HL Deb 19 July 2004 vol 664 cc1-3

2.47 p.m.

Lord Peyton of Yeovil asked Her Majesty's Government:

Whether they anticipated the effects on pension funds of the changes to the rules for advance corporation tax.

The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)

My Lords, I hope I am right in thinking that the noble Lord, Lord Peyton, is referring to payable tax credits on dividends. Those were a distortion in the tax system under which non-taxpayers such as pension funds were better off if companies distributed profits as dividends rather than retaining them for investment. They were abolished in 1997 as part of a balanced package of measures, including reductions in corporation tax, designed to encourage companies to reinvest their profits for growth. While the abolition of payable tax credits reduced the income of pension funds by around £3.5 billion per annum, the long-term effect of that package of measures will benefit all investors, including pension funds and those saving for retirement.

Lord Peyton of Yeovil

My Lords, the noble Lord will forgive me if I say that, coming from the Treasury's most skilled apologist, that Answer was really not very welcome. Will he not at least try to explain how the Chancellor of the Exchequer came to aim such a blow at both the whole of the savings movement and the arrangements made for retirement by many pensioners? A word of regret or sympathy would not come amiss.

Lord McIntosh of Haringey

My Lords, I have not had time to look up the word "apologist" in Roget's Thesaurus, but I suspect that it is related to very many words that are much less approving than the noble Lord, Lord Peyton, would be prepared to use in public. Having said that, I do not think that any apology is required. The change was a redress of a distortion that has existed for some time and has not been a significant element in pension funds' ability to meet their obligations in the years between then and now. There have of course been significant changes in the financing of pension funds, but those have been due much more to interest rate reductions than to the fall in the price of equities and, even more significantly, to increased life expectancy.

Lord Newby

My Lords, does the Minister accept that companies are currently increasing the amounts they are putting into corporate pension funds at an annual rate of 25 per cent? What estimate have the Government made of the loss of corporation tax that will follow those increased flows?

Lord McIntosh of Haringey

My Lords, when figures are quoted on which an estimate can be made, no doubt an estimate will be made. The noble Lord, Lord Newby, referred to the increasing amounts that companies are putting into their pension funds, and that is welcome. I would remind him that in the period preceding the abolition of payable tax credits on dividends, companies—many of them the same companies—took very much longer pension fund holidays, amounting over a period of years to something like £19 billion.

Lord Higgins

My Lords, is it not clear that the change in ACT to which my noble friend referred was only the first in a series of actions by the Chancellor that have added to the present crisis in provision? The Government admitted only last week in Grand Committee that the Pensions Bill was introduced in a hurry. As a result, there was not adequate time to debate it in the Commons. We in this House will have to sort out the details of the Bill, which seeks to rectify some of the damage that the Government have caused. Your Lordships will need to make that effort.

Lord McIntosh of Haringey

My Lords, I am sorry to correct the noble Lord, Lord Higgins, but the abolition of advance corporation tax took place roughly at the same time, and on the basis that advance corporation tax and dividends tax credit were generally set at the same rate. What we are talking about now is not advance corporation tax; it is only the payable tax credits on dividends that directly affected pension funds. On the issue of the Pensions Bill, I leave the noble Lord, Lord Higgins, to debate that at his usual length and with his usual assiduity with my noble friend Lady Hollis.