Ruth Kelly: The hon. Gentleman seems to have missed the point that flexible retirement is impossible under the current arrangements and that it is being opened up to the vast majority of ordinary people for the first time. To put the numbers in context, let us use the example of someone who builds up a pension pot of £1.5 million. Someone who contributes £20,000 in the most recent year would have to have made equivalent, real-terms contributions for 31 years to reach the lifetime limit. We are talking about very few people, at the margins.
Of course, Government policy is to encourage people to actively age—[Interruption.] My right hon. Friend the Paymaster General points out that I should have said, ''to age actively''. We want people to stay in employment for longer. That is partly because we think that they should have that choice, and we are now making that possible for the first time. However, we also want the vast majority of people to have the opportunity to save for longer, because they may not be providing adequately for retirement. I think that it stretches the point to say that people who are at, or close to, the £1.5 million limit have not saved adequately for their retirement. We trade that possibility off against far greater flexibility for the 15 million people who do not benefit under the current pension tax regime.
I move on to the point about the transparency of the process. I have been involved in the pension simplification process throughout my three years as a Minister. I have had endless meetings with officials and, more widely, with individuals and representatives of groups outside this place. The hon. Member for Tatton is very keen on his letter from the Government
Column Number: 609Actuary's Department, but I should tell him what the correct position is. In 2003, the simplification team met representatives from the Government Actuary's Department, including Grant Ballantine, to discuss every aspect of the proposal. Indeed, once the consultation proposals were published, we received responses from them and they had the opportunity to comment in the normal way, as one would expect. I wonder what else the hon. Gentleman would anticipate or expect from a Government.
Mr. Osborne: The Financial Secretary paints a rosy picture of relations between her officials and the Government Actuary's Department. Why does she think that Government actuaries wrote in letters to Opposition Members that
They also said:
Ruth Kelly: Clearly, we formed a view as a Government. However, I have produced evidence to the hon. Gentleman and said on the record that we discussed the simplification proposals with the Government Actuary's Department. It is at liberty to make the points it wishes and I would not like to comment or to speculate on the motivation behind that. Clearly, Treasury Ministers are responsible for making such decisions. I made a lot of those decisions, subject to views expressed to me from different quarters.
Rob Marris: Does my hon. Friend agree that the quotation read out by the hon. Member for Tatton is contradictory? It says that no consultation took place, but then it says that the points that were made were not taken into account.
Ruth Kelly: My hon. Friend makes his point very well.
PricewaterhouseCoopers, whom the hon. Member for Tatton cited at least once during his contribution, described our consultation as a model consultation. The way in which we consulted and listened to representation was widely welcomed throughout the industry.
Mr. Osborne: To clear up the point made by the hon. Member for Wolverhampton, South-West (Rob Marris), the Government Actuary's Department had to take part in the public consultation, after which its views were not listened to.
Ruth Kelly: No.
Mr. Osborne: The Financial Secretary says no. The letter I have is from the Government Actuary, Chris Daykin. It says:
We are talking about not some outside organisation, but a Government Department.
Ruth Kelly: In fact, the Government Actuary's Department, as I am sure the hon. Gentleman is well aware, operates on a relatively commercial basis and the Government take advice from it as and when they
Column Number: 610wish. The Government Actuary's Department was consulted and the matter was discussed with it in November 2003, as I have outlined.
Mr. Davies: I wonder whether the Financial Secretary will tell us, as she took the decisions, whether she saw fit to speak to the Government Actuary during her consideration of the decisions.
Ruth Kelly: I listened to all the representations that were made to me. I met a wide variety of people. I considered written representations from some people. I met others personally. As I said, the simplification team met with the Government Actuary's Department, and it had an opportunity to make any representations that it wished. While the report went to the National Audit Office to allow it to verify our estimates—or not—I attended several consultation meetings. I met several people and the pensions simplification team held a variety of consultation meetings. During the ones I attended, there was not a single voice in the entire room—I am talking about meetings where 50 or 60 people were present—against the lifetime limit, once it was confirmed that we were to be given an independent view by the National Audit Office.
Of course, certain individuals and groups still hold a different view, but the virtually unanimous consensus was that implementing the limit was the right thing to do. It was made clear to me in writing, in person, in every way possible, that we must press ahead with our reforms, and that a huge opportunity would be lost were we not to do that. When the NAO report came back, which vindicated our research, we decided, having listened to the views expressed during the consultation, to defer implementation for a year until 2006 in response to representations from the industry that it needed more time to implement the changes.
