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Baroness Hollis of Heigham: My Lords, I was mouthing—perhaps the noble Lord will forgive me—that we had already done that, and they are resolute.

Lord Naseby: My Lords, if they are resolute, the Minister will have to try and try again. It is too easy to retire at that point. The FSA was resolute about not changing on solvency ratios, but it has now changed. In the mean time, I suggest that the MFR should be confirmed for the next 10 years. Furthermore, just as the Government have capital allowances for defined periods in the industrial world, they should consider introducing pension allowances, with a matching contribution from companies.

The Government have to understand how important it is to get people to save. It is calculated that in order to receive a reasonable private pension today, the necessary pension contribution is about £200 a month. That is where Sandler and stakeholder pensions, frankly, do not have a role. Sandler is geared towards simple products for people at modest levels of contribution.

In conclusion, today, OPRA introduced emergency rules aimed at banning employees from leaving a company scheme. It looks very like the market value adjuster—so criticised by Her Majesty's Government—that life companies recently introduced. This country has a proud record on company and private pensions, but it is crumbling fast. The Government need to move swiftly to help, and to help positively. If OPRA sees an emergency, then there truly is one.

5.46 p.m.

Lord Jenkin of Roding: My Lords, I, too, want to express my gratitude to my noble friend Lord Fowler for introducing the debate—and, on a slightly different note, my gratitude to him for persuading me to take part. I have listened to nearly two-and-a-half hours of extremely well-informed debate about what I hope the Minister will acknowledge is a very serious problem. I do not see how she could sit and listen to the very knowledgeable contributions from all parts of the House and still maintain what many have described as government complacency in the present situation.

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In the few minutes I have, I want to mention only two matters. Most of the general points have been made. There seems to be widespread agreement that there is a need to close the annual gap—put at £27 billion a year—between what is needed to finance decent pensions and what is actually being saved. The issue is, therefore, not "whether" but "how".

My noble friend Lord Naseby made reference to the stakeholder pension, as did my noble friend Lord MacGregor. It is clear that the Government, from the outset, set great store by the introduction of the stakeholder pension. In their 1997 manifesto they used the words:

    "high value for money, flexibility and security".

A few months later they identified the target population as being around 5 million people with incomes between £9,000 and £20,000 a year. They introduced an element of compulsion on employers: any employer with five or more employees is "designated" as being within the scope of the stakeholder pension.

I was very surprised, therefore, at the reply of the noble Lord, Lord McIntosh, to my supplementary question on 25th February. He agreed that, as he said, about 335,000 employers were designated—the ABI confirmed to me this morning that that figure is about right: it is in the order of 330,000 to 340,000. However, he gave the figure for stakeholder pensions sold as 1½ million. I could not come back on that point—one does not have a chance to do so at Question Time. But I am now told on good advice that that figure was a considerable exaggeration. The figure that I was given by the ABI this morning is about 1¼ million. Independently, the Library has confirmed with the Treasury the same figure—1¼ million. I hope that the Minister will therefore recognise that her colleague misled the House by a factor of 20 per cent. She should not shake her head in disgust. We rely on Ministers for truthful figures. I am afraid that I was not given a truthful figure because the noble Lord, Lord McIntosh, with typical spin, tried to make the Government's position appear better than it really is. That must stop. We need to be realistic about the matter.

As regards the current figure of 1¼ million, 40 per cent—I quote the figures in the Green Paper—of their sample fall into the bracket of what the Government aimed at; that is, the wage range of £9,000 to £20,000. So, about half a million people in that bracket have bought stakeholder pensions over the period. The Government originally aimed at a figure 10 times that. I therefore agree with my noble friend Lord Naseby who was absolutely right to say that stakeholder pensions had been a failure.

But one must go beyond that statement and ask the reason for that state of affairs. One reason, that I mentioned on 20th February, is the cap on costs. If a pensions provider can gain access to employees in the workplace and can see a number of people over a short period, he may be able to keep his costs below the 1 per cent cap. However, it is impossible for him to keep his costs below the 1 per cent cap when dealing with, for example, the self-employed trader or the employee who cannot be seen in the workplace. Is it not ironic

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that the largest picture on the cover of the Green Paper is that of the archetype, self-employed trader, the market stallholder? One cannot sell a stakeholder pension to a market stallholder and keep one's costs below the 1 per cent cap.

