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Mr. Flight: I was referring, as I think I mentioned, to the minimum in the AUTIF report led by Dr. Oonagh McDonald. That is where the 70 per cent. figure bites. The hon. Gentleman will find that in the report.
Of equal importance is the point that the percentage will change over time as people build up more in money purchase pensions. The proposals are aimed not at the wealthy but at all those who will be able to purchase the minimum income and will have some capital to invest thereafter. Such individuals would greatly appreciate the freedom so to do.
A good case can be made for abolishing the obligation to buy annuities, at least for stage 1 because the Government's pension guarantee virtually requires abolition to be along the lines of the AUTIF report.
The argument has also been levelled that the proposals would be a threat to defined benefit final salary schemes. My response is that they are already under threat as a result of the rising costs of final salary schemes, of companies trying to save money and, indeed, the attractions of the simple stakeholder schedule 13 legislation. In 10 years, I estimate that at least half of the existing final salary schemes will be closed. The shift to money purchase will be far greater than many realise. The Towers-Perrin survey of money purchase pension arrangements in the United Kingdom suggests that at least half the direct contribution money purchase schemes are associated with the closure of final salary schemes. That is a telling statistic.
There has been some false concern within the Revenue, if not the Treasury, that the proposals in the AUTIF report would lead to people wanting to transfer in their last year or so from a final salary scheme into some form of money purchase pot, and that employees of the Government, in particular, would want to do that because their pensions are often not funded. It is argued that the proposals would create a funding problem. The answer is that it would be extraordinary if public sector pension schemes have rules to permit that. Most do not. If others do, the rules should be changed. This option is not the norm within a final salary pension scheme in the private sector. Revenue concerns that a wide range of civil servants would want to, and be able to, switch to a money pot are wrong. They would be much better off staying in their final salary
schemes and receiving generous inflation-linked pensions. In terms of the rules of the scheme and the motivation, there is a false concern. Often, pension arrangements for spouses are considerably better within public sector schemes.9 pm
We are dealing with a major issue that has been under debate for two years. A great deal of work has been done. The Government said that they would respond to the AUTIF report, and there has been no response. Yet about two thirds of the electorate are 46 or older and are either focusing on their pension arrangements as they are about to draw them, or are already drawing them. The Government would be most unwise in their own interests to underestimate what has become a major issue. People are aware that standard guaranteed annuities are now extremely poor value. They do not want to be locked in whether the amounts involved are large or small, and there is no logical reason why they should. There need be no loss of revenue as a result of the changes and the revenue could be greater.
There are also two small points that I would like to add to what is really the final debate on schedule 13. First, I referred earlier to the Myners report. As the Minister said, the final report is not out, but the consultative paper is. The Minister will be aware that this is all about encouraging investment in venture capital by pension schemes. Under the rules of all forms of personal pension schemes and the provisions in schedule 13, such schemes cannot invest in unquoted shares. If the Government wish to encourage greater venture capital investment by pension funds, this is an issue to be dealt with potentially within the terms of schedule 13.
Since we discussed schedule 13 in Committee, the individual pension accounts announcement has been made by the Government, I think outside the House. We welcome that announcement, but I do not understand the logic of why an IPA has to be purchased via some form of money purchase pension scheme. There is more than adequate protection within financial regulation and potential investment rules to cut out the unnecessary costs of the pension scheme umbrella and to permit IPAs to operate on an entirely analogous basis to ISAs. We would then have specific rules about who could buy an IPA and how, and who could not. Why have the Government concluded that the IPA is simply to be a method of managing money for a form of money purchase pension scheme and not a pension packet in its own right, as it easily could be?
I have strayed because, although those matters relate to the key schedule 13, they are not the key points raised by our amendments. I encourage the Government to bite the bullet and to follow Canada and Ireland, broadly to follow the AUTIF report, and to get a move on. There are hundreds of thousands of people, if not millions, who are now coming up to 75. They are extremely concerned about being forced to buy a bad annuity product. All of us receive letters from these people. The Department of Social Security is well aware of the issue, but it is ultimately a Treasury matter when it comes to reform. I fail to understand why the Government have not yet bitten the bullet.
