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Lord Dean of Harptree rose to call attention to the importance of encouraging saving, with particular reference to saving for retirement and the need for stability in the financial markets; and to move for Papers.
The noble Lord said: my Lords, I declare an interest. I am fortunate in having pensions from both the public and the private sector. I hope that the House will agree that this Motion is topical in that the Government have asked for views on their pensions review by the end of this month. It is topical also because of the confusion that now exists over the Government's policy on EMU, which is unsettling the markets and could well have a bad effect on the investment, saving and pension decisions of companies and individuals.
I wish to concentrate largely on the pensions review. It is of great importance in that millions of people now pay for and receive social security benefits. It is also of immense importance to the economy. The cost of social security is now nearly £100 billion a year, and growing. It represents over half of government expenditure. On the plus side, there are the very substantial savings that exist in occupational pension schemes, which now
The Government say that they seek consensus in the pensions review. That approach is very welcome. In a long-term business such as pensions it is important to have stability. We are more likely to have stability if agreement can be reached.
The Government also say that they believe in private sector funded schemes. That is also welcome, although it is a change from traditional Labour policy--namely, that the state would provide, and there was some suspicion in relation to private provision. However, we need to be convinced that the apparent conversion is genuine and earnest. I must express some doubts. I remember distinctly that when the previous government introduced substantial reforms in pensions designed to reduce the cost of state benefits and concentrate resources on those most in need, the then Labour Opposition opposed not all, but most, of the measures then introduced.
But there is a more recent doubt in my mind. It concerns the raid by the Chancellor of the Exchequer in his Budget on occupational pension schemes. You cannot take out £4 billion to £5 billion from occupational pension schemes without undermining confidence in the Government's intention. For most schemes it is bound to lead to higher contributions, lower benefits, or both. Also, it is unfortunate since at the present time there is a tendency for firms to go for money purchase schemes for new employees rather than final salary schemes. I fear that this Budget measure could well accelerate that undesirable tendency.
There is another reason why I believe the Chancellor of the Exchequer was short-sighted in his Budget. The more we shift the emphasis from unfunded state schemes to funded occupational schemes, the more it will mean that the present working population will have to pay twice. They will have to fund their own pension schemes, but they will also have to find the money to pay state benefits to their parents and grandparents. I deduce from that that the tax relief arrangement should be more rather than less generous in view of these circumstances.
In sum, it seems that the Government in this field, as in some others, are saying one thing and doing the opposite. Their words are not matched by deeds, and there is confusion. I suspect that one of the reasons for the confusion is that there are too many reviews going on and that they are not properly co-ordinated. The new policy, welcome as it is, will not succeed unless people have confidence that the Government will do what they say.
I hope, too, that the Government will take very seriously the criticisms that have come from very knowledgeable and responsible bodies such as the National Association of Pension Funds and the Institute
The time is ripe to ask some fundamental questions about future pensions policy. First, has Beveridge achieved its purpose, and is it now out of date? By that I mean the concept of state cover from cradle to grave for all, irrespective of means or needs. It is understandable that 50 years ago such a policy was desirable. At that time there were very few occupational pension schemes outside the public service; and because of the difficult conditions for saving in the 1920s and 1930s it was not possible for people to build up a substantial nest egg. Now, the situation has been transformed thanks to encouragement by means of government policy. Over half the pensioners now retiring have a good occupational pension and other savings. In fact, our children and grandchildren talk about "WOOFs"--well-off old folk.
In the light of this situation I ask another question. Is there now a case for saying that those in the working population who have substantial cover should be able to contract out completely from the national insurance scheme? It is certainly worth considering. After all, they would still help to finance benefits through taxation.
However, there is a big weakness in this whole area which previous government policies were not able to deal with effectively; namely, that only about half the workforce are covered for a second funded pension. If the shift from state to private provision is to work, it is urgent that that gap should be closed. I am thinking, for example, of people in irregular or part-time work; women who have a break in their work pattern for maternity and to bring up children; people with bad health records; people who give up work in order to care for elderly relatives; and some self-employed people. It is groups like that who will need assistance in building up an effective second pension. They will need rebates on national insurance and possibly other help in topping up their savings if they are to obtain an adequate second pension. I do not mind whether it is called "basic pension-plus" or "stakeholder pension", the principle is the same behind the two ideas. The principle is right. I believe that we should not shirk the possibility that, if this is to work effectively and everyone is to be covered, compulsion may be necessary. It should be seriously considered.