The Government boast about "driving down charges" of selling stakeholder pensions; but if that process leaves large swathes of the target population outwith the reach of pension providers, it is an utterly self-defeating policy. I hope that the Minister will tell the House that the Government are prepared to discuss with the Association of British Insurers the operation of the 1 per cent cap.

The second point, which I can deal with more briefly, concerns the need to demystify the jargon of the pensions industry. Many noble Lords, including my noble friend Lord Vinson, referred to the need for informed choice. Here I want to mention the valuable initiative taken by the insurance industry through its "Raising Standards" campaign. Consumer research shows that most of us have put off planning our finances due to confusing documentation, a lack of clarity about financial products and poor service.

The "Raising Standards" quality mark scheme was set up by the industry in 2000 directly to address those consumer needs. It is mentioned in the Green Paper in passing but I hope that the Minister will today give a warm welcome to the "Raising Standards" scheme. It is being run by the Pensions Protection Investments Accreditation Board. I believe that that body is doing an extremely good job. Over 50 per cent by market share of the lifelong savings industry currently operates the "Raising Standards" scheme. That means that customers receive point of sale literature written in plain language, with charges clearly set out; and that the brand is monitored through an annual customer satisfaction index. Pension providers belonging to that scheme have to reach a very high standard of retention, with low penalty charges and so on. I hope that that positive effort on the part of the insurance industry is welcomed by the Government as it is one way to help to close the savings gap.

5.54 p.m.

Lord Oakeshott of Seagrove Bay: My Lords, I declare an interest as a pension fund investment manager for the past 26 years. I duck to avoid a brickbat from the noble Lord, Lord Haskel, and others who believe that the crisis is the fault of pension fund investment managers.

I thank the noble Lord, Lord Fowler, for introducing the debate. I agreed very much with his trenchant and perceptive introduction. I also agree with him that the Green Paper is a lost opportunity and also, indeed, that we need more radical solutions.

The debate has been dominated by speakers from the Conservative Benches. I believe that 10 out of the 16 speakers so far sit on the Conservative Benches. I agree with the analysis of the problem of those who have spoken from those Benches but I do not think that we have heard very much in the way of radical solutions. However, I pay tribute to the noble

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Baronesses, Lady Greengross and Lady Turner, to the noble Lords, Lord Naseby and Lord Vinson, who made radical suggestions, and in particular to those who are prepared to grasp the nettle of compulsion. We on these Benches believe that that is essential.

The International Monetary Fund, in its annual report on the UK economy issued this week, put its finger on the pensions dilemma facing this country. With its usual cautious wording it stated:

    "Directors observed that the strength of the United Kingdom's underlying fiscal position depends importantly on containing future public pension obligations, which in turn depends on adequate individual retirement saving".

I am afraid that if you believe the British are doing that—making adequate individual retirement savings—you will believe anything.

What the language of the IMF means in plain English is that we in this country have got away with a rotten basic state pension for many years because most employees have been covered by generous and secure occupational pension schemes, certainly throughout the public sector, the former nationalised industries and widely in the private sector, certainly in larger companies.

But now we can feel the ground moving under our feet on private pensions. As the noble Lord, Lord Alexander, and others pointed out, this week alone we have seen Rolls Royce report a pension fund deficit equal to four times its annual profits. The leading City investment bankers, Credit Suisse, First Boston and Dresdner Kleinwort Wasserstein have estimated the current pension fund deficit of the FTSE 100 companies at between £70 billion and £100 billion. As we have heard, company after company are closing defined benefit schemes to new members, making members pay more for worse benefits and, as the noble Lord, Lord Freeman, pointed out, having to dig deep into their profits to keep schemes solvent.

As noble Lords pointed out, many of the companies now reporting massive pension fund deficits were only too happy for many years to boost their profits in the fat times by taking contribution holidays just when they could have afforded to pay more into their funds to protect their pension schemes against lean times like the present. In fact one company, Associated British Ports, last week closed its final salary pension scheme to new employees while it is still on a contribution holiday. The occupational pension promise in this country depends on either the company or the pension fund staying solvent. If they both go down at the same time, there really is nowhere at present for pensions and scheme members to go.