Mr. John Butterfill (Bournemouth, West): I should like to support the principle behind new clause 8, which is a well conceived proposal, but, in particular, to speak on amendments Nos. 145 and 146, to which my hon. Friend the Member for Arundel and South Downs (Mr. Flight) has just referred.
If there is any justification at all for requiring those who are retiring to use their pension pot to buy an annuity, it can only be that tax relief has been given on the accumulation that provides that pot, so it is argued that it is not unreasonable for the Revenue to require such people to buy an annuity to make sure that they are no longer a burden on the state. The compact with the state is that the purchase will guarantee, or, hopefully, will go some way to guaranteeing, that such people will not be a future burden.
But annuities are the only type of investment for the future, or virtually the only one that anyone would seriously contemplate, that carries that burden. The Government have introduced individual savings accounts, which have all the tax advantages that a pension product has, but without the disadvantages--without the requirement to buy an annuity at the end of it; without the requirement to lose one's capital at the end of the day. For the more sophisticated investors, to whom the hon. Member for Kingston and Surbiton (Mr. Davey) referred--those with large pots of money--there is the enterprise investment scheme or the venture capital trusts--much more sophisticated, perhaps more risky--in which they can invest and have even greater tax advantages.
One is puzzled to know why successive Governments have continued to lay this particular burden on those who have prudently saved for their old age, who are doing a service to society by so doing, and yet are forced into purchasing an end product, the annuity, which, as my hon. Friend the Member for Arundel and South Downs said, is probably the worst investment that people could make for their on-going retirement future. People are living much longer now than they were.
Something on the lines of the AUTIF report is not desirable but essential. The competition for the purchase of gilt-edged investments is becoming greater every year--in fact, every month. In a previous speech in the House I explained how the operation of the minimum funding requirement is creating a black hole. As gilt yields go down, so the minimum funding requirement requires institutions to purchase more gilts. By purchasing more gilts, they drive the yields down further, and so on. We have a downward spiral of gilt yields, which is becoming unstoppable.
There is a way to remedy that, at least partially, and I know that the Government are considering the minimum funding requirement to see how it can be amended. There is a suggestion that, in addition to gilts, some corporate bonds might be added as appropriate investments. I still do not think that that will solve the problem because fewer gilts are still being produced and a limited amount of money can be issued through corporate bonds, yet, as I have explained, the demand is insatiable.
What we should be doing in terms of the minimum funding requirement is what almost every other sensible fund does, which is to have a balanced portfolio where--prudently, of course--one makes sure that the appropriate ratios are maintained and looks at the total return on
investment and not simply at what can be obtained from gilts. The people who are really suffering are those who are forced to purchase gilts at the time of retirement in a market that is going further and further against them, month by month, year by year.If we follow the suggestion in the AUTIF report, we can release people from at least part of that problem. If they are required to purchase a minimum income that will ensure that they are no longer liable to be a burden on the state--it will have to be on an indexed basis--we fully justify the tax relief; if indeed it needs justifying, because in the other forms of investment it is not required to be justified. They can then invest their money in any way they think prudent.
At present we have a ludicrous situation, shown at its most perverse by a self-administered scheme. This applies usually, though not exclusively, to people with a larger pot. There are people who have bought property into a self-administered scheme and now at the end of the day have to sell the property, which gives them a secure and reliable income, and convert it into gilts. If anyone were advised to do that it would be blatant mis-selling, far worse than any scandal we have seen in any other area. Yet we in this House and successive Governments require people to behave in that way. At some time somebody will say "Let's sue the Government for making us do something so perverse and foolish". They might have a point, although I do not think it is possible to do it. Perhaps it should be.
The best thing we can do this evening is to say that we have got it wrong, that we need to change the basis on which pensions are dealt with when they come to maturity. I hope that the Government will accept the amendment.
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