Pensions: Future Problems in Europe

HL Deb 20 November 1996 vol 575 cc1262-96

3.10 p.m.

Lord Taverne rose to call attention to the Federal Trust's publication The Pension Time Bomb in Europe; and to move for Papers.

The noble Lord said: My Lords, it may perhaps seem somewhat egocentric that I should draw attention to a publication written by myself. In fact, it had been my intention to discuss the Select Committee report of the other place on pensions in Europe. But as the other place has not yet debated it, I understand that it would be out of order for me to do so. Although the publication to which I draw attention is written by myself, it was the result of a very distinguished international working party and I was merely the rapporteur.

The problem about pensions which most European countries face is very serious. It derives from three factors. The first is a falling birth rate. The birth rates in Italy and Spain have now fallen to something like half the replacement rates. Assuming that there are three generations per century, it would mean that within 200 years in Italy there would be only one baby born for every 64 that are born today. That trend will not continue. Nevertheless, it raises a serious problem while it is there.

The second problem is one of much greater longevity. In this House we are familiar with some of the evidence of longevity, although I add at once that, having previously had experience elsewhere, I am glad to say that greater age does not mean that the debates in this House are any less worth while than those in the much younger other place. But the evidence of the trend is quite dramatic. Just about a year ago a recent article by a Dutch expert in the Financiele Dagblad projected that babies—indeed not just Dutch babies—born in the year 2010 (which is not so far away) could expect to live 115 years.

The third aspect of the problem is that most countries in the European Union base their pensions on the pay-as-you-go system, whereby, as your Lordships know well, existing contributors pay for existing pensioners. Combining that with demographic factors, one finds the uncomfortable situation that an ever shrinking workforce is paying for an ever larger pensioner population. What is more, as people are living so much longer, pensioners will also be very much more expensive. Clearly there is a problem. In the publication to which I have drawn attention, the matter was raised nearly two years ago.

Following the Select Committee report, certain editors suddenly discovered the problem and some alarmists have used it as another stick with which to beat the concept of monetary union. It means, they say, that other countries will incur great debts in the future—they will incur future obligations that they will be unable to meet—and we shall have to bail them out; our pensions will suffer and we shall have to pay extra taxes to pay for their profligacy. To many people, the European monetary union is somewhat remote. But, if one starts to say that it is something which will prejudice our pensions or will mean that we shall all have to pay higher taxes, it could lead to demonstrations in the streets.

There is only one thing wrong with that alarmist view. It is based on an analysis which is wholly fallacious. In the first place, there is no bail-out allowed under the very strict provisions of the Maastricht Treaty. I am very glad that the Prime Minister pointed that out as soon as the Select Committee report appeared. The terms are quite clear: no bail-out under Article 104(b). What is more, the limit on deficit of 3 per cent. and 60 per cent. on debt will continue to apply after monetary union starts.

There seems to be an assumption on the part of some people that the moment that nations have qualified to become members of the monetary union they will immediately relax and profligacy will prevail. I see no reason to suppose that those who are members of the union will not wish to see it work. And in any event, for reinforcement and as a kind of double safeguard, there has been a move towards a stability pact, which I am very glad to say Her Majesty's Government strongly support. The details have not yet been finally settled. Severe penalties have been agreed but whether they should be automatic or applied case by case has not yet been agreed. But that pact is there to ensure that member states of the Union will not incur enormous and unjustified debts. So that is the first fallacy. They assume that there can be a bail-out but there can be no bail-out.

The second fallacy is to treat the hidden debts that flow from pension obligations like the conventional debt within the national accounts. Those hidden debts are theoretical debts and everyone knows that they are debts that will not be paid. Governments consistently break their obligations to pensioners. It is not some continental vice; we do it ourselves. We did so dramatically in 1981 when we changed the basis on which pensions were uprated from being uprated with earnings to uprating in accordance with prices. Personally, I think that that was a wise move, although it should have been followed by other provisions to prevent poverty in old age, because we too face a major problem, although it is a very different problem. We too need dramatic reform but it is reform to ensure that all our population can have decent pensions and that we do not condemn one third of our pensioners to poverty.

But we too break our obligations to pensioners. We did so again in the Pensions Act last year, when again the benefits payable to those who stay in SERPS were decreased. It is happening on the Continent as well. But we too have other hidden liabilities that do not appear in the national accounts. The decommissioning of power stations will impose very considerable obligations on us in the future. We do not know what they are and so they do not appear in the national accounts. We are building up a number of unaccounted for liabilities under the private finance initiative. Others will not have to pay for those debts any more than we shall have to pay for theirs.

The third fallacy is that the alarmists seem blissfully unaware of what is being done in other countries. In Germany, France and Italy there has been a spate of reforms in recent years—several since the Federal Trust's publication was issued—which have increased contributions, lowered benefits and in many cases increased the official retirement age.

Some people reply that there were protests; and of course there were protests. When governments introduce unpopular measures, there are protests. It did not stop reforms being introduced or will not stop other reforms taking place. I hate to suggest that one should advise foreign governments, but it seems to me that they will have to do more and several of the reforms they have already announced will have to be accelerated. But let us not pretend that nothing is being done and that those hidden liabilities are, as it were, fixed in tablets of stone and are unchangeable as the laws of the Medes and the Persians.

The fourth fallacy is that the alarmists completely ignore the very considerable move which is taking place on the Continent towards equity funding. In France there has recently been introduced a Bill which greatly encourages the private provision of pensions and indeed goes so far as to suggest that those private funds must be 60 per cent. invested in equities. That is not a matter of which the committee took any account.

There are the very impressive Italian reforms. I do not know whether the committee ever looked at the Amato reforms or the Dini reforms, which have produced what is likely in the long term to be a very viable mixed system of combined state pensions and private pensions. The Italians have made considerable strides in promoting private pensions and many people expect an explosion of private pension funding in Italy in due course.

In the Netherlands the public servants' pension fund—the ABP—has always been funded; but now it is investing in equities. Previously the total investment allowed into equities and property was only 5 per cent. In the last year since it was privatised it has risen to 30 per cent. Dutch pension funds in general are investing to a much greater extent in equities.

An influential report was published recently by the European Federation for Retirement Provision, which has been well received and is likely to promote the move towards private pensions. That report projects the impact there is likely to be on the provision of private capital in Europe. It assumes that by the year 2020—a questionable assumption but not totally unrealistic—around 25 per cent. of previous earnings will be replaced by privately funded equities operating in partnership with the state funds. It also assumes that the coverage of the second pillar—the occupation pillar—will be 60 per cent. of the working population. That again is not unrealistic because the second pillar in France is 100 per cent. and in the Netherlands about 85 per cent.

On those projections the total pension fund assets would amount to something like 60 per cent. of GDP, which one should note is considerably less than the over 80 per cent. which pension fund assets now constitute as a proportion of GDP in the United Kingdom. If those projections are right, by the year 2020 pension fund assets would amount to something in the nature of 10,000 billion ecus, or double the amount of pension fund assets in the United States at the present time.

We are seeing a move which, though it may be slower than projected, will have a dramatic effect on the liquidity of capital markets in Europe and on the capital available for industry in Europe. It is enormously encouraging for industry in Europe and should be viewed as encouraging and hopeful for Britain because of the exceptional expertise which we have in pension fund management.

If one sums up the situation, what do we find? I shall try to state the position with every attempt at objectivity and moderation. In the words of an eminent Cambridge economics professor, one of the best economists of our time, William Buiter: the alarmists have shown themselves to be politically naïve and economically illiterate. I would add that they have also shown a total, if not wilful, disregard for what is actually happening to pensions in Europe. I beg to move for Papers.

3.23 p.m.

Lord Dean of Harptree

My Lords, I congratulate the noble Lord, Lord Taverne, on his good fortune in the ballot and also on the important and interesting topic that he chose for debate this afternoon. I am sure we are all looking forward to the maiden speech of the noble Baroness, Lady Ramsay of Cartvale. I can assure her that I shall not keep her in suspense for long because I do not intend to make a long speech.

I must declare three interests in British pensions. I am lucky enough to be in receipt of a national insurance pension, a war pension and also a parliamentary pension—a fortunate position in which to be.

I agree with the analysis in the pamphlet referred to by the noble Lord, Lord Taverne, and will now read one sentence from that analysis. It appears on page 1 of the report: without radical changes, maintaining levels of benefits provided by Pay-As-You-Go schemes in line with present expectations will impose a burden on future generations of taxpayers which is likely to prove unacceptable, will worsen the competitiveness of industry and will harm the prospect for employment and for the economy as a whole". That seems to be the problem in a nutshell. But as the noble Lord, Lord Taverne, said, the problem is much greater on the Continent than it is here. Most of their pension schemes are on a pay-as-you-go basis and are therefore unfunded. As the noble Lord also said, changes are afoot in many of the countries in Europe. They have now realised that the burden is rapidly becoming insupportable and have also recognised how extremely unpopular moves to clear the rapid growth in the pensions debt are; the French and the Germans in particular discovered that with the strikes and civil unrest which have taken place. A great deal of determination will be required therefore before that mounting pension debt is dealt with satisfactorily.

I am sorry that the noble Lord, Lord Taverne, did not dwell a little more on that, both in the pamphlet and today, and give a little more credit to the British scheme with regard to the development of funded occupational pension schemes and personal pensions. Thanks to the Government's financial incentives and other encouragement, we in this country now have large and growing pension savings which provide valuable seedcorn for future prosperity. The total value of those pension investments is now no less than £600 billion. That is more than all our EU partners put together. As a consequence of that substantial development, whereas in 1979 43 per cent. of people retiring had an occupational pension, the figure is now 66 per cent. and rising.

As a further consequence of that, since 1979 pensioners' incomes on average rose much more quickly than for the population as a whole. Admittedly, that does not apply to all pensioners, but it applies to a growing proportion of the population. It is a real success story of which our country can be justly proud. Our present position in the European Union can be illustrated in another way. A recent OECD study calculated that, given certain assumptions, the net value of unfunded public pension schemes is 19 per cent. of GDP in the United Kingdom, whereas in France it is 89 per cent., in Italy it is 113 per cent., and in Germany it is 139 per cent. Whether one takes those figures or any other figures that are available, I suggest to noble Lords who favour the social chapter that those figures need serious pondering.

