemes on the continent to the power of the economy to generate the resources to do so. If we had had this debate 10 years ago, it would have been a good deal more pertinent than having it today.

I have listened in vain for any speaker this morning to mention that the past few years have been characterised by the unfunded pension liabilities on the continent being reduced by a reduction in the benefit system. Germany has increased the pensionable age from 65 to 67, but no one has mentioned that. Anyone who knows the first thing about pensions knows that increasing the retirement age by two years has an enormous actuarial effect on the solvency of the scheme. It is odd that that salient fact has not come up. No one has mentioned that, in the past few months, Belgium has followed suit. It is also odd, and perhaps significant, that this has not come up in the debate this morning. No one has mentioned that Italy, after—naturally and understandably—tremendous political controversy for several years, has completely got rid of the scala mobile, the indexation of Italian pensions. Again, no one who knows the first thing about pensions would dispute for a second that removing indexation has an enormous and positive effect on the actuarial solvency of any scheme. It is funny that that salient fact has never come up either.

Paris is not far away and, when Eurostar is working—I believe that it is again—colleagues can go there in less than three hours. I am going there tonight, although not unfortunately by Eurostar. Does the House know what our colleagues in the Assemblée Nationale have been discussing in the past few months? Has anyone in the Chamber bothered to find out? They have been introducing a funded pension scheme in France. It is odd that we are talking about this subject, but that that fact has not been mentioned. Of course, that scheme will help meet only future liabilities, but the point is that we are getting ourselves steamed up into great excitement, despondency and alarm and we are trying to generate a great sense of panic that this appalling thing, monetary union, will come upon us and destroy human life as we know it on the planet and that one of the effects that it will have is that no one will be able to meet their pension liabilities, but without actually confronting the facts before us.

We fail to notice that, in so far as there has been a problem with unfunded liabilities on the continent, it has existed for a long time. It is curious that no one in the Chamber thought to mention that this morning. The last few years have been characterised by a systematic, effective and—I think—courageous attempt on the part of our continental neighbours to address the problem. No one who has taken part in this debate has wanted to give them credit for that.

Mr. Frank Field

rose—

Mr. Davies

Perhaps the hon. Member for Birkenhead, having been prompted by me, will now do so.

Mr. Field

One hopes that a large number of people will be watching this debate elsewhere. In looking at the nature of the speeches from hon. Members of all parties, they will have noticed that the only person who has got steamed up about anything has been the hon. Member for Stamford and Spalding (Mr. Davies). The longer he goes on, the more he will be convincing people outside that there is a large problem—even if people are rather late in the day in coming to it. Some of them, who may have a little expertise, will know that the plans to which the hon. Gentleman has referred are merely proposals and have yet to be passed by the countries' Parliaments.

Mr. Davies

I am reassured and even more confident in the line that I have been taking in the debate by the fact that the hon. Gentleman, to whom I was delighted to give way, chose to make disparaging remarks about my style, and did not in any way challenge the substance of what I have been saying.

There is a further element of unreality about the debate. We have heard this morning from my hon. Friend the Member for Dover (Mr. Shaw), who is an hon. Friend in every sense of the term. He is a very old friend of mine, and I am pleased to be sitting beside him this morning. He quoted article 104b of the Maastricht treaty, which I shall quote again. It says: The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

Even if anyone had ever suggested—which absolutely nobody has—that either the Union or any individual member state should be responsible for another member state's pension liabilities, that possibility would be excluded by the article. My hon. Friend the Member for Dover said that there was a let-out in the reference to the joint execution of a specific project but he cannot be that naive; he has been in business for many years and knows about such things. The fact is that the reference is to infrastructural projects for which individual member states have given specific guarantees; for example, if a bridge were to be built across the Rhine, public sector authorities on either side might agree to guarantee the financing.

When article 104b was drafted, it had to take account of the fact that member states would clearly be liable for specific guarantees that they had given for specific projects but, quite apart from the fact that pensions are not a project, it is absolutely clear that no such guarantees have ever been, or ever could be, given for other member states' pension liabilities. To suggest otherwise was a piece of special pleading that went rather further than the normal parliamentary licence that we allow ourselves when highly controversial matters are under discussion.