The other point I wish to raise briefly concerns residential and nursing home fees. We all know that as people get older there is an increasing worry that their savings will be eaten up by the fees and will not be able to trickle down the generations to their children. There will not be too many of them, we hope, but the trouble is that we do not know who they will be until it is too late. The previous government raised the limits, which assisted in alleviating the problem to some extent. I am glad that the present Government intend to continue studying the question. It seems to me that on the face of it, the situation lends itself to insurance. It is a long-term business solution that will be required. I have heard it said that the friendly societies may be interested in extending their activities into the field. Of course, they have a long and honourable history. They have
In conclusion, there is plenty to do. I welcome the pension review. I hope everyone who has anything to say will co-operate with it. But the Government must speak with a clear voice and words must be matched by deeds. We want from Government the zeal of the convert to funded occupational schemes and no back-sliding into old Labour ways. I beg to move for Papers.
Lord Barnett: My Lords, I too begin by declaring an interest because I have used the tax system to my personal advantage. I have also been ministerially responsible for it, although I hasten to add that that was at a different time. Of course we all agree with the noble Lord, Lord Dean, that savings are good both for the individual and for the economy. No one would doubt that. But there is also a need to recognise that there are millions on very low incomes who will never be able to save enough and the state will have to help them in one way or another.
I agree again with what the noble Lord, Lord Dean, said that over half the population--I do not know the exact statistic but I take his word for it--will be in receipt of reasonably good pensions on retirement. So perhaps one should allow for the possibility of an opt-out from the state scheme. That seems a possible course of action which might be considered. I strongly support the review and I hope that it will take account of that suggestion.
However, I am bound to say that there are millions who can afford to save but who are still not doing so. That is undoubtedly the case at the moment. What can we do to help those people and encourage them in some way to save for themselves and their families in retirement?
The tax system can clearly be used to help them. It has been used in the past; indeed, I have used it myself. I have taken out annuity policies and I can recommend them to all noble Lords who wish to make use of them, although I do not normally give advice on such matters. I strongly recommend that if noble Lords are 40 per cent. taxpayers, then every £1,000 they invest costs them £600 and the investment grows tax-free. I see the learned Clerk at the Table looking closely at me. It costs the investors £600 but £1,000 grows tax-free until retirement. So it is possible to utilise the tax system to help and encourage savings, particularly--as the Motion says--for retirement.
I hope that the Chancellor of the Exchequer has it in mind to make changes--and all Chancellors like tinkering with the tax system, so it would be no surprise if my right honourable friend, if he listens to me occasionally, at some stage tinkers with the tax system. But it can be argued that I am not the right kind of person for whom the tax system should provide help. There may be others--I have no doubt that there are--who will be more deserving of help through the tax system than I. I am not sure whether the Chancellor
However, there are other tax reliefs available to help savings. We all know of TESSAs, PEPs, National Savings Certificates and many other forms of tax relief which are used often by very low income people who obtain tax relief and make savings which will be useful for them and their families in retirement. I know that the Chancellor has indicated that he might have in mind making changes in those directions. We do not yet know what he will do, although I gather there is to be a Green Paper. The idea of Green Papers on the subject is helpful. As Green Papers are supposed to give Ministers an opportunity to take account of the views of others, I hope that, when a Green Paper is issued on the subject of savings and forms of tax relief on them, when the Chancellor publishes the Green Paper and receives--as I imagine he will--a large number of recommendations about it, he will take account of them.
The markets, particularly the stock market, are affected for many reasons, some of them extraordinary. There was a recent front-page article in the Financial Times by a gentleman called Robert Peston, who is related to one of our noble friends. If I may say so, anyone who knows him and his writing will know that he is an excellent journalist. That article had the effect of sending the FTSE 100 index up substantially by 150 to 200 points. That is what the article did. The Times, which used to be a substantial newspaper, had an interview with the Chancellor who was foolish enough to give it to them. He should have known that, from a Euro-sceptical paper like The Times, he could not expect the right kind of headline. I first saw the headline in The Times, and then read carefully through the interview given by my right honourable friend the Chancellor. I could find no words to justify the headline. Nevertheless--perhaps not too surprisingly--it had an impact on the markets.
It is worth asking the question: what do we mean by stability? What is stability? Since 1st January this year, the FTSE 100 has gone up from 4100 to 5300. It is now slightly less than that. I suppose that that is instability. Are savers unhappy? Speaking as a saver, I am not unhappy about that particular change in the market.
So, what is a recipe for stability? Everybody--including those from all sides of your Lordships' House--is now in favour of free markets. But free markets, by the very nature of those markets, particularly the stock market, do not provide for stability.
I do not believe that the second part of the noble Lord's Motion makes a lot of sense. For the reasons I indicated, I can agree with the first part of the Motion. However, if there were to be a vote, I certainly could not support the second part, because it makes no sense whatever.
