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Mr. Curry: It is from the Treasury.
Mr. Gardiner: No, it is from a discussion with the Association of British Insurers yesterday. It would be an injustice if I did not pay credit to Julie Stark and Chris Curry for their work in highlighting what could have been a dangerous flaw in the legislation.
Perhaps I might also outline some of the proposals that have been made as other ways of resolving the problem. In the pre-Budget report, the Chancellor expressed concern that individuals might not be exercising their open-market option. Pensioners are entitled to shop around when their fund matures. The FSA's proposed rule on disclosure of the open-market option is one way in which the problem is being addressed. It is a real problem for the annuity market. There is a great deal of choice, but unfortunately it is not a choice of which consumers are aware. Many believe that they have to purchase an annuity with their fund provider and do not shop around, and therefore do not take the benefits that the market has to offer.
The ABI has already taken steps to address that problem with its "Statement of Good Practice on Pensions Maturities", which came out in August last year. That statement requires ABI member companies to explain to consumers their entitlement to purchase an annuity from a company other than the one that has provided the pension. The proposed FSA rule will extend that requirement to all pension and annuity providers.
The ABI statement goes further, however, by recommending that companies spell out the range of options available on retirement—including the different types of annuity product; setting minimum standards for the timing and content of letters to policyholders whose pensions are reaching maturity; and encouraging the use of consistent terminology across the industry. I am sure that hon. Members on both sides of the House will agree that those recommendations are welcome, because we want to promote the greatest clarity among consumers in what is inevitably a complex and convoluted but important aspect of their future financial planning.
It is important that we alert consumers to the fact that there is an open market with a range of products available to them to provide security in retirement. To take advantage of that range, consumers need access to advice. At present, they cannot always obtain that advice in a way, and at a price, that suits them. A recent report for the ABI, "The future regulation of UK savings and investment—targeting the savings gap", prepared by Oliver Wyman and Company last September, found—in the context of the savings market—that a complex mix of conduct of business and product regulation has actually rendered it uneconomic to offer advice to a large and growing number of consumers, especially those at the lower end of the income scale.
The right hon. Member for Skipton and Ripon will be as concerned as me and many hon. Members that the report showed that, yet again, those in the poorest position to secure their retirement and their future financial provision are less likely to be able to procure the advice that they so desperately need.
The report also found that advice was a critical element in persuading people to save, so by inhibiting access to advice, regulation inhibited saving. Regulation may similarly be inhibiting access to affordable advice for pensioners who need it in order to make a decision on how to turn their savings into adequate income for retirement.
The Government should certainly consider tackling the advice system as one way of increasing competition in the market, as that would equip consumers to choose from a much wider range of products with a greater sense of their own needs and how to provide for them.
Providing better access to advice will not be easy. The range of types of consumer will need to be taken into account. Different types of advice will be appropriate for different people. I have already referred to the large number of people with extremely small pension funds on retirement, but such people may, of course, have other—perhaps much larger—pension funds, or other savings. For people with a range of savings, it is not necessarily appropriate to consider their pension fund in isolation when deciding how best to turn it into retirement income. That relates to points made by hon. Members on both sides of the House about the fact that the number of funds and the relative value of each one does not necessarily reflect the status of a pensioner who is approaching retirement. There is no direct correlation between the value of funds and the total sum possessed by an individual.
An holistic approach should be taken to retirement planning, taking into account all the savings of a consumer. Only a financial adviser—indeed, an independent financial adviser—is in a position to take such an approach. There may be some room for generic advice. There is no doubt about that. It could be through a helpline for those with small pension funds and no other savings. Such people need to find an annuity that will give them the best possible rate according to their circumstances.
In a recent article in Financial Adviser, Peter Quinton of the Annuity Bureau made several suggestions that he hoped could make pensions as a whole more attractive and efficient. He argued that the debate should not be about annuities in isolation, but about the pensions system as a whole, making it more attractive to young people and more efficient for retirees. Some hon. Members may be horrified by one of the conclusions that he reached—the suggestion that the age for retirement should be raised. Other suggestions were to improve links with long-term care packages and make retirement more flexible.
