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Mr. Curry: I provided an example of precision, which I urge the hon. Gentleman to follow.
Mr. Dismore: I am grateful for the right hon. Gentleman's intervention, but I am afraid that I am still none the wiser.
Mr. Gardiner: My hon. Friend is no doubt aware of the barrister who, when pulled up, gave a long explanation of which the judge said, "I am none the wiser." The barrister replied, "None the wiser, my lord, but much better informed." I trust that my hon. Friend might also be.
Mr. Dismore: I am not sure that I am any wiser or better informed as a result of my hon. Friend's intervention, but "Revenons à nos moutons," as Voltaire might have said.
The Equitable Life issue is quite important in this context. To inform the House, may I say that I have both guaranteed and non-guaranteed annuity rate policies, so I suppose I am both a loser and a bigger loser. I took those policies out in my late 20s as it was a requirement of my partnership to do so, although, like most people who take out pension policies, I had no idea what I was signing up to. However, I have become remarkably better informed about the affairs of Equitable Life over the past few months, and exactly what the Equitable Life policy problem is bears pointing out to the right hon. Member for Skipton and Ripon.
When I, and many others, took out policies in the early 1980s, interest rates were high, as were annuity rates, as we see from all the research information available for the debate. Equitable Life made a promise: I would have a guaranteed annuity when I retired if I kept up my contributions. The problem has arisen for Equitable Life because it cannot achieve that, and I challenge the right hon. Gentleman to say how his Bill would solve it.
Obviously, the Bill will be of no assistance to existing policyholders who have to vote by today on whether to accept the scheme, so how can the right hon. Gentleman pray in aid, both today and in publicity, the claim that the Equitable Life problem would be solved—for the future, I assume—were his Bill passed? The real answer to the Equitable Life problem is that the insurance industry has got a lot wiser and no longer sells those particular policies. We should question some of the arguments that have been advanced today because there is a lack of knowledge about the workings of the pension industry and of annuities. I suspect that if the Bill is passed it will add to the confusion. I question whether that is the best way to proceed.
I am a member of the Work and Pensions Committee and, in the previous Parliament, I was a member of the Social Security Committee. I share the blame for the fact that those Committees have always focused on state provision such as the minimum income guarantee to combat pensioner poverty, and have paid little attention to the private insurance market. I am keen for the Select Committee to conduct an inquiry into the issue of
confidence in the private sector annuity market, and I have been attempting, with some success I think, to persuade my colleagues to agree. That would be a good opportunity for us to examine proposals such as this in detail and to take evidence from all sides about the best way forward. We could investigate whether the right hon. Gentleman's proposals are workable and whether they solve the problem that they seek to address.Apart from our little spat just now, today's debate has been very well informed and useful, but it has not allowed the House to take evidence from the experts, except indirectly in hon. Members' contributions, about whether the Bill's proposals are sensible. We also need to test its long-term financial implications. If the Bill gets to the Committee stage, that will be all well and good, but I would hope that an inquiry by the Work and Pensions Committee could be conducted in parallel with those proceedings. That would ensure that our debate is fully informed, which is important because many people would potentially be affected by the Bill.
One or two things need to be said about what the Bill will not do. It will not enable people to put any more money in their pension pot. There is no doubt that there is concern about annuities, and the House of Commons Library briefing puts that point rather well. It says:
- "Today's pensioners are faced with much lower nominal annuity rates than earlier pensioners, but the expectation of low and stable inflation in the future (incorporated in the bond yields underlying annuity rates) means that they face less inflationary risk in future and that their income will maintain its purchasing power much better than has been the case in the past. Nevertheless, the perception remains that it is unfair for current annuitants to be retiring with an annuity income based on rates half those prevalent ten years ago."
The briefing goes on to make the following important point:
- "Research from the ABI stresses the extent to which the determination of income in retirement is a two-stage process, encompassing both annuity rates and pre-retirement investment growth. While someone retiring today faces historically low annuity rates their pension fund will have benefited from historically high growth in equities in the period before retirement. The net effect of these two countervailing forces is that—for a given level of contributions relative to average earnings—an individual retiring at the end of the 1990s has a higher income in retirement than someone who retired at the start of the decade."
