Ruth Kelly: There are two basic types of arrangement: money purchase arrangements, which are also known as defined contribution or DC arrangements, and defined benefits or DB arrangements. Two further sorts of arrangement are defined in the clause: cash balance arrangements, which are a particular type of money purchase arrangement, and hybrid arrangements, which are
Column Number: 445arrangements under which someone may receive benefits of one type or another depending on the circumstances. Those arrangements exist in the current regime. We do not want to limit the freedom of members, employers or providers by dictating that particular arrangements should exist in future, nor do we want to restrict people's freedom to move between different types of arrangement. Although there will be a single tax regime, the legislation must recognise that different arrangements operate in different ways, so it is necessary in some places to provide rules appropriate to the way in which the particular arrangement works.
The hon. Member for Tatton directed his comments at the concept of the cash balance arrangement, which he proposes to remove altogether from the legislation.
Mr. Michael Jack (Fylde) (Con): Given that in her opening comments the Financial Secretary dealt with a number of existing formulations of what is a pension and then said that in future she wanted to maintain a regime of flexibility and interoperability, can she explain by what mechanism future adjudications will be determined as to which category a new pension product might fall into or when there is a difficulty with an existing product? My hon. Friend referred to the possibility of court proceedings, but I am sure that the Treasury would not want that as the sole determinant of what definition a scheme falls into.
Ruth Kelly: In general, the Inland Revenue will decide into which category an arrangement falls. However, there will be a right of appeal under the arrangements. As I understand it, there will be a right of appeal to the Commissioners in the ordinary way, as now, and people can appeal if they feel that the Inland Revenue has operated inappropriately. That right of appeal is in fact being extended in the Bill.
I shall return to the point about the cash balance, to which the hon. Member for Tatton directed the majority of his remarks. There are very good reasons why the concept of a cash balance arrangement must be retained. We referred to the arrangement in the consultation documentit was raised by secondees from the pension industry to the Revenue. Under a cash balance arrangement, the individual is promised a capital sum at retirement to be used for the provision of benefits. It is similar to standard money purchase arrangements where the benefits are calculated by reference to an amount or pot that becomes available for the provision of benefits to the individual. In a cash balance arrangement, however, the amount is promised to an individual rather than depending entirely on the level of contributions and the investment performance of the fund. There is an element that is similar to DB arrangements.
In a cash balance arrangement, the promised pot grows by a fixed, ascertainable amount each year. At its simplest, it may promise the individual that on retirement a fixed sum, say £10,000, will be put into the pot for each year of service. It would be inappropriate to treat cash balance arrangements in the same way as
Column Number: 446money purchase arrangements for all purposes. For instance, for annual allowance purposes, the individual's annual pension savings in a standard money purchase arrangement are measured by reference to the contributions made; in a cash balance arrangement there may be no annual contributions whatever. The promise may be fulfilled in the scheme providing a promised pension pot in the final year. We must measure the growth in the promised pot and not the contributions.
Wherever possible, cash balance arrangements are dealt with in the same way as other money purchase arrangements, but for fairness and to reflect the different level on which cash balance arrangements operate in certain areas, it is necessary to have different treatment.
In similar areas such as the transitional provisions and the unauthorised borrowing provisions, it will be necessary to distinguish between cash balance arrangements and other money purchase arrangements, both of which we will address when debating the pension simplification proposals. In order to make the necessary distinctions, we must have a definition of the cash balance arrangement, and that is what the clause provides.
The hon. Gentleman raised several other points, which I will try to address. He will forgive me and perhaps give me a reminder if I fail to respond to all of them. Insured lump sum death benefits provided under a money purchase scheme will be treated as defined benefits, as long as they are themselves defined benefitsthat is, the sum on death is a designated amount. In this case, the arrangement is likely to fall within subsection (9). The retirement benefits are money purchase benefits and the death benefits are defined benefits, so they will be treated as two separate arrangements.
The legislation caters for modern hybrids, dealing with the situation in which there are separate sections within the same pension scheme in which members may participate concurrently. For example, where on retirement both money purchase and defined benefits will be paid, under subsection (9) they will be treated as separate arrangements.
The points that the hon. Gentleman made sometimes touched on how pensions are treated between different arrangements. I am happy to discuss further with him, perhaps through correspondence, particular areas of the legislation where he feels that the definition is not sufficiently clear. However, we feel confident that it is clear enough for people to understand how their pension arrangements should be treated.
Mr. Osborne: I am not convinced about the need to provide a separate definition of cash balance benefits. I am merely trying to simplify the legislation. If the category becomes redundant and sits there in the legislation, so be itwe have just wasted a few more trees by printing it.
I am not convinced by what the Financial Secretary said. She said that the idea was recommended to the Treasury by secondees from the industry during the consultation. They were clearly not the people in the
Column Number: 447industry who spoke to me. One of the striking things when I prepared for the Committee, as one does, meeting various representative organisations and speaking to individuals who offered to help with the drafting of amendments and so on, is that every single one of them asked why there is need for a separate definition of cash balance benefits. They asked whether that would not simply complicate matters and make them more confusing, and nothing that the Financial Secretary said has cleared that up. I suppose we shall just see whether it becomes a widely used definition.
The Financial Secretary covered some of my specific questions such as the one concerning death-in-service benefits. She assured me that modern hybrid arrangements would be covered. She was very proud of subsection (9), which is one of the most complicated and convoluted subsections in the Bill. It says:
Mr. John Burnett (Torridge and West Devon) (LD): The hon. Gentleman has alluded to amendment No. 287. Presumably, its drafting is slightly defective, because there could be more than two arrangements.
Mr. Osborne: It was drafted in the hope that the Government would accept my other amendment. If they had accepted the entire package, it would be correct. One always approaches Committees in the spirit of optimism that everything one proposes will be accepted. I am not going to press the matter to a Division. We may wish to return to it on Report, and the Government should give further consideration to it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 142 ordered to stand part of the Bill.
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