The main proposal, however, was that the retirement age should be raised to 70. That would address the problem of increasing longevity, which policy makers are struggling with and which Members on both sides of the House have this morning acknowledged as one of the primary reasons why annuity rates have come down to their present level.
An increase in the retirement age would of course reduce the amount payable by the Government under the state pension, which I am sure would gain favour in some Government Departments, and it would prevent a reduction in the amount payable as a pension, as one hopes that it would encourage people to stay in work longer.
Any reform of the current system should benefit everyone, not just the wealthy, and should prevent people from falling back on means-tested benefits. It should also be as simple as possible; that is another hurdle that some of the current proposals fail to clear.
Recently, some ideas have been advanced that might meet those tests alone or as a package. At the fifth annual annuities conference, entitled "Delivering Flexibility and Choice in the Open Market for Retirement Income", held in Westminster and the City on 16 October 2001, Peter Carter of Canada Life suggested that 25 per cent. of the pension pot could be taken as a tax-free lump sum now; 25 per cent. could be taken as a taxable lump sum or transferred into an account to accumulate tax free and could be withdrawn as required; and the remainder could be used to purchase an annuity. Obviously, the withdrawals would be taxable. There would be no minimum withdrawal and the entire amount might be withdrawn if desired because the tax had been paid on it. Anything left in the account could be left to beneficiaries on death.
That solution is simple. It would address inheritability—another of the issues about which Opposition Members expressed great concern today. It would certainly provide extra flexibility to everyone, at little extra cost in lost tax revenue to the Exchequer. It could also be further developed to address issues such as long-term care—for example, by allowing 25 per cent. of the taxable amount to be paid tax free if it was to be used for long-term care. In that way there would be a similarity with purchased life annuities.
The danger that that proposal poses is that people might withdraw the 25 per cent. taxable amount, spend it and then fall back on state benefits more quickly than they might otherwise have done. The annuity income generated in retirement might also be reduced by up to a third, meaning that more people might qualify for means-tested benefits at the point of retirement or later in life.
A further proposal is to pay annuities gross once a retiree requires long-term care. That concession already applies to income payment from purchased life annuities, provided that the income is paid directly to a recognised long-term care provider. An alternative would be to link long-term care insurance to Peter Carter's proposal to allow a taxable lump sum to be taken, by allowing the otherwise taxable sum of 25 per cent. of the pot to be paid gross if used to purchase long-term care insurance.
The Government may not be enthusiastic about these ideas from a cost perspective, but they have said that they are keen to increase sales of long-term care insurance, and these ideas would certainly help to achieve that aim. A variation would be to re-introduce what was known as the Cannon Lincoln product. [Interruption.] I see that the hon. Member for Arundel and South Downs (Mr. Flight) recalls it with glee.
In 1991, Cannon Lincoln—an insurance company—proposed that it should be possible to take, for example, a 10 per cent. reduction in income in return for getting three times that income at the age of 85, or at earlier disability. For example, a person might have the option of giving up £1,000 of a £10,000 income to have an enhanced income of £30,000 at age 85, or at earlier disability. Of course, that could substantially help to increase the costs of residential care. That proposal was refused by the Revenue because it was outside the current
rules. An amendment to those rules may be a desirable way to accommodate such flexibility now, given that we want to improve stability and security of income in retirement.It would also be possible to allow occupational pensions to be withdrawn while a person was still employed with the same employer. That would allow people to opt for partial retirement. Again, hon. Members have mentioned that provision earlier in the debate. At the moment, to start drawing occupational pension while working part-time, the member has to leave the employment of the occupational scheme provider and work part-time for someone else. I cannot understand the rationale behind the enforcement of that rule. I have no doubt that the Treasury has one, but I am afraid to say that it has escaped my powers of comprehension. We should consider that proposal as yet another way to enable people to have greater flexibility in their retirement funds.
