Pensions

HL Deb 15 October 1997 vol 582 cc486-521

6.8 p.m.

The Earl of Buckinghamshire rose to call attention to the case for greater pension provision; and to move for Papers.

The noble Earl said: My Lords, I think that it was P.G. Wodehouse who remarked that, "Earls are hot stuff". Fortunately for P.G. Wodehouse pensions did not become a burning issue in his time. Otherwise I imagine that he would have been stretched to make a comedy out of the situation that we face today.

The 1997 report of the Office of Fair Trading stated in its introduction: Sadly, as we all know, in the past legitimate expectations have been betrayed". The Director General went on to say: I find that currently available products often fail to meet consumer needs". Those comments set the scene for our debate. It would be appropriate at this stage for the House to note that I am a partner in Watson Wyatt Partners, a leading firm of consulting actuaries and human resource consultants. The views that I express today are mine and do not necessarily reflect the views of Watson Wyatt.

There are a whole series of issues which need to be faced. They include, first, the relationship between the state, the sponsoring companies and individual provision and, secondly, whether we pre-fund or switch to a pay-as-you-go system. We need to consider the inequality in pension provision, a topic raised yesterday in this House at Question time. We need to think about better provision for those who stay at home and the low earners among us; and we need to think very carefully about the impact of divorce.

The final issue is taxation, where we are moving away from a system of "exempt, exempt"—in other words, tax relief on contributions going in, tax relief on the investments from both income and capital, which was changed significantly in the last Budget, and then taxing on the benefits.

What makes the whole debate so fascinating is that it covers many diverse and conflicting pressures that will be very difficult to reconcile as we go forward. The Government have stated that they want to build a framework for pensions based on consensus. That has led Harriet Harman to issue at least nine challenges to the respondents to her inquiry. John Denham has separately required responses which consider the nature of the problem, the balance between state and private provision and the form that future provision might take. This debate is primarily about the nature of the problem and the need to try to encourage pension provision in the United Kingdom.

What are the problems? There are a considerable number, and they are well documented in the report of the Office of Fair Trading, the Consumers Association report and Sir John Anson's 1996 Retirement Income inquiry. The last made some very interesting observations on demographic trends. I draw to the attention of the House the 1996 IMF report, Ageing Populations and Public Pension Schemes, and further valuable work was done by Labour Market Trends. While the UK is not so badly off as other European Union countries, our ratios of those in work and those retired projected into the next century do not look comfortable. That is especially true when taken in conjunction with the current value projections for the state pension in the next century.

Of equal concern is the number and percentage of those below 65 who have retired early. The Labour Market Trends report indicates that for males aged 60 to 64 the percentage in employment has fallen since 1970 from 78 per cent. to just under 50 per cent.; and in the age group 55 to 59, the percentage has fallen from 93 per cent. to 75 per cent. I believe it was the Anson report that suggested that the major concern for our citizens is not dying early (which is an interesting subject for most of us) but living longer. It impacts not only on pensions but on the National Health Service and on health care provision.

There is not time to study the statistics in greater detail—and it has to be said that within themselves the statistics hide other issues: for instance, between 1982 and 1986 some 2 million younger people joined the workforce, possibly causing the retirement of older and more expensive employees. There are at least four points to note about the statistics on early retirement. It is important to try to achieve a balance in our discussions on pensions since there is much adverse comment on pension provision in the newspapers. First, defined benefit plans have helped significantly in the process of retiring people early on reasonable incomes. Secondly, there is presently a trend in this country towards the introduction of defined contribution plans. That is particularly true of small and medium-sized companies. Even some of our major companies in the financial services industry have moved to defined contribution plans. Unless significant investment goes into such plans, they will not provide the same level of early retirement benefits for those leaving work in their fifties and early sixties. One outcome is that while early retirement benefits have been there, there must have been a considerable strain on unemployment and other benefits paid by the state. Lastly, as an individual who has reached the enviable stage of being over 50 (I hope that my colleagues in Watson Wyatt are listening) I can say that there is a considerable loss of experienced people at crucial ages.

Turning to other problems, the reports indicate that fewer than 50 per cent. of those employed are in occupational pension schemes. The statistics that I have show that in 1996 some £8.5 billion was invested in personal pensions. These seem very high figures. However, many people have made no significant investment in private pensions and will be totally reliant on the state unless something happens to change that.

In the 1970s, when I was involved in putting in many new pension schemes, I quite often heard the objection from members to the company pension scheme: "Why should I pay 5 per cent. of my income into the scheme? It will be a waste of money. The state will provide". I have not heard that comment for some 15 years. The comment that I now receive when I put in a new scheme is: "Will it be worth it for me to invest in a pension, because it may impact adversely on my husband's invalidity or other benefit?" In other words, there is an issue related to the introduction of means-testing and the level perhaps being set too low.

Other issues which have been a problem in the area of pensions are listed in an Office of Fair Trading report. There is mention of poor value for money in personal pensions. The pensions scandal has certainly done nothing to enhance the attractions of private provision. It will take some time for that particular spectre to go away. Looking back to 1978, there has been a considerable lack of stability over the past few years—I dare say that will give noble Lords on the Opposite Benches a means to get back at noble Lords on this side. Given the latest Budget changes in relation to tax on dividends, if we ever thought about changing the taxation system away from giving tax relief on contributions going in so that there was no tax relief at all on contributions but the benefit was paid tax free at the end, there is a question as to when any of us would ever trust that to be the actual position in 30 or 40 years' time.

There are a number of other problems in pension areas. Inequality of provision was touched on yesterday at Question Time in this House. There are low earners, part-timers and those who stay at home. These people all suffer from a lack of pension provision.

My final point relates to the complexity of the whole pensions arena. In my business we make money out of complexity. But matters are reaching such a stage that it will serve no good if the complexity, the regulations and other matters, are not simplified as we move forward. Other noble Lords will perceive other problems associated with pension provision in the United Kingdom which discourage people from taking up pension provision until it is too late.

What about the solution and the framework? I suspect that it will be easier to diagnose the cause of the problems than it will be to offer solutions.

It seems clear that neither sponsoring companies nor the state will be a bottomless pit for future funding. It will be necessary to re-emphasise that pension provision is a partnership between the state, the employer and the individual. Where there is no employer, the partnership has to be between the individual and the state. That partnership will need to be far more robust and a good deal simpler to understand than it is at present. The individual will need to pay more, and probably by compulsion, unfortunately, as voluntary provision seems not to have worked.

What about reallocating resources? I am not sure that it is true, but we saw in the press last week that the possibility was being raised of taking away tax relief at the higher rate. On the face of it, this would seem an easy thing to do, but what do you do about the non-contributory schemes unless you tax employers' contributions to approved schemes as a benefit in kind, and what will you do about the self-employed?

I should like to see some consistency in the approach to tax and benefits. I suspect that the Minister will be able to confirm that a review is being undertaken by the Chancellor of tax and benefits, although I understand that that will not form part of the current pensions review.

I have no statistical reason for saying this, but I have a suspicion that there is a need for greater co-ordination between the Treasury and the Department of Social Security. I think that would be helpful, although I suspect that the Treasury might miss those wonderful little surprises that they give us in each Budget.

I have already said that the framework needs to be simplified. I think that we shall probably need one all-encompassing pensions Act in order to do that. One of the points that I have found particularly difficult to deal with in my professional life is the fact that personal pensions and occupational pensions do not go hand in hand: you cannot be a member of an occupational pension scheme if you are in a personal pension arrangement. I believe that that has added to the difficulties we have had in the area of providing pensions in the United Kingdom.

I could continue to speak about the solutions to the problems we have, but I believe that that is for another debate. This debate is about the need to make greater pension provision in the United Kingdom. I hope that what I have said will form at least the basis for an interesting discussion this afternoon. In the interests of time I have decided not to raise in any depth the question of tax relief on dividends nor to discuss another situation dear to my heart, the minimum funding requirement, where I believe there are significant issues. However, noble Lords who follow me may well raise questions on those matters. My Lords, I beg to move for Papers.

6.24 p.m.

Viscount Mackintosh of Halifax

My Lords, I should like to thank the noble Earl for initiating this debate and bringing to the attention of the House a most important topic.

I should bring to your Lordships' attention the fact that I am a partner in a large professional services firm, Price Waterhouse, and in that capacity I advise individuals in relation to their tax and financial affairs. The provision of pensions is a most important part of such financial advice. I therefore felt that I should make a short contribution to the debate today but the views I express are mine and mine alone.

We are moving away from relative certainty in the field of pensions to a position of significant uncertainty. There was a time when people thought that they could rely on the state pension to keep in line with earnings. In addition, those employees who were lucky enough to be members of a company pension scheme usually relied on receiving a pension in line with their earnings on retirement. The amount which they paid into the scheme was not directly related to the pension they received; they had a defined benefit on retirement which they usually knew in advance.

These things are now not as certain as they were. The state pension is no longer linked to earnings but to prices and so it is gradually falling behind earnings. I do not necessarily think that that is wrong providing other income supplement is available for the most disadvantaged members of society. The state pension is not funded at all but is paid out of the taxes contributed by the current working population. With people living longer and an increasing population of pensionable age, the costs of providing a state pension linked to earnings would be a huge burden on any government. However, the Government should be honest about the state pension. If the state pension is not going to keep pace with earnings, those people who want an income in retirement that does keep pace with earnings need to make alternative arrangements. They should know when they start their working life that they need to make some provision for their retirement, not discover this at the end of their working life.

For those in a company pension scheme we are starting to move away from the old certainties of receiving a pension related to earnings. As the noble Lord pointed out, the defined-benefit schemes are becoming too expensive for companies to run. Life expectancy is increasing; people are retiring earlier; and, most significantly, in the last Budget the Government introduced measures which restrict the income which pension schemes receive on their investments by not allowing them to reclaim tax credits.

As a result, we shall see an acceleration in the number of pension schemes which change from providing a pension related to earnings to providing a pension related to the amount paid in to the scheme. This move to the so-called money-purchase schemes has already started but will gather pace and is the way in which those who are self-employed have had to provide for their pensions for some time.

