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Ruth Kelly: We now come to the heart of the matter. The Bill makes it compulsory for a personal pension scheme to provide a minimum retirement annuity. This annuity has to meet a minimal level set by the Chancellor of the Exchequer. It has to increase in line with the retail prices index although it will be capped at 5 per cent. and it has to be bought no later than age 65. This combination amounts to a maximum reduction in flexibility for the vast majority of pension scheme members.
The Bill would remove people's current choice and instead force them to buy an index-linked annuity for each personal pension arrangement that they hold. That may not be what they want and it certainly may not be in their best interests. The opportunity, if various small personal pension arrangements are held, of taking different annuity types at different times, to spread risk, would be removed. Using their open market option for annuity purchase, people have the freedom to decide which type of annuity best suits their needs. The proposals in the Bill would take away that choice.
The Bill would also require the annuity to be bought by age 65, so that most people would have no option to draw all their pension benefits from that age, whether retired or notagain, limiting choice. That would introduce inconsistency and unfairness, as the requirement to annuitise by 65 applies only to personal pensions and not to retirement annuity contracts or defined contribution money purchase occupational pension schemes, which are not affected.
The age 65 rule also brings in a much larger issue. If people are saving in a personal pension scheme, they would not be able to contribute to it past 65, and would have to take an annuity from that age. Those who have not made provision earlier in their life or are still active and working would be allowed to continue in employment but not to save any of their earnings in pension schemes for their future retirement, unless they have a retirement annuity contract or are in an occupational pension scheme.
Mr. Gardiner: Is my hon. Friend surprised, as I am, that the proposals in this part of the Bill so directly conflict with the flexibility that Conservative Members were seeking to introduce in the first group of amendments?
Ruth Kelly: I admire the way in which the right hon. Gentleman has piloted the Bill, but I fear that he has misunderstood the heart of the Government's objections to it. The vast majority of pensioners would not be given the additional flexibility that he advocates. Their flexibility would be reduced because they would be forced to buy an annuity with their entire income by the age of 65. The average fund from which people buy annuities is currently £23,000.
Mr. Curry: The argument about the size of the pot is becoming extremely futile. Many people have more than one pot, with money derived from SERPS or from occupational pension schemes, so the number of pots and the total that they add up to are what is at issue.
Ruth Kelly: I agree that the figure of £23,000 does not really capture the average size of people's total pension savings, but it gives an indication that the pension savings of the vast majority of people are nowhere near the level at which the Bill would introduce greater flexibility. People would have their choice restricted and be forced to buy an index-linked annuity from the age of 65. That is why the amendment would make the minimum retirement income annuity an option for those who want it.
Mr. Gardiner: In support of my hon. Friend's remarks about the level of income and the number of people affected, I refer her to the report "Targeting the Savings Gap", by Oliver Wyman and Co. It shows that the income figure goes from 85 per cent. for the first decile, down to 33 per cent. for the 10th decile.
Jim Dowd (Lewisham, West): On a point of order, Madam Deputy Speaker. Could you inform me and the House whether there is any mechanism by which the official record can show that it was my hon. Friend the Member for Harrow, East (Mr. McNulty), the Government Whip, who objected to that Bill?
Brian White (Milton Keynes, North-East): I begin by commiserating with my hon. Friend the Under-Secretary for Trade and Industry having to be present on a Friday afternoon and for drawing the short straw and so having to reply to this debate.
When I requested this debate a few weeks ago, I caused consternation in the Table Office and across various Departments mainly because the subject does not fit neatly within the remit of only one Departmentin fact, it relates to a myriad. In order to secure the debate, I had to change its title. My first point, therefore, is that regulators have grown ad hoc. Their powers, terms of reference, relationship to the Government and accountability are all slightly different, and over recent years they have mushroomed. What we have today has developed from an ad hoc, incremental approach. Each new regulatory system has been a different variation on reinventing the wheel. I shall argue that, although we have enjoyed some benefits from such a system, now is the right time to review it and to try to introduce some coherence. We have a wealth of experience on which to drawsome good, some bad.