Lord Hooson: My Lords, not having the experience, skill or knowledge in financial matters of the previous speaker, regrettably I have no interest to declare on this subject. But I must admit that I had not intended to take part in this debate. It was not until I noted today in the Order Paper a change in the wording of the Motion which enlarged its ambit that I decided to speak.
I believe that it is necessary for the Government to look at any government's ability to run the economy or the financial markets to a blueprint, which seems to be indicated in the Motion. That is totally outmoded thinking. It is rather like the thinking of old Labour or Right-wing Conservative thinking in the past. Without any doubt, we are likely to have greater stability in financial markets if we join the euro at the first possible opportunity.
Like all other epoch-making changes, that carries risks--risks to all its participants. They are there for everybody and would be no greater for this country than for the others. But the rewards of success will be very great. The risks of being outside after a successful launch are much greater than the risks of being on the inside. Indeed, it would lessen any risk of the launch itself for the UK to be part of it and for every other country that could qualify for entry to be in on the ground floor.
The impact of the euro on the world financial system will be great. The effect on world confidence will be very telling. A country such as ours, procrastinating on the outside, will see its currency become the inevitable prey of financial speculators. I fear that this country and this Government will pay a very high price--for what?--for its own lack of confidence and lack of leadership on this very issue. As Shakespeare said:
In fact, the world's observers look at our lack of confidence and lack of leadership against that historical post-empire background. Included among them are speculators, who will thrive on the instability in the financial markets. Regrettably, I have come to the conclusion that, because of this Government's attitude at the present time--they have made an awful botch in the past month through leaking their intentions with regard to the euro--we are inviting great instability in the financial markets and will pay the price for being outside, whatever the risks of being on the inside, when the euro is created.
Lord Clark of Kempston: My Lords, we are all indebted to my noble friend Lord Dean for giving us the opportunity to discuss pensions. The pension question seems to have been generating quite a lot of interest recently. Unstarred Questions have been tabled and my
Taking the long-term view, in 1995 there were 10.4 million state pensioners in the country, of whom 1.8 million were on income support. One should therefore ask about the other 8.6 million, and clearly those other 8.6 million pensioners in most cases-- 99 per cent. of the cases--enjoy an occupational pension.
But the danger long term, as I see it, is that by the year 2030--which is not that far away--there will be 14.2 million pensioners. Consequently, one wonders how many will be on income support. Despite the promises made in the manifesto that there would be no increase in taxation, we have in fact suffered 17 such increases. The one on which I want to concentrate affects the pension funds of this country--fiscal incentives.
I agree with my noble friend Lord Dean that fiscal incentives are essential. At the moment one enjoys contributions from the employer as well as the employee. The employee obtains a tax benefit and the employer benefits through a reduced corporation tax. The money in the pension fund is also free of capital gains tax.
Everyone who pays into a pension, whether it is a personal or occupational pension, is affected by what happens to the pension fund. The actuaries work out what one's pension should be, presupposing that the fiscal advantages enjoyed by the pension fund continue. If those incentives change, then the actuarial value of the pension fund decreases to the detriment of the ultimate pensioner. In the last Budget the Chancellor of the Exchequer took away one of the fiscal advantages--that is, advance corporation tax--thus depleting pension funds and affecting many pensions.
When an employer promises an employee a certain pension, it is based on a specific scheme. If that scheme is reduced in value then, in order for the employer to maintain the contract with the employee, he must increase his contribution by putting a further tranche of money into the pension fund. It may be argued that pension funds are buoyant at the moment. They are. When one is in a bull market in the Stock Exchange of course one's assets in the pension fund will increase. But what happens when one is in a bear market? Then those assets decrease. My noble friend mentioned as an aside how the dithering we have seen over the past two or three weeks in relation to a single currency has affected the pension funds of this country.
I am sure your Lordships are aware that of people aged 69 or under, 60 per cent. have an occupational pension. The present employer must honour his pension commitment. That is the basis of my argument. When changes are made in the fiscal advantages of a pension scheme, I, as an employer, must put further tranches of money into that fund.
An employer, if I may use jargon, is "stuck" with the contract he has with his present employees and must honour his commitment. But if pension funds are depleted by our tax regime then employers, though they may honour their present pension commitments to their employees, may resist new employees being included in the scheme. The Government should therefore reconsider the changes made in the recent Budget. I accept that in the short term there may be benefits for the Exchequer. But for the long-term view for the economy, the changes must be reconsidered.
It is clear beyond a peradventure that how we ensure that the state and the individual save enough to fund everyone's expectation for retirement has become one of the great issues of today. It is important, but it is certainly not understood or even much cared about outside the arcane world of the actuary or the pension fund expert.