With occupational pension funds under such pressure, protection for members and pensioners when schemes wind up moves right to the top of the agenda. The noble Lord, Lord Fowler, made the welcome suggestion that we should seek consensus where possible. We on these Benches, and my colleagues in another place, welcome the emphasis in the Green Paper on the need for sharing assets fairly when pension schemes are forced to wind up. We are happy to work with the Government to get this much needed

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reform agreed and enacted in the very near future. Where there is a significant shortfall in a fund on wind-up, we believe that pensioners and scheme members with modest entitlements should be first in the queue. Their priority payments might be limited to a multiple of the basic state pension rather than, as at present, giving all pensioners, however well off, the biggest slice of the cake, leaving only crumbs in some cases for long serving employees about to retire.

Arrangements of that sort, however, only share the misery more fairly when a scheme winds up. They do not provide any more money for its members in total. We offer to work with the Government to see whether it might be possible to establish some form of national reinsurance or indemnity scheme to rescue pension schemes which become insolvent for reasons other than dishonesty by insolvent employers, which is covered already.

I am bound to say that such a scheme would be very difficult. It will certainly be a non-runner unless the Treasury is prepared to stand behind any industry-wide scheme as the underwriter of last resort. That could be done on the model of the Pool Re scheme, the mechanism by which owners of commercial buildings are able to obtain cover against terrorist risks which would otherwise be uninsurable. Of course, the problem is moral hazard, as in banking. Well funded and safe pension schemes backed by strong companies will be reluctant to pay a levy to support weaker schemes, particularly if that might encourage some schemes to sail close to the wind and not face up to the need to make payments. With DB schemes under so much pressure already, we need to be very careful before loading any more costs or bureaucracy on to them.

Many examples have been discussed in the House over the past year, in which the Treasury has been only too happy to toss letters of comfort and guarantees of contingent liabilities around like confetti to support PFI and PPP contracts, such as in the bailing out of British Energy and the case of Network Rail. The Treasury will have to decide whether the plight of British pension funds demands equal commitment.

On those two issues, we would be happy to work with the Government. However, they must go back to the drawing board on their proposals for a lifetime limit on pension savings by better-off employees. I refer to the £1.4 million cap. The Treasury document issued with the Green Paper gave a grossly misleading picture of how many people may be affected by such a cap. It states that only 5,000 people now have personal pension schemes worth more than £1.4 million. So what? The £1.4 million limit, with a 60 per cent effective tax rate for those who exceed it, will bite just as hard on members of final salary pension schemes, whose pension rights will be given a capital value when they retire.

The Treasury document states that 90,000 people earn more than £200,000 a year. I shall take the topical example of the noble and learned Lord the Lord Chancellor, who earns £180,000 a year and is entitled to a pension of £90,000. I have been officially told in

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an Answer that the capital value of his pension rights is officially, "at least £2 million". A typical final salary scheme pays a pension of at least half the final salary, so most of those 90,000 people would be caught by the £1.4 million cap. I estimate that, typically, members of a final salary scheme retiring on annual salaries down to no more than £120,000, and in some cases down to £100,000, would be caught by the cap if it were in force.

That is a much wider swathe of British management and the professions than one would presume from the government documents. I would be delighted if the Minister cared to analyse my estimates further and write to me stating how many people the Government believe would be caught. Quite a bit more of upper-middle England will be caught than noble Lords might believe.

The other problem with the lifetime cap is that it discourages pension saving by anyone who may be caught by it. The limit should be at the front end of saving for a pension, not the back. The Government's present proposals will force savers to take a massive gamble with their pensions. All professional advice is that one should start saving early, but if people do that in a relatively well-paid job 20 or 30 years before they plan to retire, how can they know whether their pension rights will grow to £1 million, £2 million or even more in real terms by the time they retire? Stock market returns fluctuate greatly.

The principle of restrictions on high earners contributing to their pension funds is fine. We do not oppose that. However, to be fair and transparent, a lifetime limit of £1.4 million or any other level must be calculated not on an unpredictable capital value of pension rights on a single day many years away but on the cumulative total value of contributions that have built up an individual's pension rights over the years, including employer's contributions.

Many speakers today, starting with the noble Lord, Lord Fowler, referred to a pensions crisis, as I did myself in a debate last May. I do not think that there is any point pursuing that question further except to ask the Minister gently, if this is not a pensions crisis, what one would feel like.

The future for pensions in this country is sombre. We have a poor basic state pension, right at the bottom of the European league, topped up by a mishmash of means-tested benefits. Above that, a tried and tested structure of high quality occupational pension schemes almost without parallel in the world is cracking before our eyes. We on these Benches will work with the Government to stop the rot, but the hour is late and the problems grave.

6.5 p.m.

