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Mr. George Osborne: May I say how sorry I am about the deferred Division, because it affects your constituency, Mr. Deputy Speaker? Perhaps that is not in order.
I welcome the Government amendments, because the Government have adopted our proposal in Committee. I have been in Committees since the beginning of the year—such is the life that I have led for the past six months. Occasionally, one tables an amendment and the Government say, "Yes, great idea", but they deny one the chance to change the law there and then by going away to rewrite the amendment. Nevertheless, I am delighted that they listened to us and are changing the Bill accordingly.
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The Financial Secretary took a leaf from the Prime Minister's book and launched a pre-emptive strike on my amendments. Like the Government amendments, amendment No. 22 applies to schedule 32 and the crystallisation of benefits. Schedule 32 is important because the amount crystallised is tested against the lifetime allowance. Again, the Financial Secretary did not advance strong arguments why a special rule should apply to schemes with fewer than 50 pensioner members—she turned that point round by referring to the exception for schemes with more than 50 pensioner members. She did not give us a clear idea why the figure should be 50 and admitted that it is, at best, a guess.
The Financial Secretary's main argument, which she advanced today and has advanced previously, concerns the potential for tax avoidance or a scam. The example that she gave in Committee was based on a scheme with only two members. We believe that it is more than adequate to require the scheme to have at least 20 members, as my amendment proposes, and to give the Inland Revenue some flexibility by incorporating a device by which it can change that figure if it senses that it will become a vehicle for tax abuse. The amendment makes provision for it to close that loophole.
Amendments Nos. 23 and 24 attempt to tackle what remains the greatest flaw in these pensions tax proposals—the unequal treatment of defined benefit and defined contribution schemes. The Financial Secretary repeatedly denied that in Committee, but the facts speak for themselves. She cannot get around the basic fact that, under these proposals, a person with a defined benefit pension can have a substantially larger pension income than a person with a defined contribution pension. The Financial Secretary shakes her head. I therefore suggest that after tonight's awards ceremony she should log on to the Financial Services Authority's website. That is what I did last night to check out what a 60-year-old man who is a non-smoker—I am sorry to disappoint my hon. Friend the Member for Arundel and South Downs (Mr. Flight), but he gets a much better annuity than the rest of us—has a spouse three years younger, and is looking for a 50 per cent. survivor's spouse pension that rises with inflation and has a five-year guarantee, could buy with £1.5 million. In other words, I tried to devise what many defined benefit schemes offer, putting some pretty generous things into the package as I did so. When I carried out a similar exercise in Committee, the hon. Member for Wolverhampton, South-West (Rob Marris) picked me up on putting in a two-thirds survivor's pension, which he said was too generous, so I reduced it to 50 per cent. to satisfy him, should he be here.
In calculating those figures on the website, which is quite easy to do, I used the best—not the worst—annuity rate on offer from a major provider, which was the Prudential. I found that the 60-year-old could buy a pension that pays him £60,264 a year. If he was 55, which would be the minimum retirement age, he could get a pension of £53,496 for his £1.5 million defined contribution pension pot. However, if he was in a defined benefit scheme he could draw £75,000 or more—in other words, almost 50 per cent. higher than what was available to the 55-year-old with a defined contribution scheme. That is a simple fact that the Financial
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Secretary cannot deny and which exposes the truth—that there is one regime for defined contribution schemes and another for defined benefit schemes.
The Financial Secretary said in Committee, and has said here, "Well, of course people can always, in effect, go off and buy a defined benefit scheme, because they can convert their defined contribution scheme to a defined benefit scheme." I am not sure why the Government should rely on the market to address deficiencies in their legislation: they should ensure in the first place that it does not discriminate between defined benefit and defined contribution pensions.
In Committee, we tried to value defined contribution and defined benefit pensions in exactly the same way by multiplying the actual pension available; after all, most people will not go into the detail as we have, but focus on the pension income that is actually available to them. We suggested multiplying that actual pension income available to the individual, whether on a defined contribution scheme or a defined benefit scheme, by 20 and testing it against the lifetime allowance. That meant that an individual could have had a pension income of £75,000 a year from a defined contribution annuity purchased via a defined contribution pension, as well as from a defined benefit scheme.