We are facing a pensions earthquake. A few simple statistics demonstrate the size of the shocks to come. Today there are four people in work for every pensioner; by the year 2050 there will only be 1.5. Today the state pension is around 15 per cent. of average earnings; by 2050 it will be below 6 per cent. and falling. We spend £32 billion on pensions out of a total social security budget of £92 billion; and that share will continue to rise.
It is excellent that the noble Baroness, Lady Hollis--sadly, I see she is not in her place--has many years of experience of local authorities to bring to this issue, because there are seismic rumblings of what is to come at a national level unless action is taken. What are those early warnings? Quite simply, the cost of pension provision is running out of the ability of councils and public bodies to pay without undermining their ability also to fund vital day-to-day expenditure. Of course, it is partly demographics: the population is ageing. It is also partly the result of a number of other factors;
For councils alone early retirement has cost £3.8 billion over the past six years. It can cost up to £300,000 to let an official take retirement 10 years before it is due. But no up-front provision is made; no immediate holes appear in the year's spending budgets; but the cost is real.
Sir Paul Condon tells us that the number of policemen in London is significantly below the level it should be because of the costs of pension funds. According to the Audit Commission, 25 per cent. of the fire service budget now goes on pensions; it is a service where early retirement is endemic. The lesson from local authorities and public bodies is that we simply cannot afford a situation under which the state tries to bear the full burden of the cost of retirement. It is an illusion to think that we can. We should not try.
We have to find a balance between state provision and private provision that will really stand the test of time, that will stand the test of changing governments, and that will stand up to that most difficult of tests, the aspirations of the people concerned. Harriet Harman was right in September when she said,
I have to say that, looking ahead, I find it difficult to believe that government will find it possible to provide much beyond a very basic means tested level of benefit. What we must ensure is that only the very smallest number of people fall into the category of those who have nothing else to rely upon. To achieve this, the Government's principal task will be to create an environment in which substantial long-term saving will take place. I suspect that some compulsion may indeed be necessary. But if saving is required it will mostly work best if it is driven by choice. For choice to work, there has to be real understanding. There is a major education process to be undergone, and we should welcome the Government's initiatives in this regard.
The need to be understood is extremely important. If a government are to foster saving this must not be seen as another government conspiracy to avoid their responsibilities. It is an urgent problem that we all, as citizens, share as we grow older. It is not just about education. We urgently need hugely to simplify the rules governing pension savings. The world of pensions is frankly incomprehensible. Most of the rules have been created in labyrinthine complexity largely to prevent abuse by the rich, and probably rightly so. But to the vast majority of those who need to save, these rules simply do not need to apply.
I would urge the Government to override the paranoia of officials and require them to simplify by setting thresholds on contributions above which abuse prevention should operate but below which simplicity, clarity and transparency should be the overriding objective. People will not willingly do what they
Persuading people in work to save requires trust that government really will take their eyes off the pressing needs of this year's funding and not see pension savings as a honey-pot of irresistible proportions. There has to be a firm covenant with the people that pensions' savings will be left alone. That is a covenant that has to run not for 10 years or 20 years, but for everyone's lifetime. That is why it was such a terrible shame that the Government recently decided that it was expeditious to raid the nation's pension schemes. The economics are bad but the real cost has been to undermine the fundamental long-term contract that has to exist between government and people. No tax on the way in, tax on the way out. Five million members of personal pension schemes have had their trust abused by a frankly retrospective imposition.
If symmetry of tax treatment during a person's working life is removed, why should anyone bother to put his savings into such a locked up arrangement as a pension if he cannot believe that his savings will be left alone? Indeed, we have already seen a worrying trend of people contracting back into SERPS, the very last thing we or the Government should want. Let us hope, as the Government consider the future for pensions, that this is the last occasion when words and actions will quite so obviously conflict.
Baroness O'Cathain: My Lords, I am grateful to my noble friend Lord Dean of Harptree for introducing this important subject, a subject that will almost certainly gain in importance as the numbers of people over the age of 60 increase beyond the normal historic level and when almost all of them will require income over and above what can in any circumstances be called a "reasonable state pension".
Last week in your Lordships' House we discussed pensions. This debate is turning into a pensions debate, although the word "pension" does not appear in the Motion. I took part in the debate on 15th October and felt that this whole area is so important that I wanted to look at the subject again, albeit from a slightly different angle.
The emphasis in the Motion today is on saving, whereas last week's Motion majored on pension provision. Saving for retirement will almost always be equated in the mind as being encompassed by pension provision. This is the single most important form of saving for retirement, but not the only one. Indeed, the very concept of saving should be encouraged. It would be good if at the end of the debate we were given some hope that new initiatives to encourage saving are likely to be forthcoming.