In practice, this means that more and more the pension available on retirement is directly related to the amount of provision made during working life. On this basis there is significant under-funding of pensions and a need for a very large increase in pension provision. Many people will be disappointed, and some extremely worried, as they approach retirement when they realise at that point the extent to which they have insufficient funds to provide the pension which they hoped for.

The size of pension which can be received from provisions put aside will vary depending on many factors, including current and expected interest rates, the age of retirement, whether a part of the pension will continue to be paid to the spouse after death and whether it will increase with inflation.

As an example, for a male employee retiring at 60 with a wife who is just younger than him, for every pound of pension received with no indexation he will need to have a provision of £10 at the time of retirement. Thus to provide a pension of £5,000 he will need a provision of £50,000 on retirement. That £5,000 will not be index-linked and thus in real terms will be decreased by inflation over time.

For an index-linked pension with, say, a two-thirds pensions going to the surviving spouse, for every £1 of pension received in retirement £18 of capital will be needed. Thus to receive an index-linked pension of £5,555 a year the huge sum of £100,000 provision on retirement will be needed.

The amount of provision required to fund pensions is very high indeed. As a workforce we are not making these provisions. An employee at the young age of 25 who wishes to retire at 60 on about two-thirds of final salary will need to put aside between 15 and 20 per cent. of income until the date of retirement to achieve this objective. If action is delayed until the age of 40 the percentage of income that will need to be saved for retirement to achieve a pension of two-thirds of final salary will be so high that most employees could not make such a provision.

There is a need for much greater pension provision but we shall only achieve that through a major exercise to educate the working population in the need to make this provision.

I spent a few days during the summer in the United States looking at how the workforce there copes with providing for retirement. Like many matters financial, what happens in the United States often happens in this country a few years later. In the United States there has already been a shift from the defined-benefit pensions schemes to the money-purchase schemes to which I referred earlier. There is still under-funding for pensions, but employees are much more aware of the need to make contributions out of income than, I believe, is the United Kingdom workforce today. It is not uncommon in the United States for employees at all ages, including those in their 20s and 30s, to take financial advice and have drawn up for them a formal financial plan. I am not talking just about senior executives earning significant sums of money. In the large corporations, hundreds and thousands of employees on average earnings are taking financial advice. Often the employer will provide a financial plan for employees as a benefit. The employee will state his or her objectives—how much income they would like to receive on retirement and the age at which they wish to retire—and take into account other income they may receive, such as federal income on retirement or from a company scheme. The plan will calculate the amount of provision the employee will need to make to reach his pension objective. The employee may not keep up the required contributions but at least he has a plan. If he knows what is needed at an early age to reach a given level of pension, the level of funding is likely to be higher than if there is no plan at all.

We must increase the awareness of what is required to fund pensions if we are to achieve adequate provision. We shall need the combination of employers and the Government working together to raise the awareness of the workforce, especially those starting out who must start making provision early. It is unfortunate that the misselling of personal pensions by a number of companies has meant adverse publicity at a time when many should be taking out suitable pensions. I hope the Government will attempt to counter those adverse factors by emphasising the importance of properly providing for retirement.

It also seems a retrograde step for the Government to have reduced the return on pension provision in the last Budget at a time when there is a need for much greater provision. Now, an employee will have to save even more for every £1 of pension that he or she receives on retirement. I hope that the Government will indicate that at least some of the extra revenue taken from employees' savings in the Budget will be spent on educating the workforce on the need for extra provision.

We certainly need greater provision for pensions. We need to start making that provision now.

6.32 p.m.

Lord Grantley

My Lords, the House is indebted to the noble Earl, Lord Buckinghamshire, for introducing his Motion on this most important topic. Saving for a pension is, of course, just one among many different forms of saving and needs to be seen in that context. But governments have a particular interest in encouraging pension savings in order to avoid the growing burden upon the state to pay both conventional and earnings-related pensions out of public expenditure to an ageing population in the years ahead, arising from increasing longevity and the stagnant birthrate. That burden is not only growing but is widely considered to be unsustainable. So encouragement to improve currently inadequate individual pension savings is of the highest importance.

These developments have led to speculation that the Government are considering making pension savings compulsory, as happens already in countries such as Chile, Australia and Singapore. I should be in favour of that under certain circumstances but such arrangements do not yet exist. It must be recognised at the outset that compulsory savings represent a very serious invasion of people's liberty, with major implications for spending decisions and lifestyle. Most people save anyway, if they can. But pension saving is a very special and, in the abstract, disadvantageous form of saving as the saver loses access to the savings over the years or decades during which the pension fund is accumulating prior to retirement and there are restrictions on the use of pension funds post-retirement, which is a point to which I shall return.

To overcome those disadvantages, I believe that three conditions would need to be met: first, tax treatment to make pension savings clearly more attractive than other forms of saving; secondly, sufficient political stability—a point touched on by the noble Earl—to give people confidence that such tax treatment will not suddenly be withdrawn to their detriment after they have invested; and thirdly, complete freedom for people to invest their pension savings both before and after retirement as they may desire. None of those conditions is satisfied at present.

On the first point, it is at least arguable that investing in a personal equity plan (PEP) is better value than investing in a pension. Although one is permitted on retirement to withdraw up to 25 per cent. of a pension fund in the form of a tax-free lump sum, the "tax free" aspect is somewhat misleading as the balance of 75 per cent. has to be invested in an annuity, which is liable to income tax on both the interest and capital components. I cannot think of any other common form of investment in which return of capital is liable to income tax treatment rather than the normally more advantageous capital gains tax treatment. Since individuals can already invest up to £9,000 a year in PEPs, it is not obvious that there is any good reason to compel them in addition—always supposing that they can afford to do so—to invest any more than that by way of pension provision.

On the second point, the lack of political stability governing the tax treatment of pensions has been dramatically illustrated by two recent and, in my view, unwelcome developments. The first, mentioned by previous speakers, was the sudden withdrawal from pension funds of their ability to reclaim the tax deducted from dividends on equities. If that change had been made as part of a fundamental and comprehensive review of all forms of taxation and regulation of all forms of savings, including pensions, it might have been palatable. As it is, the way it was introduced has caused quite serious financial damage retrospectively to millions of investors in pension schemes who invested in good faith on the assumption that the tax treatment would be an enduring feature of the system.

Not only that: the change also has major adverse public expenditure implications. It has made contracting out of the SERPS considerably less attractive, which is surely not in line with the Government's policy of keeping public expenditure under control. I understand that the Government are now in negotiation to increase the national insurance rebate payable under the contracted-out scheme. The cost, according to newspaper reports over the weekend and depending on which newspaper one reads, would be between £500 million and £2 billion a year. I shall be interested to hear from the Government their estimate of the net, as opposed to the gross, public expenditure impact of the withdrawal from pension funds of the dividend tax credit.

The other unwelcome development is speculation that the Government are considering withdrawing full tax relief on pension contributions. In my view, if that happens, many people will do their sums and conclude that it may not be worth investing in a pension fund after all or that the advantages of doing so are not sufficient to compensate for the disadvantages of pension saving to which I have already referred.

I come to my third condition for compulsory pension saving. At present, one must invest by the age of 75 at least 75 per cent. of a pension fund in an annuity. I believe that that requirement is iniquitous and ought to be abolished. As a matter of principle, people should be free to decide for themselves how they wish their savings to be invested. Why should the Government insist that pension funds are invested in one form rather than in another?

In my view, there are two overwhelming reasons why people should not invest in annuities under any circumstances. The first is that investing in annuities is contrary to the interests of a family. Annuities are virtually unique among all forms of investment in that they are worth nothing when the investor dies. If, as I hope, it is government policy to encourage parents and grandparents to leave on death as much as possible to their children and grandchildren, the Government should not compel but on the contrary positively discourage people, particularly elderly people, from investing in annuities.

The second reason is simply that annuities are a lousy form of investment. That is not just a personal view but the market consensus, as can be seen from the fact that very few people indeed invest in free-standing annuities—that is to say, those annuities which people are not compelled to purchase—in comparison with other forms of investment.

The market in free-standing annuities is minuscule, and for good reason. On a short-term view, to obtain certainty of income—the only reason for buying an annuity—one would be better off in gilts. For example, at the end of last week a man aged 60 with a pension fund of £100,000 could have bought a level annuity guaranteed for five years of around £9,000 a year. Alternatively, for the same amount of money he could have bought gilts maturing between 2003 and 2007 with a higher income of £9,650 a year by way of interest and a fixed capital value on redemption of £82,000. That is, of course, a grossly misleading comparison because even pensioners should not be taking a short-term view of their life expectancy. The Office of Fair Trading made the point that frequently people's retirement even exceeds the length of their careers and therefore one should be taking a longer-term view.

On a longer-term view, undoubtedly people would be better off in equities in order to benefit from capital appreciation. I believe it to be the case that there has hardly ever been a period of 10 years or more in which people would not have been better off investing in equities rather than in fixed interest instruments. All financial advisers would agree that people's savings should be invested in an appropriate mixture of equities and fixed interest. But—this is the key point—it should be up to the individual, not the Government, to decide for himself or herself what is appropriate.

My final point arises from the pension report of the Office of Fair Trading published in July of this year. It is an excellent and comprehensive document and I agree with almost all of its recommendations. It may be quicker for me to mention the only two recommendations with which I disagree. The first is that annuity rates for men and women should be equalised, notwithstanding differences in life expectancy. That seems to me to be an absurd piece of political correctness. The second is that "designated pension plans" must be passively managed. There are good reasons for pension plans being passively managed, but I see no reason why an individual should be prevented from choosing an actively managed plan if he so wishes.

The Office of Fair Trading devoted a good deal of space, including the whole of one appendix, to showing how poorly early leavers are treated under occupational pension schemes of the final benefit type. It points out that nowadays people change jobs on average more than five times during the course of their working lives. The problem therefore has become widespread. I am an early leaver under a final benefit scheme and I know therefore how disadvantageous it can be.