Lord Higgins: My Lords, I agree with all noble Lords who congratulated my noble friend Lord Fowler on introducing the debate, which is on a matter of the very greatest importance. It is deplorable that we have not been given a government debate—a full day's debate in government time—either in this House or, as I understand it, in another place. Perhaps it is not surprising that we have not had one, because there is

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an almost universal view that the Green Paper is inadequate to deal with the situation that we face. There is a crisis in pensions provision and savings. It is very important that the Government recognise that that is so. I hope that the Minister will make it clear that the Government recognise it.

We have had a most distinguished debate, with contributions from no fewer than four former Cabinet Ministers and from experts in every part of the House. There have been a number of important and constructive suggestions from my noble friends Lord Vinson and Lord Naseby, the noble Baroness, Lady Turner of Camden, and others to which I hope that the Government will give careful consideration.

The original Green Paper in 1998 said that it was expected that the proportion of pensions provision would change from 40 per cent private and 60 per cent public to 60 per cent private and 40 per cent public. When I raised that matter last night, the Minister said that it was now an aspiration. It is a strange aspiration, given that almost everything that the Government have done has put pressure in the opposite direction.

Having said that, one cannot complain about a lack of legislation. Since I entered the House, we have had endless Bills on pensions and social security. The first of those was concerned with stakeholder pension provisions. Opinion on stakeholder pensions varies from "disappointment" to "dismal failure". My noble friend Lord Jenkin pointed out that the take-up has been much smaller than the Government thought. They thought that 5 million people might take them up; in fact, the figure is a little more than 1 million. As has been pointed out in a number of representations that I have received, the crucial matter is that 90 per cent of company-designated schemes are apparently empty. The scheme has been designated, but pensions have not been taken up.

The stakeholder pension was described by the Financial Secretary to the Treasury as a "safe haven" product. That was a strange expression to use. If someone had invested the full amount in a stakeholder pension when the system was introduced, what would its value be now in percentage terms if it had been invested in something entirely sensible, such as a general tracker fund? The stakeholder pension is, of course, subject to all the variations to which any pension of a defined contribution scheme is subject, in relation to the stock market and so on.

My next point is on the effect of the state second pension. The noble Baroness, Lady Barker, put forward reasons as to why that was not satisfactory, and I am inclined to go along with what she said. We also have the pension credit provisions, which are of immense complexity. In evidence to the PAC inquiry, it was stated that the computer that will be needed to operate that system will be eight times bigger than that used for the self-assessment of income tax. Another trouble with complexity is that we do not get the take-up that we want. I know that the noble Baroness shares my concern about that very serious problem.

Another problem concerns means-testing, which has a huge effect on the level of savings. If one saves but the proceeds of those savings are means tested, that

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is a real deterrent. The Pensions Policy Institute suggested a short while ago that in the current situation three-quarters of existing employees will be on means-tested benefits by the time that they retire. I leave unanswered the question of who will pay for that. It is a serious indication of the level of pension that people at that stage may reasonably expect to get.

The savings ratio under the Government has been virtually halved. I received a very complacent reaction the other day in answer to a question from the Dispatch Box from the noble Lord, Lord McIntosh. The ABI estimates that the savings gap per year is about £27 billion, which is of grave concern.

Many noble Lords have drawn attention to the ACT raid on pensions funds and to the cost to the industry, which is about £5 billion a year—cumulatively, I suppose that it runs to about £25 billion. I make only two additional points to the very valid points that have already been made about that. First, the change was justified by the Chancellor—and, indeed, by the noble Baroness the Minister—because it would encourage investment. The reality is that it has not had that effect. Companies not having the advantage of the ACT concession are now finding that they must spend money topping up pension schemes rather than investing.

Secondly, when the Prime Minister was challenged on that matter, he said, "We don't need to worry because of the high level of the stock market". I am not clear whether he is still of that opinion; it seems unlikely. That has had a major effect, which resulted in the move away from final salary schemes and towards defined contribution schemes.

A number of noble Lords rightly pointed out that there will be a need, in view of the pension holidays that have been taken, for employers to contribute more. One very much hopes that they will do that rather than change their scheme from defined benefit to defined contribution or close the scheme altogether.

The fundamental problem that we face with savings is that there is a crisis of confidence about whether one will get an adequate return from savings. The latest figures, published a few days ago, suggested that there was probably no positive return over a considerable number of years, other than the fact that one had had tax relief; without tax relief, one would certainly have a negative return.

