By David Willets MP, Shadow Secretary of State for Work & Pensions

13/May/2005

The online information provided through websites like Interactive Investor has helped improve understanding about financial services and products enormously. It is now quicker and easier than ever before for people to find out what services they need, where to get them and how to manage them. With more and better information comes increased competition between providers, and this in turn means greater choice. New and innovative products have been brought to market, prices have been driven down and products have become more transparent.

People not saving

Yet, while new technology has empowered consumers to become more able to manage their own financial matters, something very odd has happened. The amount people are putting aside in savings has actually declined – in fact it has almost halved since 1997. People simply are not doing what the Government hoped they would be doing and saving more.

There is a simple reason for this. While the financial services industry has responded positively to change, the Government has held people back from taking advantage of the new opportunities on offer. As a result, people simply do not know what they should be doing to plan for the future. And most worrying of all, many people are not planning for an adequate income in retirement.

As Labour's former Minister for Welfare Reform, Frank Field, pointed out, "When Labour came to office, we had one of the strongest pension provisions in Europe and now probably we have some of the weakest".

In 1997, Labour did indeed inherit a pensions system that was the envy of most other countries. The foundation of our system was a contributory state pension and on top of that, there was tax relief to encourage people to build up occupational and personal pensions. Attractive savings schemes had also been designed, including PEPs and TESSAs, which encouraged people to put money aside in tax-free investments. But while Labour had been promising to support pensions and savings before the 1997 election, when they actually took office they launched a series of savage attacks on them.

Savage attacks

First came Gordon Brown's £5 billion-a-year pensions tax, levied by abolishing the dividend tax credit paid to pension funds. This has made it harder for companies to finance final salary pension schemes – two thirds of which have closed to new members since 1997. And the tax has not only affected the private sector, it also hit the funded schemes run for employees in local authorities and universities. Then Labour abolished PEPs and TESSAs and replaced them with the less attractive ISA.

Alongside direct attacks on savings through tax and regulation, Labour policy has also damaged the incentive for people to save in the first place. By extending means testing in the benefits system, many pensioners with modest savings face a claw-back of benefits of up to 40p in the pound – the same marginal rate faced by higher-income taxpayers.

Nearly half of all pensioners are now trapped in Labour's intrusive means tests. According to the Government's own Pensions Commission, 'means-testing within the state system both increases complexity and reduces, and in some cases reverses the incentive to save'. We agree. The means-tested Pension Credit is so complicated that 1.6 million pensioners are not claiming the money to which they are entitled.

Conservatives understand that with people living longer, healthier lives, the right and proper job of government is to help them save more for retirement – not to attack their existing savings and undermine the incentive to add to them. We want to restore the supportive environment for savings and pensions that has been so damaged by Labour.

Reforming pensions

The first step must be to reform state benefits and send out a clear signal that it pays to save. We would therefore increase the value of the basic state pension in line with earnings rather than prices. The higher the value of the basic state pension, the smaller the number of people who would need to rely on means tested benefits.

When people understand that it pays to save, they will also need new and attractive ways of putting money aside. Many hard-working people would like to save but have not had the incentive to do so. That is why we have announced a tax relief to encourage and reward people who put money into their pensions. For each £100 a basic or starting rate taxpayer puts into a funded pension, the taxman will put an additional £10 directly into their pension. And whereas existing tax relief simply delays tax on the money people put into their pensions, our proposal will cut tax on the contributions made by basic rate taxpayers. For a person on average earnings across a working lifetime, this relief could increase the pension received by as much as £500 a year.

We will also trust people who have built savings up to make their own decisions about their financial planning. At the moment, people with private pension schemes have to use their savings to buy an annuity at age 75, even if they do not think they are being offered a good deal. Conservatives believe that people should not be forced to buy an annuity which might not be the best use of their hard earned savings. We will therefore abolish this requirement provided people do not become dependent on means-tested benefits.

But our policies to help people save more will not stop at people's personal arrangements. We will also help companies deal with the increasing pressure they are facing. When life expectancy increases beyond that which is expected, it affects the terms on which defined benefit pension promises can be made and on which insurers can provide annuities. We have suggested that the Government could shoulder some of this risk by issuing bonds linked to longevity (just as it now helps insurers to cover the risk of inflation by offering index-linked securities). We are consulting the insurance industry about this and the Governor of the Bank of England has expressed positive interest in the idea.

Doing the right thing by pension victims

Of course, there are many people who have done the right thing and saved hard, but have lost their pension savings because the companies they worked for became insolvent. Since Labour took office and imposed their £5 billion pensions tax, 80,000 people have lost 20 per cent or more of their savings in this way. The Financial Assistance Scheme, through which the Government says it will help these people, is woefully inadequate. It will provide £400 million over 20 years, which would give the 80,000 wind-up victims just £250 a year over a 20 year retirement. We would bolster these funds using the unclaimed assets of banks and other financial institutions – money which Gordon Brown says he wants for unspecified charitable purposes.

There are no quick and easy solutions to the crisis in pensions and savings that Labour have presided over. But people who work hard and pay their dues deserve better. With reforms to the state system, new incentives to save and better support for company pensions, a Conservative Government will restore confidence in pensions and saving.