Mr. Peter Lilley (Hitchin and Harpenden) (Con): The greatest domestic failure for which the Government will be remembered is having presided over the collapse of the British pension system. I pay tribute to the right hon. Member for Birkenhead (Mr. Field), who has just made a characteristically positive and objective contribution to the debate, for having done more than anyone to highlight the scale of that failure and the seriousness of the problem. He pointed out that, as my hon. Friend the Member for Havant (Mr. Willetts) said earlier, the incoming Labour Government inherited what was probably the strongest pension regime of any country in Europe. To meet our future pension liabilities, we had set aside and saved more money than not just any other European country, but all other European countries put together. Now, in the words of the right hon. Member for Birkenhead, that has been reduced to rubble.
A series of Secretaries of State have shared responsibility for presiding over this collapse. Sadly, the right hon. Member for Birkenhead was not given the chance to implement his own constructive and imaginative ideas in an attempt to alleviate or avoid the problem. The outgoing Secretary of State is no more or less responsible than his predecessors for having presided over the deterioration and having failed to stem or remedy it. I would love to be able to congratulate him on being the only one who had accepted responsibility and resigned because of that failure, but, unfortunately, new Labour Ministers are reluctant to resign at all?and, when they do, they do not accept responsibility and attribute their resignation to something else. Nonetheless, I pay tribute to the former Secretary of State‘s good faith and integrity while in office, and he certainly should not have been subjected to the humiliating series of leaks of the last few weeks that attributed all the responsibility for the cumulative failure to him alone. Everyone knows that the real responsibility lies not just with him or his predecessors, but with the Chancellor of the Exchequer, who has effectively reduced the Department for Work and Pensions to a subordinate department of the Treasury. Each of the Secretaries of State can claim in defence that they were simply obeying orders.
It is the Chancellor who was responsible for the two most damaging policy decisions that contributed to the weakening of our pensions regime. The first was the decision to introduce the pensions tax?the abolition of advance corporation tax credits, which effectively siphoned ?5 billion from our pensions schemes every year. The second was the decision to extend means-testing. The pensions tax effectively cuts the yield on savings in pension funds by 25 per cent., and the
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potential extension of means-testing to more than three quarters of all future pensioners withdraws 40 per cent. of the benefit from every extra pound of saving that they may have made.
The combination of that 25 per cent. loss on yield and 40 per cent. loss on the benefit of extra savings is very significant. As a result, it is literally inadvisable to save. It would probably be illegal for any financial adviser to advise the bulk of the population to make any additional savings for their pensions, unless they are very rich indeed. No wonder that the savings ratio is this country has halved over the lifetime of the Government.
There is another underlying problem that affects all developed countries, for which no one can blame the Government although they have aggravated it: people are living longer without working longer or saving more during their working lives. Any solution must either encourage or require people to save more or to work longer.
I would like to believe?I stand at the libertarian end of the spectrum?that it is possible to encourage savings by increasing incentives, introducing better incentives or reducing disincentives. However, frankly, it would be bizarre to introduce a fresh set of incentives while retaining all the disincentives that I have just spelled out. It would be like running up a down escalator. We cannot remove the existing disincentive of means-testing if we rely on a purely voluntary system because many people will not volunteer to save enough and will retire without an adequate pension?and we will have to make provision for them, which will be means-tested. The disincentive of means-testing remains in the system: we cannot leave people destitute, even if they are destitute as a result of their failure to respond to generous incentives that would have made it worthwhile for them to save.
I reluctantly came to the conclusion that it is essential to require everyone to contribute during their working lives towards a pension that will be sufficient to ensure that, when they reach retirement, they will not depend on means-tested benefits. We already compel people to contribute towards a state pension. Everyone in work has either to contribute to that or to make an equivalent contribution to a private pension system. We also have an element of compulsion in the tax system. We tax people?generally those who have worked hard and saved for themselves?in order to pay for the means-tested benefits for those who have not chosen to save enough, even though they could have done, to secure a decent pension for their old age. Rather than compelling the prudent to pay through taxes twice to support the imprudent, we should require everyone to make sufficient provision during their working lives for a pension in retirement so that they will not require means-tested benefits.