There is no doubt that in most of the countries of our partners in the EU the employers experience much higher costs over and above pay than is the case in this country. Inevitably, those higher costs are bound to be a drag on their economies and they are bound to exaggerate the problems of unemployment. One of the benefits of being able to keep our costs down is that we are a magnet for inward investment because those who are investing realise that our costs over and above pay are substantially less than those of most of our EU partners.

Therefore, the healthier position in this country than for most of our EU partners does not mean that we have nothing to worry about. As my noble friend the Minister will no doubt remind us, the social security budget is now £90 billion a year of which pensions are by far the biggest item. So it is still appropriate that we should ask ourselves whether we can afford it. Are we handing on to the next generation a bill which will be too big a burden for it? To their great credit, the Government have scaled down the rate of increase in the pension bill by introducing economies and by focusing resources more directly on those most in need. These reforms were not popular, but the search for economies must go on. I remind the House in passing that I do not believe that any of these reforms received support from the Opposition parties; they were carried out entirely by the Government.

Finally, I turn to the very interesting report of the Social Security Select Committee of another place. Its report was published on 23rd October of this year and is entitled, Unfunded Pension Liabilities in the European Union. It is a valuable report, as one would expect, because the committee is chaired by that well-respected and experienced MP, Mr. Frank Field.

There have been press reports which have suggested that the Select Committee report stated that the British taxpayer will have to find huge sums of money to bail out European pension debts. The Government have firmly denied that and I hope that my noble friend the Minister will be able to repeat that denial when he comes to wind up. However, as I understand it, the Select Committee report suggested that governments on the Continent, with their big pension liabilities, may be tempted to meet their pension debts by printing money, which could have an effect on inflation and interest rates which in turn could affect the United Kingdom economy. This is a worrying assumption if it is correct. I hope that my noble friend the Minister will be able to clarify the position when he winds up the debate.

3.37 p.m.

Lord Peston

My Lords, may I say how much I am looking forward to the maiden speech of my noble friend Lady Ramsay of Cartvale. I thank the noble Lord, Lord Taverne, for introducing this debate. I promise not to regard it as a precedent: I shall not be demanding that my own works on macro-economic policy be debated in your Lordships' House in the near future.

I agree with much of what is in the tract, but there are areas about which I strongly disagree, as I shall make clear. This is an area which is worthy of debate. Whether one agrees or disagrees, we are a long way from any final decision or interpretation.

I find it odd, in a world in which the gross domestic product, productivity and the expectation of life are all rising—all of which I regard as boons—that people seem to contrive the notion that we have a crisis here and that we are convincing ourselves that somehow we were all better off when we were poorer and not living as long. I regard that as quite absurd. I agree that there are problems, but I do not for one moment accept that they cannot be solved. In so far as we have a crisis it will be one that we create for ourselves. That is the whole of my position, although I shall elaborate on it in due course.

I entirely agree with the noble Lord, Lord Taverne, about EMU. The point about the debt provisions at Maastricht and of EMU mean that we cannot have fiscal and monetary profligacy, but I thought that we were all agreed that we did not want that anyway—in other words, that cannot be a point of controversy and contention. I also agree with the noble Lord that we need a stability pact, which is our method of controlling the position in the short term. However, my view of the proposals being put forward by Herr Waigil are that they are quite unsatisfactory. If I were asked to assess them I would say that he is constructing an instability pact and not one which I hope Her Majesty's Government would sign. I could devise a more suitable formula that would get us out of those problems.

I wish to be at least partly optimistic. Perhaps I may immediately put the Minister on the spot. My advisers tell me that the Government Actuary has made a forecast of the national contribution rate needed to finance state pensions over the next 50 years. He has calculated that it will be exactly the same as it is at the present day, and once the baby boom is over it will fall. Therefore, for those who believe that there is some financing problem here, the Government Actuary says that they are wrong.

Perhaps I may now make a few points which I believe are obvious. They are more a matter of arithmetic than economics. If the ratio of old people to the working population rises and nothing else happens, average incomes must fall. That is purely a question of arithmetic. If those in work demand the same incomes as they would otherwise get, a fortiori the incomes of retired people must fall. Since retired people were overwhelmingly workers once, another way of putting this point is to say that the individual, in maintaining his or her spending while in work, will then be poorer in retirement. Again, that is arithmetic and has nothing to do with policy or anything else. That is true and it is a point that is always missed. I believe that it was missed by the noble Lord, Lord Dean of Harptree. It is true whether one is discussing a pay-as-you-go scheme or a savings scheme in any other form. If the given cake is there to be divided and if some people get what they were expecting to receive and there are more other people, they (the latter) will get less. The real error made—including by some of my honourable friends in another place—is to somehow believe that the scheme can get away from the arithmetic, but it cannot.

Since state pension schemes are at least partly redistributive towards the poor, if we maintain the incomes of those who work then we shall be clearly disadvantaging the most poor people in our society. Again, that is a matter of arithmetic and I am not yet saying anything about economics. Therefore it follows—and I believe that everyone takes this view—that even those who advocate the so-called funded savings scheme still advocate some state subsidy for the poor. The overwhelming point is that if workers insist that they get what they expect notwithstanding, then someone else must pay the price.

Another way of putting this matter much more positively is to note that if the potential population of old people rises then that can be offset by people working longer. Most economists would argue that if we are to live an extra number of years, one might take some of those years as leisure and others in doing extra work. That would be a standard proposition of economics. Alternatively, if one does not want to do that, then somehow we have to raise the productivity of the working population in order to deal with the dependency ratio.

Clearly then, the problem before us has nothing to do with schemes but with factors such as productivity and how long we work. I believe—and some economists would argue—that if labour becomes scarcer then the market system will work to raise productivity. That is another way of putting the matter. We shall economise on a scarce asset and therefore we can be optimistic about that.

There is also the point that whether we have a savings scheme or a minimum state scheme, the level of private savings will rise and that will again be the way in which the system works. Assuming—and this is where those of us who call ourselves Keynesian economists differ from others—that the savings are invested in real assets, then our output will be that much higher. Most of us argue that that cannot be assumed and that we have to make sure that it happens. Either way, if the system is allowed to work—if it can be encouraged to work—there are good grounds for saying that, irrespective of whether we have a save-as-you-go scheme or a pay-as-you-go scheme, the economy will be able to deal with the problem.

In passing, I should say that I agree that this country should raise its propensity to save. If a savings scheme could do that, I would be wholly in favour of it. We have one of the lowest propensities to save in the industrialised world and we need to do something about that.

I am not sure whether I have yet used the expression "full employment", but I have to point out that if we operate a system in which the workers are out of work, we have created two major benefits problems for ourselves. One is that when people are out of work we pay them benefit; the other is that because they are not earning, they cannot save in order not to be a burden when they retire. There are thus two consequences of having a policy of less than full employment. There are social security problems in the short term, generating further social security problems in the long term. One of the reasons that some of us say that full employment is central to all economic policy is that it helps us to solve such problems.

In commenting briefly on the question of savings schemes for pensions, I must remind your Lordships—I am sure that you are no different from me—that we must bear in mind what I call the myopia, even the irrationality, of people when they are young. I confess to such shortsightedness myself. When I started out as an assistant lecturer in economics I resented paying the compulsory contribution for my eventual retirement because it was 40-odd years away. It was hard to live on one's income then, but time goes by and eventually one reaches retirement age. I had one of my last retirement parties this week and I now have a fully funded index-linked retirement pension—

Noble Lords

Hear, hear!

Lord Peston

My Lords, the point that I am making is simply that we cannot rely on individual free choice in the area of pensions provision. There has to be some compulsion—not for the sake of having a nanny state, but simply because one forgets that time goes by. In my view, that also means that because people are myopic and irrational the state cannot duck out of its responsibilities. It cannot simply say that people can be left to fend for themselves.

I do not have the time to develop the other problems of private savings schemes, but with any luck we may return to the matter in the future when I can point out other difficulties. Perhaps I may say now, however, that in my view the solution is that the state should provide a basic pension, as it does now, and that people should be encouraged—in my view they should be more than encouraged; they should be made—to have their own pension scheme as well. In other words, I am saying—I know that this is extremely tedious of me—that taking a balanced approach, which is based not on dogma but on common sense, is the way to make some progress.

I turn finally to the minimum level of the state pension. I remind noble Lords that we must do this in dynamic terms. One must never forget that the old, by definition, were young—but people do forget that. They also forget when they are young that they will grow old. When workers tell me how revolting they find the Conservative Government for breaking the wage link with pensions and opting only for a price link, I ask them, "How did you vote when you were in work? Did you vote for tax cuts and a higher disposable income?" When they say that they did, I say, "Well then, you established the criteria by which your current pension is being determined". That may sound cynical, but it is not meant to. It is a fact that people have to face harsh realities. If you choose to say, "I no longer want a large pension for current pensioners", you are voting for a smaller pension when you become a pensioner.

In my view, those of us who have a position in your Lordships' House or in society in general have a duty 'to tell people that they must choose and that they will get what they have chosen. Therefore, I do not entirely blame noble Lords opposite and their party for the fact that pensions are too low; I blame the people who voted for them—but it was not me.

3.45 p.m.

Lord Marsh

My Lords, I should first declare an interest as somebody who has earned, and does earn, his living largely in the pensions industry both here and in the United States.

We are indebted to the noble Lord, Lord Taverne, for raising this issue. Although it could be a wide issue as it brings into question the whole way in which we approach the welfare state at this time, I was slightly surprised and disappointed that the noble Lord took a somewhat uncharacteristically narrow view.

