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: 549think 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.
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.
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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 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: 551profession 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.
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