Finance Bill

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Rob Marris: I am closely following what the hon. Gentleman says. Is he sure that the amendments deal with the right Bill? Traditionally, things such as security for investors have been dealt with not in Finance Bills, but in legislation such as the Trustee Investments Act 1961. He seeks to provide protection for investors to some extent, and I understand that, but the Finance Bill might not be the right place to do that.

Mr. Flight: As I ever, I thank the hon. Gentleman for his suggestion. He may well be right. The issue comes up in the Bill because we are moving from a regime in which tax approval was the issue that controlled what people could invest in to a system in which registration has nothing to do with it. As far as I am aware, the Government have not had anything to say about the other areas of law that may be used to address the issue. That is why I made the comment that to some extent this is a probing amendment.

There is a fundamental issue about whether the matter is dealt with by the Department for Work and Pensions or by trustee legislation and so on. Do we want to move to a complete free-for-all for all forms of money purchase pension investment? Would it not be prudent to have a liberal protective regime, whether introduced in this Bill or in other legislation?

The Chairman: Order. Although it might have been more appropriate to move the amendments in consideration on other Bills, they are in order within the context of this Bill and, therefore, it is perfectly proper for them to be discussed in the context of this Bill.

Ruth Kelly: I understand the intention of the hon. Member for Arundel and South Downs to discuss whether a pension fund should be able to invest in any

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asset without restriction, provided that it is on a commercial basis. As he said in the stand part debate on clause 143, we are moving from a system based on Revenue discretion, where there are lists of permitted and non-permitted assets, and schemes must seek Revenue approval for their actions, to the system that we are discussing today, in which schemes operate within a legislative framework. In practice, under the current tax rules, however, the vast majority of schemes have no controls on their investments; only a minority of small schemes are subject to any control.

Going forward, all schemes will—subject to any restrictions in other legislation, such as the Pensions Bill and a few other places that I am sure my hon. Friend the Member for Wolverhampton, South-West can think of—be able to invest in anything provided that it is on a commercial basis. The Bill aims to provide a comprehensive set of rules to cover all pension schemes, creating a simple and easily understood system and preventing anomalies. Different rules for different schemes create borderlines leading to complication, red tape and the need for advice, which in turn leads to greater burdens on the industry and the Revenue. We want to avoid that.

Very large schemes will invest in a wide range of assets, and we do not want to disadvantage them or their many millions of members by placing restrictions on their right to invest. Therefore, in a system designed for all schemes, it would not be right to impose unwanted new restrictions on them.

From a tax perspective, it should not matter whether a pension scheme invests in certain assets or not. The decision is a commercial one for the scheme and/or the members and the appropriate regulator. It is not for the tax regime to decide the scheme's investment policy. That accords with the DWP policy, which is that schemes should be free to invest as they see fit; it is not the place of Government to specify, for example, how much is invested in equities or other assets. It is up to scheme trustees or indeed members to decide what is prudent.

This is a deregulatory measure that will enable trustees to make their own judgment about what investments suit their scheme best. There are rules in the Bill to prevent that sensible commercial freedom from being abused by entering into non-commercial transactions that put scheme assets at risk or allow value to be taken out of those schemes.

The hon. Gentleman raised the question of the ISA regime. I know that he is familiar with this area, but I must point out that ISAs are different from pensions, having been designed to encourage personal savings by individuals in the short to medium term. To provide savers with flexibility, ISA regulations allow investment only in assets or schemes that are able to provide savers with instant access to savings. That is why investments are limited to those that are highly liquid and those that fall into the retail investment market, such as shares traded on recognised stock exchanges. The regulations also restrict the ability of savers to invest in less liquid assets such as real property.

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Pension organisations are much larger. Most cover more than one individual and many cover many individuals. Individuals have limited rights to access their pension funds. That allows schemes to invest in a wide range of long-term investments that would not be appropriate for an instant access ISA. Rules relating to ISAs cannot therefore be directly applied to pension funds. I am sure that that is not exactly what the hon. Gentleman is suggesting. However, I am also sure that he will recognise the different designs of the ISA regime and the pension fund regime.

Mr. Flight: There is a huge difference between an ISA and a large, ongoing defined benefit scheme, where no one would suggest that there is any need for such protection. However, I suggest to the Financial Secretary that there is not that much difference between a pot of money built up under the tax rules for a pension fund and a pot of money built up under the different—we could argue about which is the more attractive—tax rules for an ISA. From the perspective of an individual, both pots are there to build up assets for their retirement. That is how most people see them. Indeed, outside this Room, there are all sorts of debates about what the tax rules should be and what the mixture might be. That is a false distinction in the case of personal pots of money.

