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§ Mr. David Shaw (Dover)I am pleased to have secured this debate. The question of a single currency and Europe's unfunded pension liabilities is extremely important. I first started asking parliamentary questions on this subject in 1991, when very little was known about it or its possible impact on the United Kingdom. However, the single currency is now on Europe's agenda, and it is vital that any debate should be based on all relevant material and information.
It seems less and less likely that an economic argument can be mounted in favour of a single currency. Indeed, it is worrying that it seems that it is becoming more and more a political venture with few economic facts to support the idea of a single currency. That contradicts the views of the Bundesbank and, I believe, those of the German Finance Minister; nevertheless, it can clearly be said that political arguments are being used to promote the single currency rather than the economic arguments that we were promised. That has serious consequences for the UK and we could have to bear enormous costs.
I have estimated some of the costs and found that the current UK national debt of some £300 billion is equivalent to about £5,000 per person. We have our own unfunded pension liabilities, although, as I shall point out, they are considerably less than Europe's. Our unfunded pension liabilities are equivalent to about £4,000 per man, woman and child in the UK, so our total debt, including unfunded pension liabilities, is about £9,000 per man, woman and child.
If Europe's unfunded pension liabilities were shared equally among all the countries and we had to take on a portion of them, we should have to accept something like £30,000 more debt per man, woman and child in the UK. That would be an enormous burden. I believe that the single currency would lead to our having to pay more taxes to service debts accumulated in Europe and to repay some or all of Europe's past debt.
I was concerned to read in the Financial Times this week that there are signs that Europe is not being entirely honest in its accounting methods. This week France has been shown to have been manipulating the Organisation for Economic Co-operation and Development's report so that certain expenditure cuts were included in the budgetary estimates that it gave to the OECD, although in fact those cuts have not yet been agreed by the French Parliament. Germany is also having difficulty meeting the Maastricht criteria relating to the extent to which Government borrowing and debt increase each year.
The Maastricht criteria are indeed highly selective. They include requirements on debt, but exclude significant liabilities such as the unfunded pension liabilities in Europe. Pension fund debt is just as much a liability as a Government bond, but pension fund debt is often known as the invisible debt simply because it is not in the form of a bond and it has been quantified only in the past five years. It is nevertheless a real debt that eventually has to be paid.
I sometimes wonder why pension fund debt has only recently been quantified. I have to put it down to the simple fact that the software programmes and personal computers were not available to enough people to enable 574 it to be quantified because it involves a complex and difficult calculation. Now, however, we can quantify previous politicians' promises that were not properly costed when they were made. I am talking about the politicians who made promises to young and middle-aged voters in the 1960s and 1970s. Those young and middle-aged voters did not realise that the promises they received were not capable of being met in the millennium, when the bills would start to come in.
Europe's social security systems are in a terrible mess compared with ours. Demographic changes are against the principal European countries. In particular, France, Germany and Italy are greatly affected. Their politicians made great promises, the impact of which will become very significant from the year 2005 onwards. Already, the financial markets that often deal in currencies some eight or 10 years ahead are beginning to wake up to the implications, and the impact of such promises on the financial markets will become more serious as we approach 2005.
There are few ways out of the problem for the countries of Europe, and the ways out that do exist are politically painful. Many of the countries affected have already shown, through strikes and other actions, that their peoples are not prepared to take on the responsibility of dealing with the problem.
I now give details of unfunded pension liabilities as a percentage of gross domestic product for the three major countries in the European Union. In France, such liabilities are estimated to be at least 69 per cent. of GDP, in West Germany 122 per cent., and in Italy 107 per cent. When examining those figures, we have to bear it in mind that the Maastricht criteria state that the national debt should be no more than 60 per cent. of GDP. I have cited only one estimate of the liability as it was quantified in Europe in 1990. More recent reports suggest that that liability is an even greater proportion of GDP.
In order to consider the issue properly, it might be helpful to put on record a few key terms. We have to get to grips with the implications of terms such as elderly dependency ratios, contribution rates and replacement rates. The replacement rate relates to someone's income when he retires compared with his income when he was in work. We also have to consider the implications of retirement ages and the indexing formula by which benefits are adjusted for inflation. We have to consider all those factors in all the countries of Europe when examining unfunded pension liabilities.