The Library briefing makes the point that the coincidental high pre-retirement growth and low post-retirement returns may not continue. My point is that perception and reality are not the same in this debate. My hon. Friend the Member for Birmingham, Edgbaston did the House a service by referring to the plethora of different insurance products on the market and the different types of annuities that are available.
As I said, the Bill would not put more funds into the pockets of people who are trying to buy annuities. There would be the same amount of money in circulation, so people who think that the Bill would provide a panacea for their annuity problems may be under a misapprehension. That could be wrong only if the claim in support of the Bill that it is tax neutral is also wrong. The additional money in the annuity—or the alternative
to an annuity—could come from only two sources. It could come from increased contributions by the person during their working life. We all know how difficult it is to convince younger people of the need to invest in their future. I made my own personal pension arrangements when I became a partner in a law firm, not voluntarily but because it was a requirement of the partnership. When I was in my late 20s, my partnership share was not sufficient for me to consider it easy to make those contributions. Tax breaks are the alternative possible source of additional money.The right hon. Member for Skipton and Ripon has claimed throughout the debate that the Bill is tax neutral. In my opinion, we are being asked to buy a pig in a poke. The Bill makes no mention of tax provisions. Clause 1(7)(5) states:
- "Any withdrawal from the Fund by the member under subsection (2) shall be regarded as 'income' within section 1 of this Act."
It is all very well for the hon. Gentleman to say that he will table amendments in Committee, but those amendments will probably expand the Bill to three or four times its original size, so it is important to say on Second Reading that the Bill is only half the story so far. Either the right hon. Gentleman is overselling his Bill by suggesting that it is the panacea that will help to sort out the problem, or he may be mis-selling the Bill by suggesting that it is revenue neutral when that is not the case.
My other main observation concerns the Bill's proposal in respect of the minimum retirement income. Earlier in the debate I explored the issue with the hon. Member for Northavon (Mr. Webb) who made one or two points that I had not spotted. I was attempting to raise further points that were consequential on what he said, but he had lost patience with me by then. The hon. Gentleman is a professor and professors do not like to be interrupted.
The amount of the minimum retirement income was covered by the right hon. Gentleman's press release and by some hon. Members today. As I understand it, the purpose of the minimum retirement income is to make sure that anyone who buys one of the products that the right hon. Gentleman is promoting would not ultimately have to fall back on the resources of the state. I question that based on the wording of the Bill, which appears to be somewhat contradictory. Clause 2 states that
- "the Minimum Retirement Income shall be set annually by the Chancellor of the Exchequer by order, and he shall set the amount for the financial year in which this Act comes into force".
- "The income provided each year from the annuity under section (1A) must increase by reference to increases in the retail price index, so far as not exceeding 5%."
I am concerned that the Bill contains no provision to require the Chancellor to consult anybody about what rate he should set for the MRI. In these days of inclusiveness in politics, I am surprised that the right hon. Member for Skipton and Ripon has not included in the Bill a suggestion that the Chancellor should consult the insurance industry and pensioners' groups, some of which are very active in private sector pension provision, before deciding what rate should be set.
I am also surprised that the right hon. Gentleman suggests that the appropriate rate should be linked to the RPI. I am sure that he is serious about ensuring that the provision that people make is sufficient to ensure that they are not dependent on the state, but the Bill would not achieve that. He might not like to hear it, but the Government have been very generous to the least well-off pensioners through the minimum income guarantee, which increases every year in line not with inflation but earnings. We know that the intention is to increase it for 2003 to £100 a week and that it will continue to increase and, I suspect, overtake the RPI increase. The right hon. Gentleman and his party are not keen on the earnings link and abolished it for the basic state pension in the early 1980s. It may be that if at some remote date the Conservatives should return to government, they will not continue this Government's policy of generosity to the least well-off pensioners by maintaining the earnings link for the MIG. However, that is the present Government's policy, and the Bill in its present form would mean that pensioners would quickly find themselves falling behind and becoming dependent on the state.
The problem goes further. The hon. Member for Northavon raised the issue of housing and council tax benefits. He made the valid general point that housing benefit may not be of much interest to the sort of people who would have such policies, but I challenge it inasmuch as a number of reasonably well-off people, especially in London, choose to rent property. Luxury property in London is often only available for rent, not for sale. Those people could potentially be thrown back on state provision, and the Bill would make no provision for housing benefit, let alone council tax benefit.