It is interesting that the investment rules relating to ISAs are, as they were with regard to pension saving, related to tax approval. So, the idea that we are all saying, ''You can't have any investment constraints where it is a question of tax approval,'' is not right. In one of the main areas of savings, we continue to have such constraints related to tax approval.

I think that there is intellectual inconsistency in the area of an individual's personal money pots. I repeat my point that those pots are no longer just personal pension schemes. In no time at all people's occupational schemes will amount to being personal money pots under an employee-sponsored umbrella.

The Chairman: Order. While I appreciate that there is some validity in making comparisons, we are not, in the context of the clause, considering the tax regime for ISAs or any other savings product. We are confining our consideration to pension schemes.

Further to the point made by the hon. Member for Wolverhampton, South-West, I also make it clear that we are considering only tax approval in relation to pension schemes. It may be that investment constraints would be imposed by other legislation. That is a matter for the House when it considers that other legislation. We are simply dealing with tax approval for pension schemes in this area of the Bill.

Ruth Kelly: As usual, Sir John, you make excellent points. Indeed, they are ones that I could have made myself.

To summarise briefly, the ISA account is an instant access account. Pension funds are clearly meant to provide income for retirement and are locked away until the person draws down their retirement income. Therefore, it is appropriate to have different schemes in place.

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Mr. Osborne: Will the Financial Secretary explain why the one restriction that is still in place, and in the Bill, is for a property investment limited liability partnership? As I understand it, there are already ways round that restriction by, for example, creating an exempt unit trust.

Ruth Kelly: I will come to the issue of property in a moment. We partly dealt with it under a previous clause.

The hon. Member for Arundel and South Downs tried to make a case that trustees or members of pension funds were vulnerable to mis-selling of risky and inappropriate products but, as you rightly rule, Sir John, schemes may be restricted in various ways through other legislation—such as the Pensions Bill—and not necessarily through the tax relief provisions before us. Identifying and avoiding mis-selling is the responsibility of the Financial Services Authority with its conduct of business rules. That is the best place for that sort of regulation to take place.

3.15 pm

The hon. Member for Tatton asked why income derived from investment held as property through a limited liability partnership is not exempt from tax. That type of income is not investment income but trading income, and the investment rules are not designed to exempt from income tax income that is derived from trading activities. Therefore, it is right in that case that the income is not exempted from tax. Exclusion replicates the rules under the current regime.

Mr. Osborne: Why is that one kind of investment—investment held as property through a limited liability partnership—which the Financial Secretary says produces trading income, included in the Bill? Presumably, there are similar examples. It seems rather strange that there is that one exception in a catch-all, open-ended clause that gives all sorts of freedom, of which in many ways we approve. Would not other forms of investment fall into a similar category? They are not included in the Bill.

Ruth Kelly: As I understand it, the provision catches all limited liability partnerships, not just those in which investments are held as property. I will be happy to clarify that formally and to write to the hon. Gentleman if it proves not to be the case that the clause applies to all limited liability partnerships.

Members of the Committee may be worried about the pension funds of members. Trustees are required to act prudently and sensibly in administering pension funds. They have done so, and we have no reason to believe that they will not continue to do so . I have already made it clear that, under the current rules, the vast majority of pension scheme members are in schemes for which there are no controls under tax rules about the type of investments that they can hold.

The Government are reviewing the progress that the occupational pension industry has made in implementing the recommendations of the Myners report. I wish to make just a couple of points on that, as I am aware that it does not touch directly on the amendments. We are making it a legal requirement for the first time that pension trustees must have familiarity with the matters before them. Our policy

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intent is to upgrade the skills of trustees, so that they understand investment issues and the scheme design of the pension fund of which they are trustees. That is combined with replacing the minimum funding requirement with funding requirements that are more scheme-specific. Those provisions, which are being introduced as a result of the Myners recommendations, sit well with the new simplified tax regime. I hope that I have reassured hon. Members on those points.

On the points that the hon. Member for Arundel and South Downs made on self-invested personal pensions, I can confirm that we are sweeping away the investment rules for SIPPs, which will be subject to exactly the same investment rules as other schemes under the tax legislation. I do not accept his points about tax relief. It is up to the schemes themselves when they claim tax relief. However, if he wishes to follow up a particular point, I will of course follow it up with him.

The hon. Gentleman asked whether SIPPs would be able to invest in off-exchange shares. As he well knows, it was originally proposed that the scheme should come into force in April 2005. That has been delayed for a year in response to the consultation, as people asked for more time to change their systems and so on. Some people would like schemes to be able to invest in off-ex shares as soon as possible. However, given the concerns that were raised by many employers and pension providers about the practicalities of introducing the new systems, we believe that it is best to legislate this year and introduce the new regime in its entirety on 5 April 2006. I therefore ask the hon. Gentleman to consider withdrawing his amendment.

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