HL Deb 28 February 1985 vol 460 cc1068-84

6.37 p.m.

Viscount Hanworth rose to ask Her Majesty's Government whether they have any intention of taxing occupational pension schemes or benefits from them.

The noble Viscount said: My Lords, I beg leave to ask the Question standing in my name. One may have to accept that, in spite of the revenue from North Sea oil, Britain's still shaky economy could require cutbacks and additional taxation in one form or another. The temptation to the Government is to try to obtain funds from areas where there will be fewest political objections, regardless of the damage which may result.

It appears that the taxation of occupational pensions is something the Government have in mind—no doubt with the vain hope that its unfortunate effects will not be immediately or too readily apparent. At present, occupational pension schemes which satisfy Section 24 of the Finance Act 1970 avoid tax on the employers' and the employees' contributions. Earnings and capital gains of the pension fund are tax free, and so are any lump sums paid on retirement up to one and one-half times the annual earnings of the employee.

There are three possible areas in which the Government might decide to levy a new tax. They are lump sum benefits, investment incomes, or contributions to the pension scheme. The present arrangements for tax relief have been in force for the past 60 years and encourage firms and individuals to provide for retirement. Moreover, they are a vital part of the foundations on which the Social Security Pensions Act 1975 was based. I cannot believe that the Government think that provision for retirement is more than adequate for most people. That being so, any taxation must directly or indirectly affect a potentially under-privileged section of our society—that is, unless industry makes a greater contribution, which would be hardly helpful to industry, with its need to recover and become more competitive.

Considering each of those three possible new taxation areas in turn, lump sum benefits have been a part of some pension schemes since 1909. They are the same kind of provision given in many insurance schemes. Many people rely on their lump sum benefit to pay off mortgages or other loans, for buying an annuity, settling into retirement, probably in a new location, or setting up a small business. That is something we all believe important in the national interest. Inevitably, if the Government are to gain by taxation in this way, the legislation could be classed as retrospective and the terms of pension schemes would have to be revised. Already some people are retiring early to avoid the possibility of their lump sum benefits being taxed. The gain to the Government by any means except by retrospective legislation would be small and only worthwhile in the long term.

The taxation of investment income or the capital gains of pension funds simply means that the employer or employee has to pay more to provide the same benefits. If one accepts—and I do not—the Government's ideas on employees making their own arrangements, a tax on their payments would be a great disincentive to their making adequate provision for retirement. It would be wholly anomalous to provide tax relief on such contributions and not on those paid into a pension fund. To tax the employer's contribution would simply be, as I said, virtually another tax on industry. It would be, in effect, a capitation tax and would further increase—or would be likely to increase—unemployment.

I have in this speech avoided dealing with the White Paper proposals for personal pensions and perhaps others will speak on this aspect. I will only say that it seems to me that the theory that people should be able to make their own arrangements for pensions, with no schemes to safeguard them, carries the Conservative principle of free choice too far. We include in our society the inadequates and the Micawbers of this world, and as a caring nation we cannot wholly let them reap the results of their earlier follies.

6.43 p.m.

Lord Graham of Edmonton

My Lords, I begin by saying that, not for the first time, the noble Viscount, Lord Hanworth, has done this House a service by providing us with the opportunity of debating this topic, and even if it is not properly timed, the Minister and his colleagues should accept the challenge by making a response tonight. I am absolutely certain that the contributions to the debate will be made from experience and deep interest.

The noble Viscount presented the main burden of the concerns which have been expressed by millions of people, through their organisations, and it is right and proper that those of us with interests outside the House should take this opportunity to draw the Minister's attention to the anxieties which have been expressed to us. As the noble Viscount, Lord Hanworth, so rightly said, there are some superficially attractive options open to the Chancellor in considering the taxation of pension funds and contributions. After all, this is a Chancellor who said in his Budget Statement last year that he was set upon removing so-called fiscal distortions in the system. He is a Chancellor who is seeking to earn a reputation as a reforming Chancellor. But let us examine some of those superficially attractive options.

First, there is the case that has been made that there would be a substantial income to the Revenue by adopting these policies. Secondly, there is the opportunity to remove the distortions and to cut out some of the special reliefs and exemptions. Thirdly, and as the noble Viscount said, there is the possibility of encouraging people to invest directly in their own businesses. However, as the noble Viscount also said—and I do not intend to repeat his words—on all three counts if the rumoured moves come to fruition they will undoubtedly fail. If the employers' contributions are disallowed as a business expense, there is no question but that the wage bill would have to be increased. Organisations which have been in touch with all noble Lords in the House have told us that this could very well amount to between 7 per cent. and 11 per cent. It would certainly decrease the pension benefits to employees and we are told by some organisations that it could very well lead to a discontinuation of pension schemes.

