Queen’s Speech

Lord MacGregor of Pulham Market Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord MacGregor of Pulham Market]

My Lords, it is a very great pleasure to follow the right reverend Prelate the Bishop of Durham. I believe he is extremely fortunate to be the Bishop of Durham Cathedral. In my youth, I remember travelling from Scotland to London and I was always astonished by that wonderful building. When one of my daughters went to Durham University, I was able to appreciate it even more. It is a most marvellous institution and how fortunate he is and how well in his speech he has represented the interests and aspirations of his community. As High Steward of Norwich Cathedral, I believe that Durham Cathedral is a very different rival but it is certainly an outstanding establishment.

In the list of his political interests, I was fascinated to see that the top two are finance and the economy, issues not always connected with right reverend Prelates. He has shown in his speech today just how much his interests lie in that area. At a time of very tough public expenditure decisions, I strongly agree with his point about targeted investment of public funds.

The right reverend Prelate has had a most distinguished career in the church, including being Dean of Liverpool. He speaks with great knowledge, giving a spiritual and ethical dimension to the issues that concern many of us, as the personal and ethical adviser to the UK Association of Corporate Treasurers and as chairman of an NHS trust. I hope that as we approach the issues of salaries, high rewards and so on we will hear him speak from his point of view.

In this debate, we have a limited amount of time so I do not want to make a general economic speech as that would take far too long and I would be repeating what many others will say. Therefore, I shall focus on particular points. I say to the noble Baroness on the Front Bench opposite that I believe that she failed to recognise the impact of the huge financial deficit that this Government inherited. I believe that it will take many years to put right. I was interested to see that many of her points would involve substantially higher public expenditure.

As we look at the problem of the huge deficits in many eurozone countries, we should be grateful for the resolute policies that this Government have pursued. Without them, I shudder to think what the costs of borrowing would be now. Here I follow what the noble Lord, Lord Razzall, said. I have been somewhat surprised by some of the comments about the Queen’s Speech not giving priority to the economy. Of course, the Queen’s Speech is mainly concerned with legislation but there are seven pieces of legislation that will have a major economic impact. In particular, the Queen’s Speech makes it clear that the priorities are growth, which involves many policies beyond legislation, reducing the deficit and restoring economic stability. The noble Lord, Lord Bilimoria, mentioned finance Bills, which inevitably are not in the Queen’s Speech, but successive finance Bills have been very helpful to industry and to business generally.

I will concentrate on two issues. The first is the banking Bill, following the report of the independent commission, widely known as the Vickers report. I fully support what the Government are doing on this front and I am delighted that they have acted so quickly and as promised, despite the complexities of the issues. We have yet to see the Bill and obviously there will be a lot of concentration in both Houses to ensure that some of the difficult details are well sorted out. However, I am strongly supportive of the importance of the Bill. The Economic Affairs Select Committee of your Lordships’ House, which I chair, had a long session with Sir John Vickers. Although we did not come to any conclusions—that was not our intention—it was clear from the flavour of all members of the committee that we strongly supported the thrust of the ICB report.

Representatives of the banks, too, appeared before us. They appeared a bit reluctant but confessed that it was a done deal. Their main concern was about costs, and their estimate of these is in our report. However, the estimate of costs for the banks is small compared with the cost to the taxpayers and the economy of the bailout of the banking system over the past three to four years. If we needed a reminder of the importance of separating retail and investment banking, what happened at JP Morgan in the past few days was clear evidence.

I will concentrate on one further issue which has not had enough airing in the House: the impact on pensions of quantitative easing. This will need a longer debate, and I can only sketch out some of the issues this afternoon. Pension schemes in the UK were originally one of the jewels in the crown of schemes in the developed world. We witnessed a very sad decline in recent years in their range and scope, starting with the attacks on ACT by the former Chancellor of the Exchequer, Gordon Brown, which had a big impact. Since then, there has been the impact of longevity, the complexity of accountancy rules, the necessary legislation to prevent fraud and the collapse of schemes, leading to pensions Acts, pension regulators and PPF. The measures were all necessary, but the decline in the number of defined benefit schemes offered to all employees, and the restrictions of schemes on new employees and greater emphasis on defined contributions all accelerated the decline of defined benefit schemes.

