Rt Hon Lord Lilley

    Peter Lilley, MP for Hitchin and Harpenden, called yesterday on the Chancellor to recognise the serious damage his £5billion a year pension tax has done to occupational pensions. Speaking in Parliament Peter highlighted that the Chancellor’s measure has undermined pension scheme funding, reduced pensioner security, forced scheme closures and reduced the incentive to save.

    Throughout the debate, the Chancellor kept insisting the tax rise had not damaged UK pension funds. So when the Chancellor said he had compensated charities for the impact of this tax increase, Peter Lilley asked “If the tax rise was damaging to charities and the Chancellor had to compensate them, why does he not admit that it was damaging to pension funds and they need compensation too?”

    Peter also pointed out that before the changes introduced since 1997 it was almost unknown for pension funds of public companies to fail. Since that now happens all too frequently he spoke in favour of the Conservative proposals – which had all-party support (including Labour backbenchers) to compensate members of failed pension schemes. Unfortuantely those measures were defeated the next day.




    PART A:
    Greg Clark (Tunbridge Wells) (Con): Will the Chancellor confirm that his raid has been not only on pension funds, but on Britain’s charities? And will he confirm that Britain’s charities have lost £1.3 billion to date as a result of that policy?
    Mr. Brown: That is not true. [ Interruption. ] The shadow Chancellor thinks that the matter is so important that he did not even mention it in his speech. [ Interruption. ] The dividend tax credit was indeed paid to charities, but we gave them compensation for five years afterwards, and at the same time we introduced a major reform of charities. Gift aid was worth £135 million when we
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    came in; it is now worth £750 million. I have not seen the Conservatives supporting what we have done in that area, either.
    Mr. Brown: That is not true. [ Interruption. ] The shadow Chancellor thinks that the matter is so important that he did not even mention it in his speech. [ Interruption. ] The dividend tax credit was indeed paid to charities, but we gave them compensation for five years afterwards, and at the same time we introduced a major reform of charities. Gift aid was worth £135 million when we
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    came in; it is now worth £750 million. I have not seen the Conservatives supporting what we have done in that area, either.
    Mr. Peter Lilley (Hitchin and Harpenden) (Con): If it was damaging to charities and the Chancellor had to compensate them, why does he not admit that it was damaging to pension funds and issue compensation?
    Mr. Brown: The right hon. Gentleman had better be careful in joining this debate. He was the author of plans on pensions that virtually lost his party the 1997 election. I have just explained to him that companies paying into pension funds are paying employers’ contributions, which rose by £2 billion between 1996 and 1999. It was wrong that so many companies were taking employer holidays, and it was also wrong that the share of wages paid in pension contributions was only between 1 and 2 per cent. Those companies had unfortunately been encouraged to take those holidays by the taxation regime operated by Lord Lawson, which was why those pension funds were not receiving employer contributions as they should have done. Once we made the change, employer contributions started to rise. They have now risen to £33 billion a year, and I hope that the right hon. Gentleman will acknowledge that employers are now paying a fairer contribution to the pensions of their workers. In my 1997 Budget-this is why the shadow Chancellor was completely wrong when he tried to suggest that this was not in the 1999 Budget-I said that employers had been taking holidays for too long and that it was time for them to restore contributions.

    PART B:
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    5.57 pm
    Mr. Peter Lilley (Hitchin and Harpenden) (Con): It is a great pleasure to follow the hon. Member for Coventry, North-West (Mr. Robinson), whose amiable lack of self-regard enables him openly to admit that Labour deceived the British electorate at the last election. He sees nothing wrong in developing policies in secret, which it refused to admit. As an aside, I got wind of those policies before the election. I held a press conference during the election campaign alleging that it was the Labour party’s intention to abolish advance corporation tax. Only the Financial Times took me at all seriously, publishing a comparatively modest article saying that that was allegedly being considered by the Labour party. No one else paid any regard to the matter, and even I scarcely believed that it really intended to do it. None the less, I shall put in some context the decision that subsequently followed.
    When I became Secretary of State for Social Security, the first crisis with which I had to deal was the Maxwell pensions crisis. The former Labour Member for the Milton Keynes area had left his companies’ pension funds bereft of hundreds of millions of pounds, so tens of thousands of pensioners’ livelihoods and future were at risk. We had to deal with that-we did not do so, but that is not the issue today. It meant, however, that I had enormous sympathy for my successors when they faced a Chancellor of the Exchequer who introduced a tax that took billions of pounds from the pension system, which affected every pensioner and future pensioner in the country. Indeed, on the night that he introduced that tax, I described it as the Robert Maxwell memorial tax, because no one before the Chancellor had thought that they could get away with removing money from pension funds without anyone noticing until it was too late. That is what our Chancellor did, but he has not got away with it indefinitely-only for too long.
    I want to look very simply at the Chancellor’s record on pensions and his reasons for introducing this change. He inherited a system which, in the words of the right hon. Member for Birkenhead (Mr. Field), was the “envy of the world”. He inherited an occupational pension scheme that was accepted as the jewel in the crown of pensions systems worldwide. As a result, we were enabled to build up funding, savings and investments for future pension liabilities in this country to a level that was not only more than that built up by any other country in Europe, but more than all the other countries in Europe put together had saved and invested to meet their future pension liabilities. We faced less of a potential burden of tax to fund our future pension liabilities than those countries, and we were generating a huge annual flow of savings, which were available for investment in this country or to acquire assets abroad to meet the burden of future pensions.
    In 1997, when the Chancellor took over, occupational schemes were generally well funded: they were secure, they were growing, they were giving earnings-related pensions to an increasing number of people and they were fairly taxed without disincentives to save. Let us take each of those points in turn and see what has happened under the tenure of this Chancellor.
    Mr. Wayne David (Caerphilly) (Lab): Will the right hon. Gentleman give way?