If the Chancellor is looking at discontinuing tax relief on employees' contributions, that certainly could lead to changes in the schemes to a non-contributory basis. That would have a very serious effect. In looking at the possible taxation of investment income of pension funds, we are then into the big league as regards money. Various calculations have been made and I shall not bore the House with them. The Minister who is to reply, and who is fair in these matters, will be well aware that if pension funds are taxed at various rates it inevitably will mean not merely that the members of the fund will have to pay more but also that the retrospective element mentioned by the noble Viscount would come into existence. People have been in the business of providing for their future for many years. The pension business is a long-term business, carefully put together, and I remind the Minister that in the 1970s, with all-party agreement, a substantial movement came towards recognising that what we needed was stability, security and certainty in making these arrangements. I very much hope that the Minister will bear those points in mind.

The Minister will be aware that the reason for so much agitation and apprehension is the action of his honourable friend the Chancellor in his Budget last year. He brought in the measures to deal with life assurance premium relief and immediately a situation was disturbed that hitherto had been unchallenged for a long time. This caused people to ask, "I wonder what next?". The Minister will be aware of the very strong rumours that began to circulate on what the Chancellor might have in his mind. I do not believe that it is right and proper to use the analogy of what the Chancellor did on LAPR last year as indicating, ipso facto, that he is likely to do the kind of things we understand to have at least been thought of, or are Kites that have been flown, in the past few weeks. Those on this side of the House—I speak purely for myself at this stage—and those outside the House who have been in touch with me, view with horror anything remotely like the dramatic intervention into previously established arrangements that LAPR brought into the insurance world last year.

As is proper, I declare an interest in these matters. I have a continuing association with the co-operative movement and with the Union of Shop, Distributive and Allied Workers. I also express an affinity with the friendly societies movement. I mention those three interests because the Minister and his colleagues would do well to take them on board, whether the Chancellor makes the moves that have been mooted or not, and it is well for the record to show what these individuals and organisations are saying.

Let me quote the words of a former colleague of mine, Brian Holden, who is the pension services manager of the Co-operative Union. He advises on pension schemes for some 100,000 employees of retail co-ops. Only last week he expressed his concern at reports that Mr. Norman Fowler, the Secretary of State for Social Services, planned to abolish the state earnings-related pension scheme. I shall come to an item in The Times today which runs counter to that rumour about Mr. Fowler.

What Mr. Brian Holden told me was that it had been suggested that SERPS be replaced by personal pensions. However, a closer examination of that suggestion makes SERPS extremely realistic, very practicable and economic to administer. In addition, with rumours that the Chancellor of the Exchequer plans to change the tax treatment of pension schemes in the Budget, how could all concerned with pension schemes plan effectively for the future if major changes were to be enforced at regular intervals by successive Administrations? If the required degree of co-operation was achieved, Mr. Holden tells me that he is convinced that it ought to lead to a lasting and successful partnership between state and occupational pensions.

I should also like to bring to the Minister's attention the words of the legal officer of the Union of Shop, Distributive and Allied Workers, Tony Heywood. He says that the present speculation is damaging to this consensus and any attempt to interfere with the present taxation provisions would not only be extremely damaging to the provisions made for retirement but could also have long-term damaging social and economic considerations. If, for example, the tax relief in respect of contributions or investment income were withdrawn, this would inevitably mean an increase in the cost of providing pensions which could be met only by either an increase in contributions or a reduction in pension benefits.

I draw these points to the Minister's attention because these are practical people who are acting on behalf of hundreds of thousands of people who could be affected in this matter. I want the Minister fully to understand that great care is required by his Treasury colleagues if they are to avoid some of the unfortunate consequences which may or may not be fully realised when taxation changes are made—and let me assure the Minister that I raise these matters to be helpful for the future, based on sad experiences from the past.

Let us take, for instance, the actions of the Chancellor in last year's Finance Bill. In their understandable zeal to curb tax avoidance the Government reduced the limits within which friendly societies operate from £2,000 to £750. The fact that the overwhelming number of these friendly societies are not embryonic insurance companies was ignored. These small societies are not commercial business operators. Their good work is not wholly reflected in accounts and balance sheets. They do not often make the national press. They are not big fish in the financial world; but they do an incredible amount of sound local community social work. I am told that that reduction from £2,000 to £750 will mean that many of them will not be able to survive.

The main theme of tonight's debate is the concern that disturbing hitherto laudable taxation arrangements can lead to undesirable consequences. I accept that, where tax laws are being taken advantage of in a way that was not intended, the Government must act to curb abuses; but surely they should be capable of doing that without losing sight of the value of a whole movement and throwing the baby out with the bath-water. I would hope that when these matters are looked at again—and there must surely be a continuing dialogue—consideration could be given to increasing the limit for friendly societies not operating on a commercial scale to a level which would allow them to survive.

In conclusion, this debate has been, and I believe will be, conducted in a civilised manner. I, for one, acknowledge the limitation of the Minister's brief, and I anticipate that what he has to say will be limited indeed. But despite the limited value of these exchanges, I believe that the record will be helpful in order for those outside the House to be clear beyond dispute that their deep concerns have been put to the Government by their friends and in order for the Government, via the always helpful and courteous Minister, both to dispel misunderstandings and to convey to his Treasury friends the gravamen of the worries that we have placed before him tonight.