Now the impact of quantitative easing is very clear. It is in addition to all that I described. Ten years ago, 80% of defined benefit schemes were open to new members. Now the figure is 19%. That is a dramatic decline. The big trend of schemes being closed to future accrual, as well as other measures to reduce the costs of meeting the deficit, is also substantial. The number of schemes closing to those areas has risen by more than 20% in the past three to four years, and a number are closing altogether.

Much recent concern related to the impact of quantitative easing. The problem here is the way in which liabilities are defined in pension fund schemes. They are defined fundamentally in relation to gilt yields. Therefore, while assets have from time to time improved over the past few years, the problem facing pension fund trustees—I declare an interest as the chairman of three pension fund trusts—is that however well they do on the asset front, they cannot keep up with the increase in their liabilities because these are linked to gilts. In addition to the volatility that company directors and boards face in dealing with their pension schemes, there are big extra costs to meeting the deficit, which are increasingly being spread 10 to 15 years ahead.

At a recent Economic Affairs Committee meeting, I asked the Bank of England Governor what he was going to do about this. I got a string of points in reply about how, if pension schemes matched their assets to their liabilities, it would not be a problem—that is to condense his argument a bit. However, there are very few pension schemes that can do that. I believe that the Bank of England’s scheme is the only one that has matched its assets to its liabilities. The Governor’s case was that asset prices, especially gilts, rise when yields fall, and so in a sense solve the problem of matching assets to liabilities. That option is not available to any other pension fund scheme.

What we have seen on deficits is that the £200 billion of quantitative easing asset purchases pushed up the liabilities of pension funds by £180 billion. The second load of quantitative easing—the £125 billion of asset purchases—pushed up the liabilities by a further £125 billion. These are huge figures. What is happening is that pension schemes are now facing huge deficits as a result of how we define liabilities linked purely to gilts. The Pension Protection Fund estimated recently that the aggregate deficit for defined benefit schemes eligible for entry to the PPF according to its Section 179 liabilities—I apologise for the technicalities—has risen over the past month alone to £217 billion compared with £206 billion the year before.

I am not asking that the policy of QE introduced for completely other reasons—for the economy as a whole—should be changed to accommodate pensions. But what we are seeing is that for short-term reasons—for economic and monetary policy—there are huge long-term consequences for pension funds as a whole and for many individuals caught in a short-term trap if they are reaching retirement and seeking to move into annuities. For example, a pension pot of a 65 year-old was £7,800 pension per year in 2008. It has now fallen to £6,112; a drop of income of 20% driven largely by the fall in asset prices.

I am asking that the method of valuing liabilities should be reconsidered. Actuaries to whom I have talked have been considering alternatives and there are some highly technical areas that provide alternatives. I do not have time to go into those today. But the stumbling block for them and the trustees is that the Pensions Regulator’s way out is to allow longer recovery periods. That is all that they can do if they go by the Pensions Regulator’s advice at the moment. We are having recovery periods going way ahead to 15 years and beyond. But that means an additional burden on the company and another problem that finance directors and boards face.

What is happening is that in this tough economic climate, companies are being asked to make increasing contributions for recovery periods, therefore cutting back on their schemes, when we could find a different way of defining liabilities. What I ask, therefore, is that as the National Association of Pension Funds and others have been urging, the regulator and the Bank of England make a joint statement indicating their understanding of the situation and willingness to explore ways of approving other methods of valuing liabilities during this period of such low gilt yields. In doing so, I am following a recommendation of the Treasury Select Committee in the House of Commons, which asked for virtually the same thing.

I hope that we can return to this matter and debate it in greater detail before long. Meanwhile, I urge my right honourable friend to take up that recommendation in consultation with the others to see if there can be some way of overcoming the serious difficulties that pension funds now face.