Finance Bill

[back to previous text]

Mr. Howard Flight (Arundel and South Downs) (Con): My hon. Friend has put the underlying point in relation to our two amendments extremely well. We are dealing with difficult territory to which not enough thought has been given. As he said, there are two entirely different arrangements: one for defined benefits and one for defined contributions. In the main, the defined benefit situation turns out to be enormously more generous, but there are even variations within that, in that the value of a defined benefit pension taken at 55 is clearly a great deal higher than one taken at 65. The Committee should

Column Number: 549

think very hard about this issue. It will come up more in relation to clause 205 than in relation to this clause.

I have always been broadly in favour of rough justice if it works and if the differences are not too great, rather than cluttering up systems with too much complexity. However, it has been illustrated that there is potentially a yawning gap that will work out in favour of defined benefit schemes and against the interests of defined contribution schemes, when virtually everyone in the private sector is being driven down the road of defined contribution and when, for the time being at least, those in the public sector are essentially in defined benefit arrangements.

2.45 pm

Clause 205 inter-relates to the two amendments. The main thrust of our principle is to at least examine valuing defined contribution on the same basis as defined benefit by converting the lump sum of money into whatever annuity pension it would buy on the same basis as defined benefit. That is one measure of achieving relative parity, which we will debate later.

Although there may be arguments that the first stage of the proposals for uncrystallised benefits is not appropriate, it is important to flag up the arguments as we move on to the clauses that deal with what happens when people take pensions. I am extremely uncomfortable—hence our upcoming amendments—about having a system that is fairly arbitrary and, in terms of valuation for the purposes of the tax charge to be levied, one that has a tremendous bias against defined contribution and in favour of defined benefit.

Rough justice has its price, and the price in the provisions before us is a little bit too high. When we get to the later clauses, I look forward to the Minister elucidating how the provisions allow flexibility of interpretation within the 20 to1 ratio.

Rob Marris: Will the Financial Secretary explain new clause 16 because I am not sure that I understand it? In particular, will she explain paragraph (a), which refers to ''the date''? It is not clear from the wording of the new clause, which would, as I understand it, stand alone, to what ''the date'' refers.

Ruth Kelly: I rise first to ask for your guidance, Sir John. Practically all Opposition comments have been directed towards the general debate on the valuation factor, 20 to 1, and how it affects DB and DC schemes. I am very happy to respond to them now with your permission, Sir John. Of course, we do not want to re-run the debate this afternoon, so with your permission I will continue.

The Chairman: That is fine.

Ruth Kelly: Great. In which case, I will deal with it now. The hon. Member for Tatton (Mr. Osborne) falls into a trap. First, he says that there are six types of tax regime. We have already had that debate, and there is one simplified tax regime, however the pension tax rules must recognise that pensions are taken in different ways. He seems to assume that there are only two ways in which pensions are taken—either as a defined benefit, or, through a defined contribution scheme, as an annuity.

Column Number: 550

Clearly, there is a third way, which is income draw-down. When considering those issues, one must always consider how one would treat income draw-down. For example, were we to choose to have a valuation factor for DB schemes of 20 to 1, or whatever the hon. Gentleman might prefer, and equally to decide to apply that factor to DC schemes, we could not use the same method for valuing funds in income draw-down, because annual income varies. There may be no income to apply to that valuation factor in a particular year, so we will need more than one way of valuing benefits. It is simply not possible to use the same mechanisms to value all the different benefit crystallisation events. We designed the valuation rules to give broadly accurate results in the most simple and straightforward way possible. The amendment that we may turn to in discussing how the valuation factor applies would undermine that. It would not give the same level of fairness or equality.

The second point is that we consulted widely on the regime. In the first round of consultation on pension simplification, the UK actuarial representative bodies supported the use of a single valuation factor for DB pensions. The Association of Consulting Actuaries firmly recommended a single factor and, after considerable research, proposed 20 to 1 as the most appropriate if there was an appreciable margin in the level of the lifetime allowance. In setting the lifetime allowance at £1.5 million, we have given that margin.

As the National Audit Office agreed, the new regime mirrors the maximum pension under the 1989 regime. The Faculty of Actuaries and the Institute of Actuaries said at the time that

    ''the factor should not attempt to accurately reflect market conditions at the time of calculation, as that would unnecessarily complicate retirement planning.''

The most accurate result for those taking pensions around the age of 60 was 20 to 1. That is the age at which the majority of people take their pension.

The hon. Member for Arundel and South Downs tried to persuade the Committee that we are giving much more support to DB schemes than to DC schemes. There are some in the House who may think that that would be a good idea, but I am sorry to disappoint them. It is perfectly clear to me that, if there is an incentive to take a DB scheme rather than a DC scheme in one year, that may well change in future years as annuity rates change, and the relative attractiveness of each option may change over time.

If someone feels that they are disadvantaged in a money purchase scheme, they can always transfer to a scheme pension run by an insurance company and use the 20 to 1 valuation factor, if insurance companies decide to offer that vehicle for the non-corporate market. Under our plans, there is no reason that they could not offer such a vehicle. If the reverse were true, and someone felt disadvantaged by being in a DB scheme rather than a DC scheme, as could happen, of course they could switch to take advantage of annuity rates.

I do not think that the measure is unfair. I think that it is by far the easiest, most transparent and simplest way of approaching the problem. It is the way that has been suggested to us by the actuarial

Column Number: 551

profession as striking a fair balance and giving a reasonable level of pension for those in DB schemes. That presents the case for the valuation factor of 20 to 1.