It is difficult to get across to the Europhiles that people who disagree with them are not Europhobes and that the future of the entire world does not depend on whether we do or do not enter economic and monetary union. There is a massive imbalance between some continental national pensions liabilities and our own, and that raises some serious problems. Our problem is less serious but fundamental changes need to be made. It is worrying that people dismiss pensions liabilities as not being hidden debts which have to be repaid, and say that somehow or other we shall be able to cut pensions in a bookkeeping exercise. Pensions are liabilities, and the fact that they do not attract interest (as would other liabilities on the balance sheet) does not hide the fact that there is an increasing call for their repayment at a higher rate. The pensions liability is a major problem if fundamental changes are not made.

We now come to the narrow point, which is the question: if we are a member of the European Union and if the Union develops as people think it will, will we be called upon to pay part of those other liabilities which are so much larger than our own? At a time when, in order to qualify for membership of the single currency, senior finance ministers in other EU countries are fiddling the books to an extent which would put them in gaol if they were running a public company in any respectable country, and at a time when we are paying for wine lakes and grain mountains and towards the cultivation of highly carcinogenic tobacco in northern Greece at the same time as paying our contribution to the anti-smoking campaign which the European Union has quite properly established, we must face up to the major financial problem of Europe's pensions.

If one believes that any member of the European Union could stand aside and watch such pensions problems develop, it is but a fairly short step to believing in fairies at the bottom of the garden. It beggars belief that that would happen any more than that a serious problem in any part of any national state would be disregarded by the whole. Apart from the fact that I believe that membership of the single currency would be on a par with volunteering for the flood, as somebody who like the noble Lord, Lord Taverne, takes an objective view of the whole argument I must stress that anybody who believes that misses the point.

This is a serious issue which now affects all modern industrialised countries. I agree with much of what the noble Lord, Lord Peston, said although I suspect that I believe that the problem is more serious than he suggested. I do, however, agree that a solution exists. The first big problem is the one to which he has alluded and to which I will return. I refer to the great problem that one experiences if one tries to sell life insurance in the dreaded diseases market. It is very difficult to sell policies to those aged 25 to 30 to protect them from the effects of Alzheimer's disease in old age.

The second problem is bigger. All democratic governments have an inability to plan seriously for the long term. All of them would like to do it; many of them genuinely believe that they do. However, in reality political planning is dominated in the medium term by "News At Ten" and tomorrow morning's newspapers, and in the longer term by the date of the next general election. That is not cynicism but the reality of representative government. Right reverend Prelates and churchmen of all faiths and denominations have an easier job in saying to their flocks that although it is rough now in the distant future it will be all right. As those of us who have stood for election have learned to our cost, the electorate is not like that. It wants it yesterday and it is not really interested in what happens in 10 years' time; and this is all about what will happen in 10 years' time. It is for that reason that I am grateful to the noble Lord, Lord Taverne, for introducing this debate.

Some argue that the problem is exaggerated. It may be that the noble Lord, Lord Taverne, is in that camp. I believe that the political, social and economic consequences of what is, interestingly, called the pensions time bomb are potentially very serious indeed in terms of the sheer scale of it. As the noble Lord, Lord Taverne, has said, there will be a temptation in some quarters to say that there is a way out of it if benefits are cut. No Member of this House believes that for those who have to rely purely on the state and have no other provision for their old age pension benefits are, at their best, anything but grossly inadequate for a pleasant lifestyle. No serious commentator denies the existence of the problem. It is an actuarial certainty. It is not about the boundaries of science but about arithmetic. Nor is it a problem unique to the United Kingdom, and it is certainly not a purely European problem. The same debate is taking place in countries as diverse as Australia, Canada, Japan and the United States.

It is increasingly clear that satisfactory levels of social expenditure, particularly pension provision, cannot be funded on the existing basis. To fiddle about with the universal availability of bus passes for the over 65s—who are frequently able to buy bus companies, if they want to do so—is froth. To try to deal with the fraud that exists in the field of social benefits is an uphill task because they are so complicated. In this country we provide for 7 million people who make no private pension arrangements. At the last count, the figure for a single pension was £61 per week; for a married couple it is £98 per week. Obviously, they get other benefits as well because they have to. However, the result is that even with additional benefits one is paying for a pretty miserable end to a working life.

The brutal fact must be faced that the National Insurance scheme is an underfunded and increasingly expensive shambles. It is inadequate for the people who require pension provision and a waste of public money for those who do not. We need to sit back and take a look at the whole situation, but we do not have time to do that today. Whatever we do, it is becoming increasingly clear that, except for the very poor, people must take responsibility for a large part of the provision for their retirement years, and that can be achieved only by compulsion. The noble Lord, Lord Taverne, deals with this at the end of his pamphlet. It is at that point that I take issue with the noble Lord. I read it in full: This kind of Europe-wide pension scheme could even be a vehicle for compulsory pension contributions if in due course any EU member felt that universalisation was desirable". Unless there is compulsory provision for private pensions the problem can not be solved. A high proportion of people do not make adequate provision. All governments in advanced countries find it increasingly difficult to meet the massive increases in public expenditure that are required to maintain even civilised basic living standards. Unless more people make their own pension arrangements an increasingly large proportion of pensioners will face a miserable retirement of under-provision and already inadequate state benefits.

Surprisingly, compulsory pension provision may not be as unpopular as governments fear. In September of last year a poll conducted by NatWest showed that 55 per cent. of people in work believed that it was up to individuals to make provision for their own retirement. Of two options that they were given—one was increased taxation and the other was compulsory savings—48 per cent. opted for compulsory savings provided that the savings remained clearly their property. Another poll question explained the whole problem very simply and sadly. When retired people were asked when they first began to think seriously about the financial implications of retirement, 45 per cent. replied that it was when they retired. That is too late.

One comes back to the statement of the noble Lord, Lord Peston, about the problem of trying to sell pensions voluntarily to young people. If a young man on an average wage wants to provide a decent pension of two-thirds of his earnings at the time of retirement he will have to contribute about £200 a month from the age of 25 until the age of 65. If he delays it until he is 30, when he is still young, the monthly contribution rises by 120 per cent. to £420 per month for the same level of pension. That is the crucial reason for compulsion to get people into the scheme early enough; otherwise, there is no solution to the problem. The extent of the problem will hit us in the next 10 years or so. It is a much bigger subject than we have time to go into this evening but the solutions—and there are solutions—have to be found now.

4.57 p.m.

Baroness Ramsay of Cartvale

My Lords. I rise with trepidation, having been introduced to this House only eight days ago. I have been encouraged to do so for two reasons. First, I have been received with such warmth and kindness by so many of your Lordships. I am also fortunate in having long-standing friends from Scottish student politics both in the other place and in this House. Lest it be thought that they are all of the same political persuasion, I should say that part of the encouragement of seeing friendly faces from that time comes in this very debate from the presence of the noble Lord, Lord Mackay of Ardbrecknish.

The second reason that I feel moved to speak is that for most of my 20-year career in Her Majesty's Diplomatic Service I was deeply involved in European affairs. I therefore have a particular interest in the subject under discussion. Although I do not share all of the views expressed in the report of the Federal Trust, I congratulate the authors on having produced such an admirably clear and concise statement of the potential problems which face Europe's pension funding systems and for outlining their preferred options for change. The report is commendably user friendly, even when setting out complex and detailed statistics. I am sure that I am not alone among the readers in being duly grateful for that.

It has been clear for some time that there was a potential problem for several European governments in their pension funding arrangements. Most of them—as, for example, in Germany, France and Italy—have been moving to carry out the necessary adjustments. The combination of a growing pensioner group with a decreasing workforce means that a pay-as-you-go scheme can no longer be the complete answer, if indeed it ever was.

I should, however, in passing like to make a point which is increasingly being raised in debates on the subject. The effect of funded pension systems on the whole economy is something to which much more research and consideration should be given because it is still unknown territory.

The Federal Trust report has dealt with 12 member countries of the European Union. I presume that it is because of the timing of the work undertaken by the study group that the three most recent entrants—Austria, Sweden and Finland—do not figure. This is understandable, but it is a pity because these countries in particular have interesting lessons for us.

In the course of my diplomatic career I spent three years in Sweden and five years in Finland, and I have kept in close contact with those two countries ever since. In the whole field of social security there is much that can be learnt from them. In Finland, for example, private sector pensions are operated by private pensions insurance companies, with premiums paid by employers and employees. Employers may regain part of their payment if the income from the insurance company's investments exceeds a certain percentage, which is decided annually by the Ministry of Social Affairs.

The pensions insurance companies are not allowed to offer any services other than pensions insurance. The pensions paid by the insurance companies are financed by approximately one third of the investment income and approximately two thirds of premiums paid. There is also an official body which checks that all employers insure their staff and circulates regular reports to employees on the state of contributions to their individual pensions.

Your Lordships will be relieved to hear that I do not intend to give all the details of the Finnish pension system, but it is surely of interest that the Finns do not feel threatened by some future time bomb. They are adjusting their system by negotiating about raising the pension age to 65 and allowing pension insurance companies to undertake higher risk investments. But, in the main, they seem to feel that their system of private pensions insurance companies, closely regulated by the Ministry of Social Affairs, will adequately serve their needs.

What has been depressing in the past few weeks is the way that pension funding in Europe has occasioned so many alarmist stories about the British taxpayer having to pay the bills for the inadequacies of pension funding systems in other countries. I am trying hard to avoid at all costs being contentious. I sincerely hope that I am not being so if I say that, in my opinion, based on my knowledge of what is laid down governing this matter, it is inconceivable that this could happen. Article 104b of the Maastricht Treaty, for example, states that member states will not be liable for each other's liabilities under EMU. I cannot help feeling that to the long list of Euro-myths with which we are all wearily familiar—such as straight bananas, square strawberries and hairnets for fishermen—we can now add an item about British taxpayers having to pay foreign pensioners.

What is particularly regrettable about this story is that it worries and dismays vulnerable, elderly pensioners who are concerned about the future of their pensions. It gives me no pleasure to have to say that I sometimes despair of any important European issue ever being publicly discussed in this country in a calm, rational and intelligent manner. It is because of this that, although not agreeing with all its contents, I welcome the Federal Trust report as a useful contribution to the debate on how best to deal with an important and serious issue which is facing all the countries of Europe, including our own, and about which we can surely learn from one another.