The situation is epitomised by the problem of Equitable Life, which has had much publicity. The noble Lord, Lord Elder, said that he was affected and was afraid to ask what his benefits were now worth. The Government have not faced up to the problems that have arisen with Equitable Life; I refer to the failure of the regulator to protect policyholders' interests. They set up the Penrose inquiry, which is wholly unsatisfactory. The main culprit in all of that is probably the Treasury as regulator. The inquiry was set up by the Treasury on terms of reference that were defined by the Treasury and the Treasury will decide how much of the inquiry to publish. At the same time, the ombudsman put his investigation on hold. Will the

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Minister assure us that the terms of reference of the Penrose inquiry will not prevent Lord Penrose, if he finds that the regulator or a succession of regulators has failed, recommending that compensation should be paid? That will be very important if we are to restore confidence in that side of the industry.

This debate is being held under considerable time constraints. The previous Green Paper of 1998 stated:

    "Over time, the share of national income devoted to pensions will increase, but a higher proportion will come from private, funded pensions. State spending will increase but income from private pensions will increase even more as stakeholder pension schemes become established and occupational pension schemes are strengthened and supported".

The Government have not strengthened and supported such schemes. The chairman of the Association of Consulting Actuaries only the other day said that occupational pension scheme membership and provision is declining sharply. The Green Paper stated that, over the past 20 years, newly retired pensioners have had a higher income than their predecessors. Unless something very radical is done by the Government, that will not be true in future.

6.16 p.m.

Baroness Hollis of Heigham: My Lords, we have had an extraordinarily well-informed and interesting debate, for which I, like others, am grateful to the noble Lord, Lord Fowler. I apologise that we did not have it a month ago but, as the noble Lord, Lord Higgins, knows, I was having eye surgery at the time and could not have done it.

It is undeniable, as many noble Lords have said, that people are failing to save enough to fund their retirement. I do not disagree with the figures that have been quoted: around 3 million are currently not saving enough and a further 5 million to 10 million may not be saving as much as they would wish.

The analysis is shared by all of us, so I shall not spend much time on it. Fewer years in the labour market are being asked to support longer years out of the labour market. We enter work later because of more extended education, we leave work earlier and we live longer. As my noble friend Lord Elder said, the figure is a year or two for every decade.

Moreover—this issue has been underplayed in this debate—there has been a trend to retire early, which, incidentally, has been a trend across Europe. By state pension age, around two-thirds of men and half of women—almost 3 million people—have left the labour market. The key point—noble Lords will be aware of the statistics—is that if one wants a modest occupational pension of £100 per week, one needs to save £30 per week if one retires at 65 but one needs to save £85 per week if one retires at 55. That involves 10 years less to pay in and 10 years more to live off it. That means that one virtually has to treble one's contribution.

The Government's priority, despite the comments of the noble Lords, Lord Fowler and Lord Blackwell, who quoted parts of the Green Paper, is to encourage more people to work to 65 rather than compulsorily—as opposed to voluntarily—requiring them to work

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after 65; for example, until the age of 67. That is not to say that that is a closed issue; however, in view of the statistics that I have provided, that is where our priority currently lies. Too often, people have a twilight of dependency on benefits between when they leave the labour market and when they draw their retirement state pension, which means that they go into it already having depleted their savings and without having a pension build-up. That is a major problem.

The question behind tonight's debate is: why are people not saving more, and what can we do about it? One suggestion that has been offered in the discussion group meetings and consultation exercises in which I have been engaged—this point is often made by financial consumer groups—involves financial realism; that is, people cannot afford the expense. Low earners in particular—those earning less than £11,000 or £12,000 a year—cannot be expected to save into a funded scheme. It is reasonable to expect those people to rely on basic state provision and an unfunded support system. However, of those who are not contributing, one-quarter are younger than 24 and/or earning less than £10,000 a year. The problem is that if one does not start early, one does not build up.

Equally, there is a real problem for those with very low incomes of going for compulsion. That problem was raised by the noble Baroness, Lady Barker, and her colleague the noble Lord, Lord Oakeshott. Behind that, as the noble Baroness, Lady Byford, rightly said, there is the problem of the fear of debt in this country.

Women, in particular, put their part-time earnings into household expenditure hoping, too often wrongly—a matter to which I shall return—that their husbands' pensions will be theirs. So the first explanation is that they cannot afford it, and the second is—and this is a more comforting explanation—that they do not understand all that information, and that if only we gave them more all would be well.