I have one suggestion for the Government to consider on that point. If an employee is entitled to a pension calculated at a certain percentage of final salary or whatever, and leaves early, the employer should pay as a minimum such proportion of that pension as the period of service bears to the period the employee would have served if he had not left early. One may be forgiven for thinking that that is already the case, but it is not.

I conclude by issuing a modest challenge to the Government. Can they publish or cause to be published one pamphlet containing, in sufficient detail and with sufficient clarity for a layman to read and understand, all the relevant rules and regulations governing pensions and taxation of pensions in this country? I suspect the answer will be "No, we cannot do that. First, it would be far too long a document; and, secondly, it would be so complicated that nobody would understand it." That is precisely the point. Any simplification of the issue will he welcomed by everybody.

6.44 p.m.

Baroness O'Cathain

My Lords, I welcome the initiative of my noble friend Lord Buckinghamshire in calling attention to the case for greater pension provision. There can be few people who have not expressed concern about the future of pension provision. Indeed, there has been so much scaremongering about the difficulties which may be encountered in the early part of the next century that none of us can be unaware of it. The fact that our continental European neighbours are likely to be even worse off than us is absolutely no consolation.

Since the general election I have been in some difficulty in trying to ascertain what exactly the Government's position on this issue is likely to be. I feel that I have been receiving very strong conflicting messages and I hope that the Minister will be able to set my mind to rest and clear the air. The noble Baroness, Lady Hollis, says that she doubts it, but I doubt that she doubts it. Of course, I am very aware that it may be too early to get a definitive "steer" as to what policy is likely to be formulated, and when. But I hope that in the review currently taking place, the concerns and suggestions put forward in this debate today will be addressed.

At the outset I should like to state the two premises on which my thinking about the subject of pensions is based. First, coming from a background of many years in business I am somewhat surprised that successive governments have neither encouraged nor discouraged company schemes. On the most superficial examination it must be obvious that such schemes do a great deal to alleviate pressure on government resources and I believe that they should be encouraged. Secondly, I believe, most strongly, that individuals should be encouraged to think about their likely future financial needs long before they reach "pensionable age" and to save for their long-term future in the same manner as many save for short-term requirements, such as the family holiday or the new car. My noble friend Lord Mackintosh of Halifax gave us a stark picture of the amounts needed to provide for what many people would regard as a fairly low pension. His suggestion that such calculations should be emphasised more widely is very pertinent.

For many years I have been dismayed to realise that the propensity to save is by no means universal; there is little incentive to save—despite the good efforts of National Savings. Young people today are not "switched on" either by the concept or product. Perhaps it is a generation phenomenon. Perhaps this new Government who have certainly manifested their appeal to youth could encourage greater saving.

We have been told that the Government want individuals and their employers to provide for their retirement. I support that wholeheartedly. That desire of the Government can be met by both of my two personal premises; namely, that company schemes should he encouraged and that a new "savings philosophy" should also be encouraged.

"Encouragement" is the salient word. Without encouragement individuals are unlikely to be persuaded to lock away significant sums of money over a long period. Encouragement should include tax incentives. The growth of the pensions industry has been greatly helped by favourable tax treatment of pension contributions, of pensions fund income and of payment to pensioners—particularly the tax-free lump sum on retirement. Employer schemes should be encouraged. Such schemes are usually managed at company expense and costs can be as low as 5 per cent. of contributions. That is significantly less than the 20 per cent. or more the sellers of personal pensions deduct to cover costs and profit.

Another area of encouragement is flexibility. It is an obvious area of advantage and is also an obvious requirement if flexibility in the employment market increases. It is only fair that individuals are enabled to transfer funds between pension schemes. Flexibility should also be encouraged in permitting individuals to establish a higher level of contributions matching his or her circumstances. We all recognise that demands on one's income vary enormously from being very high when first setting up home, having children and seeing them through the education period to much lower when the mortgage seems to absorb a much less significant part of one's income and the children have fled the nest. Less rigidity would encourage greater saving for retirement—especially when retirement day does not appear to be as far away as it appeared some years previously. That sentiment is heartfelt.

Simplicity and clarity are two other areas where encouragement would not go amiss. Because of the high-profile cases I believe that the general public has a strong fear of putting their hard-earned resources into pensions. The almost arcane language of all pension documents does not help this case. As an aside, I recently received a communication from the DSS about my future pension and, quite frankly, I took several looks at the words, the layout, the length of the document, the attempt to "cover the waterfront" by addressing all possible types of situation whereas my situation is just plain and simple—at least that is how I see it—and I gave up. I shoved the lot back into the envelope and phoned my accountant. But not everybody has an accountant and not everybody can afford to employ an accountant. I shudder to think how long it would have taken me—and I am supposed to be reasonably intelligent—to plough through all that lot. I would probably have been no wiser at the end of it. We really must have clarity in this area.

Similarly, we must have regulation which is easy to understand. My noble friend Lord Buckinghamshire referred, quite honestly, to the fact that his organisation makes money out of complexity, but he also made a plea for less complexity. I support that plea completely.

It really is in the Government's interest that in all these areas a long, hard look is taken in a constructive manner. If not, the Government may find themselves in a situation where there will be an escalating demand for yet more and more funding for retirement.

The Government surely want to avoid having to provide a base pension for every man and woman when they reach retirement age. That could be achieved by the following: first, employers should once more be permitted to make membership of the company's scheme part of the contract of employment. This compulsory element was allowed until 1988 and, with hindsight, it should really not have been changed. Secondly, if a benign environment is created for private pensions, the Government can concentrate on meeting the needs of those least able to look after themselves; for example, those not in paid employment such as a parent raising children or the unemployed, enabling them to receive credits towards a retirement entitlement.

I would now like to turn to the issue of fully funded versus pay-as-you-go pensions. It is quite right that companies are required to set up schemes separate from the employing company, controlled by the trustees and fully funded by contributions over employees' working lives. There is a sense of security in knowing that one's contributions are targeted on funding one's own pension. However, under the Government's present pay-as-you-go approach for state pensions we are paying for the pensions of current pensioners without any assurance that we shall reap commensurate rewards ourselves in the future. The sense of security that is present in the company scheme is certainly not matched in the state pension scheme.

Today, state pensions are funded by taxation: National Insurance contributions are seen as nothing less than a tax. To gain acceptance for the idea of investing in your pension, separate funding on a proper actuarial basis is surely needed.

We all recognise that the Government must seek to contain costs. One of the biggest costs is the DSS budget. Anything that can be done to contain or reduce this huge drain on the Exchequer must recommend itself for serious consideration. I really do believe that individuals can be persuaded to fund the bulk of pension needs, but they need incentives to do so—carrots instead of sticks. However, recent developments in this area do not fill me with the hope that common sense will prevail. The Treasury has increased the tax on pension funds and the DSS has got bogged down in over-regulation. Neither action is helpful and, I ask plaintively: do they ever talk to each other?

The disincentives currently being stacked up, or threatening to be stacked up, are formidable. I shall just mention three. First, the abolition of ACT credits has added some 10 per cent. to the average cost of funding schemes. Secondly, the growing complexity of pensions. The rules set up under the recent Pensions Act introduced a series of regulations so complicated that. I am told, even the actuaries are struggling. Has the DSS created a beast that is not capable of being controlled? Thirdly, the minimum funding requirement rules set up under the Pensions Act, which the Minister knows I have previously addressed in debate on the Pensions Bill, introduced a very serious contingent liability for companies, particularly companies with mature schemes which are heavily invested in equities during a period when equity prices are at the bottom of the cycle. There is a paradox here. The Government want to see more normal investment by companies, but seem to have forgotten that pension funds are still the biggest provider of new equity for companies.

MFR hits only at pensions that are based on final salary schemes yet all the evidence is that what employees most want is a pension scheme which relates to their salary prior to retirement. The alternative, the money purchase scheme, which is beginning to be the norm for newly-established pension schemes, does not provide this assurance as the size of the pensions depends crucially upon investment performance, and we know how unpredictable that can be over a long period with no guarantee of underpinning from any employer. Yet, ironically, and quite unbelievably, this inferior form of pension escapes the danger of MFR.

Have the Government any more "nasties" of this nature in mind? Will the review come up with yet more disincentives? I sincerely hope not. The company pension scheme is a very successful and efficient vehicle capable of delivering the relief that the Government seek from the burden of an ageing population with all the concomitant resource implications. Incentives need to be preserved. Previous incentives need to be restored. New incentives such as I have outlined need to be introduced. It is only then that we can build on our enviable strength compared to our Continental European neighbours. It is imperative that we take all these issues seriously and I do hope that the Minister can give us reassurance on these points.

6.57 p.m.

Lord Borrie

My Lords, the House must be immensely grateful to the noble Earl, Lord Buckinghamshire, for initiating this debate and indeed for giving us the benefit of his own personal expertise over his own lifetime. The Government have announced already their wide-ranging pensions review and therefore the House will certainly be looking forward to the reply to the debate by the noble Baroness, Lady Hollis of Heigham. In opposition the noble Baroness established a formidable reputation for knowledge in her field and for compassion and dedication.

In thinking about pensions policy I believe that there must be some measure of agreement among us all that the principal objective should be to enable the great majority of people to enjoy in retirement a standard of living which in some way approximates to the standard of living they enjoyed during their working lives. For some people already retired, and for some about to retire, that objective has already been attained and they can continue to enjoy in retirement quite a high standard of living as a result particularly of the growth in recent years of occupational pensions to which they have contributed during their working lives.

But, as has been pointed out by the director-general of the Office of Fair Trading in the report on pensions to which at least two speakers have already referred, most occupational pensions, by reason of being defined benefit schemes, are generally based on the employee's final salary, so that people who leave their employment lose out. Each time they move their employment the value of their pension or pensions is whittled away. As the noble Lord, Lord Grantley, pointed out, the average employee in the United Kingdom at the present time moves probably five times in his working life. Therefore, that is a serious shortcoming. Nobody is likely to predict that the number of changes in one's working life is going to reduce, because it may well increase further as the years go by.

