Meaning of ''member''
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 201, in
clause 177, page 151, line 28, leave out 'an active' and insert 'a'.
No. 202, in
clause 186, page 159, line 19, leave out 'pensioner'.
No. 203, in
clause 266, page 216, leave out line 1.
No. 204, in
clause 266, page 218, leave out lines 23 and 24.
No. 205, in
schedule 32, page 451, line 33, leave out 'pensioner'.
No. 206, in
schedule 32, page 451, line 36, leave out 'pensioner'.
New clause 15Meaning of ''member''
'In this Part ''member'' in relation to a pension scheme means a person who has:
(a) accrued rights under the pension scheme; or
(b) rights under the pension scheme which are attributable (directly or indirectly) to pension credits;
and such a person is a member whether or not there are presently arrangements made under the pension scheme for the accrual of benefits to or in respect of that person and whether or not the person is entitled to the present payment of benefits under the pension scheme.'.
Mr. Osborne: This is a complicated set of amendments designed to achieve a fairly simple purpose. Clause 141 is the next of the definitional clauses. It states that ''member'' can mean either
''active member, pensioner member, deferred member or pension credit member''.
Our first objection is on the ground of simplificationwe are going to be the champions of simplification in this Committee. If we are trying to simplify the Bill, surely we should avoid additional definitions wherever possible. We are not clear that it is necessary to establish four different definitions of a member.
Our second objection is that the provision is unclear. For example, what is the status of a member in service who has reached the normal retirement date under a scheme and so ceased to accrue benefits? The third objection is that there could be a member who is, at the
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same time, an active member, a pensioner member and a deferred member. Surely that is bound to lead to confusion.
We attempted to amend the clause, but we decided that the simplest solution was to come up with a new clause to replace itnew clause 15. I am confident that the Government will accept the new clause because it suggests a far simpler definition of ''member'': someone who has
The person is a member whether or not they are currently accruing benefits or receiving them. We do not make a distinction between those two things. We recommend the new clause to the Committee as a small victory for simplification.
Ruth Kelly: I understand that the hon. Gentleman is attempting to enter fully into the spirit of pension simplification and I applaud him for that, but there is always a danger of over-simplifying and I fear that the changes that he proposes would do just that. His proposed definition of ''member'' covers people with accrued rights and rights attributable to pension credits, but it is not clear whether that definition extends to people who have just joined the scheme, or to those who have rights transferred from another scheme.
More important, the hon. Gentleman's alternative definition does away with the distinction in clause 141 between an active member and a pensioner member. I agree that in most places there is no need to make that distinction, but there is at least one circumstance in which the distinction is important. Paragraph 10 of schedule 32 contains a rule that permits the substantial augmentation of pensions payable to scheme members without any testing against the lifetime allowance, provided that there are at least 50 pensioner members and that they all benefit from the augmentation. The effect is to constrain the awarding of big pension increases when it comes to small numbers of wealthy retired members.
Amendments Nos. 205 and 206 would remove the word ''pensioner'' from the provision in schedule 32. That could undermine the rule, since one member of the scheme could receive a very generous increase in his pension, while a further 49 members, who were not yet receiving any pension, would gain no benefit at all. Moreover, the one member would avoid any tax charge that might arise from exceeding the lifetime allowance. Although the amendments are an admirable attempt to take simplification a step further, they are flawed.
Mr. Osborne: Can the Financial Secretary confirm that, because of the flexibilityit is one of the things that we welcomefor people to take part of their benefits, and because of the removal of the requirement to retire, someone could be an active member, a pensioner member and a deferred member at the same time?
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Ruth Kelly: The hon. Gentleman makes an interesting point, but most people can be in only one category at a time. Active membership takes precedence over pensioner or deferred membership, so relief is allowed for an active member making contributions to a registered scheme even if that person has started to take benefits. However, a member who is a pension credit member will generally belong to one of the other categories as well. They will be someone with rights under a pension sharing on divorce order who may have started to take benefits and who may also have other pension arrangements. The rules around pension credits are designed to reflect that, but that is a particular situation and not one that has general application. I therefore suggest that the hon. Gentleman do not press his amendments to a Division.
Mr. Osborne: I am not wholly convinced by what the Financial Secretary says. Her principal argument against the amendments seems to be that the different definitions do not really count, except in respect of one small part of a schedule, in which there is a power to augment pensions. The Government could have redrafted the schedule, rather than put in the Bill four different definitions of a member, not least because, as the Financial Secretary confirmed, it is possible for someone to be a member in all four senses of the word, even if active membership takes precedence.
Surely, the provision will be confusing. Pension fund members may ask whether they are an active member, a pensioner member or a deferred member. Perhaps they receive pension credits as well. My hon. Friends and I were attempting to help the Government to simplify pensions law.
Rob Marris (Wolverhampton, South-West) (Lab): If the hon. Gentleman carefully reads new clause 15, he will see that it includes two main partsparagraphs (a) and (b)and four possibilities follow on from them. I work out that there are 12 possible definitions of a member in the new clause. Therefore, I suggest to him that it is not in fact a simplification.
Mr. Osborne: I am delighted that the hon. Gentleman is in the Committee. I thought that he would be out watching Venus passing in front of the sun, but he decided to turn up here instead. We have served together on other Committees, and I know that he has a legal eye for such things.
Obviously, I do not accept the hon. Gentleman's argument. New clause 15 says that a person is a member whether or not they accrue or receive benefits. It simply defines someone who has accrued rights under a pension scheme. I agree that it includes a separate category for pension credits, which is a particular subset with which we need to deal, but it reduces the definitions from four to twoit halves the number of categories. However, the Financial
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Secretary has not yet entered into the spirit of simplification, and I shall not lead my large army over the hill and press for a Division on the matter.
