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Ruth Kelly: We have had a good debate so far on this important subject. The debate has touched on pension scheme benefits and contribution rules. In the interests of being precise and concise, I shall deal with the points that have been raised, rather than elaborate on some of the grander themes.

The hon. Member for Tatton (Mr. Osborne) mentioned amendment No. 34. As he well knows, we have introduced a simplified system with generous limits, in which contributions can be made to a pension fund of up to 100 per cent. of an individual's earnings in any given year. He asked especially about the self-employed and how the limits would affect a self-employed person whose earnings are not known until the end of the financial year. He asks how such a person would know what represented 100 per cent. of their earnings, and he has tabled an amendment to try to address the problem. I agree that some self-employed people will not know their final earnings until after year-end, but as the hon. Gentleman acknowledged, the new limits of 100 per cent. of relevant earnings chargeable to tax in the UK are extremely generous compared with existing levels of relief. The self-employed will, over a period, be able to plan pension contributions on a relatively safe basis, by basing contributions on known levels of earnings.

Very few people contribute the maximum under the current rules, which only allow up to 40 per cent. of earnings, depending on age and the type of scheme, and are much more restrictive than the new rules. The new limit of two and half times that figure will provide more than adequate leeway for the vast majority of people. If someone were to inadvertently exceed the 100 per cent. limit, the scheme will have provision to refund the excess without any tax charge on the sum refunded. Those comments more or less deal with the hon. Gentleman's point.

Very few people raised the issue in representations to the Government or to the Inland Revenue. It did not come up in consultation. Only three out of 209 responses referred to it at all, and only one representation on the issue was received following the publication of the Finance Bill. It was probably the same representation as the hon. Gentleman mentioned. Of course, we keep all such provisions under review, but
 
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in the interests of simplicity I urge him to accept that the system that we will introduce is not only more generous, but simpler than the one it replaces.

The hon. Gentleman also mentioned the 50-member limit. We had a long and constructive debate in Committee about that and the requirement to buy an annuity for pension funds with fewer than 50 members. I urge him and other members of the Committee to consider that the Government have a responsibility when providing tax relief for pension savings. It is important to ensure that the relief is used for its intended purpose, which is to provide members with a pension for life. The annuity requirement is designed to ensure that it is possible for a fund to provide a pension for life. The hon. Gentleman may dispute the appropriate number of members—whether it should be 20 or 50, or perhaps 60 would be better. We could talk for hours about the appropriate number, but it is not possible to say precisely what size of scheme would provide a large enough pool so that funds would be protected if, for example, all the members lived longer than expected. That could depend on a range of factors, such as the gender of the members or the type of occupation. However, we can say that it is unlikely that a scheme with fewer than 50 members would be of sufficient size adequately to pool the mortality risk.

Mr. George Osborne: Can the Financial Secretary give us some evidence of the problem that she has identified of the small schemes being unable to pool mortality risk? How many such small schemes have run into difficulties, and why does she think that it is the Inland Revenue's job through the tax rules to offer member protection, when we have just had a Pensions Bill from the Department for Work and Pensions that contained many member protection features?

Ruth Kelly: I was about to deal with some of those points when the hon. Gentleman intervened. There is a tax rationale, because we provide tax relief to assist people in achieving a secure income in retirement. It is only right that we try to ensure that the funds are used for the appropriate purpose. There is also a member protection rationale that will rightly be considered by the Department for Work and Pensions in regulations. Those regulations will be produced in the usual way and considered over the coming months. In order to ensure that there is no overlap between the provisions and the Bill, I have given a commitment to look closely at the regulations to ensure that that does not happen. If there is an overlap, we will of course review the requirement. In any event, there is a clear tax rationale for the requirement to take out an annuity.

Mr. Flight: Have the Government had any thoughts about transitional arrangements? A final salary pension scheme with, for example, 50 members that has been operating on the basis of an ongoing portfolio is likely to encounter very substantial additional costs in suddenly paying annuities for all its members. With pension funds substantially under water already, that could result in a lot of final salary pension schemes going to the wall.