Moreover, the proportion of our working population who have joined an occupational pension scheme—the number has increased considerably—seems now to have stabilised at something less than half of that working population. That is hardly surprising given that such schemes are normally available only to those in permanent, full-time employment with major, or at least fairly substantial, employers. However, we are living longer and several other speakers have already referred to the need for saving throughout one's working life in order to achieve an adequate pension on retirement. As has been pointed out, there is also the question of early retirement. The need for such savings is becoming more urgent every year.

The alternative of personal pensions has, for many, proved to be a mirage through the misselling of pensions and the lack of transparency as to the substantial commission and other charges (often upfront charges) which diminish their true value.

For purposes of clarification, perhaps I should point out that I have not been the Director General of Fair Trading for five years now so I take neither credit nor responsibility for the report to which reference has been made and which I should like to mention because the present Director General, Mr. John Bridgeman, has said—this was quoted in part by the noble Earl who initiated the debate—that in recent years the legitimate expectations of many have been betrayed through the misselling of pensions, especially to those induced to leave their existing entitlements in favour of some less advantageous personal pension scheme.

However, it is not just a matter of the scandals which we hope are past and which are now being dealt with, although in this context I should like to pay tribute to the forthright language and actions of the Economic Secretary to the Treasury, Mrs. Helen Liddell. In the report, the Director General, Mr. Bridgeman, states that too many pensions today are poor value. As the noble Viscount, Lord Mackintosh of Halifax, said, there will be many who will be disappointed, shocked and amazed when they are entitled to claim their personal pensions on retirement at what poor value they offer, compared with the prognostications made by those who sold them the pension. To quote Mr. Bridgeman: Their benefits are consumed in the high levels of expenses needed to support the marketing effort and the active management of the funds. Their expenses are often loaded on the early years and … employers' contributions may be inadequate or non existent". Mr. Bridgeman puts forward an interesting and, I think—but I am not an expert in these matters as is the noble Earl—well worked out scheme for what he calls a "designated personal pension" which could be offered by friendly societies, trades unions and employers' associations as well as by individual firms or private companies. It would enjoy a contribution from the employer when the employee opts out of the occupational scheme. Contributions would be invested in tracker funds and be passively managed and, of course, the pension would be portable from job to job. I believe that that is essential in this day and age. I hope that the Minister can say that the Government are looking carefully at such proposals in the course of their pensions review.

Mr. Bridgeman came to no conclusion about compulsion. The noble Lord, Lord Grantley, referred to a number of conditions which he thinks should be met before any question of compulsion is introduced. I found those points good, but I also have the feeling that some element of compulsion will become essential to the success of any second pension plan. Above certain income levels, employees are already required to a degree to contribute to the basic state pension and to the state earnings related pension scheme, or to an equivalent contracted-out scheme, and this has been so ever since my noble friend Lady Castle of Blackburn introduced that scheme some 20 years ago.

Of course, there will be those who, at least at some stages of their life, cannot afford to pay the kind of contributions that are necessary to secure a good second pension. The noble Viscount, Lord Mackintosh, mentioned the kind of contributions that could cause great difficulty to those in less well paid jobs. Others, by reason of being disabled, sick or unemployed at some point, will need to be credited with contributions. I know that that involves a public expenditure commitment and I know that those on the Benches opposite will not agree with me on this point, but it seems to me to be more socially just to charge to public funds such a credit for those who are unable to make their own contributions than it is to allow the 40 per cent. tax relief on contributions which is now available to higher rate taxpayers. It is certainly vital that a national pension policy for the 21st century caters for all—women as well as men, part-time as well as full-time workers, as well as for the increasing number of self-employed people and those on short-term contracts.

I am told—and I believe—that Her Majesty's Government look forward to at least 10 years in office. Surely any such government are right to be thinking of a strategy for the long term. Such a government should be seeking to lay the foundation for those who are starting their working lives now. I accept the point that those at the beginning of their working life need to be encouraged and educated to think of such matters over the next 30 or 40 years until they retire. Indeed, as I have said, the Government should be laying the foundations for those who are starting their working lives now and who will not retire before 2030 or 2040, but that does nothing for those who are now in retirement or who are soon to retire.

As this point has not yet been mentioned, I should like to say that we all know that the basic state pension is far too low to sustain any sort of dignified retirement, and that because of the indignity and stigma attached to applying for additional sums by way of income support, hundreds of thousands of pensioners fail to make a claim and have a lower income than is their legal entitlement.

Unlike my noble friend Lady Castle, who unfortunately is unable to be present today, I do not think that the answer lies in a substantial across-the-board increase in the basic state pension, claimable by all pensioners. I believe that that would dissipate large amounts of public expenditure and taxpayers' money on the significant numbers of retired people who do not need such an increase. The great need is to find a way to target those who right now urgently need more money.

I have favoured some sort of minimum pension guarantee, a sum set above the present basic pension and above income support levels, which would enable people to enjoy a reasonable standard whereby they can truly feel a part of normal society and not feel excluded from it through poverty. I certainly want to get away from the stigma involved in the present means-tested system, which involves, in effect, having to say, "I am poor. Please give me more money". That system inevitably leads far too many people to be ashamed to ask for what they are entitled to.

Perhaps we should try a new system in which all who retire at 65 say that they are 65 and that they want their entitlement. They would disclose what other regular income, especially pension income, they were likely to receive. If it was small or nil they would be able to claim as of right the minimum guaranteed pension. If however they were in receipt of reasonably significant amounts of occupational or private pension they would receive from the state only the basic state pension as it now is or as it may be upgraded in November. The principle of to each according to his needs is a respectable one. We need an efficient claims system that is effective in putting that maxim into effect.

7.10 p.m.

The Earl of Lindsey and Abingdon

My Lords, I too should like to thank the noble Earl, Lord Buckinghamshire, for initiating this short debate. Just before the Summer Recess I tabled a Written Question regarding the proposed alteration to the treatment of advance corporation tax in respect of pension funds. I asked Her Majesty's Government why, in proposing to alter the treatment of advance corporation tax for pension funds, it was intended to abandon the convention that tax was levied either on contributions or on pensions in receipt but never on both for personal pension holders and the self employed. The Answer I received from the noble Lord, Lord McIntosh of Haringey, was as follows: There is no tax charge on exempt pension funds when they receive dividends. But they will no longer receive a subsidy from the Exchequer on their dividend income. The reform of corporation tax has removed a distortion which gave a tax incentive for pension schemes to prefer dividends to long-term growth".—[Official Report, 30/7/97; col. WA 64.] I believe that the Government may in the long term regret this change to the tax regime. I spent 38 years of my working life in the insurance industry. However, I spent only one-and-a-half years of that period promoting and selling personal pensions and money purchase schemes. One matter that I learned during my time in the City was that when trying to explain the advantages of an insurance plan which involved a long-term commitment the important consideration in the minds of most people was whether it was a tax-saving project. It was relatively easy to persuade people to take out schemes where there was an attractive investment which attracted as little tax as possible. This applied to pension schemes as well as to other insurance policies. Even in the case of Lloyd's I was able over the years to persuade about 30 people to become underwriting members. That was done on the back of tax incentives such as reserve funds which were exempt from higher rate tax, making capital work twice over, etc. When it came to explaining the downside, such as the high risk ratio and the aspect of unlimited liability, people tended to apply cotton wool to their ears. They did not want to know. What mattered were the tax advantages.

There is also the concept of mis-buying as well as mis-selling. I am pleased that the Government are committed to retaining and upgrading the basic state pension. That must be available to everyone including the self employed, followed by a second tier pension scheme for everyone including the self employed, and then a voluntary third tier. My main worry is not so much about the larger company pension schemes in relation to the proposed change in advance corporation tax. They will comply and find ways to cover the extra cost. One unpleasant way of doing it is to lay off some of the older employees within 10 years of their retirement. That can be a big money saver for the employer.

The real danger arises with small businessmen and the self-employed who are not involved in big pension schemes. Having taken out what they believed to be a good personal pension to supplement the state basic pension, when they retire they find out that they are worse off because of the Government's retrospective legislation to amend the treatment of advance corporation tax on pension funds. I think not so much of the high-earning barrister but the 90 per cent. of people who earn less than £30,000 per annum during their working lives. They will not thank the Government when they discover that their pension plans are likely to yield 25 per cent. less than they thought. For a government that describes the mis-selling of personal pensions as one of the greatest financial scandals of modern times to propose a tax change that will hit many victims even more severely, along with the self employed who cannot belong to final schemes, this is an unprincipled act.

In conclusion, I make the following plea to the noble Baroness, Lady Hollis, on behalf of people with money purchase arrangements that have no surplus to absorb the shock. They can and should be exempt from advance corporation tax changes as are Treasury civil servants. Their schemes are not funded and therefore they are automatically immune to this discriminatory raid.

7.18 p.m.

The Earl of Clanwilliam

My Lords, we are indebted to my noble friend for this most important debate, especially as he comes from an actuarial background. The members of that profession certainly on this occasion, but not always, speak with one voice and a great deal of authority. There exist already two well researched proposals. I begin with Mr. Lilley's basic Pensions Plus, which seeks to solve the demographic problem over the longer term by the immediate introduction of compulsory pension planning. Secondly, there is the more immediate proposal by the Minister, Mr. Frank Field, which was published during the last Parliament. That combines reform of both pensions and social security and requires some kind of compulsory contribution. I feel slightly awkward in presuming to define these great appraisals so briefly, but I am sure that all noble Lords are well aware of their scope, which provides great food for thought.

In the meantime we heard in the Budget of the proposed reform of PEPs and the introduction of a new savings scheme. Perhaps we may assume that this is being considered by Mr. Martin Taylor, who has been appointed to review the proposals. On top of that there is the review by Mr. Denham. One wonders whether there is a danger of confusion which is compounded by separation of the two essential parts of the same problem. PEPs form a vital part of pension planning and of planning for the future and preparing for indigent old age, by providing tax-free capital from tax-paid contributions, as has already been said.