I suppose that I had better define at the outset what I mean by "regulators". A narrow definition would cover only the former public utilities of gas, water, electricity and telecoms, but the regulatory function goes far wider than that. Organisations such as the Environment Agency, the Health and Safety Executive and the lottery and rail regulators all have regulatory functions. In the health service, the National Institute for Clinical Excellence and half a dozen other bodies carry out some aspect of regulation. I shall consider bodies such as the National Audit Office and the Audit Commission shortly.
Debates about regulation tend to polarise opinion around whether we have too much regulation. I do not believe that we have time today to stray into that territory except to emphasise that the work of the better regulation taskforce is to be commended. However, it has only begun to scratch the surface. Regulation will not go away, and the debate should be about its style, content and application, for example, whether it is full blooded, light touch, co-regulation, self-regulation, or the application of reserve powers, which will be more common in future.
Let us concentrate for a moment on the narrow definition. There has been tremendous change since the first regulators were established with British Telecom. They were set up to tackle incumbent monopoly, but today's economic landscape is totally different, and EU directives will make economic regulators examine issues such as market dominance. There are also arrangements for individual regulators in different countries to work together. In future, those regulators, working together, will have an impact on our lives outside normal Government and Council of Ministers decision making. We need to consider that.
Overall, the economy is doing well and that is likely to continue. However, there are several blockages in the micro-economy that have an impact on the quality of life; regulators make decisions that affect ordinary lives. Let
The free market approach has been the Whitehall orthodoxy for some time. We do it automatically without thinking and assume that it is good rather than ascertaining the circumstances in which it is appropriate and those in which we should adopt a different approach. The renewables industry's current problems and its representations to the Chancellor to try to protect some of the combined heat and power companies in next week's Budget is a good example of that.
When we hit a problem, we find that we have devolved decision making to the independent regulator, but the responsibility does not leave the Government, who continue to pick up the flak without having the tools to deal with problems effectively. That applies in the case of the Rail Regulator, the Financial Services Authority in respect of Equitable Life, which was mentioned earlier today, and the lottery licensee, to give only three examples. The only remedy is primary legislation, and the Minister knows only too well that that is difficult to obtain.
I should like the Government to examine the assumption that an independent regulator is de facto a good idea. I accept the need for independence, and I do not argue for a return to day-to-day political interference. If people are to regain trust in governance, they must have faith in the information that they have been given. There must be strict rules and transparency. However, there are drawbacks and I want the Government to consider how we deal with them. If the appointments process is the only sanction, problems arise such as those that the Select Committee on Public Administration is currently considering.
The Government have rightly moved away from individual regulators to a more collegiate approach. The FSA and Ofcom are clear examples of that. For too long, we have had individual regulators, and Oftel under Don Cruickshank is a different beast from that body under Dave Edmonds. Ofgem under Callum McCarthy was different from Offer under Professor Fairchild or Ofgas under Clare Spottiswoode. I am not commenting on quality, but Ofgas was not prepared to examine environmental considerations under Clare Spottiswoodethat was her decisionwhereas Offer under Professor Fairchild was prepared to do so. If we compare Ofsted with the prison inspectorate, it is apparent that the characters of the individual regulators led to the consequences that ensued. A board leads to less maverick interpretations and a more independent point of view.
Regulators in Europe operate in a clearer, more transparent framework. We have a tendency not to learn from other countries, and to think that because we started it we know best. However, central bank independence and the way we have run the economy show that we have learned lessons and benefited from them. The Government are to be commended for learning those lessons and applying them here.
Because there is an assumption that independent regulators are a good thing, the automatic answer is to have a regulator, but that assumption is not necessarily correct and I ask the Minister to accept that there is a need to challenge it.
There is a need for regulators to provide proper information, but the problem is that some of the information provided by the companies is commercial in confidence. The result is that regulators become very close to the companies. They become captured by the provider culture rather than looking at the matter from an end-user perspective. In fact, companies have actually poached staff from the regulators' office. The regulators are then much more dependent on the companies that they are supposed to be regulating. That is a serious issue that needs to be addressed.