At that time, we also decided to uprate £1.4 million to £1.5 million to take account of inflation between the initial announcement in 2004 and implementation in 2006. We listened to representations maintaining that certain people were worried about the planning horizon and whether there would be sufficient certainty about what the limit would rise to in future years. Because there was that worry, we decided to set out in the explanatory notes, as the hon. Member for Tatton said, precisely what we intend the lifetime limit to rise to over the next five years. As a result of the package, we listened to representations on how that limit would be reviewed. People asked us to review it on a five-yearly basis and that is what we have pledged to do.
The hon. Gentleman suggests that we did not listen to the consultation, but the opposite is true. From memory, I can tell him some of the points that we listened to. People talked to us about whether the exit charge was penal; we reduced the exit charge significantly in response to the representations. They suggested that we should have a single valuation factor of 20 to 1; we brought that in. They suggested that, if people went over the lifetime allowance, they ought to be able to take a lump sum subject to an exit charge; we brought that in. We listened on a wide variety of issues. In fact, we could not have been more responsive
Column Number: 611to the issues that were raised with us by individuals and representative organisations.
Several hon. Members, including the hon. Member for Yeovil (Mr. Laws), made some philosophical points about the concept of the lifetime limit. Let me deal with one suggestion that might have some inherent, intuitive attractiveness: we should not test the overall pension pot when it is drawn down subject to a lifetime limit, but should instead have a test that works against annual contributions. That would mean that annual contributions could be made up to a certain limit, be it £1 million, £1.5 million or whatever the Government decided. Although a contributions limit has certain attractive features, it would not be simple to administer. It is an extremely difficult issue—I see the hon. Member for Arundel and South Downs (Mr. Flight) nodding in agreement.
To make a contributions limit workable, one would have to stop the tax relief at the point at which the limit was reached. How could that be achieved? It might be possible for an individual who has one long-term pension scheme and one employer, but it immediately starts to get very complicated if the individual switches schemes or employers. How would the new scheme or the new employer know the amount of contributions that had been made in respect of an individual up until that point? As soon as one starts to consider an individual with several concurrent employers or schemes, it becomes as good as impossible to keep track of the cumulative contributions.
There is another possible variant on that scheme: all the separate contributions could be added up and tested right at the end, subject to a lifetime limit on contributions. Presumably, there would be some exit charge if a certain limit were exceeded. However, even that system would be very difficult to implement. When one considers transfers of rights, DB schemes, and unfunded and non-contributory schemes, one can see that the calculation would either be extremely difficult to achieve, or allow great opportunities for avoidance in the system. It would also mean keeping records for a lifetime. In choosing a lifetime limit on the overall size of the pot, we have struck a reasonable balance between a fair system and one that can be easily administered. It allows full flexibility for 99 per cent. of the population.
The hon. Member for Tatton and others drew attention to the US scheme. The CBI has made representations on the subject and said that, if all members of a scheme were treated on the same basis, there should be no lifetime limit whatever. I notice, however, that the hon. Gentleman did not read out the letter published in the Financial Times from Tony Reardon, the pensions consultant. He questioned that view and said that the proposals could lead to far more administration to track individuals as they moved between schemes. Having some capped schemes and some uncapped schemes would, he argued, in no way lead to simplification. We have chosen a simple system that is easier to administer, delivers maximum
Column Number: 612flexibility for 99 per cent. of the population and treats the top 1 per cent. fairly.
We said in our consultation, however, that we remain interested in the 401K schemes in the United States. We shall continue to look at the operation of those schemes and schemes in other countries, always seeking to improve our system. We are of course always interested in schemes that would lead to increased take-up of pensions and savings. We rule nothing in or out for the future.
The hon. Member for Tatton argued that a lifetime limit would lead to highly paid executives leaving their company pension schemes and seeking alternative pension arrangements. That argument was put to me several times when we first put the proposals out for consultation, but since then almost no one has done so. It has become clear to most people that it is in everyone's interests to accumulate the £1.5 million under their lifetime limit, even if individuals then seek alternative pension arrangements. The proposals could, in fact, encourage far more people to join their company pension scheme than the reverse. I do not agree with the representations that have been made.
The right hon. Member for Fylde (Mr. Jack) talked about the net cost of our proposals. We have published a regulatory impact assessment, which includes those costs. The net costs of our proposals as published are £25 million for 2006–07, £70 million for 2007–08 and £165 million for 2008–09. Our scheme is not only flexible for the vast majority of people, but much more generous for many millions of people. We have debated that with the hon. Member for Yeovil. The scheme is generous, flexible and fair. However, I ought to discuss the amendment.
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