A further element of unreality in the debate was the suggestion that the convergence criteria in the Maastricht treaty are somehow wanting because they do not encompass the pension liabilities that exist in various member states. Evidently, I must take two minutes of the House's time to explain to certain hon. Members why the fiscal convergence criteria are included as criteria for monetary union.

If a member state were to default on its financial liabilities—if, for example the British Government defaulted on a gilt issue or the German Government on a Bund issue—that would clearly trigger a systemic financial crisis, because many investors, both private and, more especially, institutional, such as banks and insurance companies, hold that debt. If the debt had to be written off, those institutions would have to write off a portion of their capital and that would greatly reduce demand in the economy as a whole, producing a recessionary crisis. That is what is known as a systemic financial crisis.

A default by the various pension funds on the continent of Europe would not trigger a systemic financial crisis, because they have not issued any such debt. Nobody outside this wonderful House of Commons of ours has ever dreamt up the possibility of going down the road of pension schemes paying out their pensions by raising current debt in the markets. There is therefore no reason to protect ourselves from such an eventuality in the criteria for monetary union.

What would those pension funds do if they could not pay their pensions? They have two choices. [Interruption.] I can see that the hon. Member for Vauxhall (Miss Hoey) does not like being told all these things. I am well aware of her strong emotions on the subject and that she thought that she had found a wonderful way of torpedoing monetary union, but I have to tell her that it will not work.

Miss Hoey

Look at the time.

Mr. Davies

I am afraid that I have every intention of finishing my speech.

Pension funds that could not meet their liabilities could either increase their contributions or cut their benefits. In the past few years, they have chosen the sensible way of substantially cutting their benefits. If there is any problem, it is less of a problem than it was a few years ago when, curiously, we heard nothing from the Euro-sceptics on the matter.

I cannot sit down without raising the most fundamental point about pensions, which was not raised either in our debate this morning or in the Select Committee's report: any pensions scheme, whether funded or not, involves a wager on the future. If one funds a pensions scheme, one accumulates financial assets or claims, equities, bonds and so forth. If the issuers of those bonds or the firms in which one holds an interest through the equity do not perform and generate a return and cannot service their debt or pay dividends, it does not matter how much the scheme is funded or what the actuarial surplus is, because the real resources will not be there in the future to meet the expectations of the pensioners.

Both pay-as-you-go and funding involve a wager on the future. The only reason known to economics for preferring funding is, so the theory goes, that it will involve an increase in the savings ratio, because of the money that is set aside from current income against future liabilities, and that that will provide the possibility for greater investment, which will enhance the economy's capacity to generate more resources, so output and the wherewithal to meet the real resource claims of pensioners will be increased.

That is a fine argument, and I happen to accept it, but it is based on certain assumptions about the return on investment and the efficiency of markets. Most importantly, it is based on the assumption that the compulsory savings levied from the population in enforced pension contributions—which I believe are a good idea—will involve an additional savings effort out of current income and will not simply displace savings that would otherwise have been made elsewhere. If savings are simply displaced, there will be no increase in the aggregate savings ratio as a result of funding pensions.

All the countries that we have been talking about—most notably, France, Germany, Belgium and Italy—have much higher savings ratios than we do at present, even though they have a lesser element of funding in their pensions. Therefore, considering the real economic backing for future pensions, one could legitimately draw the conclusion that the unfunded pensioners in those countries are better assured of getting a real return from their pensions than the funded pensioners in this country, where the savings ratio is, sadly, a great deal less.

I am sorry, and quite surprised, to have had to remind the House of a few elementary economic principles. I had to do so not because I am sure that hon. Members are genuinely ignorant of such matters or have set out in bad faith to exclude material facts and arguments from their presentation of the case this morning—I would never accuse any colleague of doing that—but because of the strong emotions, which I respect and entirely sympathise with, that are generated by the prospects of monetary union and those, I fear, have the capacity to distort the judgment of even the most intelligent, well-informed and well-intentioned people.