The hon. Gentleman also made an impressive point about long-term care for the elderly. That is phenomenally expensive, as we all know from our debates on the royal commission reforms. We also have the additional complication that although taxation arrangements are UK-wide, different arrangements for long-term care pertain, for good or ill, in England and Wales compared with Scotland, as a consequence of devolution. In Scotland, it has been accepted that the state will meet the cost of long-term care, but that has not been accepted in England and Wales, where the means test still applies to the personal care element of long-term care of the elderly. That cost is rising, as we all know. The right hon. Member for Skipton and Ripon provided no answer to that problem and we do not know whether he believes that the cost of long-term care for the elderly should be borne by the state or by setting his MRI at such a level that individual pensioners should be able to absorb the cost.
I also challenged the hon. Member for Northavon on the pension credit. The Bill's relation to the concept of pension credit, the purpose of which is to reward savings, is complex. It rewards pensioners with a small amount of savings—whether from an occupational pension or from an annuity of the sort contemplated by the Bill—by
allowing a small amount from such sources to be made up by matching funds from the Government to various sliding scales, as set out in the chart at the back of the Bill.I do not understand from the right hon. Member for Skipton and Ripon whether he perceives that subsidy from the pension credit—which is aimed particularly at middle-income pensioners—as something that should be covered by the minimum retirement income figure, or whether that figure should be set at a level whereby people who purchase an annuity under MRI should not have to make provision for that so they could maximise their entitlement to pension credit. At the moment, there is no incentive to have that sort of fiddle, when one can arrange one's affairs in such a way as to maximise one's entitlement to pension credit. Either one is entitled to it, through the purchase of an annuity, or one is not.
As it stands, the provision could enable people to have some sort of benefit planning arrangement where they can set their annuity under the MRI at a level to maximise their benefit, which is effectively potentially increasing the burden on the state in respect of the people to whom the Bill is supposed to apply. The pension credit raises complicated questions for the right hon. Gentleman which, so far, he has not answered.
The old system that we inherited from the Tories was simple; we had the basic state pension and a low level of what was then supplementary benefit, now the minimum income guarantee. However, because the present Government have been generous to the least well-off—and are about to be generous to the next band of pensioners—the problems have started to arise in terms of pension credit, long-term care of the elderly and ancillary benefits such as housing and council tax benefits. Frankly, the right hon. Gentleman has not answered those points. If the Bill is to be revenue neutral, those are important questions that he must answer.
We then come to how couples are treated in these arrangements. The difficulty that the right hon. Gentleman has to face is that taxation is done independently within a couple but benefits are assessed on a family basis. That includes pension benefits. Again, he has not dealt with this question. The Library briefing states:
- "The treatment of pensioner couples is a further complicating issue. The MRI proposals—like the income sources which would constitute any MRI—are based on the individual. However, the means-tested benefit system which the MRI seeks to maintain pensioners above is based on the family. The interaction between individual income and family assessment of benefit entitlement raises the issue of the MRI over-providing for couples where both have pension entitlements from a defined-contribution pension scheme."
- "Both partners would be required to purchase an annuity sufficient to provide them with individual income of £140 per week, producing a joint income of £280 per week. Given that to avoid dependence on the MIG they only require a joint income of £140.55 per week, their flexibility in annuitising their pension fund may be seen as somewhat less than is intended."
At current annuity rates, an annuity producing an income incremental of £67.50 difference between the basic state pension and the MRI would require a fund of
about £55,000 for a man aged 65 and about £60,000 for a woman. Given that the average annuitised fund in 2000 was just £23,000, it appears that many annuitants would not be able to meet the MRI, let alone benefit from any flexibility in the use of their remaining fund. That argument applies with knobs on if we are talking about a couple as opposed to the two halves of a couple, a husband and wife. This is a practical question: how would we overcome the difficulty of people being taxed independently while the benefits system applies jointly. Should we go back to taxing husbands and wives jointly? That is a tendentious problem that raises issues that go way beyond the Bill and could open a whole can of worms.What about the sex discrimination legislation and the double exemption? Is it the role of private sector provision to level up between Peter and Pauline, to use the example of my hon. Friend the Member for Brent, North, or is that the responsibility of the state? There is nothing wrong with the state's involvement in pooling risk between the sexes. I take the point that when each sex reaches the age of 65 the differences between life expectancy are somewhat lower. However, I question whether it is right for the private sector to adopt this position, bearing in mind how annuities are currently calculated for pooling risk.
