Finance Bill

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Mr. Osborne: There is the potential for some injustice here, where a scheme administrator doing everything possible to discharge their obligations is misled by the member of the scheme and then gets clobbered by the Inland Revenue. However, one would hope that in practice the Inland Revenue will exercise a bit of discretion and, if not, in the event of an appeal to the commissioners, that it would see that

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there were grounds for common sense. However, as my hon. Friend the Member for Arundel and South Downs wants to develop some of the broader points during the stand part debate, I shall not press the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr. Flight: The clause provides that the administrator will pay the charge where members of the scheme are over the lifetime limit. It strikes me that in principle and, to a lesser extent, in practice, the Government's proposals are somewhat flawed in that area because there is no obligation for the scheme to recoup what it has paid from the member either in straight money or through adjusting their pension.

A growing number of senior people in the public sector will be caught by the lifetime limit, such as justices, senior people in the judiciary and senior executives in local authorities, and I have even been surprised to discover that a number of doctors in my constituency have pensions that will already be over the lifetime limit. To put it bluntly, any part of the public sector could, if it so chooses, simply pass the bill on to the taxpayer. That would constitute a stealth situation where public sector pensions are increasingly subsidised by the taxpayer, while private sector pensions are increasingly hit by higher taxes.

Even within the private sector, to the extent that there are comfortably funded defined benefit schemes left that become better placed in the next few years, a situation could develop where the scheme foots the bill for senior staff who are generously pension provided. We want to hear what the Government have to say about that, but otherwise we may want to see whether an amendment can be tabled on Report that clearly obliges the pension scheme to recoup the excess from the member.

3.45 pm

Rob Marris: Would not the trustees of the pension scheme be in breach of their fiduciary duties if they did not seek to recover that tax in the scenario outlined by the hon. Gentleman? There is already adequate protection.

Mr. Flight: I thank the hon. Gentleman for his intervention. He is the lawyer, not I, but I am not certain that he is necessarily correct, because the trustees could argue that they had no legal basis on which to recover the tax. There might be certain extant agreements—in local authority pension schemes, for example—where existing agreements with members would be breached.

I hope that the hon. Gentleman is right, but as I am advised that there is not an automatic and secure legal position in which the scheme administrator is obliged to recover the tax that they have paid out, I am interested to hear what the Government have to say. It is not good enough to say, ''We certainly think that that will happen in all cases.'' Will it happen in all cases and, if not, what are the cases in which it will not?

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Ruth Kelly: We are straight into what happens to the lifetime allowance charge. The hon. Gentleman thinks that there should be a requirement for schemes to reduce members' benefits to fund the tax, arguing that in public sector schemes, for example, the taxpayer could end up footing the bill. In fact, he will be interested to know that the Inland Revenue pensions simplification team benefited from a review conducted by Watson Wyatt, benefits consultants, which asked schemes how they were likely to react in that situation. It says:

    ''Of the changes being considered, the overwhelming majority are looking at options which do not increase costs to the company with only a very small percentage willing partially to compensate executives for the increase in tax.''

In fact, over 95 per cent. of companies said that they would not consider compensating employees for any increased tax. It is perhaps not surprising that the overwhelming majority will reduce members' benefits to fund the tax.

I put it to the hon. Gentleman that, as part of the recruitment and retention benefits resulting from this change for higher earners, perhaps it is right that employers should have as much as freedom as possible over how and whether they choose to remunerate high earners in different ways. That could be one consequence of the simplification proposal that we introduce. If schemes choose to absorb some of the lifetime allowance charge, they will want to consider how to do so.

Mr. Flight: I would be grateful if the Financial Secretary could confirm that the Watson Wyatt survey covered only private sector pension schemes. I am particularly interested to know the position for public sector pension arrangements, because the taxpayer, not the company, would ultimately pick up that bill.

I appreciate the Financial Secretary's arguments in favour of flexibility, but she confirms the Government hope that the charge will be passed on at the bottom of the heap, citing surveys to demonstrate its likelihood. There is no certainty that it will be passed on. It would be absolutely wrong if, in the public sector, it was not passed on but levied on the taxpayer. If I recollect, it would mean that the Lord Chancellor, the Prime Minister and potentially quite a large number of highly paid people would escape the limits imposed by the new regime.

Ruth Kelly: I will deal with both points. First, on the private sector, I do not have a view about how firms arrange their recruitment and retention or form their executive packages. It is a decision best made by the firms themselves. They could either allow the individual member of a scheme to pay the lifetime allowance charge—they could decide under our new arrangements that they wanted to supplement that with an unfunded scheme that is not subject to pension tax privileges—or they could absorb some of the charge themselves. Clearly, the firms should make that decision when they design their recruitment and retention packages. It would not be right for me to tell them what to do.