There is a great deal of truth in that. The point about Sandler was not to seek to regulate the salesmen and saleswomen but to regulate the simplified product. That way we might be able to rebuild confidence, together with pension credit, which was like a wrap-around to allow one to enjoy more. That is true. We certainly need simplicity of products and information about them.

There are others who, although understanding the situation well enough, face conflicting demands, such as student debt, mortgages, university costs for children and possibly even care for the elderly. So they put off making pensions provision or thinking about it until their late forties or fifties. We are therefore almost asking people to be counter-intuitive; to start their pensions early and delay some of their other expenditure as late as possible in order to benefit from compounding. That of course is counter-intuitive to natural priorities.

That is reinforced by another dimension, which has been highlighted by our research, our focus-group work and from our meetings with organisations. Many

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people believe that it is an issue that they can put off. They are not perhaps sufficiently worried and do not have enough sense of what your Lordships have referred to today as a "pensions crisis".

People recognise that they have not put savings away in a pensions format. They see high employment—and we have the highest employment since 1977. That is before taking into account the extra that comes into households of second earners, which has increased dramatically since the 1970s. So there is a real sense of security through earning at the moment, added to low inflation, which as we know makes the value of one's savings last much longer, together with soaring house prices. It is a comfort blanket, in particular regarding people's homes.

It would be sensible, as one noble Lord mentioned, to improve products that allow safe withdrawal of income from property without trading down. The Financial Services Authority will need to explore that area.

Putting off pensions provision—and I return to a point raised by the noble Baronesses, Lady Barker and Lady Greengross, with which I rather agree—is essentially a problem for women. Psychologically, they have the mindset that his pension is theirs; that they not only have the comfort of a house but of a husband, or even—and this is a worse illusion—a property and a partner. Yet we know that one marriage in two ends in divorce. Furthermore, 60 per cent of the population think that "common law wives" exist and that they have rights. They are wrong on both counts.

That suggests that many women will enter old age without even a national insurance pension, let alone an occupational pension. How many women know the difference between the lower earnings level and the primary tax threshold? I guess that there are few. Yet, if only they knew that by working an extra one or two hours in order to get over the LEL, they would build up an independent pension, how much we could help them.

Much of this may be transitional. To a degree women carry an older mindset that they will look after children or the elderly, while also trying, but not yet succeeding, to build up an independent pension of their own.

The noble Baroness, Lady Barker, referred to the married women's stamp. Women have made at least three elections to continue with the reduced married women's stamp, as well as being exposed to several publicity campaigns, including one as late as October 2000. I refuse to accept that women are children and cannot take responsibility for documents they signed once when they married, a second time in 1977–79 and again in responding to campaigns in the 1980s.

The next reason why people may not have developed a pension is because they think it is not financially worthwhile and that the returns are not good enough. Perhaps they do not appreciate the effect both of compounding and—disturbingly—the benefit of employer contributions, let alone the tax wrap-around in which their 5 per cent may produce a

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12 per cent or 15 per cent contribution that goes into the pot. They may overestimate the problems and the price of inflexibility—that they cannot get at it. Therefore, they fear not only poor returns but that they are locked into a no stop-loss situation.

Finally, and this is the biggest obstacle, there is the perception of risk. There has been mis-selling. Have the sharks now become playful dolphins? There is the risk to DB schemes, from Maxwell through to Maersk. There are problems of seeking additional contributions to DB schemes. As regards problems with DC schemes—and I agree with several noble Lords, in particular the noble Baroness, Lady Greengross—providing the money going into the pot is the same as for a DB scheme, over time it can have the advantage of portability without necessarily producing a lower return.

It will be difficult for people to build up a decent DC scheme when, as with one major food retailer—I am tempted to name and shame—both the employer and the employee put in 2 per cent. That will not produce a decent pension. I pay credit to, for example, insurance companies which put in 12 per cent and 4 per cent from the employee. That can produce a return not dissimilar to a decent DB scheme.

If those matters have contributed towards people failing to save, what is the appropriate response of government? I was particularly disappointed in your Lordships—as a junior Minister I scold former Secretaries of State, if that is not impertinent—with respect to the language directed at the Government regarding complacency. The suggestion seemed to be that they have a quiver-full of solutions with which to address the problem. I suggest a situation and ask your Lordships to think about it. If the FTSE today stood at 7,000; if therefore half the companies in the country were still taking contribution holidays—indeed a quarter were taking such holidays last year—and if therefore finance directors were not pressing for compensation to go from DB to DC schemes, and more importantly to halve their contributions in the process, and were not exposed to the rigours—and unfortunate ones at this point in time—of FRS17, would we then be talking about a crisis? I ask your Lords to what extent you would hold the Government responsible for what underpins the situation in which we now find ourselves.