In addition, PEPs can be used to provide tax-free cash sums on retirement to pay off mortgages and to replace their anomalous counterpart, the tax-free sum from the accumulated pension fund. The accumulated pension fund should be used to provide income for the future, whether in the form of a partly or fully deferred annuity is another matter. Perhaps the noble Lord, Lord Grantley, will allow me to say that if the sum is totally free someone may well go off and buy a yacht, go bust, and then become an indigent person dependent upon the state for support. We do not want that. There should be some form of control. There must be a level below which an accumulated fund should not be allowed to drop.

Lord Grantley

My Lords, I am grateful to the noble Earl for giving way. Just to clarify the point, I was not arguing that governments should not impose limits on the extent to which pension funds can be drawn down. I agree with the noble Earl on that point. I say merely that there should not be limits on the investments into which the drawn-down income needs to be put.

The Earl of Clanwilliam

My Lords, I thank the noble Lord for that clarification. I agree with him. I agree also that the annuity is a nasty animal, but there does not seem to be a better one about. We have the long-established occupational pension scheme run by many of our great companies, greatly to their cost, where total contributions vary between 12 per cent. of salary in the smaller schemes and up to 16 per cent. in the schemes of some public bodies. That is extremely expensive. It is an indication of the level of planning required for personal pensions.

I shall take the bull by the horns on the subject of occupational schemes, which, in particular, have been hit by the Chancellor's raid on ACT. The effect has been to render some schemes liable under the minimum funding requirements. Fund managers of all types of pension plans have in some instances gone out of equities and into gilts, which reduces the effect that the Chancellor intended. In addition, it will require companies and contributors to increase their payments, adding to the load of tax rebates on the revenue.

Another snare is that a number of contributors will now tend, as has been said, to rejoin SERPS, which will be another added cost to the Exchequer. To avoid that, the Chancellor will have to increase the rebate on national insurance contributions for those who wish to remain contracted out. That will be yet another cost to the Exchequer. On that basis, the Chancellor is on a hiding to nothing.

All in all, while it has been said that the previous Chancellor was considering limiting ACT, I can now see clearly why he did not do so. In relation to that I shall give one short excerpt from a press release from the Pensions Management Institute, which states: For many companies, the increased costs of maintaining final salary schemes could mean a reduction in profitability or cash flow. Unless employees make increased contributions to money purchase arrangements for personal pensions, they will see a reduction in their expected pension. Local authority schemes will also be affected and this could well result in a rise in the Council Tax". That matter was raised before the Recess.

Of the remainder of the population who are not in occupational pension schemes, fewer than a quarter have private provision. Those who miss out are the part-timers and the self-employed, including men and women who are taking a break between jobs, for whatever reason, and even more importantly those who are busy at home looking after the country's future generation. They have no earned income from which they can make contributions under existing Inland Revenue rules, and are likely to be left widowed, if they are not single parents, with greatly reduced resources and will be a consequent liability of the state.

The adjustment of the rules governing investment rates and fund limits, as well as the earnings rule, is one of the greater problems to be solved, and when tackled successfully will, I hope, lead to a greater level of savings in the long term. That certainly is a long-term problem, and obviously fits in with any decisions by the Inland Revenue in its future reviews in respect of tax relief on contributions on up to what has been suggested by some quarters of the pensions industry should be a relatively low maximum rate.

However, none of that dilutes in any way the overriding need to ensure that those who are in employment are compelled—I have to use the word "compelled"—to make a basic personal pension provision through the existing NIC system. I have spoken on this subject many times before. If people do not do it, it will be too late, as was pointed out by my noble friend Lord Mackintosh, who described the costs of late investment.

If there is to be a stakeholder plan, then the plan must belong to the stakeholder personally and not be a credit available from some Treasury fund which is so conveniently available for whichever Chancellor may be in power at the time to raid, as has been so spectacularly demonstrated recently.

We await decisions from these unending reviews, but in the meantime perhaps I may suggest that we take a leaf out of the Australian book with regard to fund management. They have "Major Funds" where a combination of major suppliers manage a series of funds. Managers of the occupational pension funds in this country have shown some skills in amassing some £675 billion and they would qualify to run such a scheme, which, one would imagine, would do a great deal to reduce the upfront costs which so beset personal pension selling at the moment, as has been demonstrated.

Admittedly the managers of occupational pension schemes manage defined benefit schemes as opposed to defined contribution schemes. My noble friend Lord Mackintosh mentioned the problem of combining occupational and personal pensions. We have free-standing additional voluntary contributions which can be separate from the occupational scheme. That is a personal pension. There is no reason why that system should not be developed so that personal pensions can take over from occupational schemes as they become too expensive for companies to run. As I have said, contributions of up to 12 per cent. per annum are too high. They are a vast charge on the competitiveness of our great companies. It is interesting to note that the cost to our companies of achieving that £675 billion has been something like 6 per cent. on their annual profits. That is a sum which has not been charged by our friends in Europe. They have not paid those sums. They do not have those funds. If they are to catch up with us, they will find themselves in a somewhat less competitive position with our own great companies.

I hope therefore that the reviews will determine that personal contributions will have to be supplemented to make a viable sum of something like £100 a month or 10 per cent. of earnings, whichever is the greater, to be supplemented by the state, or in the case of the employee, by both the employer and the state.

The personal plan, as has been said, must be portable and accessible. The beauty of it is that it is visible. The person who has it can see at any one moment what it is worth. He can adjust his contributions to it in accordance with the need. That is why for the past five years I have said that a personal pension plan is a vital element in any future pension planning operation by either government.

There is an urgency in the matter, as all are agreed, and I hope that my approach may be construed as constructive. We are in a prime position to deal with this demographic problem, but we must act soon or it will be too late.

7.30 p.m.

Earl Russell

My Lords, I, too, thank the noble Earl, Lord Buckinghamshire, for introducing the debate, which is very timely. During the general election campaign, to my considerable surprise, the requirements of party balance dictated that the BBC News should interview me on pensions. I spent about a minute expounding my party's pension policy and about 15 seconds providing a sound bite about the other two parties. I do not believe that anyone in this Chamber will be in any doubt which of those was broadcast.

For reasons of which that is typical, I wish to take the opportunity provided by the debate to comment on the pension policy of my party. I am sorry that the speech is not being made by my about to be ennobled friend Lord Goodhart who is the author of the policy and to whom I look forward to hearing on the subject on many future occasions. But, as it is, the task falls to me.

Sadly, it is an arithmetical rule that the more people belong to any category the harder it is to be generous to them. But as the noble Earl, Lord Buckinghamshire, pointed out, the ratio with which we are concerned is not just of pensioners to non-pensioners but of pensioners to earners. In financing pensions, the rule that early money is like yeast, which I am sure is already familiar to the noble Baroness, applies very clearly indeed. Therefore, I agree with the concern expressed by Chancellor Kohl that the increasing tendency to prolong the educational process is causing a funding problem for pensions. As part of pensions policy, we should be thinking about getting younger people into employment rather quicker.

We, too, belong to the consensus which has moved away from linking pensions to earnings and links them to prices. I entirely agree with what the noble Lord, Lord Borrie, said about the costs involved. Ann Robinson, addressing a fringe meeting as a guest at the Liberal Democrat conference in 1996, summed that up as a consensus that we should keep the state pension but not be too generous about it. I said to her that I thought that description was ungenerous but not inaccurate.

It is the dilemma caused by precisely that point which our party policy is designed to address. We have decided that we should keep the basic state pension. If it is argued that it is not affordable, I wish to quote a few words which I discovered by accident when looking through my papers. They were written by Mr. Donald Dewar when he was social security spokesman for the Opposition during the previous Parliament. He said: After all, the Government's own statistics show that this country spends 23 per cent. of GDP on social protection. The comparable figure for the European Union is 26 per cent. As Ministers repeatedly imply that the country cannot afford adequate state pensions it is easy to forget that private pensions do cost money". Furthermore, every means test that I have ever come across has gaps in it. There are always people who fall through the net. For that reason, some basic universal provision is essential. However, I entirely agree with what the noble Earl said about the need for partnership between the state, the employer and the individual. I hope that that is now common ground in every quarter of the House.

I do not agree with the remarks made by Mr. Frank Field in an interview with the Express on 4th August when he proposed as a long-term plan to abandon the income support supplement for pensions on the ground that it was necessary to compel people to go in for private contributions. I do not disagree with the argument for compulsion, but, as regards dropping the supplement, it is Mr. Field's job in this Government to think the unthinkable—it is the thinkable that he seems to find so difficult!

I am much more in agreement with the remarks being made by Mr. John Denham, who might be described as Minister for the thinkable. Writing in Parliamentary Policy Forum last month, he stressed the difficulties faced by low income workers, those with intermittent employment patterns and those who cannot contribute to second pensions; for example, because of caring responsibilities. One should also include those who are part-time and earning below the national insurance limit and a category in which I should declare an interest because I belong to it; those who have spent part of their working life abroad and who fall out rather badly in some ways.

Taking those points into account, we decided that we would split the basic pension; we would keep a universal pension which was linked to prices and we would have a means-tested supplement which was linked to earnings. To that we have now added a further supplement of £5 a week for the over-80s. That is a limited category of pensioner among whom a great deal of poverty is concentrated and who are least able to supplement it with earnings, as they can do now that the earnings rule has been happily abolished. We would abolish SERPS which we believe produces a very bad return—20 per cent. of the final salary—while many of the occupational schemes such as mine can produce something approaching half the final salary or occasionally something better.

However, we would have a compulsory occupational scheme for all employees funded by the usual partnership scheme. Of course, where people are not in regular employment our second part of the basic pension—that related to earnings—comes into play. Therefore, I hope that we would target the state spending on those in greatest need—and I agree with the noble Lord, Lord Borrie, that that is a proper charge on public funds. I do not see what else it could be.

We also believe that we need much better regulation of the private pensions industry. There is a welter of regulatory bodies—what I might describe as an Acropolis of acronyms. I am not an expert on exactly how those bodies should be put together, but some kind of linking should be done. We are also concerned that not all the recommendations of the Goode Report have yet been put into force. We want trustees representing the employees and trustees representing the pensioners, who are two potentially conflicting interests. We want those trustees not to be removable by the employer's trustees and we want it to be clear and certain that under no circumstances will the employer trustees have a majority on their own over the other two bodies.