6.55 p.m.

The Earl of Buckinghamshire

My Lords, the position was well outlined by the noble Viscount, Lord Hanworth, in his opening words to this debate. I, too, share the concerns of the union representatives which have been mentioned by the noble Lord, Lord Graham of Edmonton. The points that I have to make will, I hope, serve to emphasise the very great concerns that have been expressed in this matter. But before I go into the main parts of my speech I should declare two interests. I am a potential beneficiary of my company's pension plan, and therefore have somewhat of a private interest in this matter; and, secondly, I have been a pensions consultant for the past 14 years.

It is extremely tempting for the Treasury, or for that matter any Government, to find a potential, rich source of increasing the annual tax take. Cash estimates of the potential tax that could be raised from pension funds have varied between £2 billion and £5 billion. I have no doubt that the Treasury's view is that, in contemplating the raising of taxes and looking at pension funds, it would prefer them not to be where they are at present; in other words, it would prefer not to be looking at funds which enjoy and have enjoyed since 1921 significant tax advantages when compared to other forms of saving. Your Lordships may be surprised to know that I have a certain sympathy with that view, but the problem is that, having arrived at where we are, any attempt to reform the tax treatment of pension funds will have detrimental ripple effects elsewhere.

There is very great concern among companies at the prospect of a major change in taxation for pension schemes without major and radical tax reforms elsewhere. Manufacturing industries are particularly worried because they are still in the process of regaining world competitiveness and need to resist vigorously any threats that could increase their unit labour costs. But, as we have seen and as has been pointed out tonight already, speculation on tax has centred on three key areas: the taxation of cash lump sums on retirement, the removal or reduction of tax reliefs on employer and employee contributions, and the taxation of investment returns or on capital gains.

It has been stated in the other place that cash sums will not be taxed retrospectively. That means that the likely tax take on that benefit, which for most of those retiring will represent only about 25 per cent. of their total retirement benefit, will be negligible and, I suggest, not worth pursuing. It must be remembered that the revenue gain will be greatly delayed—for at least 20 years.

Taxation reliefs on employees' contributions are currently allowed up to quite modest limits on earnings for both occupational pension schemes and self-employed arrangements. A significant removal of those reliefs in occupational schemes will lead inevitably towards non-contributory arrangements and thus negate hopes of an additional tax take. It raises, in addition, the question of double taxation, since the bulk of retirement income is taxed on receipt. It also removes one area of self-help away from individuals, which helps them to become self-sufficient in retirement.

Employers' tax relief and the corporation tax arrangements are already progressively reducing. To remove tax reliefs totally from the employers' contributions will, the Institute of Fiscal Studies estimates, increase labour costs by about 6 per cent. if pension promises are maintained, or, as is more likely, reduce pension promises by about 36 per cent. Neither probability is a welcome prospect. The most fundamental tax, and perhaps the easiest to implement, would be a tax on investment returns or capital gains. Taxation on capital gains would lead investment managers to be unwilling to trade in stocks with low yields and high capital gains potential; and taxation on investment income would require the Government to rethink their strategy on raising cash through the markets.

Investment managers are already restructuring their portfolios out of high coupon gilts towards other forms of investments of an equity nature. Thus the indirect effect of taxation in this area will lead to a reduction in the rates of return because the investment managers' opportunities will have been reduced. This in turn will increase the costs of pre-funding pension promises. The effect of such a tax for employers will be very significant. It will increase the costs of the pension fund. I have seen figures that show a 17 per cent. reduction in benefit or a third increase in the employer's costs for a 10 per cent. tax on investment return.

In a mature fund—and there are many in this country—the effects will be worse. One mature fund that I have looked at shows a doubling of the employer's contribution on a 10 per cent. rate of tax. Even if actuaries were to use less conservative assumptions, we are still considering increases in costs for new funds in the region of 6 per cent. to 8 per cent. per annum.

Pension funds project liabilities forward from between 20 and 40 years. That is a very long period. The recent high rates of return from 1977–78 onwards, are not necessarily a guide to the future. Figures produced by the stock-brokers Philips and Drew show that between 1963 and 1983 average funds achieved a 10.9 per cent. rate of return against a wage rise of 11.6 per cent. That is a negative rate of return.

I appreciate that you can produce statistics to make your point wherever you wish. Nonetheless, there were periods during the 1970s of negative returns, markedly in 1973 and 1974 when United Kingdom equities registered—28.8 per cent. and—54 per cent. as inflation raced away. Deficiency, not surplus, was the topic of my discussions at that time, and who among us today will confidently predict the future on investment rates of return when interest rates are showing the highest positive rate over inflation since the 1830s? Most of the funds for which I am responsible have been trying to remedy the effects of the high inflation experienced in the 1970s by distributing prudently the surplus to their pensioners.