Very frequently in our debates we are reminded of the deprivations in our society, deprivations which the state, quite rightly, attempts to alleviate. What we seem to hear less about are the measures to encourage people to run their own lives in such a manner as to ensure that, barring severe misfortune such as catastrophic breakdown in health leading to a continuing drain on savings, they can look after their own financial future.
I have always felt that those who can, should make significant provision for their own future, relieving the state of some obligation and enabling the state, in turn, to concentrate on those who, for whatever reason, are unable so to do. Such provision can only be guaranteed by saving, but saving in a responsible and sensible manner. We have all heard of unfortunate people who have lost what they call their "life savings" by foolishness or indeed by greed. The Barlow Clowes example comes immediately to mind. Sadly, with the demise of Latin teaching in our schools, I fear that not enough people today follow the maxim caveat emptor.
Taking a bird's eye view of the way we run our lives compared to the way our parents and grandparents did, one of the biggest differences is in the attitude to saving or, more colloquially put, "providing for a rainy day". My Lords, does anyone use that expression any more? When I was a child it was one of the most frequently used sayings of my grandmother. She would give me half a crown and in the same breath would say, "Remember to save for a rainy day". Well, as it was practically constantly raining where I was brought up, I never could quite see the point of that at the time. Pocket money was "saved" for long periods so that something special could be purchased for Christmas. Today, time after time I hear young people say, "I want X or Y. Thank goodness for Visa, or Mastercard, or a bank overdraft, or whatever". Seldom, if ever, does one hear, "I want X or Y and it will take me three months to save for it". The famous advertisement of the 1970s said it all, "Take the waiting out of wanting". But have we completely lost sight of the idea that if one could not afford to have something now, we had only one alternative; and that was to save for it.
I am not decrying the universal availability of instant credit. The advent of the plastic card has had a huge impact on growth, on helping people to manage their expenditure in a planned way, and on stimulating the economy. Most people are responsible about using these cards. But the universal and easy availability of such cards militates against the concept of saving and pushes such an idea to the back of one's mind. The whole principle of saving is that we cannot afford to buy today and the excitement of looking forward to possession encourages a regular commitment of doing without something today in order to obtain the satisfaction or pleasure tomorrow. None of us hears much about that concept nowadays.
An even more insidious enemy of saving is the availability of the so-called "nothing to pay for 12 months" and the "no interest on loans" schemes. People actually believe that the providers of goods--furniture and motor cars spring instantly to mind--are utterly altruistic and are, in effect, giving away their products. That raises a very serious issue of basic
What it really does is to encourage people to spend, probably beyond their means, by fooling them into believing that they are special customers who are getting a special deal. These customers do not realise that either they are paying for it in the price or that other customers, who do not wish to have a debt burden of any type around their necks, are subsidising their needs for instant gratification. Either way that is wrong. We have an Office of Fair Trading: does this subject recommend itself for investigation by the OFT? I would like to believe that it does.
I do not want to be accused of being a supporter of the nanny state, but I believe that tougher regulation on the ludicrous claims made by so many organisations in their attempts to get one to purchase their goods and services would be commendable. Such organisations should be made to disclose the true inflated costs of goods and services concomitant on supposed interest-free benefit. That form of disclosure should reduce the number of individuals who fall prey to that type of selling and, by extension, encourage saving.
A debate concentrating on saving should not dwell too much on spending, but I believe that the illustration I have given underlines the point that there has been a distinct shift away from saving to consumption and that such a shift has dangerous implications for the provision for retirement by both individuals and the nation as a whole. We need to give serious attention to the possibility of encouraging a return to the concept of saving.
The introduction of the form of saving in terms of the personal pension has increased awareness of the need to save for retirement. However, it is often far too late and final benefits are, thereby, substantially reduced. Even the photographs in the advertisements illustrating personal pension plans tend to be of people like me tending one's garden in a slightly arthritic way rather than the lively 20-30-something year-olds in the wine bar with a mobile phone stuck to their ear. Even employers nowadays tend to down-play the importance of pensions; it is almost the last item to be mentioned or considered in what they call the "package of employee benefits", coming way down the list after salary, holiday entitlement, medical insurance, sports club membership, etc., instead of at the top of the list. I fear that salaries are seen as funding today's expenditure and no thought is given to the possibility of putting some of that aside for the future. That is another example of the lack of a "savings" culture.
