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Mr. Peter Viggers (Gosport): I hope that the debate does not disappear into a black hole, because Parkinson's law tends to apply to such matters. The numbers are so large and the time scale so long that the press do not pay much attention. That is wrong because the debate is important. I am pleased that my party chose to allocate a whole day to it and I hope that its importance is reflected in the press.
In a fiercely competitive field, pensions are the Government's greatest failure. They are condemning millions to inadequate pensions and means-testing. I declare an interest in the general subject as the chairman of a pension fund who has taken an interest in such matters for many years.
From a global perspective, the United Kingdom does not stand too badly against our European colleagues. About £1,270 billion is invested in pension funds in Europe, 90 per cent. of which is invested in three countriesthe UK, the Netherlands and Ireland. The disparity is that we value our investment in pension funds in a way different from that of most of our European colleagues and there is a serious funding crisis in the UK.
We also face the problem of outflows caused by longevity and fluctuations on the stock exchange. We all know, however, that actuaries can and do take account of longevity. They tabulate their projections on a very long-term basis, which also takes account of variations in stock exchange values. One cannot attribute the crisis in pension funds simply to those two issues. There is the further problem of FRS17, which requires companies to include a reference to their pension fund situation in their annual accounts. I am pleased that that has been delayed while further discussions take place. There is also the problem of the miserly uprating of the contracted-out rebates, which cost each contracted-out pension fund member about £130 a year.
Those problems pale into insignificance, however, when compared with the Chancellor's raid on pension funds in his first Budget. The £5 billion-a-year raid on pension funds has been the major single factor in causing the crisis in pension funds. It adds up to a £27 billion shortfall, which pension funds cannot sustain.
The pensions debate takes place against a background in which companies find it appropriate to phase out their final salary schemes partly because of projected underfunding and FRS17. It also reflects a changed employment system. It is unusual for someone to stay with a firm for his whole career. Individuals are more likely to move from company to company, which is why many employers regard money purchase schemes as more appropriate.
Mr. Viggers: That practice is a reflection of FRS17, which requires companies to take account of their pension fund situation, and of changed employment practices. It is still appropriate in some firms to have the advantageous final salary schemes, but if individuals are not staying with companies for long periods one has to accept that the final salary scheme does not suit such an employment system. A money purchase scheme also has advantages for employees who work for longer periods but who are not expecting to move further up the ladder in their firms, perhaps because they decide to work in a different capacity at the end of their employment, which means that they earn less than when they were younger.
Firms with final salary schemesthis relates to the hon. Gentleman's questionwere in the habit of paying 15 to 20 per cent. to the pension fund of each employee, but employers tend to pay 5 to 10 per cent. towards money purchase schemes. If an employer pays 6 per cent. to the pension scheme, the employee contributes about 3 per cent. on average. That 9 per cent. contribution is less than half of what will be needed to allow for a reasonable pension at the end of the employee's period of work.
Those problems add up to a crisis. We need leadership, encouragement from the Government to contribute to pension schemes and incentives. It has been mentioned that people in their 30s and 40s who are concerned with
Something needs to be done. What is the way ahead? First, I have no doubt that compulsion in pension funding is necessary. It is not possible to envisage a sensible scheme unless there is compulsion across the board. Compulsion can be supported for those who cannot afford to pay, but compulsion there must be. Secondly, there must be an admission that the guaranteed minimum pension is unfair and unsustainable. It cannot be continued indefinitely. The right hon. Member for Birkenhead referred to the percentage of national product that it will take if it continues.
Thirdly, the Government need to take decisive action to simplify pension schemes and to ease contributions. There must be tax support for contributions to reverse their collapse to only a quarter of what they were when the Government came to power.
I turn now to an area that has not been mentioned. It is one in which we would have expected a reforming Government to be active, and in which this Government have been supine. They have failed to take account of problems in the "trough", whereby individuals employed in government service find that at a time of pay restraint the Government hold back wages, which means that their pensions are also held down. If someone retires on a low wage held back by the Government for their own purposes, their pension will for ever be lower than that of someone who retired when wages were higher. That trough in public sector pensions is unfair and should be rectified.
The hon. Member for Brent, North (Mr. Gardiner) looks uncertain. There are cases in the armed forces where, because of a period of pay restraint, a person of a certain rank retires at a wage lower than that of someone of the same rank who retired before or after him. That individual's pension will be permanently affected, and that is unfair.
The Government have also failed to reform by upgrading the pensions of those who have retired abroad. It is monstrous and unacceptable that those who retire within the European Union have their pensions upgraded, while those who retire to the old Commonwealth of Canada, Australia and New Zealand do not. That is unsustainable, and any fair, reforming Government would seek to tackle the situation.
The Government have also failed to reform the provision whereby widows sacrifice a public sector pension when they remarry. I had a case recently in my constituency surgery concerning a woman who has been widowed more than once. When she was first widowed she received a pension, which she sacrificed on remarriage. When she was again widowed, she applied for her pension to be restored, and after she had filled in a rather complicated form, it was restored on a means-tested basis. She has now been widowed again, and although her income and circumstances have not changed, she has been told that she cannot have her widow's pension restored. It is wrong that this elderly and dignified lady should not have her pension restored.
Finally, on a point made by one of my colleagues, the oldest pensioners also deserve further support. Many of them retired after a long period of service and are now very poor. They may be unable to fill in the forms for the various means-tested benefits that might be available to them, and they lose out.
In a pertinent question, my right hon. and learned Friend the Member for Sleaford and North Hykeham (Mr. Hogg) asked the Secretary of State what amount an individual will need to have saved to escape means-testing, and suggested that the amount may be £100,000. My own calculation is that an individual who has saved for his retirement and is not eligible for means-tested benefits will be ineligible for council tax benefit and housing benefit, which come to about £100 a week. That is £5,000 a year, and if one takes an average actuarial calculation and multiplies it by 16 to subtend the capital amount required to produce £5,000 a year, the answer is £80,000.
In other words, under this Government, if people can save £80,000, they will be okay, but if they can save less than £80,000, they are better off blowing the whole amount and not trying to save at all. That is monstrous and unacceptable. The pension credit will not resolve the problem because it is far too complicated and many pensioners cannot cope with the amount of paperwork involved. I therefore condemn this Government for their utter failure on funded pensions.
James Purnell (Stalybridge and Hyde): The Opposition seem to operate on the basis that if they assert something often enough in pained tones, it will become true. Unfortunately, that will not happen because the facts undermine their case. The decline in the number of people covered by an occupational pension has been going on for a long time. Since 1991, that number has fallen from 5.6 million to about 3.8 million, and the pretence that it is due to changes made since 1997 will not wash for several reasons.
First, the change to advance corporation tax in 1997 has not had the effect that the Opposition allege. Like other changes made then, it was part of a policy to get rid of a perverse incentive in the system which encouraged companies to distribute money as dividends rather than to reinvest it. If, as the Government argue, their policy encourages people to reinvest in their company and to raise productivity, even by only 0.25 per cent., the profitability of pension funds will be far higher over the long term than it would have been if the perverse incentive had remained in place.