Recent changes in legislation to improve the lot of early leavers, no matter how meritorious, will affect current solvency levels. Any change in taxation of pension funds in this area will also have an adverse effect in future years. In particular, any moves to tax pension funds on a once-off basis, as was done with bank profits recently, should be withstood because of the immediate impact such a move will have on solvency levels and the security of members' benefits. A real rate of return—and most actuaries adopt a 1 per cent. positive rate over the rate of salary increase—is vital if pension promises are to be maintained. An attack in this area will have the worst possible effects, by increasing company costs, or reducing defined benefit and final salary schemes, and, in the last resort, the abandonment of the pre-funded approach in favour of less prudent methods. It is also a fallacy to think that pensions funds are totally tax free. They are subject to tax. They pay development land tax, they pay stamp duty and in certain instances they have to meet VAT which cannot be reclaimed.

I now wish to turn briefly to the policy on portable pensions and the recent press publicity on the possible wind-up of the state earnings-related scheme, which started in 1978, so far as they are both relevant to the topic of taxation. It is clear that state benefits will become an ever-increasing burden on the working population. The Government are seeking, in my view quite correctly, ways to encourage individuals to make provision for old age, partially in order to reduce the state's future liabilities. Portable pensions will encourage those not in occupational pension schemes to make provision. But, if tax reliefs are removed, this encouragement will disappear.

Encouragement is required if we consider the following statistics. In 1981 £12 billion was consumed in beer drinking while only half a billion pounds was spent on pensions in self-employed markets. Incidentally, the same amount of half a billion pounds, was spent on bingo. A drive towards fiscal neutrality will not encourage provision for old age. Given those statistics, I think it is a key point to remember that we do not really provide for ourselves in our old age at the present moment.

I support totally the need to scrutinise and question areas that many may regard as sacrosanct. In the instance of taxation of pension funds, I see great drawbacks if a policy of fiscal neutrality is to be zealously pursued. Promises made within existing schemes will have to be curtailed or employment costs will be forced to rise if taxation at even quite modest levels is introduced. A policy of taxation in this area will not encourage self-help and the reliance on the state will increase and not decrease.

Pensions are a complex area and statistics will be produced ad nauseam to prove one case or the other. However, a significant raising of tax from pension funds where promises have already been made will be detrimental to the interest of those companies which run pension funds for their employees and indeed for those in pension funds, whether occupational or self-employed arrangements.

In conclusion, I cannot stress too strongly that, if it is the policy to ensure that reliance on the state is minimised, then removing tax reliefs or introducing tax on a greater scale than at present seems an odd way of achieving the success of any such policy.

7.8 p.m.

Lord Banks

My Lords, I am sure that the House will be grateful to my noble friend Lord Hanworth for asking this important Question this evening. I should like to support the general tenor of his remarks. The noble Earl and others have referred to the earnings-related pension. Although I feel that discussion about that is probably outside the scope of the Question, I cannot resist saying at the outset that I would abolish the earnings-related pension if I could and replace it with a greatly increased basic retirement pension.

Before I return to the taxation of pension funds, I should like to declare an interest. I am an insurance broker specialising in life assurance and pensions. For that very reason, I am aware of the very great anxiety which surrounds the Government's intentions in this field. Despite the assurances given by the Chancellor, people are retiring early, as my noble friend said, and they are doing so at the expense of some of the benefit which they might have expected in order to avoid being caught in the taxation net. I know of people who are retiring now rather than in August, though it means some small loss to them, in order to avoid what might be in the Budget.

It seems that there are two ways in which we can regard pensions. We can regard them as deferred wages, in which case the build-up would be tax free and they would be taxed when received. Broadly speaking, that is the method which we have at the moment. There is nothing of special privilege at all about that concept. The other way is to regard pensions as savings out of earned income in which case they should be taxed in the build-up and completely tax free in one large lump sum at retirement. It seems to me that there is no point in changing from the one system to the other. It would make no great difference to the Government in the long run which system was adopted, although there might be some immediate advantage.

Noble Lords have explained that there are the three reliefs enjoyed at the present time—on the contributions of employees and employers, on the investment income of the pension funds, and on the proportion of benefit that may be taken in lump sum under either occupational pension schemes or personal pension policies, self-employed retirement annuities. The noble Lord, Lord Graham of Edmonton, pointed out, as did the noble Earl, that if we end the tax relief on employees, then the likelihood is that schemes would simply become non-contributory. That would leave employers and employees in virtually the same position. There would be no gain for the Government.

If we end the tax relief on employers' contributions, that certainly seems unfair. What they pay out in contributions is surely a legitimate expense, particularly if pensions are regarded as deferred wages.

The noble Lord, Lord Graham of Edmonton, pointed out that if, in fact, we ended the tax relief on employers' contributions, this would add something like 7 per cent. of payroll to the cost. This, in turn, might encourage companies to move to setting up internal reserves to meet future liabilities for pensions. If they did that, there would be no gain to the Government, unless of course the Government intended to tax reserves generally which would be a fundamental amendment of company tax law. It would mean that tax relief was not available on advance provision by a company against its specified future liabilities. That would clearly go wider than pension funds.