So what can be done about it? Harking back to the debate last week, I reiterate that encouragement is required. Tax concessions are always a powerful incentive and I have no hesitation in supporting their cause. It is not like the three-piece suite. By giving tax
Yet again I use the word "encouragement". If the Government wish to enhance the commitment of the population to provide additional retirement benefits for themselves there have to be inducements. In addition I believe that there should be a programme of information distillation--not by spin-doctors--drawing attention to the fact that there are currently insufficient numbers making provision for themselves. Some figures produced in the Financial Marketing Handbook 1997, which is compiled by NTC Publications Limited, show that in 1995 only 17 per cent. of the population contributed to a personal pension and, equally worrying, only 58 per cent. of the population contributed to any pension. I am assisting the noble Lord, Lord Barnett, by supplying that statistic. Sadly, women seem to be even less convinced of the need for pension provision than men. Only 30 per cent. of the contributors to personal pensions were women. That is yet another area which needs highlighting and encouragement for women to think about. The days are long since gone when men were the great providers for women throughout their lives.
I end by expressing great anxiety about the messages that we are receiving concerning the Government's attitude to long-term saving. I know that we should not believe everything that we see in the papers--witness the great EMU debate--but a recent article in the Financial Times raised my fears about the implications for savings by the move to abolish TESSAs and PEPs. Both these vehicles for saving have been hugely popular and have encouraged saving. Messing around with these is just the sort of thing which does not encourage long-term saving and I hope that either there is a rethink about it or another proposal put in their place which will be equally attractive or even better.
Lord Lucas: My Lords, I want to concentrate in my speech today on tracker funds. That is because I am aware that it is a matter which the Government view with a great deal of sympathy and one which may come to play a very important part in the Government's thinking if they are considering a further degree of compulsory saving. When I raised the subject in the course of a rather general speech last week I was surprised by the reaction of the noble Baroness, Lady Hollis, to my mild words of caution.
When one first thinks about the subject, tracker funds seem immediately appealing. The argument for investing in equities has always been that the equity market does better than investing in gilts or cash, and by buying tracker funds one is buying into that market without having the burden of costs imposed by an active management and without having the risk that that management will result in a substantial under-performance of the market. In other words, one is buying what one wants.
But tracker funds are a parasite on the market. A market exists to combine hundreds of thousands of individual decisions into larger ones and to enable, through that mechanism, decisions to be taken on the pricing of securities and on the allocation of resources. Imagine a market which was entirely made up of investors using tracker funds. It would be a nullity; there would be no decisions being taken of any variety. If I wanted to launch the great "Lucas Corporation" for £1 billion, all these funds would have to subscribe for it. It would not matter what the purpose of the business was. It could be entirely worthless--it probably would be! As a market goes towards the point where tracker funds form a larger and larger proportion of it, its utility as a market is decreased.
A market, left to itself, has mechanisms for dealing with this problem, as tracker funds are predictable. If such funds are known to be investing in particular stocks--say, tracking the FTSE 100--and they represent as a collection of funds, say, 20 per cent. of the market, then those stocks will become much more valuable. This opens up the possibility of trading on the entry and exit of stocks from that index. Indeed, that is a very profitable source of money for a number of operators in the market even at the current level of tracker funds, which is about 10 per cent. of the market. If one has a tracker fund one cannot deal with the problem that one has to pay an average of, say, 15 times earnings for a stock which is outside the index and 20 times if it is in the index. People who are not bound by the rules of a tracker fund can drive a stock out of the index or into it, and make one pay them their profit at the end of the day. So, if tracker funds are a large enough part of the market, the rest of the market can begin to get value back from them and make them under-perform.
It might be thought that one way of avoiding that would be to use tracker funds which track the all-share index, but you cannot easily do that because you cannot buy small numbers of shares in all of those companies. You have to do it by proxy. Although such funds may say that they are tracking the all-share, they generally track a proxy, and if people know and understand what that is, they can trade against the tracker funds in the same old way. If all-share funds represent a significant proportion of the market, one starts to get what one might call "issuance" fraud. It becomes so easy for the big companies to issue shares, as they go straight into the maws of the tracker funds, that one sees distortions of the way in which the market behaves. Big companies can profit from that--at the eventual, long-term economic expense of the tracker funds.
There are also problems because tracker funds reduce the amount of money that is available to small companies. They reduce their valuation and make it harder for such companies to raise money. One of the functions of the market--surely one must seek to protect this function--is its ability to nurture small companies and to bring them on. Such companies are the future prosperity, rather than the present prosperity, of this country.
Tracker funds are in any case only a partial answer. I cannot believe that any scheme of regulation into which the Government may enter would be allowed to prescribe that investors have access only to UK shares. Surely these days we must have access to European shares. Indeed, why not have access to shares on all of the world's markets? Why not cash? Why not bonds? A whole set of decisions on asset allocation has to be taken by somebody. Such decisions matter a great deal.