However, the hon. Gentleman's point on the public sector is of real public interest. Let me put it on the record absolutely plainly that public sector schemes

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will ensure that the individual meets any lifetime allowance charge. There will be no exceptions. The Government, as the employer, will not pay the charge for the individual. As the hon. Gentleman rightly pointed out, that would, in effect, constitute an increase in remuneration.

Mr. Flight: Can the Financial Secretary confirm that that includes local government?

Ruth Kelly: It includes the other members to which the hon. Gentleman referred, and I believe that it also includes local government. If it does not, I shall write to him to correct that answer.

Question put and agreed to.

Clause 254 ordered to stand part of the Bill.

Clauses 255 to 258 ordered to stand part of the Bill.

Clause 259

Trustees etc. liable as scheme administrator

Amendment made: No. 467, in

    clause 259, page 211, line 33, leave out subsection (6).—[Ruth Kelly.]

Clause 259, as amended, ordered to stand part of the Bill.

Clause 260

Members liable as scheme administrator

Amendments made: No. 468, in

    clause 260, page 212, line 10, leave out

    ', and is assessable accordingly,'.

No. 469, in

    clause 260, page 212, line 21, leave out from 'as,' to second 'the' in line 23 and insert

    'is held for the purposes of such of the arrangements under the pension scheme as relate to'.

No. 470, in

    clause 260, page 212, line 41, leave out 'made by virtue of' and insert

    'in respect of a liability under'.

No. 471, in

    clause 260, page 213, line 1, leave out 'a' and insert 'an occupational'.

No. 472, in

    clause 260, page 213, line 4, leave out 'is' and insert 'was'.—[Ruth Kelly.]

Clause 260, as amended, ordered to stand part of the Bill.

Clauses 261 and 262 ordered to stand part of the Bill.

Clause 263

Relevant valuation factor

Mr. Osborne: I beg to move amendment No. 420, in

    clause 263, page 214, line 9, leave out '20' and insert

    'the number certified from time to time by the Government Actuary which is appropriate having regard to the age of the individual.'.

The Chairman: With this it will be convenient to take amendment No. 421, in

    clause 263, page 214, line 13, leave out 'than 20' and add

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    'or less than the appropriate number certified by the Government under subsection (1).'.

Mr. Osborne: With these amendments and this clause, we return to the familiar discussion about the relevant valuation factor; in other words, the factor of 20, by which a defined benefit pension is multiplied to calculate the lifetime allowance. As I have said, it allows someone with a defined benefit scheme to draw a pension of £75,000, while those with a defined contribution scheme are likely to be allowed a much smaller pension—some £20,000 less.

In case the Financial Secretary has not been persuaded by my arguments during the past fortnight—there is certainly no evidence that she has been—let me quote a senior Inland Revenue official who, before joining the Revenue, made a submission to the Treasury Committee. I refer to Mr. Edward Troup, who has just become head of the Treasury business unit, as my hon. Friend the Member for Arundel and South Downs reminds me. In a personal memorandum submitted to the Treasury Committee, he stated:

    ''The debate over the size of the cap on tax privileged pensions has over-shadowed the question of how that cap should be measured. The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefit schemes.''

That is a man whose judgment the Financial Secretary trusts enough to put him in charge of one of the important departments of the Treasury. It is surprising, therefore, that she has not listened to him on this matter. No doubt, once he gets his hand on internal policy advice, the Government's position may change, but for the moment he has had to put his position publicly.

There is also an element of inequity in the defined benefit pension world, because a 55-year-old with a pension of £75,000 has the same lifetime allowance as a 74-year-old, even the day before his or her 75th birthday. In other words, the system is generous to those who retire young, and not so generous to those who work longer and retire later. That runs contrary to everything else that the Government are trying to achieve—getting people to work longer or, as the Financial Secretary puts it, giving people the opportunity to work longer.

I already said that there is merit in having a simple 20 to 1 valuation. I know that the Association of Consulting Actuaries proposed it. I merely raise, through probing amendments, the question of whether there is a danger that it is too simple and unfair on older people.

My amendment would leave it to the Financial Secretary's best friend—the Government Actuary—to provide the valuation factor. I assume that he would group people by age, so, by way of illustration, for 55 to 60-year-olds, there might be a 25 to 1 valuation, for 60-year-olds a 20 to 1 valuation and so on. That would also allow the valuation factor, even if just a single factor, to be varied in light of changing mortality without the need to amend primary legislation.

Before the Government rubbish what I just said, I point out that it is exactly what they proposed in

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December 2002 in their original consultation document. When they first considered the issue, it was their solution. The Financial Secretary explained the benefits and the simplicity of the 20 to 1 valuation factor. I agree with that and I have said so. Will she also let us into some of the thinking that went on in the Inland Revenue about the possible disadvantages of a single valuation factor, what perverse incentives it might have on people choosing early retirement dates and whether there is a degree of unfairness for older people in defined benefit schemes? I would be grateful if the Financial Secretary explained why the Government changed their mind.

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Prepared 17 June 2004