4.5 p.m.

Baroness Seccombe

My Lords, it is indeed a pleasure and a privilege to congratulate the noble Baroness, Lady Ramsay of Cartvale, on that memorable, thoughtful and powerful speech. She told us that she had been at Glasgow University and she also mentioned her colleagues. It may be that, as president of the students' union whilst there, she indulged in political debate. Following that she went for a distinguished career in the diplomatic service and from 1992 became the foreign policy adviser to the right honourable John Smith MP. So she brings with her a wealth of experience. I am sure that I can say on behalf of the whole House how much we look forward to hearing her frequently and soon.

Noble Lords

Hear, hear!

Baroness Seccombe

My Lords, I too add my congratulations to the noble Lord, Lord Taverne, for bringing this matter before us today. This debate on the pension timebomb in Europe is both emotive and very timely. It underlines the vital importance of the United Kingdom being involved in the detailed discussion on the criteria for the implementation of a single currency. Whether one believes in this country going in as early as possible or, at the other end of the spectrum, refusing to sign up at any stage, there are bound to be ramifications for the United Kingdom in the pensions field.

I would like to declare an interest as I am chairman of the Trustees of Nuffield Hospitals Pension Scheme. I hasten to say that it is not a financial interest in any way. Indeed, I am the only trustee who is not a member or a beneficiary of the scheme. In fact my only pension is the one I receive as the wife of my husband. We have a comparatively young fund and are placed around the middle of the list of funds in size. Our scheme is based on final salary. Both men and women retire at 65 with widows and widowers eligible for pension.

I know that my noble friend Lord Dean of Harptree has mentioned this, but the one thing that we must never forget—and I stress it by repetition—is the fact that there are more people covered by pension schemes in this country than the rest of Europe put together, with £600 billion invested. Over 10 million people are in company pension schemes; in excess of 5 million have contracted-out personal pension schemes and, in addition, approximately half a million have other personal pension schemes. I have taken this information from official figures from Government in 1992. I would suspect there may be even more by now.

Each year there are fewer people who receive only the state pension. Amongst existing pensioners about three-quarters have extra income from investments and two-thirds of pensioners receive an occupational pension in addition to the state pension.

As we have heard, many other countries pursue a pay-as-you-go policy but demographic changes, with an ageing population, a smaller workforce and higher rates of unemployment being experienced by our European partners, must be of great concern to them. But the problem is also of great concern to us. The single market development must not be allowed to put our forward planning and financial prudence in jeopardy.

I feel that the Government grasped the mettle and gave the vital lead with financial and other incentives to which the employers and employees have responded. The majority of schemes in this country are contributory with the balance of costs being paid by the employer. It is far easier for a large employer to take on the very sizeable contribution required, but I have been very heartened by the number of small employers who have made pension arrangements for their employees—both those in part time work as well as full time work. They have shown concern and respect and have acted in a most responsible way for their workforce in retirement.

The Government have at the same time maintained the value of the state pension by increasing it each year in line with prices. I believe in addition that no one has to live on the basic pension as targeted income of £1.2 billion per annum is given to those who need it to top up their incomes.

The standard of living has also increased for pensioners over the past 18 years with many more having cars, freezers, washing machines and, of course, practically all having fridges and telephones. One of the most dramatic changes is the rise in the number having central heating—78 per cent. now compared with 46 per cent. in 1979. That is such good news. I always remember my mother saying she would rather be warm and hungry than the other way round. Warmth during winter is essential to keep old people healthy and I hope the increase will continue. Perhaps the most fascinating statistic is that 44 per cent. of all pensioners have a video. I only hope they can get theirs to work—I always have difficulty.

Providing for the total of the social security budget is now costing every working person £15 each working day and is about one-third of all public expenditure. It is, therefore, vital that the costs do not spiral. Among the measures being taken personal responsibility is being encouraged, benefit fraud is being rooted out and punished and saving is also being encouraged.

Our partners in Europe have a much more difficult problem. The honourable Member of another place Frank Field said in his report: They can't cut pensions because people will go out on the streets and riot. If they issue bonds interest rates go up and if they print money it causes inflation". The report goes on to say that attempts so far by countries such as France and Germany to reduce their public debt by cutting social security benefits had met with "fierce political industrial counter-action".

Perhaps the very best action to help pensioners maintain their standard of living is the control of inflation. In the late 1970s we all knew people who retired on fixed incomes, confident that they would be able to enjoy a comfortable lifestyle. But no one can withstand the onslaught of 27 per cent. inflation. It was immensely saddening to see people unable to do what they had planned. In many cases they were only able to live out their lives in misery and penury. It was that experience which motivated my right honourable friend the Prime Minister to take measures to eradicate inflation from the system.

We all want our citizens to be able to have a dignified, decent, and happy retirement; to live their life to the full and not to have to worry about future financial insecurity. The Government are determined to try to deliver those aspirations.

I fear New Labour's plans for a flexible decade of retirement will end in disaster. It is splendid in theory, but who would pay for it? The public purse could not and should not be expected to fund the extra £15 billion per annum that it would eventually cost. The alternative would be a reduction of £20 per week from the basic pension—not exactly an exciting prospect for those approaching retirement. I was most interested to peruse the report by the Federal Trust and to note that the rapporteur was the noble Lord, Lord Taverne.

I agree wholeheartedly with the view that the field of pensions in the European Union is difficult and in need of urgent consideration. I am, however, concerned that I could not find any reference to the fact that it was the UK which took the necessary action with policies and reforms that will benefit our economy well into the next century. The national debt will consequently be reduced. In Germany and France, where reforms are being attempted, the national debt could double as a result of their pension commitments. People in this country who have made provision should not be made to pay for our partners in Europe.

I was delighted to hear my right honourable friend the Chief Secretary to the Treasury say in another place that there was "no question" of Britain taking on other countries' pension costs. Other countries, will find themselves … either having to cut pension entitlements, as some of them are trying to do now and causing trouble in the streets, or they will have to put up taxes". The Government should be congratulated on anticipating the problem. I hope your Lordships, particularly the noble Lord, Lord Taverne, will agree with me.

4.16 p.m.

Lord Bruce of Donington

My Lords, I should like, first, to join in the congratulations that have been offered to my noble friend Lady Ramsay of Cartvale. On the basis of what she said this afternoon, it seems that we may argue from time to time on a number of matters upon which our views may differ. Nonetheless, I welcome her because the House of Lords remains one of the places where argument is still possible, as distinct from the caterwauling which often happens not very far from here.

I am puzzled about the origins of this debate. I gather from now on, as my noble friend Lord Peston indicated, we can now have Motions drawing attention to works that may have come from our own pens. Perhaps I should give notice that I shall ask the Leader of the House to draw attention to a paper on the Common Market that I wrote nearly 33 years ago, the contents of which I am afraid, in the light of events, are indisputably correct, but that is for another occasion.

I listened with great interest to the noble Lord, Lord Taverne. In expressing his anxieties, he drew attention to the tendency for private pension arrangements to show increasing growth, which might in due course enable us to solve the problems that he raised. That is interesting. I have no means of disputing his predictions—they are predictions—but whether they will spread over the entire European spectrum is another matter upon which he did not venture to offer an opinion.

However, the proceedings of the other place are a little puzzling—notably the Social Security Select Committee, which culminated in the publication of a report (No. 23), which has attracted some public attention. I went through the report, and noted in particular the composition of the committee. I do not wish, obviously, to pass any comment—adverse or otherwise—on procedures adopted in another place; but I am bound to note that throughout the existence of that committee devoted to the production of that report, not one member of the Liberal Democrat Party in another place was on the committee. I find that surprising, particularly in the light of the contribution that we have heard today.

On reading the report, I found that there were four Members of my own party in another place and seven Members of the party opposite. However, I did not see a prominent Euro-sceptic among those who comprised the committee. They all seemed to be open-minded—I might almost say Europhile—and there was no one whom I would recognise as being an out-and-out sceptic. Yet they appear to have arrived at some unanimity.

Moreover, the membership of the committee contains a number of highly qualified people, including economists like my noble friend Lord Peston—although perhaps not in the same high bracket as he occupies.

There was a chartered accountant, who must always be listened to in matters of mathematics, and a number of other distinguished people of varying opinions. They produced a report and, to say the least, it is uncharitable to rubbish it in advance of its discussion. The report made some very important observations, including the observation that the pension arrangements abroad and the arrangements for refunding might have some adverse consequences on the United Kingdom; that is on the assumption that the United Kingdom joins the single currency arrangements.

The fact that that should have come from a committee headed by my honourable friend in another place, Mr. Field, makes it immediately worthy of attention. The report states: As the UK's outstanding public pension liabilities are substantially below those of other EU members, there would be a risk that if the United Kingdom joined a single currency British taxpayers could be called upon to help finance the pay-as-you-go pension obligations of other EMU members, or suffer the consequences of being tied to interest rates on the single currency that were forced up by the market pressures of financing certain countries' inherited pension commitments". I do not believe that such an observation should give offence to anyone. I believe that if the risk is correctly apprehended by people who have studied the subject for three or four years—that is the period during which the committee has been dealing with it—the observation merits something other than derision.

In citing the International Monetary Fund's six-monthly report, the report points out that: 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". Surely, such observations from the IMF should be given some attention. They are not frivolous observations—and I have often been accused of making those by reason of my well known views on the subject. The observations are from a cross-party committee in another place quoting a perfectly reputable body and I believe that, to put it at its mildest, there is a case to answer.

I know that my noble friend Lord Peston believes that it is ultimately a question of arithmetic and that ultimately it will solve itself. That is a most comforting observation, but perhaps not as comforting as it might be bearing in mind that he referred to the "brutal" facts. My experience of people who give voice to brutal facts is that they have rarely suffered personally from any brutality or, at any rate, from some of the ignominy, despair and hopelessness that is endured daily by at least 2 million of our population in the United Kingdom. They are the people with whom we must ultimately be concerned.