10.48 am
Mr. John Denham (Southampton, Itchen)

There is insufficient time to respond in detail to the arguments that have been made, so I shall make only a few brief points. My hon. Friend the Member for Birkenhead (Mr. Field), the Chairman of the Select Committee on Social Security, said that there had been a number of misconceptions about his report, but the debate has made it clear that many issues are involved.

The debate is in part about United Kingdom pensions policy, in part about European pensions policy, in part about monetary union, in part about the alleged conspiracy of perfidious foreigners to steal our pension funds, tax our citizens and do numerous other unspeakable things in the name of the European Union, and in part about funded and unfunded schemes.

It would be wrong to draw the conclusion from the report that the United Kingdom is in a strong position overall on pensions. It is true that our unfunded liabilities for pay-as-you-go pensions are less and that that gives us advantages. It is equally clear that our citizens cannot, in general, look forward to high standards of pensions, and not necessarily to standards comparable with those of other European countries. In cutting the state pay-as-you-go element, the Government have failed to ensure that people can build up adequate funded schemes.

The hon. Member for Stamford and Spalding (Mr. Davies) was right to say that all pension schemes are pay-as-you-go at the moment of delivery, whether the payments are made from funded schemes or from taxation. In the United Kingdom, the cost of future pensions will be reduced by the simple expedient of giving people inadequate pensions, and not through any other means. I and my party advocate moving towards funded pensions.

Paragraph 12 of the Social Security Select Committee report suggests that changing demographic structures will require a substantial increase in national resources devoted to the pension system, unless further cuts were made in pension benefit levels and entitlement. However, that applies to a funded system equally as well as to an unfunded one. An aging population means that a funded system must enable people to have a greater call on the resources of a future society. It would be a mistake to believe that we have resolved that problem.

The European elements of the report are important. The crux of the Select Committee's argument is that, in some way, the British taxpayer will end up paying for unfunded pension liabilities. It is clear that many European countries will have to make some adjustment because of demographic changes. Countries may have to raise taxes and contributions, cut benefits and raise retirement ages; they may have to introduce, over time, new elements into the funding of their schemes; they may have to use a combination of all those measures. Many hon. Members have contended that none of those options is possible, that it is impossible for our partner countries in the European Union to adjust to demographic changes, and that the UK will inevitably end up bearing the consequences. I do not share the Select Committee's pessimism.

First, I am not convinced that adjustment to change is impossible in other European countries. It is undoubtedly difficult, but I do not believe that it is impossible. The level of sustainable payments into pension systems varies enormously in Europe, according to different histories, political choices and cultural patterns. Levels of contribution that seem unsustainable to us have historically been sustained for many years in other European countries without great difficulty. Adjustment to change, although by no means easy, is not impossible.

Secondly, I am not convinced that there are not safeguards in the Maastricht treaty and in the current economic and monetary union negotiations, especially the stability pact, to prevent the burden of an unwillingness to change in Europe being passed to the United Kingdom. Thirdly, it is a bit rich for some representatives of such a fiscally imprudent Government, who have doubled public debt in the six years since the Prime Minister came into office, to lecture other European countries on their alleged fiscal imprudence. That does not sit well with the factual record of the past six years.

Finally, and this point is recognised in the Select Committee report, although buried in it, there is the mistaken assumption that isolation from monetary union isolates us from the consequences of integrated monetary markets in Europe and of the actions of other European countries. That is an illusion. It is the integration of markets that may bring across knock-on effects, not the monetary union process itself.

This debate has been an hors d'oeuvre to the two-day debate that starts this afternoon. The Select Committee has done us a favour in raising the issue but, as hon. Members will have gathered, I do not entirely share the pessimism of its conclusions.

10.53 am
The Parliamentary Under-Secretary of State for Social Security (Mr. Oliver Heald)

The Select Committee's report is more than an appetiser; it is an important contribution to the debate about unfunded pension liabilities in the European Union. We have had a good debate, which was opened with his customary panache by the hon. Member for Birkenhead (Mr. Field). There were thought-provoking speeches by my hon. Friends the Members for Dover (Mr. Shaw) and for Stamford and Spalding (Mr. Davies), and excellent interventions from my hon. Friends the Members for North Tayside (Mr. Walker), for Lancaster (Dame E. Kellett-Bowman), and for Coventry, South-West (Mr. Butcher). The hon. Members for Inverness, Nairn and Lochaber (Sir R. Johnston) and for Southampton, Itchen (Mr. Denham) also spoke.