The need for that principle is clearly illustrated in the sad story of the bus company pensions; the Bus Employees Superannuation Trust, commonly known as BEST. It reminds me of the remark of St. Augustine that the decay of the best is the worst. Perhaps I may say to those who know the original Latin that they will notice that I made a parliamentary translation of the saint's words.

Originally that was an alteration of the clear terms of the pension scheme, which had directed that the surplus should be distributed to the employees, altered by a vote of the trustees to transfer the surplus to the employer from whom it got further diverted to the Government. I say that without respect to party because government policy on that has shown no sign whatever of changing as a result of the general election. We are dealing with a government as the executive animal rather than any particular political party.

The ombudsman was clearly of the opinion that that transfer of funds was illegal. I pass no judgment on whether or not that was so. But it clearly contradicted legitimate expectations because it contradicted the express words of the scheme under which people had contributed to their pensions.

If the law were to be changed, it should have been changed by parliamentary legislation without retroactive effect. This matter is now sub judice in the courts. It may be that in the end the bus employees will receive what they believe, with some reasonable excuse, they deserve. But one should say that a posthumous pension, like a posthumous partner, is of very limited, if not negligible, usefulness. Therefore, I hope that the Government will think again about that and, whatever they think the law should be in future, they should do something now about that very legitimate grievance.

That exactly illustrates why there is a case for better regulation. We are asking people to invest a very great deal of their money and future security in schemes over which they do not have direct control. The degree of trust which is needed, especially if we are to compel people to do that, is very great indeed. I do not believe that our institutional framework is yet ready to bear the weight and something should be done about it.

I intend to make just one more remark dealing with the subject of long-term care. It is not perhaps technically within the words of the Motion but it is very closely related to it. The Government's manifesto committed them to a review. We agreed with that commitment and said something closely similar. At the end of the Labour Party Conference, the Prime Minister said that he hoped that those who conduct the review will not tell him that that is a subject which needs more money. According to the rules of counsel, as understood by every medieval ruler, it was the duty and first mark of a faithful counsellor to tell the ruler things that he did not want to hear. I hope that the Prime Minister has faithful counsellors.

7.43 p.m.

Lord Lucas

My Lords, when I saw the list of speakers I knew that today's debate would be of high quality but even those expectations have been exceeded. I listened with fascination and awe to most of the speeches and with relief to some of them, including that made by my noble friend Lord Buckinghamshire which was so high powered that I feel quite unable to even attempt to reply to it. I do not envy the challenge placed upon the noble Baroness, Lady Hollis, in responding to the debate.

The Motion addresses a matter of great national importance and it is one which the Government have set out to take on. In doing so I hope that they can count on a great deal of support from us because I think that we share the aims that they have set out and I hope that in many instances we shall be able to approve of the methods they choose.

We are all living longer, we hope, and living better. That places a great strain on the finances of the country and on the way in which that income in our retirement is to be provided. We face a challenge of what to do with our poorer pensioners not only as regards how we are to provide for them but how we are to deal with the transition between poor pensioners for whom the state provides and slightly better off pensioners for whom the state does not. It would indeed be a very odd twist of a compulsory additional pension scheme if it turned out to be a tax on the relatively poor, who ended up no better off than they would be on social security, and a benefit for the rich who ended up with additional money.

It is a problem of great complexity. We must understand how to incentivise people and to persuade them that parting with that additional money is the correct thing to do. We must understand how to control and decide on the degree of risk which individuals should be asked to take as to what their final pension is to be and, if we wish to moderate that risk, how it should be moderated. We need to pay particular regard to some of the side effects that those great changes will have.

I take one particular example which was mentioned by the noble Lord, Lord Grantley, in what I thought was a superb speech: that is, tracker funds. Tracker funds are a parasite on the markets of which they are a part. They contribute nothing to decision taking within that market and nothing to the ultimate functions of that market to allocate capital correctly. A market can withstand them in low volumes but they pose all sorts of problems if they become a serious part of pension provision.

What are they to track? Are they to track a limited index and leave companies out of it or are they to track an index comprising all quoted shares and become totally indiscriminate? Are they to take in European shares? Are we sure that the rules of the European Union and the ecu will permit us, in the evolution of the timescale that we are talking about, to have our principal pension fund investments restricted to UK shares? Indeed, what is a UK share? Is it one that is listed here or is it restricted to companies which have the principal proportion of their business here? If it is to be a company which is listed here, why should we discriminate in favour of a company which has chosen only to list here rather than one which has an almost identical business but happens to be listed in, for example, New York? There are all sorts of problems in deciding what to track.

If tracker funds become a significant proportion of a market, then the opportunities for people to play against them become enormous. Tracker funds have to buy shares and, as anyone who has looked at the way that currency speculators can make money out of markets where governments are committed to going in one direction will understand, there are enormous opportunities for people to play against tracker funds: to sell to them when they have to buy; and then to make it impossible for them to sell when the market is going down. It is possible to make extremely substantial amounts of money by playing against them. Therefore, I hope that we shall not go down that route.

But, of course, not going down that route re-opens the question of how risk and expenses are to be controlled in that additional saving. Asking people to save more also re-opens the whole question of what a pension fund should be. Again, as the noble Lord, Lord Grantley, pointed out, as currently structured, pension funds are disadvantageous forms of saving. The advantage is made up only by the tax advantages which they enjoy. The restrictions placed upon them are cumbersome and difficult to live with. If we are to be asked to save greater proportions of our money in pension schemes, it seems to me that we should look at how we incorporate houses and real property in them. Why should I not, during my life, put aside money in the form of a villa in the south of France? That is something which, when I no longer wish to use it, I can sell, and that is providing for my retirement. That is perhaps taking a rather gross example but why should saving have to be additional to that? Coming down to a more ordinary level, why should people have to put aside money throughout their lives when they have bought a house which is suitable for themselves and their children and which, in retirement, they will be happy to down-size to a smaller house and release that capital to be part of their pension funds.

The noble Lord, Lord Grantley, raised the question of annuities. I agree with him entirely. As currently set up, they are an iniquity. Few people with any sense and the freedom to choose would invest in an annuity. It does not reflect personal circumstances. There is the extraordinary situation whereby if you wish to insure your life, which is rather the other side of an annuity, your health will be assessed but if you want an annuity, the fact that you are likely to die two years hence makes no difference.

The investments underlying an annuity, as it is currently structured, have to be low risk, steady investments with a consequent low rate of return. When people are picking up such annuities to look after them for, say, 20 or 30 more years, the underlying investments should, if they are to give the best value to the pensioner, be much more flexible. If, as this Government suggest, we are to increase and make compulsory the additional pensions and additional savings for retirement, such matters must be addressed.

In proceeding with this difficult and important task—and one which we hope to be able to support—I hope that the Government will adopt three principles—namely, openness, thoughtfulness and trust. I say openness because what the Government know, in particular what the Civil Service knows, is limited. We are talking about enormously complicated areas. There are many people in the world who understand bits of such areas better than the Civil Service. The Minister need only look at the Pensions Act that we passed and its consequences to realise the limitations of the Civil Service which produced it. That legislation was produced by a team of 80 civil servants with a great deal of effort and intelligence. Yet it has still produced some side effects that we regret, as well as being a cumbersome and unpractical way of tackling the problems that it set out to address. It is most important that such matters should be widely discussed and aired before we commit ourselves to further legislation.

Secondly, I emphasise thoughtfulness. In my view it is enormously important that the Government should think before they leap. The Budget was a great example of doing the exact opposite. As the noble Lord, Lord Grantley, and my noble friend Lord Mackintosh, said, it will perhaps turn out to have been the death knell of defined benefit schemes. That is surely not something that the Government, in taking a longer term and calmer view of things, would wish.

The additional tax on pension funds was said to be a move to encourage companies to invest more long term. However, because of the structure of the pension funds industry and because of the way in which the Pensions Act that we passed bites and, indeed, because of the way that pension funds are currently valued, it will instead result in a net cash outflow from companies in the short term. It will also result in institutions taking a shorter-term view of investments and demanding even more cash back from companies by way of share repurchase and other systems to make up for their lack of income. Its effects in the medium to short term will be exactly the opposite to those which the Chancellor of the Exchequer said he wished to have. As pointed out by other speakers, that is likely to result in a large-scale return to the SERPS scheme which, again, is something which surely, given the time to think about it, the Government would not have chosen to do.

Thirdly, there is the question of trust. I believe that the noble Lord, Lord Borrie, and others quite correctly raised the issue of pensions mis-selling. Clearly, that is a betrayal of trust. If we are to ask people to trust us and to trust the investing institutions with money under restrictions over a long period of time so as to provide something which is very important to them, then trust is the essential ingredient. That is why we are seeing the likes of Marks and Spencer and Virgin coming into this market. They do so with a clean sheet and they are names which we have learned to trust. That must be an enormously important part of whatever is put before the public in the future.

However, it is equally important that the Government should earn our trust. An individual who was due to retire shortly after the last Budget will find, at a stroke, that he will get 16 per cent. less by way of pension. That is not the sort of action which is likely to encourage people to believe that their pensions, and the arrangements under which they are made, are in safe hands under this Government and the proposals which they make. As my noble friend Lord Lindsey and Abingdon pointed out, I very much doubt whether this would have been brought forward if the senior civil servants who proposed it had thought that it would mean a 16 per cent. cut in their pensions should they retire the year afterwards. But, of course, it does not affect them because they belong to a different scheme and are not subject to this particular additional tax.

Breaking the trust of the nation in the way that the Government did with the last Budget—indeed, breaking the trust in terms of the promise which they made not to increase taxes and directing that tax at pension funds where trust and long-term trust is so important—is a mistake which they will regret for a long time.

7.55 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)

My Lords, while there are many strengths in our pension system and many people who do enjoy a reasonable degree of independence and security in retirement, far too many, as has been mentioned tonight, do not. The failure of the last government over the past two decades to develop an adequate pensions strategy has resulted in widening inequality among pensioners. As we noticed yesterday in an interchange which took place during Question Time, the gap between the richest and the poorest pensioners has more than doubled in the past 18 years. A quarter of all pensioners either receive or—worse—are entitled to but do not claim income support. Many more depend on means-tested benefits. All the indications are that these inequalities will continue and widen in the future if we simply continue with the current system.