The OECD study on the impact of demography on the levels of saving and government spending on pensions, health and education commented: It is clear that if present [public] pension payments are left untouched, the pension schemes in some countries would impose major burdens on their societies in the next century, either through requiring higher taxation or other spending cuts, or by rapidly increasing public debt burdens resulting from high primary deficits". Figures have already been given which show that in funding the United Kingdom has done better than the rest.

The committee had the opportunity of visiting the European Commission in Brussels, notably DG2 and DG10, and made some observations. A note on its visit states: The European Commission document considered at Verona had recognised that national sovereignty over tax matters would continue, at least for the moment". I give some emphasis to that comment because it was always said that the taxation arrangements would remain undisturbed.

The issue must be faced. Let us say, for example, that the efforts towards voluntary pension arrangements—particularly as they affect the poorer sections of the Community, many of whom have not yet had the opportunity of obtaining employment—have a partial success. That still leaves some unfunded debts. I know that contingent liabilities have no meaning for economists: because they are contingent, they are unascertainable and therefore they are not by reference to any particular mathematical formula. But they are important. With the provisions of the Maastricht Treaty as they are—in particular Article 104C—every sentence, bar sentence 14, being applicable to the UK whether it opts in or out, it is quite clear that the proposed new mechanism in the stability pact may well involve the UK's bankers, who will of course be the Community's bankers (the ECB). They may have to act in a way which helps other member states to finance their own deficits in this respect. If that happens, we cannot escape our own financial responsibility here. And our own financial responsibility will be determined by our bankers, who are not elected but who will be our bankers and in possession of our foreign exchange reserves once the single currency comes into operation.

Therefore, I believe that the Select Committee's report deserves far wider examination, and far more dispassionate examination at that, before we can dismiss it as another Euro-sceptic stunt. I am not interested in stunts; I am interested in arriving at the truth, and sooner or later the truth must be ascertained.

4.30 p.m.

The Earl of Clanwilliam

My Lords, the debate of the noble Lord, Lord Taverne, is extremely apposite, but I must take issue with him slightly at the start because I believe that his paper begs the question as regards whether we should even join the EMU at all. At the same time, he continues to believe that there is a huge time bomb, as he so aptly describes it. It is indeed a huge time bomb. I am less sanguine than he is as regards the ease with which we shall be able to cope with that time bomb. The cost to our colleagues in Europe will be significant as it will be to a lesser extent to ourselves and to the Dutch.

My noble friend Lord Dean of Harptree expounded very clearly on the strength of the position which we have in the United Kingdom from which we can start planning further investment provision for the future. Therefore, I need not dwell on that at length. But in my view it is evident that convergence decisions which do not account for discernible debts which can be calculated in terms of tens of billions of pounds in the future—that is, within 10 or 15 years—amount to nothing less than creative accounting and will be the final nail in the coffin of EMU, if indeed it ever happens.

Therefore, the question is raised whether we should take part in such a deception. If the funds are to be found by the French and the Germans from their own pockets—and the paper clearly details the costs that they will incur—and if they are to make sufficient provision for their pensioners in the future, they will have to raise taxes. That will damage their economy. If we are in there with them, we shall have to raise our interest rates and increase the unemployment factor throughout EMU.

The noble Lord, Lord Taverne, has already mentioned what steps are being taken in that respect and how increased contributions are being imposed and pension dates are being delayed. Benefits are being reduced. But all that will result in lower employment—and not only that, it may cause serious political unrest throughout Europe. That must be quite self-evident.

The problem is perhaps not so much what the European Central Bank will do, as I suspect that it will be as hard on the finance ministers as it should be; the problem is what the Commission will do. If we are not careful, it will find ways to weevil through legislation which will provide that we should all be taxed together to show our communautaire spirit in the cause of health and safety at work. However, I take heart from the words of the noble Baroness, Lady Ramsay of Cartvale, who made a very wise and comforting maiden speech. She seems to be quite happy about the future but I have some suspicions. That is why it is so important to stop the Commission and its politically motivated Court in its tracks at the present time and to ensure that the elected Parliament in our unique parliamentary democracy must have the final say in the imposition of taxes and control over our way of life in this country.

The noble Lord's report demonstrates clearly that the Commission, having failed to interfere through a new directive, is now beavering away to bring to bear influence through the capital liberalisation directive. I have not read that directive, but it would appear that it may bring great benefits to City investment houses and institutions. I do not know whether the noble Lord, Lord Barnett, will have a few words to say on that. I am very much open to be convinced on that point.

The pension time bomb lives in our own economy in a very real way, and the pungent paper prepared by Mr. Frank Field, who was of course a contributor to the noble Lord's report and who was chairman of the Select Committee in the other place, is a remarkable example of the need for additional compulsory provision. It has been said that such provision will be seen as a tax. Indeed, in a sense it will be but it will be no more than the present national insurance contributions which source current old-age pensions. The funds so accumulated will be actual savings that each individual tax-paying employee or self-employed individual can account for and be able regularly to value the fund in preparation for retirement.

There is a need for all employees to start making provision as soon as they start employment. The noble Lord, Lord Peston, said that the Government Actuary suggests that we can proceed at the existing rate. I believe that he is referring to the Government Actuary's suggestion in Mr. Field's report that pension payments would start at the age of 18. The noble Lord, Lord Marsh, mentioned that there would need to be provision of £200 per month at the age of 25 and £400 per month if one started at the age of 30. That demonstrates quite clearly the vital need for compulsory pension contributions to start at the earliest possible opportunity: as soon as any single individual starts paying national insurance contributions. Indeed, I am on record making that proposal in previous debates on pensions while I have been a Member of your Lordships' House. If that is done, there will be a good chance that we shall be able to leap the hurdle of the noble Lord's time bomb, and we shall fall at that hurdle, without doubt, if we fail to do so.

There is some talk of a stability pact which it is hoped will prevent unassociated European countries from putting a spanner in the works; for example, by taking advantage of exchange rate variations. Just such a pact may involve us in bailing out our less provident colleagues. I am all for a stability pact which will deliver stability so long as it does not destabilise established relationships in our country. We must be on our guard and I have confidence in the Prime Minister's assurance that we shall not be caught in any such trap.

4.37 p.m.

Lord Barnett

My Lords, I begin by congratulating my noble friend Lady Ramsay who made a quite remarkable and excellent maiden speech. In the other place we have always said that we shall look forward to hearing the maiden speaker often in the future. I say it and mean it. We very much look forward to hearing from my noble friend. She showed a quite remarkable knowledge and we look forward to hearing from her on many occasions in the future.

Like many others in this debate, I begin by declaring an interest in the sense that I have an MP's pension, a ministerial pension; but, much larger than that, to indicate the benefits of the tax system, I have a very large pension fund which I have not yet drawn on. It is a marvellous system. For every £1,000 one pays in, it costs only £600 but it grows from the £1,000. It is a marvellous system, as I am sure the noble Lord, Lord Marsh, will be aware. Therefore, I declare that interest.

Perhaps I may revert to the subject of the debate and the title of the report. I welcome the fact that the noble Lord, Lord Taverne, has had the opportunity to introduce this debate. I know that my noble friend Lord Bruce of Donington takes a keen interest whenever Europe is mentioned. I have constant disagreements with him on that subject, although I am very fond of him. Moreover, he generally takes great care in quotes that he makes, although on this occasion he quoted Article 104c, but not the more important one, which is Article 104b. In relation to that, the Chancellor, in answering a question on 6th November, made it quite clear, quoting the no bail-out clause of the Maastricht Treaty—as did the noble Lord, Lord Taverne—that a member state cannot be liable for another member state's commitments in any area of spending.

Unlike the noble Lord, Lord Marsh, my noble friend is not a cynic. The noble Lord, Lord Marsh, told us that he is not a cynic. I am bound to say to him that if he is not a cynic, he would not be sitting on the Cross-Benches. He would be sitting where he normally should be—on the opposite Benches. However, I do not wish to be difficult with him. He chose another reason why there will have to be a bail-out. He said that there are fiddles in Europe by member states trying to get within the 3 per cent. of GDP. Of course that is true. I never indulged in creative accounting during the whole of the five years when I was Chief Secretary to the Treasury. Neither did I indulge in fiddles or fudges. The noble Lord said that in his view, because of all that, there would inevitably be occasions when we would have to bail out those member states. That was the implication of what he was saying.

That was unlike my noble friend Lord Bruce of Donington, who said he did not believe in stunts. I agree with him. He does not believe in stunts; he is just a strong Euro-sceptic all the time. When the word "Europe" is mentioned, he is immediately sceptical, whatever the subject that is being discussed. The noble Lord, Lord Marsh, in his uncynical way, must concede that if those countries can fiddle their accounts in the way he suggested—and that might happen in the future—there would then have to be new European Union legislation going beyond the Maastricht Treaty to allow those bail outs to occur. The noble Lord is nodding in agreement. I shall leave that point because the plain fact is that at the moment there is no possibility of member states, including the UK—whether or not we are in economic and monetary union—having to bail out other countries' debts, whether those have arisen because of pensions funds or anything else.

I now turn to the report itself. There is a strong foreword by Sir Brian Corby. I agree with much of what he stated about future costs. However, on that point, I do not agree with my noble friend Lord Peston. Of course the future costs constitute the real time bomb. There may not be a crisis as of this moment. My noble friend Lord Peston referred to Government actuary figures which claim we can manage for another 50 years. We can manage, but on inadequate pensions. That is how we shall manage. It is quite wrong to imagine that we shall be able to manage in that way for 50 years, or for anything remotely like that length of time. I am glad to see my noble friend nodding in agreement.

I agree with Sir Brian Corby when he says we must not saddle our children and grandchildren with burdens that they would find difficult to deliver. That is absolutely right. However, I disagree with him when he states that the generation approaching retirement will be wealthier than its predecessors. That is right. But he further states that that generation will be better able to provide for its own retirement needs. That depends how one defines the word "approaching". If one has only a few years before retirement but one has not taken out adequate insurance or a pension scheme, one will not be able to manage. I certainly do not accept that for all those approaching retirement things will be easier. They will certainly not be easier for all those who are approaching retirement now. We shall need to look after them.