The issue of huge and increasing pension liabilities, especially unfunded or pay-as-you-go liabilities, is serious. In the 1940s, when the retirement age for men in Britain was fixed at 65, life expectancy for men was 63; today it is 74 and set to rise to 78 by 2030. The population over state pension age is set to rise from 10 million to 14 million in 2030. Those changes are mirrored, to a greater or lesser extent, across Europe.

In 1979, the Government had to consider the long-term sustainability of the British system and decided to develop a strategy which was affordable, yet met the expectations of people in retirement. The key to that has been encouraging individuals to make greater provision for themselves by introducing greater flexibility and choice for those choosing a pension. We allowed people to contract out of the state earnings-related pension scheme in different ways. We introduced personal pensions and have made a series of changes in the Pensions Act 1995. The effect has been that two thirds of employees have opted out of SERPS; more than 20 million people have rights in occupational schemes and more than 5 million hold appropriate personal pensions.

We also took steps, as has been mentioned, to make pensions more affordable. Taken together, those steps have defused the effect of the demographic time bomb in Britain. The result is that we have £600 billion invested in private pension funds on behalf of present and future British pensioners. That is not only more than in any other European Union country but more than in all the other member states put together. That means that we can face the future without imposing a huge tax burden on our economy and that our economy is strengthened by an immense injection of savings and more investment. That point was well made by my hon. Friend the Member for Dover.

The Organisation for Economic Co-operation and Development report, which was mentioned by my hon. Friend the Member for Dover, estimated that the net present value of the liabilities of unfunded pension schemes in France is 98 per cent. of GDP; 113 per cent. in Italy; and 139 per cent. in Germany. In Britain, it is only 19 per cent. My hon. Friend also mentioned the International Monetary Fund report, which suggests that countries such as Germany and France would either have to raise social security tax collections or reduce pension liabilities by about 3.5 per cent. of GDP a year—a huge task. We are better placed than our European partners. Although I acknowledge, as my hon. Friend the Member for Stamford and Spalding said, that our European partners are beginning to heed our example and that several countries, such as France, Italy Portugal and Spain, are beginning to encourage private pensions to supplement pay-as-you-go, much more needs to be done.

There have been suggestions in this debate and elsewhere that in the event of our joining economic and monetary union, the UK might have to pay for other member states' pensions, directly or indirectly, through higher interest rates or higher inflation. There is no question of the Government agreeing to pay other countries' unfunded pensions. We have no intention of using the assets that we have so carefully built up over many years to bail out other countries that have been slower to recognise what will happen and take the necessary action. There will be no common pensions policy under this Government, but I cannot give the same assurance if, heaven forbid, the Labour party were to come to power. The Labour leader has said that he would go along with whatever was pressed by other member states to avoid ever being isolated in Europe. The Select Committee may be right to say that we would face such pressures. The importance of avoiding any extension of majority voting and of maintaining our veto is immense.

Mr. Denis MacShane (Rotherham)

It says here.

Mr. Heald

It does say that here, but the hon. Gentleman will be pleased to learn that I wrote it. My right hon. and learned Friend the Chancellor of the Exchequer has said that we shall be bolstered in our determination to resist any pressures to help finance other countries' unfunded pensions liabilities by articles 104b and 104c of the Maastricht treaty. The no-bail-out clause and the excessive deficit rules will make a difference in helping us to deter members of a euro zone from funding pension liabilities through excessive borrowing. The real protection that Britain and its pension scheme members have for the future is a Government determined to stand up for British interests and ensure that what we have built is not destroyed by others. So member states across Europe which face the difficulties of crystallisation of pension liabilities will have to deal with them by raising taxes, raising contribution rates, reducing the value of pension entitlements or cutting other spending programmes.

I welcome the attention—

Mr. Deputy Speaker (Mr. Michael Morris)

Order. We now move to the next debate.

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