If we end the tax relief on the investment of funds, it is estimated that the cost would be between 5 per cent. and 11 per cent. of payroll extra, according to the rate of tax levied in the range between 10 per cent. and 25 per cent. This would mean either higher employers' costs—directly, it seems, against the Government's intention to keep down employers' costs in order to avoid, as they would argue, an increase in inflation—or lower pensions, lower benefits and, very likely, the closure of schemes at the margin. The noble Earl pointed out that there are already going to be higher costs for employers because of the provisions being made to deal with the position of early leavers—provisions that probably all of us present in the House would agree with. Nevertheless, we cannot overlook the fact that they already add extra costs.

My noble friend referred to the element of retrospection that would come in. It would be extremely difficult to sort out from the investment income that which related to contributions paid after the Budget and that which related to contributions paid before. The lump sum, that is to say, a proportion of benefit that may be taken in a tax free lump sum, may seem anomalous. It is, in fact, the only tax area where there is a real taxation advantage. However, this was looked at by the Committee on the Functioning of Institutions presided over by the noble Lord, Lord Wilson. Its report stated: If this view of pensions as deferred pay is accepted, the chief anomaly lies in the tax free nature of the lump sum. It is difficult to justify this on logical grounds. But it has become such an accepted part of the present arrangement that its removal could not be regarded as equitable in its effects". Its removal, the Committee said, could not be regarded as equitable in its effects. To treat lump sum payments under pension arrangements any more harshly than golden handshakes, where £25,000 is tax free, would surely be unthinkable.

No doubt, we shall be told that the noble Lord who is to reply cannot anticipate the Budget statement of his right honourable friend. Nevertheless, without doing that, he can perhaps let us into his thinking in the matter and say how he feels about some of the points put tonight. They are not all directly related. The noble Lord could talk about them for some time without necessarily saying precisely what his right honourable friend intends to do. We look forward to instruction from the noble Lord in that respect. If he can give some amplification of the Chancellor's reassurance, that would be welcome, as would an assurance that the Chancellor will consider carefully all that is said in the House tonight and all the representations that have been advanced to him by persons and bodies with intimate knowledge of the pensions field.

7.16 p.m.

Lord Shackleton

My Lords, I am grateful to the noble Viscount who asked this Unstarred Question. Although I am not a insurance broker and not as specialised as those noble Lords who have spoken, it has been my good or bad fortune to be responsible for a number of pension schemes in industry, some bad and some rather good. I suppose that since everyone is declaring an interest, I should declare my own interest as a pensioner who has been responsible for a pension scheme in one of our largest international companies. I am amazed that the Government should seriously contemplate interfering with a pension scheme. I know that we have a radical Government, and I know that they do barmy things. However, I know of nothing more calculated to infuriate their supporters and industry. I have never known quite such a unanimous reaction from industry, which which I have been actively involved for a number of years, as has arisen over this matter.

Although the noble Lord who is to reply will probably not be able to say very much, he will not mind our saying that we not only wish to educate him—or, if not him, because he perhaps knows it all, his advisers: one can sometimes argue that the real value of our debates is not the Minister's reply but the influence on his department—but also to express disbelief that serious civil servants can favour this sort of proposal. I was responsible when Minister in charge of the Civil Service Department for Civil Service pensions. I warn the Civil Service that the next stage is that there will be another go at their inflation-proofing. The Prime Minister has been stopped twice on that. If you are taxing lump sums in the private sector, what will happen to lump sums in the public sector? The case has been put strongly. I hope that, in the end, the Government do nothing about this.

There has been reference, I believe, to the LAPR scheme. That was an example of how not to do it. It really does show a degree of irresponsibility. The Conservative Party always says that it provides good, sensible government. It does not. There is a doctrinaire spirit and a determination to get money. I am not saying this to be nasty to the Conservatives: I am trying to save the Government from an act of folly that may lose them the next election. This is not in the interests of my party, but it is in the interests of potential pensioners.

I do not know what the Government intend to do. The view has been expressed that pension schemes are currently in good heart and can obsorb 10 per cent. tax without difficulty, and that in the interests of fiscal neutrality—I shall say more about this—pension schemes should not continue to enjoy completely tax- free status. Of course, they do not enjoy a completely tax-free status. That has already been explained.

Although it is true that pension schemes have enjoyed real rates of return in recent years—and there was a time when they did not do so, when companies had to pump a great deal of money into their schemes to make them actuarially sound—any actuarial surplus must result in a reduction of company contributions unless applied towards an increase in benefits for members or better protection for current or deferred pensioners. The reason is simply that the Inland Revenue police regularly each scheme and will not allow an excessive surplus to be maintained. Other things being equal, reduced contributions will increase profits which are taxed. Therefore, this is a very complex area.

When we passed the 1975 Act there was agreement between the parties. Successive Governments—first the Labour Government and then the Conservative Government—came forward with their schemes. For goodness sake, please let us leave them alone! The most important aspect—and this has been referred to by my noble friend and other noble Lords—is the fact that pension schemes are funded on long-term assumptions, and any alteration in the taxation position would destroy, literally at a stroke, the whole foundation. It is vital that funding assumptions are not made subject to annual Budget manipulation. Therefore, if there is to be a change of treatment, it is essential that the matter be properly debated and properly discussed and that no step is taken just to meet a particular Budget situation.