5.45 pm
The Government rejected those amendments in Committee and we have therefore tried a new approach of offering an underpin so that people with a defined contribution pension can have the pension pot valued in the way in which the Bill currently sets out or by multiplying the available annuity—A in my equation—by an appropriate actuarial factor, which is represented by AAF. Conservative Members can devise equations, too. That factor would be 20 for a lifetime annuity that increases, for example, with inflation or through being related to an asset value such as risk profits annuity, and less than 20 for a flat lifetime annuity, as defined by the Government Actuary. The latter would be initially higher than an increasing annuity.
The Financial Secretary claims that there is a great flaw in our scheme in that it creates a tax avoidance loophole that would enable someone to have an artificially low pension and subsequently increase it. If that is the case—I am happy to take that on advice—she is more than welcome to go away and consider my amendments, which could easily be tweaked to get around the problem, for example, through different definitions of types of annuity and their treatment. I should be more than happy for her to do that and table relevant amendments to next year's Finance Bill.
If the Financial Secretary is right that the Bill does not treat defined benefit schemes unfairly, she should not mind placing an underpin in the measure because, she would argue, it is not required. However, if the Government turn out to be wrong—I suspect that they will—the underpin will act as a guarantee.
Only a relatively small number of people will have £1.5 million. The pension incomes that we are considering—£55,000, £65,000 or £75,000 a year—are
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much greater than the pension incomes of almost everyone in the country and most of the people whom we represent. However, the Government are conveying a signal that they will treat defined contribution schemes differently from defined benefit schemes. Many people in the country believe that we in the public sector—there is an MPs' final salary scheme—feather our nests with those generous schemes while the final salary schemes of those in the private sector have closed and been replaced with money purchase arrangements.
A survey by JPMorgan Fleming showed that 61 per cent. of the top 350 pension schemes have closed or restricted availability to defined benefit schemes and 60 per cent. offer defined contribution schemes. They are almost exclusively in the private sector. The Bill will confirm a suspicion that there is one rule for us and another rule for the rest of the country. That is the wrong message to send when there is a general perception that pensions are in crisis and people are not saving enough for their retirement. There is a general view that the public sector is insulating itself against the changes and problems.
We should be scrupulous in our legislation in emphasising that defined contribution schemes are not discriminated against but treated equally by the Government, the state and the Inland Revenue. That is not the case in the Bill as it stands and it should be changed.
Mr. Deputy Speaker: Order. It is somewhat unusual for two Front-Bench spokesmen of the same party to speak on the same group when we have had no intervening debate that needs winding up. It would be inappropriate.
Ruth Kelly: I look forward to responding to the points that the hon. Member for Tatton (Mr. Osborne) made. First, I shall deal with the 50-member rule. As he made clear, he knows that the 50-member rule for providing an annuity to ensure that tax relief is used to grant a secure income for life is altogether different from what he referred to. I do not accept that there will be confusion. The measure is clear: the rules have different purposes.
I do not accept that the 20:1 valuation factor gives a more generous result to defined benefit schemes. The factor has been agreed, with consensus from the pensions industry, as providing a broadly accurate result for valuing defined benefit pensions. With defined contribution schemes, there is an identifiable amount available for the provision of benefits to the member, so it is possible to value pension rights accurately using that amount. With defined benefit schemes, that is simply not possible because there is no identifiable amount, so it has been agreed that the valuation factor of 20:1 provides a broadly accurate equivalent.
I accept that using two different valuation methods will inevitably produce slight tax differences. Whether they favour one individual over another in any
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particular year will depend on a variety of factors. If the hon. Gentleman had proposed a different age—perhaps 65, instead of 55 or 60, for example—he might have come up with a different result. If investment growth rates or annuity rates were to differ, that too would produce different results.
The valuation factor is a broadly accurate method of valuing defined benefit pensions. However, if any defined contribution schemes feel that the 20:1 valuation would give them an advantage, they may offer scheme members a scheme pension valued at 20:1 as an alternative. Indeed, any individual who wishes to access the 20:1 valuation factor can move his pension product to the product of his choice.
The representatives of the pension industry who were involved in designing the new simplification rules were not, at the outset, in favour of lifetime annuities being paid at 20:1, and they are still not in favour of their being valued in that way. They accept that, because there is no pot in a defined benefit arrangement, some sort of approximation must be used to value its capital worth, and the single factor is indeed an approximation, but it achieves that end. Those people are highly experienced representatives of the pension industry and they are firmly of the view that, when there is an identifiable pot—as in the case of a lifetime annuity—it is that pot that should be taken as the capital value to be tested against the lifetime allowance. That is the simplest and most accurate method. It does not seem sensible to us, or to them, to turn a real capital amount into a notional one.
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