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    Mr. Lilley: May I make a little more progress? I will happily give way when the hon. Gentleman has something about which to ask a question.
    Pensions were well funded in 1997. We know that because when the Chancellor introduced the tax, one reason that he gave was that they were over-funded-he thought that they had too much money. Now, the deficits are measured in billions of pounds. I have asked the Library for the figures, and it puts the gross deficit shortfalls of pension funds at some £76 billion, which is a turnaround from surplus to deficit that is commensurate with the net present value of the £5 billion a year taken from pension funds and its impact on the value of those funds’ assets.
    The Chancellor had the cheek to suggest that my hon. Friend the shadow Chancellor needs a lesson about the value of assets, but it is he who needs the lesson. What is important is whether assets exceed liabilities, which was the case in 1997. Now, the liabilities of pension funds exceed the assets. That is the Chancellor’s record, which he must answer for, and the lesson that he needs to be taught.
    We were told then, and we knew well, that occupational pension funds were secure. Robert Maxwell had delivered a blow to confidence, but that blow was enormous precisely because up to that point no significant public company had ever gone into bankruptcy while being unable to meet the liabilities of its pension funds. Such pension funds were sufficiently well founded that even if the company did not survive, the pension fund did, or if the funds were underfunded, they were met by the resources of companies. When I faced the Maxwell pension crisis, I asked officials, “What normally happens in such cases?” They said, “This has never happened before”, so secure were we. Now it happens all too often, and all too many companies have failed leaving deficits in their pension funds. Hence the amendments that Conservative Front Benchers will introduce tomorrow to the Pensions Bill, when Opposition and Government Members will have an opportunity to try to make good the deficits and help the pensioners who are now caught in an occupational pensions system that is no longer as secure as it was.
    The Chancellor has mentioned £8 billion being made available, albeit over 60 years, which is a measure of the crisis that he has created.
    David Taylor: On pension fund deficits, surely the right hon. Gentleman should refer, at least in part, to the fact that after a long boar market the FTSE 100 was at about 7,000 on 31 December 1999, and that it halved to 3,500 by March 2003. Surely that played a huge role in the decline of pension funds, at least for a period-as we sit here today, it has, of course, almost climbed back to those levels. Why does he not refer to that? It is important, is it not?
    Mr. Lilley: I am grateful to the hon. Gentleman to doing so for me. I entirely take the point. Markets go up; markets go down; markets go back up again. When they go down, it is like the tide going out-it reveals who was swimming without wearing any swimming trunks. When the market went down, it revealed the shortfalls in the provision that the Chancellor had made available and the problems that he had created.
    The system was growing before this Chancellor came into office, but now pension funds are closing. The
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    majority of them are closed to new members, and two thirds of final salary systems have closed on his watch. Lord Turner has forecast the virtual euthanasia of final pension occupational schemes. The crown jewel of the occupational pension system has been successively plundered and sold off to the fences.
    The Chancellor inherited a system that was fairly taxed and well incentivised. The system was fairly taxed in the sense that it was designed so that people did not pay twice. Having paid taxes on their incomes and made savings-the companies in which they invest pay tax-people did not pay a further round of tax, which is what the complex system of advance corporation tax credits was all about. The tax credit reflected the value of the tax-when taxes went down, the tax credits went down. The bulk of the reductions reflected that, rather than being a cut in the credits without any corresponding cut in the tax for the most part.
    Mr. Dorrell: My right hon. Friend has touched on an important point of principle. My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) referred to the fact that that option was rejected when he was Chancellor, partly because the arguments about rebalancing investment flows were rejected and partly because the tax change implemented by the Chancellor introduced for the first time double taxation on pensioners-taxation on income into the pension fund as well as taxation of the pension paid to the pensioner.
    Mr. Lilley: My right hon. Friend is absolutely right. Any fair system taxes money either when it goes in or when it comes out, but not when it goes in, when it is in there and when it comes out again, which is where we are heading under this Government.
    There is another change that no one has mentioned so far, which is the double whammy that this Chancellor landed on the pensions system, namely, the resort to extensive and almost universal means testing. That has meant not only that the pensions system bears more taxes, but that the incentive to save is reduced, particularly for those on middling and low incomes. That will have a serious, long-term deleterious effect on savings and provision for pensions in this country, not least because it means that most providers of pensions are now afraid that they will be acting unwisely if they advise someone who is not very rich to save and invest, which is surely a serious indictment of the situation that this Chancellor has created.