I agree strongly with chapter 3 of this report which has the excellent heading "No Easy Solutions". Certainly there are no easy solutions to this serious problem. It has been said in this debate that there is a possibility of raising the retirement age, which could be justified by fiscal means and the fact that people are living longer. We in your Lordships' House can certainly say, "Thank God for that". However, we had better accept that no government in the foreseeable future will raise the retirement age or reduce benefit with the ensuing consequences for pensioners. I do not believe that will happen. I say that without being a cynic, if I may say so to the noble Lord, Lord Marsh. I do not believe that any government, whether Labour, Conservative, or even in the remote possibility of our having a Liberal government, would do such a thing.

I now turn to chapter 7 which concerns the transition to private funding. The alternatives set out in this report in chapter 5 as regards book reserve schemes are worth noting. As regards book reserve schemes, Germany and other countries have introduced that scheme and have thereby helped their pensioners considerably. It is worth noting, incidentally, that those schemes apply generally to large companies but not to small companies. Privately funded pension schemes are referred to in chapter 6. It has already been said in this debate that we shall have to move to privately funded schemes, even if that will help the insurance companies, in respect of which the noble Lord, Lord Marsh, declared an interest. We shall have to adopt privately funded schemes. However, the question that arises is whether they would need to be compulsory or voluntary.

My noble friend Lord Peston spoke of the time when he was a young worker, if one can call an assistant lecturer a worker! However, I am sure he worked hard and that his students could vouch for that. There is no way young working people will be willing to save enough money for their eventual retirement, not just because they do not think they will retire one day, but because they need the money from their wages now. They will not save enough; there is no question about that. We shall have to grasp the nettle that there will need to be compulsory privately funded schemes. I do not see how we can avoid recognising that fact. I certainly recognise that need and support them. I now turn to chapter 7 which concerns the transition to private funding. The report states that this will inevitably be gradual. It will certainly have to be gradual if we are to try to persuade young, middle aged and older people to take out privately funded schemes on anything like the required scale. That will not happen unless it is made compulsory.

I like the report because it is honest, and all of us must be honest about this subject. The report is sensible, but we have to accept that there is no immediate answer to the problem. There will not be a solution in the next few years for those who, in the words of Sir Brian Corby, are "approaching" retirement. I am sorry to upset my noble friend Lord Bruce of Donington by mentioning the word "Europe" again. However, a Europe-wide scheme which would allow for mobility of labour, and all the things that are referred to in the annex, would be helpful, especially if the privately funded schemes had the kind of tax relief that I was able to take advantage of.

A Europe-wide scheme would be helpful and could be achieved either by using a privately funded scheme, and/or a book reserve scheme. However, as I say, we are bound to recognise that it would not help those who are approaching retirement now. We have to do something to help them. The state had better recognise that it will have to help them. The money will have to be found out of taxation. We shall not get it from any other member state in the European Union, just as they cannot get it from us. We shall have to finance people now before we reach the stage when people entering retirement have adequate privately funded pension schemes. We must not pretend that the situation will be anything other than the way I have described it.

4.50 p.m.

Lord Desai

My Lords, we have had a good debate on the publication, The Pension Time Bomb in Europe, and an interesting maiden speech by my noble friend Lady Ramsay of Cartvale. Most of what I had intended to say has already been said—luckily for me. Therefore, I speak from a slightly different angle.

We are talking about distribution. My noble friend Lord Peston took an economist's view, an economy-wide view: that at any point in time pensioners can only have what earners will not consume. In considering funded or unfunded pension schemes we take a micro-economic view. A funded pension scheme at a given point in time can be relatively independent of the economy's performance. It can do somewhat better than the economy. But all pension schemes cannot do better than the economy. The problem is not as regards the individual myopia that my noble friend Lord Peston and others have mentioned. I believe that there is a collective myopia. In western Europe when we had the best years of growth, the elderly population was small in number. It was easy to give generous pension entitlements because at that time the outgoings were small and with a large population of working age there was large growth. It seemed to be the Utopia that we all wanted.

However, in the past 15 years growth in western Europe has slowed down, and I do not envisage the average GDP in Europe accelerating very much. To some extent we may benefit from the East Asian miracle, emerging economies and so on; but the more one invests outside the country, the less one invests at home, and there will be problems.

We are facing a crucial issue. The GDP is not growing as fast as in the 1950s or 1960s. We have a larger elderly population. Who will lose out? As my noble friend Lord Barnett and others have said, to a certain extent there is a severe distribution problem. Within that distribution problem, as occurs with some privately funded schemes, some people will do slightly better than others. I am more worried about those people not covered by privately funded schemes. Those, like myself, who are covered by privately funded schemes will be all right. Yes, we shall suffer; we shall not have as much as we had thought, but we shall not be on the streets. The real problem relates to those who have to rely, by and large, on state pensions. Even if they have a private scheme, their lifetime incomes will not be high enough for them to afford large savings for a pension at the end of the rainbow.

I am also worried that nothing in the report takes care of problems relating to women, who often do not work or who work for an insufficient period of time, or who are left widowed. Pension scheme rules are not always honest. I am not as much an enemy of capitalism as I used to be, but I am no great friend of it, because people make profits by not giving as much as they should. We have witnessed the scandal of private pensions. Even after the scandal, there are still no payments. I have heard cynical remarks by members of insurance companies who say that their actuaries have told them that the longer they wait, the less they will have to pay out because the claimants will be dead. The claimant's estate may be able to make a claim—with violins playing in the background. But basically some people are being robbed and they are not being compensated. However, I leave that aside; it is perhaps contentious.

Increasingly there will be those in the population who will not build up sufficient savings over a lifetime of work to finance a pension. That may apply to 30 or 40 per cent. of the workforce. Technology is changing. We know that there will not be the work perspective to which the noble Lord, Lord Marsh, referred—of starting work at 20 and working for 45 years. Jobs will not be like that. Although there will be mobility of pensions, we shall not be able to compensate for the fact that there will not be work for quite a lot of people. What does one do about those people? That will be the real time bomb as regards pensions.

What my noble friend Lord Barnett said is crucial. Governments will have to stop pretending that the problem does not exist and ask whether society, through taxation, wants to pay a decent pension to people who would otherwise be left in poverty. We do not need detailed research into poverty statistics. We know that that will include the elderly, single mothers and the unemployed. The numbers in those three categories will not decrease; if anything, they will increase, notwithstanding the palaver about family values. We have not tackled that large problem.

Although it will affect a smaller part of the population, the problem will be greater. In the rush for private pensions, those who take out such pensions will be reluctant to pay through taxation for the state pension. That is what we have found. After all, we have reneged on a promise made to pensioners rightly or wrongly. When the rules were changed from average earnings to index linking, we reneged. Breaking such promises will occur again in the future unless we inculcate the culture that people must have an entitlement to a minimum standard of living, especially in their old age. Excellent though the report is, it does not tackle that problem.

As my noble friend Lady Ramsay pointed out, the report deals with only 12 of the European Union countries. What worries me is this. We know that when the expansion towards eastern Europe takes place, the problem will be more serious in terms of budgetary burdens on the European Union of transfer payments and other matters. If one takes a longer term perspective, the problem of adequate pensions for elderly people will be more serious. Excellent though privately funded schemes are—I am sure that there will be more of them—they do not tackle the problem which will cause serious social deprivation in Europe. Until we face up to that, we shall not have taken care of the pension problem.

4.58 p.m.

Lord Ezra

My Lords, the fact that we have had an informed and at times lively debate on this vital issue justifies the action taken by my noble friend Lord Taverne in raising it today. The noble Lord, Lord Bruce of Donington, seemed to criticise my noble friend for phrasing the subject of the debate by reference to a report in which he was involved. However, my noble friend explained carefully why he had done so. He would have preferred to have debated the report of the Select Committee in another place but he was advised that that could not be done because it had not yet been debated there. Therefore, he did the next best thing, and I believe that he was quite justified in the action he took.

How refreshing it was to hear the maiden speech of the noble Baroness, Lady Ramsay of Cartvale. I was particularly impressed—I hope we all took it to heart—with her concluding remarks. She said that it was about time we tackled some of the European issues in an objective and informed manner. I believe that we should address the subject of the so-called pension time bomb in that manner.

In the course of the debate today there has been a certain amount of common ground, as there often is in the debates in this House. The common ground has been, first, that undoubtedly there is a problem. Indeed, that was made clear not only in the report with which my noble friend is associated but also in the report of the Select Committee of another place and in the report from the European pension organisation to which my noble friend referred.

The reasons for the problem have been clearly stated. One is increased longevity. As the noble Lord, Lord Peston, said, we should be the last to complain about that. It is a great social asset that people are living longer. We must aim to make their longer lives happier and more secure. Falling birthrates may or may not be regarded as a good thing. Widespread unemployment is certainly undesirable and must be overcome. Early retirement is quite contrary to what should he happening given our longer lifespan. Recently, we have seen lower economic growth generally; and there is budgetary stringency. All those factors have contributed to the problem. The question is how it should be dealt with.

There are many aspects to the problem. For example, the noble Lord, Lord Desai, said that the issue will be made even more difficult when the central and eastern European countries become members of the enlarged Community. All those aspects have to be considered.

As I found when reading material in preparation for this debate, not only in this country but elsewhere, too, the problems are being taken very seriously. One aspect of the debate on the single currency is often missed; namely, it has concentrated minds on the proper running of the financial and economic affairs of each country. I cannot think of a time, during our lifetime or before, when it could positively be stated that 15 countries in western Europe and a number of other countries aiming to join the Union were so undividedly concentrating their attention on getting their budgetary systems and government expenditure right, dealing with the problems of unemployment and so on. We are living in a unique situation of transparency and recognition of the problems that we face. Surely that is a positive aspect to the debate, whatever we may feel about joining or not joining a single currency.