The bottom line is that such calculations enable us to measure the contribution gap, which is the difference between the current contribution levels and the annual liabilities from past commitments, all brought together through discounting accounting techniques to a value at today's level. The International Monetary Fund defines the contribution gap as
the difference between sustainable contribution rate and projected overall contribution rate".To prepare this speech, I read a number of studies, many of which were not around when I first started asking questions in 1991. The first known study was carried out by the Dutch civil service pension organisation ABP in about 1991. It concluded that Europe's unfunded pension liabilities were about 7,500 becu, or probably some £10 trillion at today's levels. The study was not greeted warmly by European Governments. Indeed, they were so worried by its implications that many argued with its methodology.575 In 1993, a study by the OECD examined pension liabilities in the seven major economies. It confirmed that there was a significant problem, but used a different basis of calculation from the ABP study. In November 1993, the Centre for European Policy Studies published the study "The Hidden Liabilities of Basic Pension Schemes in the European Community". Not only does that study confirm the problem, but it shows how civil servants in member states have secured better pensions than private sector workers will ever secure.
Table 6 on page 16 of the study contrasts the pension privileges of Europe's civil servants with those of the private sector. It points out that, at 1990 prices, a French civil servant's pension is worth about £150,000 of capital, a West German civil servant's pension is worth about £230,000 of capital, and a Luxembourg civil servant's pension is worth about £250,000 of capital. No figures were given for United Kingdom civil servants in that table. Those figures show the level of commitments that have been given in Europe to public sector civil servants for their pensions and the impact of that cost on state pension schemes.
The most recent study was conducted by the International Monetary Fund. It is quoted in the current six-monthly report, but I have been unable to get hold of the working paper SM/96/7 of 19 January 1996, entitled "Aging Populations and the Fiscal Consequences of Public Pension Schemes with Particular Reference to the Major Industrial Countries". I hope that that working paper will be published, because it is in the national interests not only of the UK, but of all people in Europe and the world that it should be openly discussed and its implications considered.
I shall quote briefly from the IMF six-monthly report, which contains some information from the working paper, so that hon. Members can realise some of the implications involved. I shall start with good news in respect of the United Kingdom. The IMF says:
The United Kingdom should experience almost no contribution gap'.For the German pension plan, however, it says something different: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. would be required each year. Assuming average contribution rates remain unchanged at just 10.3 per cent. of GDP over this period, Germany is likely to face a contribution gap of 3.4 per cent. of GDP.That gap will be faced each year. The Maastricht criteria state that Germany's annual increase in debt cannot exceed 3 per cent. of GDP, yet its unfunded pension liability cost alone is equivalent to 3.4 per cent. of GDP a year.The IMF goes on:
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 buildup of pension debt over the next fifty five 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 payout reductions of this magnitude.We already know that German industry is suffering as its indirect pension costs are too high. Europe has reached the limit of increasing social security taxes and other costs that are affecting labour costs. The UK is in a much better position in that area than those countries, and I would be extremely concerned if we took on their debt.576 I should say that the United Kingdom is not perfect in that regard. We have made promises to 500,000 teachers, 1 million national health service employees, civil servants, policemen and firemen that are unfunded pension liabilities. Fortunately, because our overall financial structure is better than those countries on the continent, we can probably meet those promises—yet they are costing a considerable amount.
At today's prices, as the hon. Member for Birkenhead (Mr. Field) was recently told in a parliamentary answer, unfunded pension liabilities in the UK are worth about £230 billion of debt. Even we in the United Kingdom have a problem, although the IMF thinks that we are much better off than most. I understand from a parliamentary answer that I received some time ago that, when the Government took office in 1979, public sector pensions cost £2.5 billion a year. Today, they cost about £10 billion a year. Over the next 20 or 30 years, I understand that that could rise to about £40 billion a year.
Why are unfunded pension liabilities a problem in relation to the single currency? Adopting a single currency means adopting a single European balance sheet. Ultimately, one cannot have a single currency without a single balance sheet. That means that we shall all share Europe's assets and liabilities. The liabilities of Germany, France and Italy would no longer relate solely to them, but would be shared in Europe.
European countries could adopt a number of possible solutions. They could try to increase their social security contributions, but, as I said, it seems unlikely that German industry could pay more in indirect taxes. The problems of higher unemployment in Europe mean that fewer contributors are available to pay future pensions. Fewer people in Europe are contributing to their social security systems because so many of them are out of work.