5.15 pm

Ruth Kelly: I should like to make a couple of points about that. First, we have not received representations about that issue, which in itself suggests that it is not
 
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likely to be a significant problem. Secondly, it is not at all clear that an additional cost will be imposed on small schemes. That is completely dependent on the nature of the scheme. When an insurance company provides the scheme pension, it will be necessary for the entire purchase price to be paid from the scheme to the insurance company as either a one-off lump sum or in a series of payments. However, where the scheme itself pays the pension, cash injections from the employer may be required to ensure that the pension is payable for the member's lifetime. So in the long run, the insurance company route may cost no more and might, in fact, even be cheaper than the in-house pension route. So I do not foresee the situation that the hon. Gentleman envisages arising in many cases.

I now turn to the alternatively secured pension debate that, again, we had in Committee. The hon. Member for Tatton has referred to the Government's decision to set the rate at 70 per cent. of the relevant annuity rate. The reason for that decision is to ensure that an income can be provided for life, thus providing security of income for the members. Indeed, that can be rightly described as a secured pension. He asked why we chose 70 per cent. With a maximum income of 70 per cent., for example, if a group of people all take their fund into alternatively secure pensions at the age of 75, only 5 per cent. of them could expect their maximum income to fall to a third of its initial value if they grew 70 per cent. of a comparable annuity each year. If the maximum income were to increase to 100 per cent., the incomes of 30 per cent. of that group would drop to a third. That is therefore an incredibly important part of our provisions which will ensure a decent and secure income for life. The hon. Gentleman argued that the Brethren have been lobbying him to increase the limit from 70 per cent., but that is not my experience of the Brethren's position, although we always listen to them and will continue to do so.

Mr. George Osborne: The thrust of my speech when I mentioned the Brethren was to peg things to the annuity that can be bought at the age of 75. Even when people are 85 or 90-years-old, they must still be measured against the annuity that can be bought at the age of 75. The Financial Secretary is knocking down the arguments that I advanced in Committee, not on Report.

Ruth Kelly: I have explained that the rules exist precisely to ensure that the funds are not depleted too quickly. The hon. Gentleman's amendments would create a significant risk in each case that the funds would be depleted too quickly. Clearly, if people are not members of the Brethren, they always have the option of annuitising if they find that the conditions do not suit them and they want to maximise their potential income. I understand that the Brethren fully welcome the Government's proposals and do not argue that any different provision need be made.

I shall not rerun the debate about whether people other than the Christian Brethren will use alternatively secured pensions—other than the hon. Member for Arundel and South Downs (Mr. Flight)—apart from issuing the warning that, if we find that people intend to use the alternatively secured pensions to bequeath any unused funds to their dependants, we will of course
 
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review the provisions, and we could consider ways to tighten up the proposals to make that a very unattractive option.

The hon. Member for Grantham and Stamford (Mr. Davies) was absolutely right to table amendment No. 15 and I enjoyed his contribution to the debate. He explained well that in the new regime, all pension incomes from registered pension schemes will be subject to the operation of pay-as-you-earn by the person who pays the pension. That includes income paid from retirement annuity contracts—RACs, as they are commonly referred to—because from 6 April 2006, they will come under the umbrella of registered pension schemes.

During the preparation of our simplification proposals, the industry made strong representations that annuities paid under RACs should not be subject to PAYE for a temporary period. I agree with the hon. Gentleman that we must ensure that pensioners in receipt of RACs do not suffer as a result of the current arrangements, and I stand by the Government's previous commitments to protect their positions as far as possible, to which he drew attention.

We need to ensure that the change is carried out effectively and efficiently. The task will not be achieved without difficulty, because bringing those pensioners under PAYE will take up the time and resources of not only the Inland Revenue, but the industry. For example, all pensioners will have to be contacted to get the necessary information to operate PAYE. Unfortunately, as I am sure that the hon. Gentleman will agree, some pensioners are often reluctant to respond to Inland Revenue requests for such information, so it is an unfortunate fact of life that despite the best will in the world, the task will be resource intensive and its completion will take time. That is why I have asked officials in the Inland Revenue to form a joint working party, including representatives of RAC providers and bodies that represent pensioners' interests, such as the Low Incomes Tax Reform Group to which he referred, to carry out a feasibility study to take account of the scale of the problem with the aim of resolving the matter by 2007, and to examine short-term measures that might help to alleviate the problem to which he referred so that people are not penalised unfairly by the current system. We intend to resolve the matter as quickly as possible.

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