We have discussed what happens if the annuitant dies early. It was alleged that the money goes back to the insurance company. It does not. As I said in my intervention on the hon. Member for Northavon, it is part of the pooling arrangement. If we are already arguing whether the pooling arrangements in the annuity system work fairly, those arguments will become stronger if we broaden the pooling arrangements by pooling across the sexes, for example.
Another criticism is that the Bill benefits only rich people. The Labour party has been accused of bringing the politics of envy into the debate. Frankly, I am not bothered whether the Bill will benefit only rich people; my main concern is whether it is fair between the different income groups and between the annuitant/taxpayer and the Exchequer. If the measure is genuinely revenue neutral, I am laid-back about it—that is not a problem. My concern is whether the process could penalise the less well-off, which takes us back to the relationship between pension credits and the minimum guaranteed income. I am also concerned about whether there is equity between the different income bands.
I pray in aid the comments of the Association of British Insurers that were reported in the 17 December edition of This is Money magazine under the headline "Insurers welcome pensions Bill". I must say that I am not hostile to the Bill, which contains proposals for important and necessary reforms. I simply question whether the right hon. Member for Skipton and Ripon has covered all the bases. On equity, the article in This is Money said:
- "The Association of British Insurers said that this was a contribution to the debate on the compulsory purchase of annuities. However, association spokeswoman Emma Grainge said: 'Our general fear is that most people will have insufficient savings to take advantage of it.'
She said that to get an income of more than £140 a week"—
- "people would have to spend around £50,000 on an annuity, and many people's retirement funds were less than this. 'We do welcome any contribution to the debate on compulsory annuities but any changes to legislation should enhance flexibility and choice for all consumers.'"
The Bill takes away some current choices. It removes the drawdown provisions, although that fact is not clear from the Bill itself as one must cross-reference it with the 1988 Act. I do not have time to go through that point in detail, but drawdown would be withdrawn.
Compulsion at age 65 has been canvassed today. I believe in flexibility, and we need to work towards the flexible decade of retirement. People increasingly live longer and want to work beyond 65. We have all had letters from people who object vehemently to being forced to retire at 65. They think that that is the worst sort of ageism, and I agree to some extent. In some jobs it may be appropriate to retire at 65, but in others it may not. By specifying 65, the Bill does not provide the flexibility that the modern age requires.
Equally, I must tell the Minister that specifying age 75 in the tax scheme is also inflexible. I am with the right hon. Member for Skipton and Ripon on the need for that reform, but his Bill would create as much of an evil as that which he proposes to remove.
The Bill does not deal with multiple policies. I have four different private policies, and the hon. Member for Ryedale said that he had 11. Would one have to opt all one's policies into the Bill's system, or could one pick and choose? I foresee cunning tax avoidance schemes in which I could include one policy in the system but maintain my position in relation to annuities for the others. There could be all sorts of juggling as people bought all sorts of different policies, and that would not be sensible. Should the Bill reach Committee, I urge the right hon. Member for Skipton and Ripon to consider how multiple policies should be dealt with.
Will he also examine security of investment? The Bill refers to schedule X of the Insurance Companies Regulations 1994, which specifies permitted investments that could be quite risky. We have already discussed whether it is wise to put all a person's money into gilts. Schedule X goes perhaps too far the other way, and I urge the right hon. Gentleman to consider whether there should be restrictions on that.
Will the right hon. Gentleman also consider the transitional arrangements in his Bill? The Bill would straddle the introduction of pension credit and the growth of stakeholder pensions, and there is potential for a series of loopholes.
I have spoken for some time, and, as I promised, I am not trying to talk out the Bill. I hope that I have offered constructive points and criticisms. The right hon. Gentleman's proposals have a lot going for them, but they also contain some flaws.
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