The Europeans could cut their pensions and raise retirement ages. Indeed, the IMF suggests in its six-monthly report that there will have to be
adjustments in benefits and retirement ages, the latter because of steady gains in average lifespans.It continues:Modifications could include reductions in the replacement ratio in countries where it is high"—that means less income in retirement—and some slowing in the inflation indexing formula. In addition, governments could aim at linking individual pension contributions more closely to benefits—for example, by diverting part of contributions to individual retirement accounts—and at fostering increased personal responsibility for retirement support".The IMF is recommending everything that the UK has already done. We have gone to the trouble of ensuring that those problems have been tackled, but it is very serious that such problems have not been tackled in Europe. There is a risk that, if we joined a single currency, we would have to take on part of those countries' problems.All the studies conducted to date show that past pension commitments by European politicians, especially in France, Germany and Italy, are incapable of being met. That means that if those countries had to draw up their accounts on the same basis as British public companies on the stock exchange, auditors would qualify those countries' audit reports and declare them insolvent. Auditors would say that those countries would be unable to meet their liabilities when they fell due.
577 I should point out that the liabilities are truly massive. They are measured not in tens of millions of pounds, but in hundreds and thousands of billions of pounds. Studies confirm that the UK is probably the best placed country in Europe, if not in the world, on unfunded pension liabilities. They also point out that entering a single currency would mean that the UK would have to give up its competitive advantage, which has been hard earned and is significant from 2005 onwards.
We can also conclude from the studies that the Maastricht criteria are meaningless figures based on false accounting since they do not include the unfunded pension liabilities of Europe. If those liabilities were included, no country would meet the criteria that have been set down.
§ Mr. Frank Field (Birkenhead)I am grateful to be able to contribute briefly to the debate. As he said in his speech, the hon. Member for Dover (Mr. Shaw) and I have crossed paths in parliamentary questions on the nature of the size of unfunded public sector pension rights in Britain. If I represented Dover rather than Birkenhead, perhaps my sights would have crossed to Europe, rather than crossing the Irish channel to Ireland.
The hon. Gentleman raised two points of crucial importance, to which we all want replies. First, he spoke about the size of the national debt and unfunded pension debt in Britain. If it is spread out evenly, it represents £5,000 per person for the national debt and £4,000 per person for unfunded pension liabilities. If we have to share the European debt for unfunded pension liability, however, the figure increases to £30,000 per person. The hon. Gentleman properly raised this question: if we have a single currency, how will the Government prevent taxes from being imposed on people in Britain who have already provided for their own pension entitlements, to pay for people in Europe who have refused to do so?
Secondly, the hon. Gentleman was too polite and gentle to suggest to the Treasury Bench the underlying theme of his debate. If the Government only had a grip on their nerve, a sense of humour and some real finesse on the issue, they would be totally committed to a single European currency, but would say that, before we could go down that path, we should have to address the problem of debt. The difficulties of calculation and getting the French, the Germans and the Italians to face up to the size of their debt will probably take us well into the millennium before we are in a position to decide on the terms of debt, let alone how we might proceed to a single currency.
§ The Economic Secretary to the Treasury (Mrs. Angela Knight)First, let me thank my hon. Friend the Member for Dover (Mr. Shaw) for introducing such an important debate today. I am well aware of his long-term concern and his in-depth knowledge of these matters, which he demonstrated in his remarks.
My hon. Friend was quite right to say that ignoring the issue will not make it go away, so it is of particular importance to note that there has been considerable work on it, including a number of studies, to which he referred. 578 No doubt some member countries of the European Community look at them with greater or less favour because of the message they send to those countries.
The Government have consistently behaved in a fiscally responsible and prudent manner over pensions. We have long recognised the effects of demographic and other changes on the financing of future pensions. We have acted early and wisely to forestall pressures on future taxpayers and have encouraged individuals to take responsibility for providing for their future needs while at the same time safeguarding a minimal level of state provision.
The same cannot be said of some of our European partners, although they have recognised the problems that they are facing and have started to take at least some action to deal with what is described quite rightly as the pensions time-bomb. We can help them and there are,some excellent opportunities for the United Kingdom to do so.