Far too many people at work today face the bleak prospect in retirement in which they passport the poverty of their working lives into a poverty of old age. That will continue to be the case unless we tackle the failings in the current system. Past policies have left too many people without access to value for money, or to secure and flexible pension provision.

Occupational pensions now cover less than half the work force and as local and central government staff numbers have retracted, so has that proportion shrunk since the late 1960s. We need also to address the problems and difficulties faced by low income workers, especially those with intermittent work patterns—that is, those working part-time, casually or on temporary contracts. We need to understand the situation of self-employed people and we must also recognise, as many speakers have said tonight, those who cannot contribute to a second pension because of their caring responsibilities. As I said, even among those with access to occupational pensions, too many are choosing not to join such schemes.

We know that this is the broad picture of the pensions world that we have inherited and these issues are central to our review of pensions. The initial consultation period is now well under way and will last until the end of October. We plan to publish an initial framework for change in the first part of 1998. There will then be a period of further consultation before firm proposals are finalised. However, at the heart of the difficulty—and this has been mentioned tonight in our most thoughtful and wide-ranging debate from which I have certainly learnt a great deal—is the fact that pension provision today is too often misaligned with the world of work that it represents. The world of work has become a flexible world, but pension provision has not followed suit.

I shall now attempt to answer the questions raised by speakers tonight. In a thoughtful and most professional speech the noble Earl, Lord Buckinghamshire, was highly altruistic. He is someone who makes his money from pension complexity, but he called for pension simplicity. We look forward to his continued pro bona publico work in that area in the future. The noble Earl made two main points. First, he was right to emphasise the need for a good second pension and to highlight the inadequacy of existing second pension coverage. The noble Earl drew our attention to the fact that defined benefit schemes were being replaced by defined contributions which of course lay the risk off onto the employee—which is perhaps the downside—but which equally can offer good returns based on equities and a more flexible response, especially with transfers, to a flexible labour market.

The noble Earl also drew our attention to the problems which can arise with personal pensions, as indeed did other speakers. However, in my view none of your Lordships criticised the triple scandal surrounding personal pensions. I have in mind not only the scandal of mis-selling that has already been mentioned but also the scandal as regards charges. In the latter case, even if a personal pension lasts for only two years, 75 per cent. of the money invested can go into charges. If it is a matter of 10 years, then up to one third of the money can go into such charges. Indeed, overall, one quarter of the money is likely to go into charges. That is scandalous.

However, there is a third scandal; namely, that over 50 per cent. of these mis-sold personal pensions were based merely on the recycling of a national insurance rebate which is so low that they are unlikely to float their recipients off income related means-tested benefits in old age. That is a triple scandal. These pensions have been mis-sold to people and as a result people's own best efforts to meet the aim that we have identified tonight which is a portable, transferable and flexible means for secure retirement, have failed and their trust has been destroyed. I do not think there is any doubt in this House that we must seek to ensure that no such scandal ever recurs. When talking about the report of the Director General of Fair Trading, my noble friend Lord Borrie was right to make the points that he did. I am sure that all Members of your Lordships' House welcomed that report.

The noble Earl also referred to the problem of inequity of pension provision for part-time workers, for those who are caring for others at home and other such people. He will know that is precisely why, in addition to our stakeholder pension, we seek to provide for those in flexible labour situations. We shall introduce a citizenship pension to enable those who have home and caring responsibilities to passport into a version of SERPS the contributions that at present the Government would have to make. We hope that that citizenship pension will provide proper taxpayer support for the old age of those with legitimate caring responsibilities. We shall bring proposals forward for that in due course.

The noble Earl mentioned the need for simplification of our pension formula. In this he was joined by the noble Lord, Lord Grantley, and the noble Baroness, Lady O'Cathain. As your Lordships will know, the Pensions Act has been in place for less than 12 months. We are monitoring it. That is necessary to allow the new arrangements to settle down. However, trustees are required to provide information about the schemes. We shall want to monitor that to ensure they are doing so properly and successfully. The Government may consider an investors in pensions award to publicise such activity. As has been rightly said, if people do not know of the virtues, the advantages and the investment policy of the pensions that trustees are managing on their behalf they will not invest so readily in those pensions and they will not take advantage of the available opportunities. I am sure that we all speak with one voice on that issue.

The noble Viscount, Lord Mackintosh, asked us to be honest about the state pension and its inadequacies. We are honest about it. It is precisely for that reason that my honourable friend in another place, the pensions Minister, Mr. John Denham, is reviewing proposals for a stakeholder pension. He, too, is concerned—as we all are—that people should think about and start pension provision at the beginning of their working lives, when they have ample time to build up a pension fund to meet the pension promise they are entitled to enjoy, rather than at the end. That is why in its New Deal proposals Labour is anxious to ensure that people enjoy a good working life as the basis on which to build a secure pension life.

The noble Viscount reminded us of the significant problem of the underfunding of pensions, particularly in the case of people such as women who have intermittent working lives. He was right to mention that. For that reason many years ago in the late 1970s my noble friend abolished the right of newly married women to pay a limited national insurance contribution which would result in only limited pension rights. As this scheme progresses, more and more people will benefit from pension coverage. The noble Viscount also asked us to consider encouraging employers to develop financial plans—as in the USA—for their employees to consider their long-term pension future and to increase their awareness of that. That is a useful and interesting suggestion and certainly one that I shall ask my honourable friend John Denham to bring to the attention of the pensions review if it is not already on the agenda, as I suspect it is. I thank the noble Viscount for that suggestion.

The noble Lord, Lord Grantley, made an interesting speech in which he considered the issue of compulsion. As my noble friend Lord Borrie rightly said, there is already a considerable element of compulsion within the existing pension arrangements. Contributions to taxation which funds the state pension scheme and contributions over the income level of £62 a week to SERPS or their equivalent are already made. However, I refer to the wider issue of compulsion. The Government are of course happy to consider representations made to us on this matter. If it is clear that there is an overwhelming consensus on this I am sure that the Government would be happy to move in that direction. However, at this stage it is an issue for the pensions review to consider in the light of representations made to it.

The noble Lord, Lord Grantley, was in favour of compulsion on three conditions: first, that there is better tax treatment; secondly, that there is sufficient political stability; and, thirdly, that there is complete freedom for investors to choose how they draw down their annuity rates. As regards tax treatment, that brings us to the spectre at the feast—if I can call it that—of ACT which either hovered over or subverted most of the speeches tonight. At the end of the day I believe that there is a basic division of opinion between those on the Benches opposite and those on these Benches who do or do not believe that pensions should be supported by an artificial distortion of the investment market.

As we all know, what has happened with ACT is that money has been drawn for short-term income benefit which in our view should instead have been invested in the capital strategies of companies to produce the long-term economic health on which the companies themselves and their long-term pension plans rests. There is a fundamental difference between us on this but we do not believe that people should be attracted to pensions exclusively by virtue of a distorted pensions regime of taxes as opposed to being attracted to pensions because they represent—as I believe they do—the most healthy and satisfactory method of making a long-term investment in one's own, one's company's and one's country's economic future. I believe that only pensions based on that premise will be healthy and secure. As I said, that is the division between us. Before the changes in the Budget, ACT warped and distorted the economic framework of investment in this country. The Budget in its wider context, including the reduction in corporation tax, the new deal proposals and other such measures seeks to establish a healthy pensions framework built on a healthy economy of investment. We believe it is right that we should take the long-term view on this.

The noble Lord, Lord Grantley, also wished to build sufficient political stability. I was delighted to hear the interesting speech of the noble Earl, Lord Russell, and the interesting comments of the noble Lord. Lord Lucas. I was delighted to hear that they will join with us in seeking to establish an agenda for a generation in which we can all be secure. Your Lordships were right to point out that pension schemes in which people can have no confidence for the future and which they believe are subject to the vagaries of political judgment will not attract the savings and the investment that they need. I welcome their contributions to the discussions and debates to ensure that that stability is achieved.

The noble Lord also referred to the need for investors to have complete freedom for investment and not to find by the age of 75 that 75 per cent. of their income is forced into annuities. The pensions review will consider the rules regarding the drawing down of annuities to see whether that is correct. However, we believe that pensions funds and the regulatory regime that surround them should be required to take the long-term view, as is the case with annuities. I believe that the noble Lord asked for a pamphlet on all the pension rules. My answer to that is that it would be some pamphlet and some rules!

I now address the thoughtful remarks made by the noble Baroness, Lady O'Cathain. She emphasised—rightly in my view—that government must encourage saving and that government must encourage a propensity to start saving early. We need to increase saving but the problem has been that irregularity of income, which is what flexible work engenders, does not encourage regularity of saving. That is why we must work with the pensions industry to develop new packages, new portfolios, with which to carry that investment into old age. As the noble Baroness said, we need to encourage employer schemes. She is right to emphasise that charges in occupational pension schemes at about 5 per cent. are very favourable and beneficial in good occupational schemes compared with personal pensions. She is also right to say that we must have regulation that is easy to understand.

The noble Baroness asked me whether the Government will reconsider the changes made in 1988 by the previous Government which did not require employees to join employer schemes. I believe that since 1988, and as a result of that change, 1 million employees now forgo the opportunity to be members of good occupational schemes. Like the noble Baroness, for most of them that must surely be short sighted, although in some circumstances it may be a prudent decision.

However, that is why we are considering the issues as regards what goes into stakeholding to make that an attractive alternative funded scheme in order to offer the benefits of flexibility, portability, and so on, that some of the occupational schemes have not offered in the past. We hope, therefore, that it will encourage the generation of people who I believe should be in occupational schemes to have a good, satisfactory alternative on a group base, or the like, which currently they do not have.