The National Audit Office issued its "Pipes and Wires" report this week on how the utilities regulators have worked. They have been very good at achieving lower prices and improving efficiency, but that is the only measure of success. The report talks about what happens when the regulator gets it wrong. Ofwat was criticised in April 2000. The report says:
One of the ways in which the Government have sought to counter this provider-centric approach, under the Utilities Act 2000, was to make customers Ofgem's primary focus. Ofwat and Oftel still have customer focus as a secondary objective, and that remains a concern. For a number of the other public service regulators, customer focus is not even on the agenda.
While regulators focus on the economic side, they are making value judgments. Under the Utilities Act, the Government gave themselves a reserve power to require cross-subsidy if they concluded that the benefits of competition were not being shared by all consumers. As the Energywatch campaign on pre-payment meters shows, low-income customers are not getting the benefits of the existing regime and, as the Minister for Industry and Energy has pointed out, would lose out under the removal of price controls. Can the Under-Secretary tell us the circumstances in which she would use those reserve powers? It seems to me that the present circumstances represent the kind of fallback situation for which the Utilities Act was designed.
If the independence of regulators means that the Government's only powers are to talk to the regulator or the nuclear option of replacement, what is there to ensure that regulators help to achieve the Government's objectives, or at least do not frustrate them? That is a real problem. I tabled a number of amendments during the proceedings on the Utilities Act to help the renewables system. At the time, the Government said that they would provide guidance on environmental and social objectives to the regulators. That guidance has not been forthcoming. I am a believer in the cock-up theory of life, rather than the conspiracy theory, so I am sure that there is a very good reason for that. However, if the Government were to issue the guidance nowI would be interested to know when they are likely to do sohow would it affect the way of working that Ofgem has already set in stone? If it does not properly take effect, there will be very little point in issuing it, but proper guidance will have implications for other regulators and their relationship with the Government.
I have concentrated on independence because I do not believe that we have thought through the issues. I believe that a regulator is not only about regulation but about the monitoring and provision of information, and should be a catalyst to change. It is also an adviser to the Government and should undertake its work in the context of modernising government and achieving better regulation initiatives.
It has often been proposed that, because we have a number of regulators, they should be merged into one, but I do not think that that is necessarily the best way forward. One problem is that our small companies, niche players and market entrants often do not get a look in, as the regulators tend to talk to the larger companies that have specialist staff for that purpose. We also get into a game in which the competitors automatically complain and the dominant players automatically appeal against any decision. In today's economy, speed of decision making is vital. In respect of new technologies, it is even more important. I am concerned that the RPI minus X formula needs to be reviewed if we are to move our regulators forward.
I firmly believe that regulators need to move to a much more coherent and transparent framework. They need to be providers of impartial and understandable information, and to have a complete range of sanctions that are more coherent than the individual sanctions that some of them currently use. They need to be seen to reduce costs, or at least not to add to regulatory burdens. We need also to redefine the relationship between Government and regulator, and the relationship with service users and the industry. In other words, we should consider the nature of decision making. We need a mixture of roles to ensure that staff are not tied to the provider culture that I mentioned earlier and are sufficient to tackle the end-user focuses.
There are plenty of examples of good practice, including the work of the Environment Agency and the Audit Commission, but we have also had problems with regulation. Too often, we have designed complicated routines that seek to cover the whole area, rather than tried to identify risk and apply a light touch. Everybody says that we need light-touch regulation, but we very rarely achieve it. We need quicker decision making with shorter
In conclusion, there has been an assumption that the creation of independent regulators is a good thing in its own right. It is now time for us to switch from that producer mentality to a focus on the end user. The question is not how we tackle company X, but what is done for the citizen. Times have changed and regulators need to move on. What was right in the past is not necessarily right now. The Michael Lyons/Ian Byatt study for the Treasury is a very useful step forward, as is the NAO report. With the imminent publication of the Communications Bill, now is the right time for the Government to step back and consider the whole regulatory environment, what has worked in the past and the challenges for the future. I do not expect an immediate reply from my hon. Friend the Under-Secretary, but I hope she will accept that there is an issue that the Government need to consider.