Our system of funded pensions is a model of its kind. We have recognised the importance of having a sustainable pension system in place for future generations. The basic state pension is and will remain the cornerstone of pension provision in the United Kingdom. Most people want to look forward to incomes closer to what they have been used to earning when at work, and funded private pensions are the key to that.
Recent work by the OECD and the IMF shows just how successful the United Kingdom has been. According to the OECD, pension payments are expected to cause the national debts of Germany and France to double as a proportion of GDP between 2000 and 2030, on current policies. My hon. Friend put those figures in a more human context, but whichever way one looks at them, it is a very large debt that has to be addressed right now.
The problem is not limited to the European Union—Japan faces the same problems—but the United Kingdom and the European Union are examining problems that affect us all and are the subject of today's debate.
If one looks at the figures in another way, the OECD expects our public expenditure on pensions to peak at around 5 per cent. of GDP, compared with between 15 and 20 per cent. in Germany, France and Italy.
Some action has started to be taken in Italy, Germany and France. Italy approved plans to reform its pension system last year; Germany has set up a commission to review the current pension system; and the French Government plan to supplement the public scheme with private pension schemes. However, the proof of the pudding is in the eating, and we are waiting to see whether those proposals manifest themselves in practice, as we have been told they will.
My hon. Friend spoke about the single currency and its effect on unfunded pensions in other countries. The hon. Member for Birkenhead (Mr. Field) also touched on that point. My hon. Friend was right to raise a proper concern relating to the national accounts. I, too, am concerned that in some European countries political arguments on a single currency seem to take over from hard-headed economic reasoning.
My hon. Friend is well aware that the Government have said consistently that the United Kingdom will join a single currency only if it is in the national interests to do so. It is because the Prime Minister secured our right to 579 opt out that Parliament and Government can take that decision at the appropriate time in the light of all the circumstances. It also raises the question how Government debt is defined within the Maastricht convergence criteria for all countries and where unfunded pension liabilities fit in.
Unfunded pension liabilities do not appear in the national accounts. The Maastricht measure of debt, which is the general Government gross debt, is a measure of gross financial liabilities outstanding—that is, liabilities to repay earlier borrowing. It does not include liabilities for other forms of future spending, such as unfunded pension liabilities. Including such liabilities within measures of debt would introduce a number of problems, the main one being that most member states would probably dispute the figures. However, the need to keep their budget deficits below 3 per cent. of GDP will constrain member states with very expensive unfunded pension systems. When those pensions come to be paid, their Governments will need either to raise taxes or to reduce other expenditure to remain within the 3 per cent. limit. Tough decisions need to be made, but they are sensible ones in any event.
Under the Maastricht treaty, member states are responsible for their own fiscal policies and their own pension provision. Member states have the right to determine their own taxation and expenditure plans, but they are also duty bound to ensure that their own plans do not force others to bail them out.
Article 104 of the treaty specifically rules out any prospect of one member state bailing out another. That provision extends not just to the purchase of the debt of other member states, but to offering overdraft facilities or any other credit facilities. That "no bail out" clause 580 safeguards one member state from the actions of another and ensures that member states act responsibly in keeping their finances in order.
In addition, the excessive deficits procedure set out in the treaty keeps up the pressure on sound public finances. Member states' debt and deficit performance is monitored with a view to restraining excessive deficits. For those member states that participate in monetary union, the Council may also consider applying sanctions if participating member states persist in running excessive deficits. Those requirements are taken seriously by other member states, as they are by the United Kingdom. Many hon. Members will have heard of the stability pact that was proposed by the German Chancellor, and I know that my hon. Friend is well aware of what it involves. It aims to apply the excessive deficits procedure even more rigorously to member states that participate in monetary union.
It is a long and complicated matter. We have touched upon it in today's debate perhaps only superficially, but the main issues that have been raised and that are related to unfunded pensions and the difficulties that all Governments must face are decisions and objectives that will not go away.
The UK has done a good job in recognising the issue and deciding how to deal with it. Elsewhere in Europe, the decisions are being made rather late in the day. I hope that those Governments are aware that they must take action whether or not they intend to join a single currency, as it is in their interests to look at unfunded pension liabilities. If they do not, they will pass debt on to their heirs, rather than assets. The matter is the subject of on-going discussions, not just in the House, but elsewhere. One thing is clear: member states must recognise the importance of fiscal discipline and responsibility, including responsibility—