The same is true in relation to pensions. We may say that they present a major problem and ask how it will be dealt with. But at least it is being looked into and dealt with seriously in the parliaments of a number of member countries. My noble friend referred to action being taken in Italy. The measures are creating trouble and difficulty, and sometimes there are riots in the streets. But governments in Italy, France, Germany and other countries are seizing the problems and trying to deal with them. These are positive developments indeed.

In this context, as a number of noble Lords pointed out, the UK is more fortunately placed. We have a much better balanced pension arrangement as between funded and unfunded schemes. The European Commission introduced a pension fund directive, referred to in my noble friend's report, in which it tried to encourage more funded schemes and open up investment by those schemes in a wider range of countries than the member country concerned. Unfortunately, the proposal was objected to and therefore did not come about. I hope that soon a further initiative will be taken in that respect.

The question of moving into a higher proportion of funded schemes is being seriously considered at the present time. It is right, as pointed out by the noble Lords, Lord Peston, Lord Marsh and Lord Barnett, that we should have a clear combination of the state scheme—the noble Lord, Lord Desai, emphasised the importance of that—and a funded scheme; and that a degree of compulsion should be introduced into the funded element. That is an important point which emerged from the discussions we had. It is another area where I believe there was, if I dare use the word, a "convergence" of opinion emerging. Perhaps the noble Lord, Lord Mackay of Ardbrecknish, in replying, will take up these points.

What is so interesting is that the consideration on the Continent of the introduction of more funded schemes raises the question of equity markets. On the whole, we in Britain, the United States and some other countries have had a very much more highly developed equity market than have the continental countries. Generally, people on the Continent have been worried about how they invested their money and have gone for bonds, saving schemes and so on, in which they have been much encouraged by various tax incentives. Now, however, they are beginning to realise that they need to move more and more in the direction of equity investment which is related to privately funded schemes.

The recent issue of Deutsche Telekom in Germany represented an historic departure in the attitude of the German investing public, in that it was over-subscribed several times. More and more privatisation issues are likely to arise in Germany and elsewhere which will awaken interest in equity funding. If the funded schemes to which we refer can get off the ground and the range of equity funding can be widened, substantial amounts of capital could be released for investment in European business activities, manufacturing and other productive engagements. So we can see coming out of this development something that is very positive. It is a serious problem; however, it has another side to it which could be positive.

That leads me to consideration of the role that the UK should be playing. Frankly, I was a little dismayed to read the views expressed in the report of the Select Committee of another place. The committee seemed to think that the only impact on the UK could be that we should be asked to finance the pension deficits of other countries. In my opinion that proposition is totally ludicrous. We could not even begin to do that, as was pointed out by some of our friends on the Continent.

I believe that the role of the UK should be to try to help our continental friends to move in the direction in which we have moved: to enable them to achieve a better balance between funded and unfunded schemes, and to explain to them how the equity market works and how it could be widened and opened up in our common interest. That could be a positive role for the UK. Given remarks already made by the Government in response to the Select Committee's report, I hope that will be a route that they feel we should pursue.

5.8 p.m.

Lord Mackay of Ardbrecknish

My Lords, we have had a most interesting debate. I, like every other speaker, am grateful to the noble Lord, Lord Taverne, for introducing it. We have ranged a little wider than the report we were invited to consider; however, this is a very wide subject.

Before I respond, I want to say how much I enjoyed the speech of the noble Baroness, Lady Ramsay of Cartvale. I nearly said "my noble friend", because, as she indicated, we go back a long way. I met her only once during her long and distinguished career with the Diplomatic Service, when I visited Finland in my capacity as Scottish health Minister. Then, much to the surprise of both of us, we discovered in the line-up that we knew each other. We were probably considered pretty rude for the rest of the evening, since we sat in a corner, partook of some of the wine of our country—even in Finland, and despite its price—and discussed all our mutual friends. Many of them are in this Palace in one capacity or another. My noble and learned friend Lord Hailsham introduced me one day as "one of the Lord Mackays". He said, "I am beginning to think you need to be called Mackay to get in here". I believe my noble friend may have to rephrase his remark. You may have to have been at Glasgow University between about 1955 and 1965 in order to get into either House. As the noble Baroness said, we are a pretty "cross-party" lot. In the other place the right honourable Member for Garscadden, Mr. Donald Dewar, the honourable Member for North-East Fife, from the Liberal Democrat party, and in my own party the honourable and indefatigable Member for Southend East are three examples of the same vintage. To show that in Scottish politics we embrace all sides, for a brief time until I put a stop to it, the Scottish National Party was represented by Mr. Iain Maccormick, who was also one of our number.

In case noble Lords think that that happens merely in politics, a particularly important achievement by the noble Baroness was to be not only the first woman president of the Students Representative Council, SRC for short, at Glasgow University, but also the first woman president of the Scottish Union of Students. Those are two considerable achievements when we realise that it was back in the 1950s. She succeeded another of our colleagues who has just given up the office of president of the International Bar Council. So noble Lords can see that we are a fairly cross-party and cross-purpose group.

Perhaps our most famous colleague at the time at the university achieved something else more important. For many years he created—not manufactured—the Macallan whisky on Speyside. That ceased recently. Noble Lords can see that it was a vintage few years at Glasgow University! We warmly welcome the noble Baroness, Lady Ramsay, to our midst and look forward to hearing many more of her contributions in the future.

Hardly a day goes past without an opportunity to read about the latest report or study on the ageing of Europe's population and the issues that raises. This is particularly the case in relation to pensions. Most recently, the Social Security Select Committee in another place reported on the unfunded pensions liabilities in all the member states and in particular some of those on the mainland of Europe. That has been an issue for some time and has brought to the fore the 1994 report of the Federal Trust which forms the kernel of our debate this afternoon.

I agree with much of the report and I am glad to see that its conclusions are broadly in line with the policies pursued by the Government in this area. Moreover, since the report appeared in 1994, many European countries have recognised the problem and are beginning to take action.

To put the debate into context, fertility rates have declined while longevity has increased. I welcome both, although it seemed that the noble Lord, Lord Ezra, welcomed only the longevity. I am not entirely sure that I do not welcome both because in a crowded little island like ours in an increasingly crowded world, it seems to me that fertility rates continuing at their high level would cause us enormous problems, far greater than those we are discussing today.

The average male life expectancy is set to increase from today's 74 years to 76 by 2010 and 78 by 2025. One interesting fact—I was going to say "useless", but it is not useless because it illustrates the problem posed in our own system when we examine our own pension provision—is that in 1945, when the welfare state as we now know it was created, the average life expectancy of a man was 63. You do not have to be an actuary to realise that pitching the retirement age at 65 was not a bad actuarial decision. Today men's retirement age would have to be 75 if we were honouring exactly the same promise as was made in the 1940s. Sometimes those who use the pension promise that was made in the 1940s and 1950s use it too glibly because they do not appreciate that the position has moved dramatically since that promise was made.

The number of workers compared with the number of pensioners is set to fall from just over 3:1 in 1994 to just over 2:1 in 2040. That takes account of the equalisation of the state pension age for men and women. So there will be fewer workers paying fewer taxes and contributions when at the same time there are more elderly and retired people in the population.

The issue of increased pension liabilities, particularly unfunded or pay-as-you-go liabilities, as the population ages is a serious one which we in this country have already recognised. We began to take the necessary steps in the early 1980s. I was pleased that the noble Lord, Lord Peston, seemed to recognise that. However, I was not entirely sure whether the beginning of his speech and the end of it were quite logical. I shall come to that in a moment. The noble Lord recognised it and asked me whether it was true that the Government predict that contribution rates will not rise in the long term. The rate of contributions is predicted to vary slightly from the current level as the post-war baby boom and the 1960s baby boom move through to retirement. No long-term increase is predicted.

The reason for that is that, since the Conservatives won the election in 1979 we have taken serious steps—without the approval of the Opposition—to ensure that actuarially the system can work and continue into 2010, 2020 and beyond. We broke the link between the basic state pension and earnings. The noble Lord, Lord Taverne, said that that was a wise move. I am not sure that the noble Lord, Lord Peston, agreed at the end of his speech. I thought he complained a little about it. His noble friend Lady Hollis, with whom I am more usually locked in debate, as your Lordships know, has criticised me on a number of occasions for breaking that link, but as I understand it, it is as near a part of official Labour Party policy as anything that is official Labour Party policy. Perhaps we are reaching the same ground and I look forward to not being criticised on it again.

It is important to say, and the scale of the figure is well worth mentioning, that, if we had not broken that link but had kept it, this year the welfare budget would have cost £7.4 billion more. I am glad to hear that other people are joining us, looking back and saying that the decision in 1981 was correct.

We also began to encourage individuals to make greater provision for themselves through the introduction of greater flexibility and choice in pension options. That is largely through the 1988 Act put through by my right honourable friend Mr. Norman Fowler. Money purchase schemes, both occupational and personal, were allowed to contract out of SERPS. As a result of those efforts to encourage private provision, over three-quarters of employees opted out of SERPS. Over 20 million people have rights in occupational pension schemes and over 5 million people are holders of appropriate personal pensions.

My noble friend Lord Clanwilliam returned, as he has on a number of occasions, to compulsory pension provision. I notice that the noble Lord, Lord Barnett, said that he never undertook any fiddles, but those of your Lordships who have read his book will realise that they are classified under the title "wheezes". I always enjoy debating with him. The noble Lords, Lord Marsh and Lord Peston, together with the noble Lord, Lord Barnett, discussed the problem of compulsion.

We already have a compulsory second-tier pension in this country for employees who earn enough to pay national insurance contributions. They must either be in SERPS or in a contracted out scheme which provides at least equivalent benefits to SERPS. So a compulsion exists for those in employment and sometimes I feel we tend to forget that when we discuss the possibility of compulsion. I appreciate that the debate can move on from that to compulsion for those people who are self-employed, although many take out pensions, and for compulsion to go further than the equivalent of SERPS. Those are issues to which all parties will return in the months and years ahead because I do not believe the problem of pension provision will be easily resolved or go away.