    The Chancellor justified what he did in his Budget speech and subsequent interviews in three ways. First, he said that the measure would increase investment. Figures from the Library show that when the measure was introduced business investment amounted to 10.4 per cent. of GDP-it subsequently went down before recovering again to 10.4 per cent. of GDP. The measure has not raised the level of investment in this country-I will not pretend that the decrease was due to the tax change-and it has failed in the central thing that it was supposed to do.
    The Chancellor said that the measure would discourage dividend payouts. As we all know, dividend payouts follow a cycle, but in the nine years since the measure was introduced, the payout rather than falling has risen compared with the nine years before its introduction. The amount is only small, but the measure has had the opposite effect, if any, to that which the Chancellor proposed and forecast. He imagined that there would be
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    a complex system whereby even though the cash flow of companies would clearly be reduced by this tax measure-there is no way of taking money from companies and pension funds that does not leave them with less-they would none the less invest a higher proportion of a reduced cash flow, which would increase asset values in the long term sufficiently to offset the effect of the money that was taken out. That was an absurd, incredible and complex thesis which I am pleased to say that the Chancellor did not resurrect today, although it will be interesting to see whether his devoted colleague and potential successor will do so in the wind-ups.
    Finally, the Chancellor said that it could all be paid out of surpluses-that these pension funds were awash with money that served no purpose, and that they could pay it out at a rate of £5 billion a year with no harm done. As we have seen, however, those surpluses were available at that time but subsequently disappeared and have been replaced, by and large, by deficits on a fairly substantial scale.
    Ed Balls: I will resist the temptation to ask the right hon. Gentleman about pensions mis-selling. I am following his argument very carefully. Is his refutation of the Chancellor’s argument based on the fact that dividends-the profits paid out by companies in the UK-have been rising over the past 10 years under this Government?
    Mr. Lilley: No, it is not, but never mind. If the hon. Gentleman reads the text in Hansard he will be able to see what I was saying.
    The Chancellor said that the percentage of dividends paid out would decline; in fact, it has risen. [ Interruption . ] I am sorry-the percentage of profits paid out as dividends.
    Ed Balls: Let us be clear: the right hon. Gentleman is saying that dividends have been rising over the past 10 years.
    Mr. Lilley: I was referring back to the Chancellor’s Budget speech, when he said:
    “The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits.”-[ Official Report, 2 July 1997; Vol. 297, c. 306.]
    If he introduced this measure to discourage paying out dividends, he has failed, as companies paid out a higher proportion in dividends in the subsequent nine years than they did before.
    Ed Balls rose-
    Mr. Lilley: I will allow the hon. Gentleman one last attempt.
    Ed Balls: Given that the overall level of profits for corporations in the UK is at a record high, if the level of profits paid out in dividends has gone up, that means that dividends going to pension funds and to recipients of those profits have also been rising. The right hon. Gentleman is therefore saying that profits and dividends being paid out have gone up over the past 10 years, which is a fair point.
    Mr. Lilley: That series of interventions by the hon. Gentleman was probably worse than his contribution on the “Today” programme. All that he may end up saying is that the Chancellor successfully achieved the opposite of what he intended, but it was not such a bad thing after all.
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    The Chancellor committed two great sins of commission by imposing a heavy burden of taxes on pension funds and introducing extensive means-testing, but he committed an even greater sin of omission, which was the failure to cope with the growing issue-I would not call it a problem; it is a good thing that people are living longer-of longevity. The Government failed to address that for their first eight years in office. Why is that? I suspect that it is in large measure to do with their misrepresentation of the pension proposals that we published ahead of the 1997 election. Having so grossly and grotesquely misrepresented our proposals for reform, they could not return to the issue until it was all in the past, when they came back with something not entirely different from what I had proposed. It is a case of dishonesty being the root of a failure to act subsequently.
    I believe that on this issue the Chancellor has revealed his failures of judgment and unwillingness to accept when he has made mistakes. It is time to drive home to him that he seriously damaged the glories of the pension system that we had in this country by taxing it, means-testing it and failing to adapt to the longer life expectancy that we all now enjoy.
    6.15 pm