Mr. Webb: The right hon. Gentleman advances an interesting case, which he has put to the House before, for compulsion. Will he clarify what he would do for the low earners who currently benefit from a highly redistributive basic pension and a very redistributive second state pension? How will those people who are able to contribute only a small amount of absolute cash secure a decent pension that is enough to live on?
Mr. Lilley: My system is internally redistributive and is designed precisely to achieve that and to mirror some
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of the redistribution that is inherent in the state pension. I propose that everyone will be required to be members of a pension fund. They will receive a flat-rate rebate paid into that fund from the national insurance fund sufficient to ensure that, over a working life, they will be part of a fund that is adequate to pay for a pension. Together with the basic state pension, it would ensure that they would not need to rely on means-tested benefits. The state would guarantee that minimum state pension so that if the fund fell short for whatever reason, the state would top up the pension to the guaranteed level, which is above the means-tested level.
Of course, there would have to be provision to ensure prudent personal investment rules so that people did not take advantage of that guarantee.
Mr. Douglas Hogg (Sleaford and North Hykeham) (Con): I have a great deal of sympathy with what my right hon. Friend is saying. However, if he is going to make proposals that will lock people into compulsory saving schemes, does he not have to address the question of the consequence of inheritance tax on those savings? People will be locked into pension schemes and, in the absence of inheritance tax concessions, their descendants will not inherit the moneys compulsorily saved. Moreover, does he not agree that a second problem that must be addressed is the question of compulsory annuity?
Mr. Lilley: Yes, although I think that my right hon. and learned Friend raises second-order issues. As I shall explain in a moment, I believe that people would have to use the money to ensure that they have a pension that keeps them clear of dependence on means-tested benefits. However, if they died before they retired and acquired an annuity for the rest of their lives, they would be able to transmit their savings to their heirs. Whether those savings would be liable to inheritance tax would be a matter for the Chancellor of the day but, as I say, that is a second-order issue that we do not need to address at this stage. At present, most people are not in a position to pass on savings, and their heirs are not in the happy position of receiving 100 per cent., or 60 per cent., of what is left.
My proposals would have several key and valuable consequences. First, everyone in work would acquire a pension adequate to keep them above the means-testing level, and they would therefore be able to avoid means-testing when they left work. We would thus be able to allow the pensions credit system, and the means- testing associated with it, to wither away.
Secondly, everyone would have greater incentives to save. Moreover, since they would have their own pension fund, they would find saving much easier. One of the greatest inhibitions against people making additional savings is that they do not have a pension fund. Setting one up is a major process for most people, even those who are financially sophisticated.
The evidence from Australia in that respect is very encouraging. The introduction of mandatory superannuation schemes has led to the amount of voluntary saving doubling in size. People are required to save more, but their voluntary saving on top of that has doubled.
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Thirdly, ownership of their own funds would give people more choice about when they retire. They would be free to retire whenever their fund could provide a sufficient basic pension that would mean that they would not depend on means-tested benefits. They would have a double incentive to work and save longer: every extra year worked would mean that people could contribute more to their funds, and that they would have a year less of retirement to finance. They would therefore be able to enjoy a better pension during retirement.
The evidence is that people with money-purchase schemes work longer, whereas people with final-salary schemes tend to end work earlier. Where people have the double incentive to work and save longer, the evidence is that they respond.
If we were to introduce such an incentive to get people to save and work longer, the only way for the Government to meet the sensible target that they have set?which is to increase the share of future pension liabilities that are met from savings from 40 per cent. to 60 per cent.?would be to require people to work longer. I challenge the Minister, or whoever winds up the debate, to tell us in what other way the Government could meet that objective.
One overall benefit from my proposal would go much wider than the benefit that would accrue to future pensioners and the pension system. Above all, my approach would lead to the greatest transfer and extension of wealth to ordinary people to have occurred since the extension of home ownership and the right to buy. As a result, more people would have independence, self-respect, and power over their lives. They would have choice about savings and the timing of their retirement, and everyone would have a common interest in the prosperity of the economy in which their savings were invested and on which they would depend for enhanced benefits in the future.
In the spirit of the two speakers who preceded me, I urge the House to look positively at my proposals, and to consider whether they should form part of a new consensus for us to work towards. That would enable us to overcome the enormous problems in respect of pensions that any future Government will inherit.