The Government's response is to do as the Chancellor is doing, which is to build for the future and continuing health of the economy in terms of jobs and pensions—because my job is your pension, and your pension investment is my job. The best guarantee of a decent pension in one's 60s is a decent job in one's 20s. Every former Secretary of State in the Chamber today, every Minister and every contributor knows that. The fact that we have the lowest unemployment since 1977 and that there are 1.5 million more jobs in the economy is building up prosperity, even if we have not yet managed the trick of turning that prosperity into pension savings.

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I suggest that the somewhat futile debate about ACT is not germane. I have tried, but cannot work out the hypotheticals of what if it had never happened. However, I shall make three points. It was a tax privilege that encouraged the distribution of dividends rather than their retention. Pensions are already, and continue to be, heavily tax-privileged, which is why I suspect there was so much pressure to scrap the annuity rule at 75 because it is such an attractive proposition. As my noble friend Lord Haskel said, what matters at best value added is management not tax rates.

The second point is that through the windfall tax we have reclaimed £5 billion. But it was connected at the same time to a cut in corporation tax worth £3.5 billion a year. I calculate that 10 speakers have mentioned ACT, but not one has mentioned the cut in corporation tax. Funny that. If reinstatement was such a good idea, as some noble Lords have suggested—I know that the noble Lord, Lord Fowler, would not commit himself on this point—I point out that Mr Willetts has made it clear that he has no intention of reinventing ACT, unless of course policy changes.

So what can and should the Government do? First, and I think that noble Lords will agree, they should meet the needs of those who cannot save. I agree entirely with the noble Lord, Lord MacGregor, that what needs to be provided is a floor standard for citizens of a secure basic retirement pension in order to deal with poverty today and to reduce the risk of poverty for future pensioners.

One popular proposal suggested today is to scrap pension credit, state second pension and to add it to the basic state pension. The noble Lord, Lord Northbrook, wanted to link the entire thing to earnings. At a stroke, as far as I can see, that would add something like £46 billion to public expenditure by 2030. Heaven knows what that would do to the 60:40/40:60 ratio. That is for him and his Front Bench to work out.

Basically, with such proposals they are asking the basic state pension to carry a lot of weight. That is arguable—my noble friend Lady Turner has honourably argued that for many years—but there are two key points. First, the basic state pension is a national insurance pension. It is contributory. None of your Lordships mentioned—I am sure that you know—that 51 per cent of female pensioners now do not enjoy a full NI pension in their own right, because they do not have a complete NI record, and they are the poorest.

So any increases in the basic state pension, which go to everyone, go to us, but not to her, because she does not have a basic, complete state pension. If we are not careful, such proposals will redistribute wealth upwards, as opposed to what we are trying to do, which is to target wealth downwards to the poorest. I challenge your Lordships to address the point about a basic state pension funded by national insurance.

The second point is that that preserves inequalities. We have debated that before, but if we really want to help the poor, and we can either give £1 to everyone or £5 to the poorest fifth, I know where my priorities lie.

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The first role of government is to be a provider and, through the basic state pension but, above all, through the state second pension, which is heavily redistributive, and pension credit, which ensures that value is retained for small savings—and which does not presently exist, because income-related benefits cancel it out—we are meeting that task.

The second role of government is not just as provider but as enabler, to help extend savings provision, to help to deliver and to construct vehicles to deliver private contracts. How do we incentivise people to save? We must keep people in the labour market longer. I agree with your Lordships' calculations about the 7.5 per cent on the increment past 65, which is why one proposition is to increase it to 10.5 per cent and to advance that. We need to bring more marginal people into the labour market—lone parents and disabled people—and we are succeeding in that. In the Green Paper, we are consulting on whether joining an occupational pension scheme should be a compulsory option available for employers to impose on employees.

I was also intrigued that no one mentioned vesting. Let me give your Lordships an example. Ms Patel is earning £20,000 a year and putting 5 per cent into an occupational pension—£2,000 after two years. At present, without immediate vesting, the money could be taken out after one year and 364 days. Her £2,000 would be worth £1,200. With immediate vesting, it is worth £3,400. Especially for women, part-timers and those who change jobs when they are young—often quickly—immediate vesting will transform the early size of the pot, therefore compounding the possibilities.