Another great problem--this could be the subject of another speech--is annuity fraud. There you are, you have spent 40 years building up your funds by taking long-term decisions in long-term assets when suddenly, in an instant, you are made to take a decision on converting the fund into an annuity. If the market is low, you lose out. If the gilts market is high, you lose out. It is entirely wrong that such instant decisions are imposed on that pattern of long-term investment. The Government must tackle that if they are to impose a higher level of saving. Indeed, it would be a good idea if the Government tackled that matter anyway. Safety has a cost, and the Government must pay attention to the side effects if they are thinking of imposing safety on investors in any way.
As an alternative to tracker funds, the Government might think of going for guarantee funds. I do not mean the sort of guarantee funds which use "mirrors" and simply sell the investor what he has already bought and call it something else. Sadly, there are still such funds in the market. I mean guarantee funds which are based on buying options so that they can genuinely guarantee that if the fund--it is probably a tracker fund anyway--falls in value, that value will be made up from elsewhere; or one which specifies that if the fund ever reaches a particular level of the all-share index but, at redemption, is below that level, the difference will be made up. Those guarantees are based on options which are traded in the financial markets, and they are all very well at the level of the guarantee funds at the moment.
Only a small percentage of the market comprises such funds. However, as soon as there are a lot of them, the liquidity of the market will be put under strain. It is not a market which is backed by investors selling the options; it is backed by the banks taking positions in such options. If we in any way major on guarantee funds, we will put the financial system at risk and increase the chances of the market being pushed into a crash as a result of people desperately trying to cover their positions. The Government have to take the broad picture into account if they are to impose such restrictions on investments in the "people's pension" or whatever the Government may choose to call it. My message to the Government is, "Don't push a good idea too far".
Perhaps I may put forward one idea as a constructive contribution to the debate. I am conscious that the Government are worried about the level of fees charged for managing money. Why do the Government not say that if you are managing money under the new people's pension scheme, there is a limit on the costs that can be charged? If the Government were to set that limit low enough, there would be two beneficial effects. First, fund managers would be made to think long term.
Secondly, if the amount of costs allowed to be incurred were limited, the fund managers would not be able to spend a great deal on marketing and would have to think of products with a real underlying value which could be recommended by word of mouth rather than products which rely on pizzazz advertisements in the newspaper and which sell by the coupon at the bottom--or by whatever other deceptive method a number of people are, sadly, using even today. If one wanted to put some cream on that rather dry cake, one could allow fund managers to take a share of the performance if they beat the all-share index.
Lord Rowallan: My Lords, it is with a great deal of deference and temerity that I rise to speak in this debate. We are in knowledgeable company and I am someone who foolishly relied on my pension coming from your Lordships' House. As an hereditary Peer, I am now fast discovering that my pension is disappearing before my very eyes.
I rise to speak about savings in relation to Mr. and Mrs. Average--not about the big pension funds or the big companies. It strikes me that Mr. Average does not want to save. He is determined to live for today because tomorrow may never come. Mr. Better Off is also slightly frightened because of the myriad of taxes that he can face. However, we should be encouraging saving as much as possible because saving ultimately saves the taxpayers' money and results in a gain for the Exchequer when tax is paid on the resulting income from savings. Savings are the life-blood of the banks, the stock market, the building societies and the pension funds. The first three are all cashable items, but the pension fund is held in trust until the end of its term.
We must remember that such a person has no vested interest in his pension until he retires. If you are 45 or so, you have little or no chance of being able to refill your pension coffers, so you are obviously reliant on the state, which is not a very satisfactory situation.
Lawyers are apparently arguing the case, as lawyers are wont to do, that if a pension company puts in a forfeiture clause, you will not lose your pension. Apparently, it works like this: the bankrupt loses his automatic right to the benefits, but gets them indirectly through the pension scheme trustee, who can pay him, his family or dependants. In theory, that keeps the trustee in bankruptcy at bay. Apparently, retirement annuities cannot be protected like that. Obviously, there have to be safeguards against gratuitous alienations made to a pension fund at the last minute.
I found all that rather peculiar, so I thought that I would ask someone who should know about it. I contacted a Glasgow-based bankruptcy expert and asked him his thoughts. He replied that he had seen three legal firms and asked for their opinions as to his powers with regard to seizing pensions containing forfeiture clauses. None was able to give him a definitive answer. The partners were all in total disagreement on whether he did or did not have the powers to confiscate the pension. So he then went further and asked three QCs. Lo! and behold, they also disagreed.
So what does a man or a woman do? We are encouraged to save but so much of life and taxation today says "Spend, spend, spend". If you do not spend, when you die inheritance tax will have to be paid, which in turn means that when your goods and chattels are sold to raise the money to pay the tax, capital gains tax has to be paid.
The Government are removing reliefs on taxation and there has been a lot of chat about the wealth tax. Is that encouragement to save? Not in my book. No one in this life knows what lies in store for them, but as long as there is a problem there is a disincentive to save, which takes me back to where I started. Without people saving there can be no borrowing, and it is saving that we must encourage in order that people can save for their future so that they have a future and so that they do not have to rely purely on the state pension fund, which more and more people are probably having to do.