There has recently been legislation. Those of us who have been interested in occupational schemes have wanted those schemes to be improved. One of the more objectionable aspects of certain types of deferred pension has been that they did not benefit from the value of the money that was invested, as it were, for that particular pension, which would actually go to help those who had pensions later on and who were having their pensions uprated.

The Government had to intervene, and legislation has been passed relating to the uprating of deferred pensions and the abolition of "franking". Those measures have imposed additional costs on many schemes, and it is virtually certain that they could not absorb the additional costs of a tax on their income. The costs would vary, but it has been estimated that if there were a 10 per cent. tax it would mean a 33 per cent. rise in contributions or a reduction in benefits of the order of 17 per cent.

The occupational pension schemes in this country are very varied and very unequal. Those of us who sought within industry to improve and bring them up from eightieths to sixtieths and to make some of the disability and long-term benefits available will be discouraged from presenting and pressing on with this. The best of industry has set an example, and its pensions are practically up to the standard of the Civil Service pensions. The argument about fiscal neutrality is very doubtful. Indeed, the Institute for Fiscal Studies, which is a very worthwhile body—and some of my friends have been involved in it—point out that: With the exception of the tax-free status of lump sum benefits, the existing tax regime for pensions is broadly consistent with that objective"; that is, fiscal neutrality. That may be arguable against the lump sum, but the lump sum has a special social significance. I really do beg the Government not to press too heavily.

There are quite a number of other points which could be made, but the case has been very strongly expressed already. Let me give another example which arises if they start taxing assets. There are some closed-off companies for which nobody is responsible. They are finished, but the pension funds exist. If those assets are reduced there is no way in which they can be increased by the injection of new funds from a benevolent employing company. That, again, would inflict further hardship.

There is no doubt that any change in the tax position will result in a reassessment by companies of the way in which pension obligations are funded. It is just conceivable that there could be a switch from advance funding towards a pay-as-you-go and/or a ceasing to contract out of the state earnings-related scheme. Either course would have serious implications for the capital market, on which the Government rely for funds.

I hope, therefore, that the Government will be exceedingly careful in this area. It is very difficult to make comparisons with other countries. Incidentally, recently in Australia it was possible to take the whole of the funded amount as a single sum and not just merely a proportion, which is what we allow. Some people would take 300,000 or even 400,000 dollars. I beg the Government to leave the lump sum alone. I beg them to think again and not to endanger their future electoral prospects.

7.26 p.m.

Lord Stoddart of Swindon

My Lords, I, too, should like to congratulate the noble Viscount, Lord Hanworth, on asking this Unstarred Question tonight and for initiating the very well-informed debate that we have so far had on this important subject; namely, taxing pension schemes and contributions. I should also like to thank him for his excellent explanation of the present position of pension schemes and his excellent exposition of the case against taxing them.

I, too, I suppose, ought to declare an interest because I happen to be a member of two pension funds neither of which, I am afraid, will give me a living wage at the end of my working life. Nevertheless, I declare the interest just the same. I should also like to say that the timing of the Question is quite interesting, and the reply of the noble Lord, Lord Brabazon of Tara, will no doubt be intriguing, bearing in mind that the Budget is less than three weeks away. We are all of us awaiting his reply with bated breath to see whether he can give us a glimpse of the Chancellor's thinking on the subject at the present time. I hope that he will respond to the invitation of the noble Lord, Lord Banks, to let us into the secrets of the Treasury at this time.

However, I have to say that I was somewhat surprised that the Chancellor should be thought—even thought—to be considering extending taxation on pension schemes. I was even more surprised that he should have arranged to leak his thoughts so far in advance of the Budget. I trust, in the light of recent happenings, that he sought and obtained immunity for himself and his civil servants from prosecution under Section 2 of the Official Secrets Act.

Like my noble friend Lord Shackleton, I am no less surprised that there should be even consideration of raising additional tax by a method eminently designed to alienate the maximum number of Conservative voters and, at the same time, cause confusion and dismay to employers, employees, the pensions industry itself and the City, not to mention Conservative Members of Parliament. You could not worry and offend a much more influential bunch of people than that. I am most surprised that the Chancellor should have taken such risks.

However, having let the cat out of the bag, the Chancellor must now deal with the storm of protest that has engulfed him and make his Budget dispositions accordingly. What I do learn—and I warn the noble Lord and the Chancellor now—is that if he goes ahead with the proposals so far mooted, the storm of protest will become a tempest that may very well sweep him out of office. Of course, some of us would think that that would be a good thing.

