HL Deb 28 July 1997 vol 582 cc8-10

2.55 p.m.

Lord Dixon-Smith

asked Her Majesty's Government:

Whether there was any consultation with local government over the decision in the Budget to abolish the tax credit for pension funds.

Lord McIntosh of Haringey

My Lords, under existing Budget procedures it is not appropriate to consult. The ending of payable tax credits to pension funds announced in the Budget is part of the package of measures for reforming corporation tax to promote greater long-term investment. The effects upon local government pension funds were considered carefully before the final decisions were taken.

Lord Dixon-Smith

My Lords, is the noble Lord aware that for local authority pension funds, which already on average have a 15 per cent. actuarial deficit, the loss of income resulting from that decision will mean that at the next actuarial revaluation in 1999 contributions will have to rise by a sum equal to 3½ per cent. of relevant local government pay? Above the consequences of any non-ordinary revaluation, if the accumulated loss of income at that point is to be eliminated, it might be done by amortising it over 12 years—which is the way in which actuaries would tend to look at this question. Will the Government consider bringing forward the date of the actuarial revaluation in order to reduce that overall cost?

Lord McIntosh of Haringey

My Lords, in reply to the noble Lord's first question, he is correct to say that the 100 or so local authority pension funds are in deficit. My figure is by an average of 10 per cent. or £250 million a year. He forgets to mention that the deficit was caused very largely by the disaster of the poll tax and the previous government's encouragement of increased early retirement. Indeed, in 1990, the last government encouraged local authorities to reduce their contribution rate from 100 per cent. to 75 per cent. So we know where the blame lies for that.

The noble Lord's second question concerned the cost in terms of rates and council tax in the future. As he knows, the next valuation is due in March 1998 in England and Wales and in March 1999 in Scotland. We do not know what the valuation recommendations will be but certainly they will not come into force until the year 1999–2000. The Local Government Association has had our undertaking that any changes in contribution rates will be taken into account in determining the level of local authority provision.

Lord Mackay of Ardbrecknish

My Lords, is the noble Lord aware that the London Borough of Haringey, with which he has at least some kind of association, will find that there is an annual cost to its pension fund of between £800,000 and £1.7 million? That is just a small example of the total £5.4 billion that has been taken out. If the noble Lord believes that that does so much good to pension funds, would it not do double the amount of good to make the sum £10.8 billion?

Lord McIntosh of Haringey

My Lords, I do not know from where the noble Lord obtains his figures but he anticipates the valuation which will take place in March next year. He anticipates the conclusions that the actuaries may take on that valuation. I have already made clear that none of us knows the effect on council tax.

As for the noble Lord's more important question, the point needs to be made that the shift to longer-term investment from lower dividends, which is the whole thrust of that tax change, will result in improved company performance. It will therefore result in an increase in long-term share values and that will be to the benefit of local authority pension funds as well as other pension funds. Perhaps the noble Lord will bear in mind that only 60 per cent. of the investments of local authority pension funds are in equities and of that 60 per cent., 75 per cent. of the return is in capital growth rather than in dividends. So, he will see that the gearing is less damaging than is sometimes suggested.

Lord Boardman

My Lords, the noble Lord said that it was customary for there to be no consultation on Budget matters. But has it not been the practice for a long time for potential changes to taxation to be the subject of wide consultation, well in advance of the change? I do not say that is done as part of the Budget, but to find out what impact will occur if the Government decide to make changes. If that is not done, are not the Government travelling blind?

Lord McIntosh of Haringey

My Lords, the Government were obliged by the economic mismanagement of the previous government to bring in a Budget within barely two months of coming to power. Clearly, consultation of the wider kind referred to by the noble Lord, Lord Boardman, continues to take place, but not in the specific run-up to a Budget.

Lord Peyton of Yeovil

My Lords, is not the noble Lord making too much of the suggestion that the economy which the Government inherited is as weak as he describes? I wonder whether, in a year's time, when the noble Lord reads the answers he has given today, he will find them a little tinged with optimism.

Lord McIntosh of Haringey

My Lords, I am not accustomed to reading my own words unless I am forced to. If I am forced, I shall read only those words which relate to the original Question, which concerned local authority pension funds.

Lord Dixon-Smith

My Lords, is the noble Lord aware that the illustration that I gave as a possible outcome to this situation is based on what actuaries are likely to do, albeit one must acknowledge that no one can predict precisely what the situation might be in 1998 or 1999? That said, will the noble Lord accept that he is advancing a new departure for pension funds in general if he is advocating that capital gains or enhanced share growth will help the pensioners of local authority pension funds? The fiduciary duty of the trustees of those funds is to maximise the income of those funds in order to pay the pensions, and pensions are not paid out of capital.

Lord McIntosh of Haringey

My Lords, the noble Lord is right in regard to the fiduciary duty of pension fund managers. The point I was making was the wider point that increased investment by industry in the equities sector will not only increase the share values, but will also enable pay-outs from dividends to be greater in future years.

Lord Brabazon of Tara

My Lords, can the noble Lord explain how, if the economy was in such a mess when his Government inherited it on 1st May, in answer to a previous question he said that the vast majority of the rise in sterling happened under a Conservative government since last August? Weak economies do not have strong currencies.

Lord McIntosh of Haringey

My Lords, strong currencies may lead to weak economies, which was the thrust of the point made by the noble Lord, Lord Spens. Cannot we combine these questions and simply be asked a question every day in relation to how wonderful the last government were and how terrible this Government are rather than having the kind of boringly specific questions we hear at the moment?