Viscount Brentford: My Lords, I too would like to thank my noble friend Lord Dean of Harptree for introducing this debate. The more I have thought about it since I saw it on the Order Paper the more important
I believe that the greatest need in the whole field of savings is for it to be demystified. I am not sure if there is such a word but I hope it is clear what is meant: it is taking the mystique, taking the mystery, taking the feeling out of it that it is incomprehensible and one has to rely on experts. The more that we can do to simplify savings, the better I believe it will be. I am talking, of course, not about government pension schemes but the work of the individual in saving money, especially for his retirement. In answering the question on how does one encourage it, I would like to consider certain problems that I see in the country today.
First I will deal with certain practical steps of encouragement. I would like to see this subject mentioned in sixth form classes in schools where the pupils are preparing for life. When you are a sixth former the question of a pension is totally irrelevant but if the emphasis is made that as soon as you start work and start earning you need to start saving for your retirement, the idea may click at a later date. I believe that people need to be spoken to about this subject and for it to be discussed as often as possible in order for it to have effect. So I hope that it can feature, without taking up much time, in those regular preparation for life classes which are called different names in different schools.
Secondly, employers, whether in large businesses or small, and I believe this is more common in large businesses, need to point out to a new employee where he or she can obtain advice on a pension. If there is a company pension scheme which people automatically slot into, that is fine. But a lot of employers do not have corporate pension schemes. It should be the job of every employer to say where advice can be obtained so that the whole question of savings can be demystified as quickly as possible.
The third point I wish to make, which again has been touched on by some noble Lords, is that this is much more of a problem for those on lower incomes than for those on higher incomes. One reason for that is that the tax savings for those on lower incomes will be proportionately less than for those who pay a 40 per cent. rate of tax. Again, an early start is all the more important. I wish that I had started saving for my pension the moment I started earning. I did start fairly soon, but I would have done better if I had started the moment I began earning a proper salary. I believe that the more that people can start right at the outset, the better for savings; the better for the individual and the better for the country. Again, the question of advice is all the more important for an employee on a low income, and encouragement needs to be given for that.
On the question of savings, particularly for those on lower incomes, I have not yet heard in this debate any mention of friendly societies. I believe that friendly societies are organisations which can well be encouraged in this field. I believe that that again is a means by which encouragement can be given.
Fourthly, I would like to pick up on something my noble friend Lord Rowallan mentioned: spend, spend, spend. There is a tremendous conflict for the individual today between the pressure to spend and the pressure to save. Advertising is always about the individual spending money: to buy this, to gain that for whatever purpose it may be--a slightly more expensive holiday or, as my noble friend Baroness O'Cathain said, buying a suite and not paying for it for at least one year and then incurring no interest for the next few years. It is all spend, spend, spend. This temptation to borrow money to spend more money militates against saving. There is conflict in this materialistic time which needs to be faced as we aim to encourage saving.
Fifthly, I would like to refer to the long-term future, not only of this country but of other countries too. Many futurologists say that the country will not have the resources in 20 or 30 years time to maintain its present high standards. I read somewhere that today three French employees contribute to the pension of one retired employee but in about 10 or 15 year's time there will be only two employees who contribute to one person's pension. Life will become tougher in the future. There will be less high standards which means that it is all the more important for the individual to save money today.
The Government are contemplating individual savings accounts, ISAs, I assume. I have a question on the word "individual". If this Government wanted to be really radical, I wonder whether they would look at the field of family savings and family insurance syndicates, which are ideas that are being thrown around at the present time to help people, particularly on lower incomes, to look forward together for their future. We have become such an individualistic nation that the extended family is not of much interest today but I believe there is a great deal of scope for looking at schemes for family savings in the future.
I wish to make another point about ISAs when the Government look at it after their research. I wonder if ISAs could be sold as widely as lottery tickets are sold today, to make them available to anybody coming off the street so that they can put aside a small amount from time to time when they can, when they receive a weekly pay packet or a monthly pay packet, to be able to buy their share of the ISA. It would make it much easier if they could go in, as they pass--not necessarily the Red Lion pub--somewhere that sells lottery tickets or somewhere like that. It should be made relevant to the individual so that he could spend money buying a lottery ticket on chance as well as gaining a secure savings scheme, something I am sure the Government's ISA will be.
I hope that the Government will be able to promote a national savings culture--to quote a phrase already used--and to keep it simple. I hope that the noble Lord, Lord McIntosh of Haringey, will "KIS ISA". KIS, of course, means keep it simple. I hope that he will take this to heart.
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