Before I go on to deal with the proposals themselves, or at least the rumoured proposals, I want to refer to a point that was raised by my noble friend Lord Graham of Edmonton. My noble friend raised the very important matter relating to the state pension scheme, and the rumours apparently emanating from the Secretary of State at the Department of Health and Social Security, that the earnings-related element of the state pension scheme might be abandoned. If that happens—and I sincerely trust that it will not, and I hope that we can have an assurance tonight that it will not happen—it would be tantamount to a huge fraud. Any insurance company which treated its pension policyholders in that way would be hauled before the courts and given long gaol sentences for fraud on its policyholders. My right honourable friend the Leader of the Opposition and Mr. Norman Willis, the General Secretary of the TUC, have today condemned the proposal out of hand. It will be resisted by every possible lawful means if it should be brought forward by the Government. I make that statement from this Dispatch Box tonight.

We have had a good discussion about what these rumours or proposals mean. As has already been mentioned, the proposals fall into three distinct compartments: first, the ending of the tax relief on employers' and employees' contributions; secondly, the taxation of lump sum payments; and, thirdly, the taxation of investment income and gains of pension funds. If all three proposals were implemented, pension funds would be devastated and the benefits of their members savagely reduced. It is quite beyond belief that the Chancellor would introduce all these measures in one fell swoop. But the fact is that any single one of them would be damaging to pensions, and would have serious implications for savings.

If it was decided to remove, for example, tax relief on employees' contributions, this would not only amount to double taxation since pensions are already taxed; it would also significantly increase the cost of pension contributions to the employee and make him less willing to make his own provision for retirement. That is specifically what the present Government have been asking him to do; that is Government policy. Yet if it was proposed to tax the employee's contribution, the employee would be discouraged from doing so. For an employee on average earnings of around £9,000 per annum, paying 6 per cent. of salary in pension contributions, the effect of removing tax relief would amount to £162 per annum, roughly £3 per week, a significant amount by any standards, which of course employees would seek to make up by higher wage and salary demands. Again, that would militate against the Government's own policy of limiting wage rises.

Similarly, if employers' contributions ceased to be tax deductible, employers would be very reluctant to promote private pension provision, and some may very well discontinue existing schemes. In any event, where schemes continued employers, already faced with additional costs of indexation of pensions, would have to increase prices of goods and services to meet the added tax burden. This would of course be a damaging blow for the Government's counter-inflation policy. Therefore, on those two issues alone the Government would be working against themselves if they proposed taxes of that sort.

To tax lump sums would be extremely unpopular, since the lump sum probably represents the only opportunity that most people ever have of amassing a significant capital sum. In recent weeks we have had an indication of just how unpopular this would be and how fearful people are of the Chancellor's proposals by the number of premature retirements, often of very experienced and intellectual people. In any event, the Chancellor's assurance that existing employees have nothing to fear means that additional revenue to the Exchequer from this source would in the short term be very small indeed, and would amount to a mere £25 million in 1985–86. But, as has already been mentioned, it would be intolerable if worse treatment were given to lump sum pension payments than to severance payments, which are tax-free up to £25,000. If this was accepted, tax revenue would be even further depressed.

So, lastly, we come to the possible taxation of investment income and gains of pension funds. The general view seems to be that this is the Chancellor's chosen method for taxing pension schemes. According to a report in the Daily Telegraph of 18th February, the Charterhouse Investment Group forecast that income tax will be levied at 13 per cent. or 15 per cent. on the currently tax-free income of pension funds in next month's Budget. That is their forecast. The Institute for Fiscal Studies takes a similar view in its Budget briefing published on Wednesday of last week.

Of course, from the Government's point of view this is the most politically acceptable method of milking pension funds since it will have no immediately discernible impact on either employees or employers. But, in fact, it would be political sleight of hand, for the impact on both employers and employees would be very great indeed and damaging, in that eventually either contributions would have to rise or benefits be reduced. The noble Earl, Lord Buckinghamshire, gave the House detailed figures which show in the starkest terms the enormous damage to pension funds if this method of taxing them were adopted by the Government.

The Opposition's view on these matters has already been made known to the pensions industry by the right honourable Roy Hattersley. He has made it clear that proposals to remove tax advantages to employers and employees would be resisted. Nor is it the Opposition's view that investment income and gains should be taxed, although on lump sum payments we would examine closely any proposal to limit exemption from tax to the first £25,000.

However, basically, the Opposition believes that the Chancellor is playing with fire in proposing any tax changes for pension funds at this stage. The short- and long-term consequences are likely to be serious, not only for individuals and firms but also for the whole economy, especially in relation to investment in industry, which is so important at the present time.

Discussion of such profound issues should not revolve around a shabby little Treasury leak, but be on the basis of a full, expert and informed inquiry where every proposal and every implication can be examined in the light of its impact on our national life and our overall economy. The narrow approach of the Chancellor simply will not do and I trust that, in the light of our debate tonight, which has been an excellent and an informed one, the noble Lord, Lord Brabazon, who is to reply, will—backed up, I hope, by the Leader of the House—tell the Chancellor so in no uncertain terms.

7.40 p.m.