We have continued to deal with the demographic situation, building on the changes which we introduced in the 1980s. We have reformed SERPS. Again, that has been pretty unpopular with the party opposite. We have done so not because we wish to be miserly, but because we wish the scheme to be affordable. I sometimes wonder how people could have sat round the table in the Department of Social Security and devised SERPS. I wonder about the actuaries who advised them. By 2030, unreformed, SERPS would have imposed a burden on taxpayers—because it is a pay-as-you-go scheme—of £41 billion. Because of the changes we have made, it is now £12 billion and it is clearly much more affordable. We have also equalised the state pension age at 65 and we had a debate in this Chamber during the course of the pensions Bill. I was invited to go for 60 but the cost of that would have been about £15 billion extra by 2025.

I was asked to go for a flexible decade of retirement, so that retirement could take place any time between the ages of 60 and 70. But, of course, everybody who retired under 65 years of age would impose additional costs. While the cost of everybody retiring at 60 might not have reached £15 billion, it would have begun to approach that figure as more and more people retired at 60 and took advantage. So the additional cost would have been there. I now see that a "wobble" is being put on that policy by the party opposite. In fact, the party opposite says that people can retire early but that their pension would be cut by the actuarial calculation of that early retirement. That could easily mean that somebody retiring at 60, instead of having the £61 that has been mentioned, would have barely £40 a week. And that would not be just until that person was 65; it would be £40 a week for the rest of his life. Then, to avoid claims by those people for income support, if that is what they need, one would have to make sure that they could not do it or else the cost would still be in the area of the £15 billion that I mentioned.

So we took steps to make the situation affordable and to resolve the problem in this country. Private funded pensions need to be secured. We took steps with the Pensions Act, after the Maxwell affair, to give people confidence in occupational pensions. I did not see the television programme last night. I decided that I had not taken enough sick bags from aeroplanes over the past few weeks in order to allow me to see the programme through. I gather from this morning's reviews that I probably missed nothing from that point of view. The Act of course increases the security of members, which is very important.

We welcome the growth of group personal pensions among those employers who do not currently run an occupational scheme but who wish to do something for their employees' retirement. We certainly want to encourage that. I believe that the Act provides the framework that we need to build on to encourage people to provide for their own retirement. A number of noble Lords mentioned young people and that issue was vividly illustrated by the noble Lord, Lord Marsh. We have run a campaign in one part of the country to test how we get through to young people to get them to start pensions. It has been quite successful and the feedback has been good. We have tried to bring in the pensions industry to take on that campaign and direct some of its campaigning in an attractive way at those young people. I have to say that some of the captions used might have made some of your Lordships gulp a little, but they certainly had the desired effect of bringing the advertisement and the problem to the young people's attention.

All those steps are helping and they have helped with the £600 billion that we have invested in private pension funds. It is invested not only in the United Kingdom. More than a quarter of funds are invested overseas. So to an extent, we have spread the load around and made sure that even if some time in the future our economy does not perform so well as it might do, we have perhaps investments in other economies which are performing well. So those are good things.

The positive effects have been recognised by, for example, the OECD. The OECD recognised that there is a partnership between public and private provision which places us in a healthy position. We are alone with Canada in avoiding the mounting debt problems faced by other OECD countries as a result of the growing costs of pension provision. The policies which rely in a very big way on pay-as-you-go can lead to very difficult problems, as my noble friend Lord Dean of Harptree mentioned. The OECD estimates that the net present value of the liabilities of unfunded public pension schemes in this country is just 19 per cent. of GDP; for France it is 98 per cent.; for Italy it is 113 per cent.; and for Germany it is 139 per cent.

My noble friend Lady Seccombe illustrated in very real terms the improvements in living standards that we have seen for our elderly people as more and more pensioners retire with second and third-tier pensions and in a very much better position than people were 10, 20 or 30 years ago. I do not normally take issue with the noble Lord, Lord Desai, but I believe that pensioners are becoming much better off and indeed the proportion of pensioners in the lowest income decile has fallen significantly since 1979, from 31 per cent. to 8 per cent. I am sure that we all welcome that.

The IMF, in its World Economic Outlook for May 1996, drew attention to the problem and suggested that countries such as Germany and France would have either to raise social security tax collections or reduce pension liabilities by around 3.5 per cent. of GDP.

I do not wish to give the impression that our European partners are not taking steps to deal with their problems. Of course they are. Indeed, mention was made by a number of noble Lords, including the noble Baroness, Lady Ramsay of Cartvale, about what is happening in other countries. The French Government are to submit an amended finance Bill to the parliament in December with a view to encouraging some funded second-tier pensions for private sector employees. They have also changed the way that unfunded pensions accrue and have introduced a new tax of one-half of 1 per cent. in order to reduce the welfare deficit. Indexation of pensions in France is now based on prices rather than earnings—a little like this country. Italy has instigated a number of reforms. Spain and Italy have introduced tax incentives for private schemes. Germany will see a gradual raising of the retirement age for women from 60 to 65 and for men from 63 to 65. Clearly, more will have to be done but I believe that a start is being made.

For the last two or three minutes of my speech I want to return to the Social Security Select Committee report. There has been considerable speculation in the press and elsewhere—indeed, the noble Lord, Lord Bruce of Donington, brought it to the fore in this debate—that, because we have funded schemes in this country and many Continental countries have large unfunded schemes, we might find ourselves having to pay for their large unfunded schemes. I want to make it absolutely clear that there is no question that we shall pay for pensions for the workforces of Germany, France, Italy or any other country.

Many noble Lords have mentioned that Article 104b of the Maastricht Treaty is perfectly clear. I draw your Lordships' attention in particular to two passages. The first reads: 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". That is quite clear. The next sentence goes on: A Member State shall not be liable for … the … undertakings of another Member State". So it is perfectly clear in Article 104b that each individual member state will have to bite its own bullet, so to speak, and deal with the problem inside its own boundaries. They will have either to raise taxes or reduce pensions. It is perfectly clear that that is what they will have to do. Some of them are beginning to move in that direction. Moreover, the next part of the same Maastricht Treaty—Article 104c—makes clear that the rules of excessive deficits will apply. In fact, in the very first sentence it states: Member States shall avoid excessive government deficits". It goes on to suggest how they will do it. The stability pact is under consideration. I have a Question on that to answer tomorrow and so I may leave it until tomorrow to deal with that problem. So, other member states will have to address the pensions problems that they have, just as we have had to address the problem that we have in this country. Nobody should be in any doubt about that.

I welcome the attention that has been focused on this issue this afternoon and I am glad that international organisations such as the OECD as well as the Social Security Select Committee and the earlier report of the noble Lord, Lord Taverne, have recognised the strong position that we are in in the United Kingdom. Our policy is simply based. We believe in a triple partnership between the individual, the state and the private sector. Our aim is to encourage funded pension provision while at the same time ensuring that the state pension system remains affordable and the less well off pensioners are given adequate support through the benefit system. That means maximising choice and flexibility. It means providing adequate protection. It means that the whole system and the economy have to be run on a sound financial footing. It is through that kind of partnership that we have demonstrated to Europe how to deal with the pension problem.

This has been an interesting debate. A certain amount of common ground is beginning to emerge as the party opposite begins to agree with some of the matters with which they have disagreed over the past 17 years. That is to be welcomed. I believe that it is certainly welcome for the pensioners of the future.

5.30 p.m.

Lord Taverne

My Lords, it occurred to me after I moved the debate that perhaps I should have declared an interest. I do not believe it is relevant, but I am a director of an international insurance company.

I cannot refer to all the valuable contributions which have been made in the course of the debate, which I much enjoyed and from which I learnt a great deal. I therefore want to concentrate on two main issues. First, as the noble Lord, Lord Mackay of Ardbrecknish, pointed out, there has been a considerable measure of agreement. There has been agreement that there must be some sort of compulsory second tier. The noble Lords, Lord Peston and Lord Marsh, and the noble Earl, Lord Clanwilliam, felt that we should go further than what is perhaps a compulsory element at the present time. It was felt that it must be funded and involve a measure of state aid if everyone is to be helped, because it must be universal.

There is a great deal to be said for a Select Committee of this House looking at the problem of pensions in this country. We face a grave and serious problem. We sometimes boast about the relatively good fiscal position we are in; but we must remember that the reason we are in such a good position is that we still tolerate a degree of poverty among the elderly in this country which would be regarded as intolerable by some of our European partners whose fiscal position we criticise.

The second main point I wish to address was particularly well covered in the impressive maiden speech of the noble Baroness, Lady Ramsay of Cartvale. I am sure that in future all our debates will he greatly enhanced by the experience, eloquence and insight which she can bring to bear.

The noble Baroness said that we can learn from Finland. I entirely agree. I believe we can learn from many other countries too. We have a great deal to learn from Australia, Switzerland—which also passed a referendum in favour of a compulsory second tier—and the Netherlands. We have much to learn from all those countries about transition and securing a simple form of ministration for those universal pensions which is much less costly than that available at the present time.

I agree with the noble Baroness that there are shortcomings in the Federal Trust report. It was written two years ago and a great deal has happened since. There have been many developments over the past two years, some of which were referred to by the noble Lord, Lord Mackay, not only in the reforms that have been made in terms of limiting the Government's commitments to the future, but also in the shift that is now visible towards funded schemes. The noble Lord, Lord Marsh, said that those hidden debts are matters of actuarial certainty. That is true, but they are not certain debts. Politics and commitments change and all sorts of changes have been taking place even since the Select Committee sat. My criticism of the Select Committee is that it does not appear to have paid sufficient attention to the changes which have taken place in other countries.

Finally, I am glad that the noble Lord, Lord Mackay of Ardbrecknish, confirmed in the clearest possible terms that there is no question of our being liable to bail out other countries for their pension debts. I was glad also to have the endorsement of such an impressive, authoritative and uncontroversial maiden speech that the Select Committee's report is based on myth and belongs in the same category as the straight banana and the square strawberry. I hope that the issue of monetary union will be discussed on its merits and will not be affected by the gigantic red herring drawn across our path by the Select Committee. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.