In the United States, 401(k) pensions allow people to withdraw pension savings that suffer tax charges to meet emergency payments, or for specific uses such as housing and education. Arguably, such flexibility could encourage people to save more in pensions because it would overcome their fear of tying up their money until retirement age and not being able to get at it in an emergency.
As we heard earlier, in the past few years PEPs, ISAs and TESSAs have provided the sort of tax-free savings inducement that makes similar provision. However, that is another example of the way in which different Administrations and jurisdictions approach this problem and can enable people to prepare better for their retirement.
Further incentivisation would provide another way to encourage people to save more in their pensions, especially if the incentive could be targeted at employers. Early evidence from stakeholder pensions shows that take-up increases to about 85 per cent. if employers make contributions. The Government would do well to take note of that statistic.
The behavioural effect is borne out by the ABI's recent report "The prospect for stakeholder pensions", which it prepared in July last year. If employers were further incentivised to contribute to pensions, particularly stakeholder pensions, perhaps through a tax credit or similar direct incentive, employee take-up would be likely to increase substantially. Again, 401(k) plans provide an incentive for employers to contribute on behalf of what they call rank and file workers, by denying full tax reliefs to the pensions of highly compensated workers, unless a specific proportion of workers are in the company's scheme and benefit from a specified employer contribution.
The idea of allowing annuitants to switch provider after they have purchased their annuity—particularly investment-linked annuities, which people view as akin to income drawdown products that allow for switching between providers—has been suggested recently by a number of commentators. It is designed to allow individuals to move from poorer performing providers, so increasing competition and performance. However, that would also be very expensive and would be likely to lead to reduced annuity rates as actuaries then factor additional costs and risks into the price of the original annuity.
There would also be the risk of selection by annuitants. For example, if an annuitant contracted cancer, he could transfer out of his current annuity, in which the benefits are based on his expected mortality when he took it out, to an impaired life annuity from which he would receive increased benefits owing to his reduced life expectancy. To avoid that, a charge or adjustment would have to be levied on the transferring annuitant to be fair to the remaining annuitants in the mortality pool. Again, the increased costs of administration, which would be factored in by the companies, would tend to reduce the returns yet further.
Effectively, annuitants would strike a deal with the transferring annuitant whereby, if one of them died early, the transferring annuitant and others would benefit, via a cross-subsidy, from the fund remaining on his death. The hon. Member for Northavon (Mr. Webb) went into the issue, and it is important to appreciate the point that the hon. Gentleman who chairs the parliamentary pension scheme made. I am sorry, but I have forgotten the name of his constituency. [Hon. Members: "Bournemouth, West."] Indeed. It is a shame that the hon. Member for Bournemouth, West (Mr. Butterfill) is not here at present. I am sure that he will rejoin the debate, because he is an assiduous attender of such debates. I also welcome the way in which he guides pensions affairs in the House.
The hon. Gentleman made the point to the hon. Member for Northavon that the money reverted to the company and not to the Government. However, as my hon. Friend the Member for Hendon (Mr. Dismore) pointed out, a proper analysis of the issue shows that this money goes back to the other annuitants because it is part of the actuarial considerations that the company took when it entered into the contract. Under such a deal, if the transferring annuitant died early, the remaining annuitants would benefit, via the cross-subsidy, from the fund remaining on his death. Transferring out early would mean that that annuitant had disadvantaged the other members of the fund. Therefore, there are disadvantages to the proposals.
I could go on for much longer. I am sure that many other Members wish to speak, and I have had a good crack at the debate. The right hon. Member for Skipton and Ripon has alighted on an important issue and his Bill has sought to address it in an extremely responsible manner based on the work that has been done by the industry and by many in the voluntary sector. He has led the debate with great tact and diplomacy.
I am sorry that I cannot support the measures in the Bill, but I hope that this debate and any debate in Committee, should the Bill reach that stage, will be used to inform Government thinking. It is vital that certain changes for pension provision are made, so I look forward even more to hearing the remarks of my hon. Friend the Economic Secretary.
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