Lord Brabazon of Tara

My Lords, the Government are of course well aware of recent speculation, which I can assure the House did not emanate from Treasury Ministers, that they intend to make changes in the tax treatment of pensions. As I am sure your Lordships appreciate, it is not normally the practice to comment on speculation of this type, and I do not intend to do so now, especially so soon before the Budget which my right honourable friend the Chancellor of the Exchequer will introduce in another place.

However, we are concerned that the recent rumours about the question of pension lump sums may have led some people to consider premature retirement, as the noble Lord, Lord Banks, mentioned. That is why my right honourable friend has given an assurance in another place that there is no reason for anyone to retire early on account of such rumours: he made it clear that there would be no retrospective taxation of pension lump sums. But, my Lords, I cannot go any further than this.

It would be wrong for me or other Ministers to be pressurised, by unconfirmed speculation, into premature announcements about what may or may not be included in a future Budget. I should like to assure your Lordships that the Government are aware of the value that many people place on the existing tax treatment of pension provisions. Before any changes were contemplated, we should naturally give very careful consideration to all the factors involved.

The Government's proposals for personal pensions were set out in a consultative document published in July 1984. Comments were invited by 30th November and my right honourable friend the Secretary of State for Social Services is currently giving careful consideration to the many replies received. The Government believe that personal pensions provided quite independently of the employer will give individual employees a greater flexibility and freedom to invest for their old age in the way they choose. It will give them a real sense of involvement in their own pension savings and remove another barrier to job mobility, We regard measures to encourage job mobility as a vital plank to our programme for economic recovery.

The arrangements for personal pensions are being developed in the light of the many and helpful responses to the consultative document and in the broader context of the social security review. We shall, of course, also be considering the implications for personal pensions of the new system of regulation proposed in the recently published White Paper on United Kingdom Financial Services. We hope to announce any proposals for change on the social security front following the social security review in the next few months. Meanwhile, I trust noble Lords will appreciate that I can do no more than assure them of the Government's firm intention to protect both potential and actual personal pension holders by adequate consumer safeguards.

I must, however, comment on the noble Viscount's reference to people "with no schemes to safeguard them". The Government's intention is for personal pensions to sit alongside existing employers' schemes, not to threaten them. We are concerned that we must help to maintain the vital role of occupational schemes for a great many employees. But we must also take heed of those who for so long have been demanding a greater say in how and where their pension savings should be invested.

Many noble Lords have mentioned the future of the state earnings-related pension scheme, and the noble Lord, Lord Stoddart, most forcefully. I would say that concern about the future cost of the state earnings-related pension scheme was of course one of the reasons why the Secretary of State for Social Services set up the social security review. Obviously the review has been considering those costs and the relationship between state and occupational pension provisions.

However, I am sure that noble Lords will understand that I cannot comment on speculation about pension arrangements which have appeared recently in the press. The Government's conclusions on the whole of social security will be published as soon as possible.

The noble Lord, Lord Graham, mentioned friendly societies. With the withdrawal of tax relief on life assurance, logic would have pointed to complete withdrawal of the tax exemption for friendly societies. But the Government recognise the valuable social role played by friendly societies over the years, and in recognition of this decided last year to fix the limit at the lower level, which we hope will be sufficient to cover funeral and other essential expenditures on death, which I believe was why the friendly societies were originally set up.

I must tell the noble Lord that I am a member of a large motoring organisation which must have many millions of members. I remember well a few years ago that they invited me to become a member of their friendly society with a limit of £2,000. I cannot believe that that is the sort of friendly society to which the noble Lord would refer.

Lord Graham of Edmonton

My Lords, I am grateful to the Minister for being able to comment on the specific point. The Minister is right; the kinds of small friendly society which have made representations to me are those which originated to carry on the function of looking after the burial arrangements of their members. With the reduction from £2,000 to £750 the amount of business that they are able to transact is insufficient for them to be able to run their organisations, which is not merely for the provision of their benefits but for a wide range of community-related benefits, too.

There are more than 2 million members of friendly societies. When the Government take their action can they, besides looking at matters in strict fiscal and taxation terms, also appreciate that there are social considerations as well?

Lord Brabazon of Tara

My Lords, I quite take the noble Lord's point, but I think he would agree that the system was being abused by certain organisations.

Lord Graham of Edmonton

Yes, my Lords, I agree. Where abuse, and real abuse, can be proved I am no party to wanting that abuse to continue, or any evasion. It is the small friendly societies which in my view are being punished severely. They are the ones I am concerned about, and I simply ask the noble Lord and his colleagues to bear their future in mind.

Lord Brabazon of Tara

Certainly, my Lords. It is inevitable at this time of year that there should be considerable speculation about what might, or might not, be in the Budget, and comment from various interested parties on what ought, or ought not, to be in it. It would be wrong for me to comment on any speculation, even if I could. I know no more of the contents of the Budget than does any of your Lordships present.

However, we have had an interesting debate. I have certainly listened carefully, and I shall draw the remarks of noble Lords to the attention of my right honourable friend the Chancellor of the Exchequer.

House adjourned at thirteen minutes before eight o'clock.