We are also helping through tax simplification and through stakeholder pensions. I accept the point made by the noble Lord, Lord Jenkin of Rodin, but my statistics state that more than 1.25 million stakeholder pensions have been sold. That is an honourable figure; although we want more. There is a debate about capping; but I disagree with him—what is depressing that figure is not capping but the failure of employers to contribute. Where employers contribute, 85 per cent of employees take up stakeholder pensions; where they do not, only 15 per cent do. That is a more important driver in achieving a spread of stakeholders than is the 1 per cent capping charge.

If my noble friend Lord McIntosh said 1.5, that may have been a misreading of 1.15, given the latest statistics that he had at the time. If so, I apologise to the House for any slip of the tongue that may have occurred.

We again had the request about annuities at 75—I think that the noble Baroness, Lady Byford, put the case most eloquently that one should not be forced into that. Leaving aside issues of morbidity drag, about which I suspect that others know more than I do, and the risk—which I do not rate especially highly—of people blowing it all on a cruise, the real question is why people do not want to annuitise at 75. I suggest that that is because the pensions vehicle is so attractive by virtue of its tax privileges that people

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want to use it for devices and reasons other than merely as a secure income in old age—as an inheritance vehicle for their children.

If I want to leave money to my children, there are plenty of other ways in which I can do that. I do not have to ask the state to do it by wrapping it with the tax privileges associated with pensions. Leave it through property, building societies, bonds, or whatever one wishes, but do not unreasonably ask for the privileges of high-rate taxpayers to enfold around a pension and then have the right to leave it to one's offspring at the expense of those who have no such tax privileges.

If the first role of government is as provider and the second is as enabler, I think that we all would agree that the third is as educator, addressing the issue of information. I hope that with our combined pension forecast we shall do exactly what the noble Lord, Lord Freeman, called for. It will come as a cold blast of reality to many people when they read what they might otherwise be getting. That has already started to work: when we have tested that on a pilot basis, people begin—even if only modestly—to put extra money into their pensions. We hope to roll that out on a voluntary basis with other companies over the course of the year. We also want to develop the mass marketing of financial advice; I do not think that there is any disagreement about that.

Finally, there is the question of government as regulator addressing the issue of risk to rebuild trust and confidence in the pension system. That touches on some of the issues raised by the noble Lord, Lord Oakeshott, about the minimum funding requirement, the role of the new regulator and questions about wind-up—I welcome many of his comments about that. It also addresses the issue raised by the noble Lord, Lord Alexander of Weedon, about transfer.

I understand that schemes are usually required to provide transfer value populations on receiving a request from a member. That time limit can be extended by the Occupational Pensions Regulatory Authority in all sorts of circumstances. It has currently decided to extend it until legislation is amended. Dependent on the outcome of consultation, regulations could come into effect before June. That may not have the significance suggested by the article in the Financial Times today but, if I have any further information, I shall be happy to write to your Lordships.

Given the Government's role as provider, enabler, educator and regulator, there is one final role, which is, as I said, to help to build trust and develop partnership. That is why, as my noble friend Lord Lea said, we must all own the problem: employers, employees and the financial services industry as well the Government. We await the full responses to the Green Paper as we shape our response. I am sure that your Lordships' debate, which I thought was extraordinarily good, will help to inform that response. I thank your Lordships for that.

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6.37 p.m.

Lord Fowler: My Lords, I have only a minute or so in which to end the debate. I should like to thank everyone who has taken part. We have had 16 speeches from the Back Benches, which I cannot now go through, but they were all excellent.

Twice the Minister raised with me the question of the £5 billion pension tax and what we intend to do about it. It is interesting that Ministers are at last asking about the policy of the next Conservative government; I welcome that. I am clear that it should be a policy aim to restore the tax advantage. That should be our aim. I am in no doubt about that; I hope that the Minister will note it. I must enter the caveat that Gordon Brown always mentioned before the 1997 election: obviously it depends on what kind of economy we inherit.

I fear that I must tell the Minister that I was not convinced by her reply: I was not convinced on pension tax; I was not convinced that the Government fully appreciate the pensions crisis; above all, I was not convinced that the Government have the policies to meet the crisis. I give notice that we on these Benches will raise the issue again and again, but for this evening, I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.

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