My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) asked about paragraph (a) and what date it refers to. It refers to the date at which the benefits need to be valued. All the clauses that depend on new clause 16 will make it clear what that date should be. I hope that my hon. Friend rests assured on that point.

Amendment agreed to.

Clause 171, as amended, ordered to stand part of the Bill.

Clauses 172 to 174 ordered to stand part of the Bill.

Clause 175

Income

Mr. Flight: I beg to move amendment No. 423, in

    clause 175, page 150, line 40, at end insert

    'but only to the extent that the investments are prescribed as being investments which such a registered pension scheme may hold.'.

The Chairman: With this it will be convenient to discuss amendment No. 424, in

    clause 175, page 151, line 4, at end add—

    '(5) No registered pension scheme may hold investments which are not prescribed as being investments which such a registered pension scheme may hold and section 10 of the Pensions Act 1995 applies to any scheme administrator or trustee of a registered pension scheme who has failed to take reasonable steps to ensure that that registered pension scheme holds only prescribed investments.'.

Mr. Flight: As the Committee will be aware, part of the new arrangements abandons the regime of investment restrictions that were tied to tax approval. Apart from one or two items, the new registration system will create an open house in respect of the investments in which pension schemes can invest in the future. We have touched on this before. I question the logic whereby the other main way of saving for retirement has been personal equity plans and, subsequently, individual savings accounts. The regime under which PEPs and ISAs have made investments has been fairly liberal, but it has been designed to shield out things that are likely to be extremely volatile and high-risk and by which people might get ripped off. As a simple example, it establishes what are, in essence, approved markets that are reasonably liquid and excludes equity markets that are sufficiently dangerous to be deemed unsuitable for ISA investment of monies for retirement.

As an economic liberal who broadly welcomes the ending of over-prescriptive regimes, I have concerns about the wisdom of moving to what is in effect a completely open regime for the large number of individual money purchase pension pots, be they structured as personal pension schemes or, as is increasingly the case, as various forms of occupational money purchase pension schemes in which the individuals who benefit are largely controlling the investments. At worst, such a regime

Column Number: 552

could expose people to exploitation by those who market unsuitable products. It will inevitably lead to scandals in the future, and people will ask, ''Why did the Government permit us to participate in investments that have gone bust and that were never particularly suitable for pension saving?''

There is a dichotomy, because I certainly do not want to clutter the arrangements with too much complexity. I commend the Government for biting the bullet and saying, ''Let's scrap the whole lot.'' For example, I have always felt it illogical that money purchase schemes could not invest at all in venture capital investments. It may not be appropriate for them to invest all their money in such investments, but a modest amount is perfectly justifiable.

We could get out of the frying pan and into the fire. Therefore, our amendments are prophylactic. They leave open the possibility of thinking about a regime that is somewhat analogous to the PEP and ISA regime: one that is broad and not a hassle but which screens out and protects individuals from deciding mistakenly or unwisely, or being conned into, investing in areas that are not particularly suitable for pension fund savings.

3 pm

Another point relates directly to the two amendments but is slightly wider. The Committee may not be aware that if money purchase pensions are structured as insurance wrapped, life companies are the legal owners of the assets. If life companies fail, notwithstanding the insurance arrangements, what is guaranteed is typically a great deal less than what might be in an individual pension pot. I am not saying that life companies are going to fail, but there is a hidden risk, and the self-invested personal pension structure, which in the past was very much for a provincial elite who had significant amounts of money, is now perfectly usable on a corporate basis. A person can have a corporate SIPP analogous to a group personal pension scheme. It has the advantage that basically the beneficiaries own the assets, so there is not that additional risk.

SIPPs have been subject to some rather archaic investment rules that have put them at a disadvantage compared with group personal pension schemes. Does the Bill sweep away those investment disadvantages? If it does not, will the Government consider doing so? I have a feeling that this matter may be governed by regulations that are secondary to the Bill itself.

The first crucial point is that individuals who obtained protected rights from a previous employment—when the scheme that they belonged to was contracted out—cannot transfer those protected rights into SIPPs, whereas they can be transferred into a group personal pension scheme. I see no logic in the difference. It is a simple issue that needs to be addressed.

Secondly, the crediting of tax relief should be on the same terms whether a personal pension scheme is structured as a SIPP or under an insurance contract, whereas at present a person gets the money a great deal earlier if they have an insurance contract as opposed to a SIPP. Thirdly, SIPPs have been unable to

Column Number: 553

provide life insurance contract arrangements, whereas group personal pension schemes can. Finally, group personal pension schemes can invest in off-exchange market securities, whereas SIPPs will not be able to do so for another two years.

There may be other issues that I am not aware of, but my simple point is that, if we are to have fairly open investment, there is no logic in SIPPs being disadvantaged on various fronts compared with group personal pension schemes. The playing field should be level. If anything, from the point of view of the pension saver, there is the matter of their having perhaps a marginal legal advantage in using the SIPP corporate structure as opposed to the group personal pension structure.

To some extent, these are probing amendments. As I said, my views are dichotomous, but I would interested to know whether the Government intend to have a complete free-for-all and not to think about offering the same sort of fairly relaxed protection for personal pension saving as is in place for ISA saving for old age. If they do not want to offer that protection, why have those prescriptions for ISA saving for old age? I just about come down on the side of thinking that the ISA rules are rather sensible and that without realistically restricting sensible investment, they protect people against imprudent investment.

 
Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index


©Parliamentary copyright 2004
Prepared 15 June 2004