Question put and agreed to.
Clause 141 ordered to stand part of the Bill.
Meaning of ''arrangement''
Mr. Osborne: I beg to move amendment No. 207, in
clause 142, page 131, line 6, leave out
'cash balance benefits or other'.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 208, in
clause 142, page 131, line 8, leave out subsection (3).
No. 209, in
clause 142, page 131, line 14, leave out '(whether' and insert 'where'.
No. 210, in
clause 142, page 131, line 16, leave out 'or any other factor)'.
No. 211, in
clause 142, page 131, line 17, leave out subsection (5).
No. 212, in
clause 142, page 131, line 26, leave out from second 'benefits' to end of line 28.
No. 213, in
clause 142, page 131, line 30, leave out 'all of'.
No. 214, in
No. 271, in
No. 272, in
clause 171, page 148, line 40, leave out subsection (8).
No. 278, in
clause 171, page 148, line 31, leave out subsection (6).
No. 287, in
No. 288, in
clause 266, page 216, leave out lines 19 and 20.
Mr. Osborne: The amendments are another genuine attempt at simplification of pensions taxation. Clause 142, which defines the meaning of ''arrangement,'' is the last of the definition clauses before we get to the chapter on registration. Instead of the two types of pension arrangement that are currently defined, the clause establishes four: defined benefits, money purchase, hybrid and cash balance. Cash balance is a new concept in legislation and certainly one that caught the industry by surprise.
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Would not it be simpler just to have two arrangements: defined benefits and money purchase? That is the view of almost everyone in the industry with whom I have discussed the matter. The National Association of Pension Funds states that
''it seems an unnecessary complication in this already difficult document to isolate conditions for the arrangements described as cash balance, and we are not convinced that the cash balance provisions work consistently.''
My amendments are designed to remove the cash balance definition. I can see a problem, because one reading of the definition of cash balance appears to encompass everything that would come under the definition of a money purchase scheme. On the other hand, the definition of money purchase benefits includes nothing that would be included in the definition of a money purchase scheme. Perhaps we should remove the definition of money purchase benefits from the clause, and rename the cash balance benefits as money purchase benefitsI hope that hon. Members follow me.
The clause seems to say that a cash balance is an arrangement determined otherwise than wholly by reference to the payments made by a member. What pension scheme is made wholly by reference to payments made by a member? What scheme does not pay, for example, the expenses of experts such as fund managers? If a scheme pays expenses, an amount must be available that is not calculated wholly by reference to the payments made. There are also investment returns, which play a crucial part in determining how much money is available in a pot. The amount in that case is not determined wholly by reference to the payments made.
My amendments are designed to get rid of cash balance altogether, and leave it to the Government to ensure that the money purchase definition covers what we all recognise as money purchase arrangements. This is a complicated concept to convey to the Committee. At the moment, no schemes would come under the definition of money purchase benefits, and all money purchase schemes would come under the definition of cash balance benefits. If the Financial Secretary has understood what I am saying, perhaps she will comment on that.
There are other problems with the definitions in the clause. I shall highlight for the Financial Secretary those problems that have been raised with me by the industry. First, is a scheme that pays out only for death in service, and which is funded by the employer, covered under the definition of defined benefit arrangements? There are schemes offered by employers that pay out sums only on death; they do not pay out pensions. Secondly, if insured lump sum death benefits are provided under a money purchase schemewhether paid for by an employer or an employeeare the death benefits defined benefits?
Thirdly, the definition of a hybrid arrangement does not seem to apply to alternative hybrids where there are separate sections within the same pension scheme, in which members may participate concurrently. As someone from the industry said to me, the Government seem to be stuck in a time warp. They have the rather old-fashioned idea that a hybrid
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consists of a money purchase scheme with a defined benefit guaranteefor example, it will not be less than x 80ths of a final salary. These days, however, popular hybrids include schemes where the employer provides a certain defined benefit element, and there is a money purchase element on top. It is not clear where those increasingly popular schemes sit in the definitions. The NAPF raised that with me.
What about money purchase schemes that buy an annuity for a scheme member shortly before retirement? Will they become defined benefit schemes? If part of a member's benefits is vested under the scheme, is the part being vested treated as a separate arrangement?
I am not the only one who wants answers to those questions. They have been raised by all the representative organisationsthe Association of Consulting Actuaries, the Association of British Insurers, the NAPF and the Chartered Institute of Taxation. If those organisations, which spend their lives looking at pensions legislation, are struggling with the definitions, and if they almost universally object to a cash balance arrangement, or believe that it is unnecessary, that illustrates a problem with the clause.
A broader point that is worth making concerns the problem with the significant shift from a system of discretionary approval with practice noteswe shall discuss that when we come to the next few clausesto a legislative set of definitions that cannot be clarified when the Bill is enacted because they will be written into law. In other words, it will not be the Inland Revenue that decides through its current discretionary system exactly what arrangements best suit a scheme and how it will treat that scheme, and instead the matter will be argued over in the courts. The arguments and questions that I have raised with the Financial Secretary today are precisely the sort over which there will be a number of court actions in the years to come.
That is perhaps inevitable when moving from a system of discretionary approval, but it makes it all the more essential that, as we pass the legislation, we are clear about the definitions that we are putting in the Bill and reduce the scope for confusion. If the Financial Secretary does not agree with me, will she at least go away and think about that? I have spoken to quite a lot of organisations and to quite a lot of pensions tax lawyers and all have raised queries about the definition of a cash balance benefit. Surely it is worth the Inland Revenue thinking about that and deciding whether it is strictly necessary that it has its own special category in the clause.