The noble Baroness and other noble Lords asked about credit for carers. That is exactly why we shall be developing citizenship pensions, so that those who in good faith take themselves out of the waged labour market to enter the unwaged labour market of caring should not be penalised in old age for doing so. We all know that too often being a carer and helping someone else to cope with the poverty of old age ensures that the carer will be impoverished and isolated when in turn he or she enters old age and finds no one to care for him or her. The Government take the issue seriously and will seek to review it. I am chairing a review on disability and carers' allowances.

The noble Baroness asked the wider question as to why we do not offer more carrots as well as sticks in encouraging people into pension provision. We should emphasise that pension schemes continue to benefit from significant tax exemptions. Government made it clear in the last Budget that, for example, they would not implement the previous Government's proposal to phase out tax reliefs on employee contributions. Companies were privileged as a result of the cuts in corporation tax—they are now the lowest in Europe—which we believe will provide an environment for investment. We believe that pensions continue to provide an attractive and tax supported regime for savings, but we shall look at the issue in our review.

My noble friend Lord Borne, and the noble Earl, Lord Russell, raised the problem—it is dear to my heart—about the increasing inequality within the pensioner world, if I may so put it, through the growing dependence on income support while many others rightly enjoy the financial comfort of occupational pensions. Income support is received by 1.8 million people. A further million should receive it but do not claim it. About another 400,000 to 500,000 people are within £5 of income support levels and are therefore deeply poor.

My noble friend Lord Borrie and the noble Earl, Lord Russell, were right to draw attention to the problem that if we raise the basic state pension, all of us, including many of your Lordships, stand to gain except those who need it most—elderly women who simply see it deducted off their income support. How do we achieve targeted help without stigma? It is precisely because of that problem that the pensions review needs to consider over the next year the roots of earnings link as opposed to the RPI link for the state pension.

The noble Earl, Lord Lindsey and Abingdon, and the noble Earl, Lord Clanwilliam, raised the question of ACT. I hope that I have addressed that. There was reference to rebates to the National Insurance Fund. Should the Government Actuary decide to raise the issue with Government, at that point the Government would consider those representations.

The noble Earl raised a wider point about whether pensions were a burden on companies, handicapping British companies in the competition with Europe. Employers do not have to provide occupational pensions. It is a choice they make because they believe that it is to their economic advantage so to do.

The Earl of Clanwilliam

My Lords, I am grateful to the noble Baroness for her remarks, and for giving way. I entirely agree. It is greatly to the credit of our great companies that they make these provisions. The only point I make is that at an additional charge of some 15 per cent of salary companies are finding it almost too expensive to provide those pensions.

Baroness Hollis of Heigham

My Lords, again it is a matter for the individual company whether it sets up funds and what the contributions will be, in particular in cases where companies have moved from defined benefits to the equivalent of money purchase schemes. The reason that blue chip companies offer good pension schemes is precisely because they see it as part of the total remuneration package with which they attract and retain good employees, which is what every company wishes to do.

The noble Earl, Lord Clanwilliam, and the noble Baroness, Lady O'Cathain, raised the question of minimum funding requirement and whether there had been a move from equities to gilts. I believe that I am right in saying that there has been no evidence of any major shift taking place. Where there has been any such shift, my advice is that it may well be due to the maturing of many pension funds rather than to any changes in the Budget. However, that is an issue which must be kept under review.

I turn now to the final speeches from the Liberal Democrat and Conservative Benches. The noble Earl, Lord Russell, reminded us of the ingredients of the Conservative menu for pensions, ranging from a universal basic state pension, a means-tested related earnings pension, a £5 slice, and attitudes towards SERPS. Listening to his speech, I supported part but not all of his menu. I can see why it perhaps neatly bridges the "thinkable" and the "unthinkable" with the conference "sayable". The noble Earl raised concerns about the National Bus Company. I have sought advice because he was kind enough to give me notice of his concern. Ownership of pension scheme surpluses, as we all know, is an emotive subject. There are conditions and requirements in legislation which must be satisfied before a payment can be made to the employer. Those are strengthened from April. As regards the National Bus Company, it was a decision by the pension ombudsman who is an independent statutory commissioner. As the noble Earl will understand, it is inappropriate for Government to comment on his ruling in individual cases. However, as the noble Earl said, the case will be coming before the courts.

I was delighted that the noble Earl joined with the noble Lord, Lord Lucas, in seeking to join us with the pension settlement which will have widespread consensus and staying power. I am sorry that he was so harsh on tracker funds in particular as some of my PEPs are in tracker funds. He regarded them as parasites on the market and, therefore, people like me as parasites on the market. I am not sure that his views would be widely shared by his colleagues behind him or by the pension industry as a whole. If I understood him correctly, I was also slightly puzzled by his proposal that people should be able to draw down mortgage equity released sums into their pension, considering the huge expense that this would involve to the public exchequer in terms of Inland Revenue rules. But perhaps now that the Conservatives are in Opposition, they feel free to make proposals which could have significant public expenditure in a way that they would not have done six months ago.

I also thought that he was rather harsh on the Pensions Act 1995, which he described as cumbersome and impractical. Again, I am not sure that that is a view widely shared by those behind him or in the pensions world. But I am sure that he is right to raise the questions he does even though some of them somewhat surprise me.

The debate has been interesting and wide-ranging. The issues raised have included coverage; flexibility; compulsion; simplification; and tax treatment. I have answered as many of your Lordships' questions as I was able to in the time. In so far as I have been unable to answer, I shall write to noble Lords, and shall certainly ensure that this debate is drawn to the attention of my honourable friend Mr. Denham and of the Pensions Review.

It is clear that we have inherited a major challenge on pensions policy. In the review we are conducting we want to lead the process with the help of all noble Lords on all wings of this House, so that we shall be able to meet that challenge and build a sustainable consensus on the future of pensions in this country.

8.20 p.m.

The Earl of Buckinghamshire

My Lords, I thank everyone who took part in the debate. The Minister kindly summarised everybody's speech for me and picked up on most of the major points. I wish to take up one or two issues in my concluding remarks. Before doing so, I congratulate my noble friend Lord Clanwilliam, who has great stamina. He has now sat through two debates. I hope that he enjoyed the greater freedom of this one in relation to time. I should also like to congratulate the noble Earl, Lord Russell, who is a great pleasure to listen to. He brings a sense of humour to a debate such as this that I cannot rival.

The noble Lord, Lord Borrie, mentioned that support on these Benches for removing higher rate tax may not be as evident as he might think. There are complications in moving that tax relief. Secondly, I suggest to the Government that any move to remove tax of that nature or reallocate it is part of an overall strategy on tax and benefits. One of the points that I put to the noble Baroness related to whether the Chancellor is undertaking an overall benefits and tax review. Perhaps she will let me know later.

Baroness Hollis of Heigham

My Lords, it is certainly the case that the Chancellor has asked Martin Taylor to conduct the inquiry into tax and benefits. We await the recommendations that he will in due course make to the Chancellor.

The Earl of Buckinghamshire

My Lords, I thank the Minister for that clarification.

Another point made by the noble Lord, Lord Borrie, related to defined benefit plans and how early leavers are not treated all that well. It is clear that in the way defined benefit plans are designed there is a cross-subsidy between the young and the old, and a cross-subsidy between the early leavers and the stayers. That is a fact of those types of plans. It is why, philosophically, many companies, particularly American companies, prefer to move to a defined contribution arrangement where those types of subsidies do not occur. I am not an apologist for defined benefit plans; however, I believe that they have a very important place in the pensions planning of this country. Defined contribution plans equally have a place; and other types of plans might be considered—clear average and cash balance, for instance. They also have their place. The critical issue in relation to early leavers is that their benefits are operated in line with inflation rather than national average earnings. If the Government decide to make that sort of change, it will add yet again to the cost of defined benefit plans.

Turning to the question of compulsion, mentioned by the noble Lord, Lord Grantley, it is to be hoped that we shall not arrive at a situation such as that in New Zealand, where there is great objection to the concept of compulsion. I totally understand the idea that it infringes on personal liberty. Now and again, personal liberties have to be examined in relationship to other issues. In particular, we do not make enough provision in this country for our retirement. Another point is that there is quite a degree of compulsion at the moment in our system in providing for a mandatory state earnings related scheme and the basic state pension. It is particularly important that in considering proposals, the Government—it is to be hoped with the help of everyone in this House and the other place—put forward a plan whereby this is not seen as merely another means of convenient taxation on individuals in this country.

I congratulate the noble Baroness, Lady Hollis, on her very competent summing up. I enjoyed listening to her. I suppose that it will be another few months before she is unable to blame the previous Government for everything that she finds.

On ACT, the interesting point is that actuaries can never agree on anything; and the good thing is that economists can never agree. Is there any evidence that companies will reduce their dividends in the way that the Minister suggests—in that they will actually reallocate tax back into research and development or into other areas? I believe it was BAT which, following the tax changes, came under colossal pressure from shareholders for not increasing its dividend. The dilemma needs to be addressed. It is always nice to know that the economists are warped and distorted—perhaps that is an alliteration that I should not draw from the comments made.

As we move forward we shall certainly need to get used to some new terminology in this House: citizens' pensions, stakeholders' pensions, and designated personal pensions—which go by the slightly unfortunate initials of DPP. Perhaps the noble Lord, Lord Borrie, will be able to revisit his old stamping ground and help the Government through with that.

The debate has been about the need for the greater provision of pensions. In closing, I wish to draw the attention of the House back to the origin and terms of reference of the Pensions: 2000 and beyond inquiry by Sir John Anson and his colleagues. The report provides a final word on the matter which perhaps I may quote: Looking forward over the next 40 years, the number of pensioners is rising and the number of active working people supporting each pensioner is declining. This is a world wide phenomenon. The cost of state pensions in the United Kingdom will increase even though the basic state pension is falling as a proportion of average earnings. And there is a widening gap between incomes of pensioners who have been able to make sufficient contributions to occupational or personal schemes, and those who rely on the state". That is a very good summary of the issues raised in our debate today. I look forward to playing a part as one of the intelligent species of this House. I hope that that debate will take place before I am perhaps removed. That is possibly too gloomy and pessimistic a view of life. Once again, I thank everybody who took part. I enjoyed the debate and hope that everybody else did.

I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.