Finance Bill

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Ruth Kelly: The hon. Gentleman suggests an alternative to the arrangements that we have proposed. I fully accept that when in power the Opposition adopted an approach that meant that every pension regime in operation at that time was grandfathered. That is why we have a system in which eight pension regimes operate. We have responded to calls from the industry to introduce simplification with a single regime. We introduced a genuine and fundamental reform, removing all the past regimes and replacing them with a single regime for tax purposes. The approach that he advocates would not deliver any of the benefits of simplification, and we will discuss that when we debate his amendments to schedule 34.

Our proposal is radical and fair because it protects people's existing accrued rights under previous regimes and it introduces a simplified regime. The basic point that the hon. Gentleman wants me to put on record is that the lifetime allowance charge will not apply to pre-A-day funds where protection is cleared. Primary protection is there to give full rights to participate in the new regime, and enhanced protection allows pre-A-day rights to grow faster than inflation in return for a test that no further benefit accrual occurs after A-day, so rights accrued before A-day are protected in full, and future growth on pre-A-day rights can be protected. It is only post-A-day

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contributions and service that need to be subject to the new regime. Of course, A-day is the date on which the regime is brought into force.

That is generous protection. It is more generous than the transitional protection arrangements that we first consulted on. The arrangements do not in any way seem retrospective. I commend the clause again to the Committee.

Question put and agreed to.

Clause 269 ordered to stand part of the Bill.

Schedule 34

Pension schemes etc:

transitional provisions and savings

9.45 am

Mr. Flight: I beg to move amendment No. 371, in

    schedule 34, page 465, line 3, leave out sub-paragraph (2) and insert—

    '(2) Any modifications of the rules of a pension scheme made by the regulations have effect until the first date after 5th April 2006 on which amendments of the provisions of the pension scheme referring (however expressed) to any limit contained in, or relevant in relation to approval under or for the purposes of, any provision of Part 14 of ICTA (pension schemes etc.) as it has effect at any time before 6th April 2006.'.

The Chairman: With this it will be convenient to discuss amendment No. 372, in

    schedule 34, page 465, line 16, at end insert—

    '(c) modifications to give power, in prescribed circumstances, to prescribed persons to make prescribed amendments to pension schemes irrespective of whether such amendments would otherwise be provided by the rules of the pension scheme, the Pensions Act 1995 or otherwise.'.

Mr. Flight: The amendment is designed to address a problem in paragraph 3, which is about giving the Revenue power to make regulations that modify existing schemes. Many defined benefit schemes provide benefits to be defined in part by reference to existing Revenue limits and the earnings cap, and they may require a percentage of a person's salary to be contributed in order to receive a matching employer contribution, although at present that is limited under the cap arrangements. As a result, when the existing cap arrangements go, such schemes could have a problem because they may find themselves with vastly increased liabilities. An example is a post-1989 member whose accrual was until then limited to a fraction of the salary below the earnings cap. For DC schemes, both employee and employer might find that the scheme requires much higher contributions.

The intention seems to be that the Revenue will make regulations ensuring that any such provisions in existing schemes continue to have effect as they would have done but for the Bill. However, paragraph 3(2) contains a time limit: 5 April 2009. The assumption seems to be that there should be a period in which to amend schemes to avoid the type of problems that I have just described. However, there are some schemes with very restrictive amendment powers, which may not allow such amendments.

Amendment No. 371 would allow the regulations to continue indefinitely. Amendment No. 372 calls for a statutory power to make such arrangements and to

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ensure that there is an overriding statutory power to make amendments to existing schemes, whether or not the schemes' own amendment powers would permit such amendments. There are quite complex issues relating to who should have the power. For example, in a defined benefit scheme, it may be that both trustee and sponsoring employer should have to pay, or just the employer. Equally, for money purchase schemes, where both employer and employees may be affected, arguably it should be the two together. The amendment is designed to establish the statutory power to make appropriate regulations, but leaves the detail to be dealt with separately.

Ruth Kelly: The Government are committed to ensuring that the move from the old pension regimes to the new system is as smooth as possible. We will achieve that by ensuring that the transitional arrangements are administratively as straightforward as we can make them, while being fair and flexible.

Amendments Nos. 371 and 372 are concerned with the first part of the schedule and the provisions that allow pension schemes a transitional period in which to make amendments to their rules to bring them into line with the simplified regime. Those provisions are intended to be used to protect schemes that have adopted the wording of the previous statutory system, as the hon. Gentleman suggests. Without that power, and the regulations made under it, many schemes would be obliged to change their scheme rules in advance of A-day. It is unclear whether they could do that in time for the introduction of A-day on 6 April 2006.

The pensions industry has lobbied us hard to include extra flexibility in the Bill. Where a scheme does not have time to make the necessary amendments, paragraph 3 provides a three-year window. During that period, they will be protected from being compelled by members to make unauthorised payments or payments in excess of existing Inland Revenue limits under their pre-A-day rules. For example, a pension scheme may include a rule that allows the payment of benefits up to current IR maximums. Revenue maximums will disappear under the new regime, but the regulations under this power will allow schemes to continue as if they had a further three years to run. Amendment No. 371 would allow the Inland Revenue to override pension scheme rules indefinitely. We do not believe that that is desirable. We believe that three years should be adequate for schemes to make the necessary adjustments. In practice, they are likely to have over four years in which to do so.

Mr. Flight: The reason behind the amendments is not lazy schemes, but that there may be some schemes that, because of the rules, cannot make the necessary amendments. Have the Government focused on that? It is no good having a period for adjustment if the scheme cannot make the necessary changes. If the Government do not like our route, how else might the problem be dealt with?

Ruth Kelly: I was going to deal with that point on the next amendment.

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Amendment No. 372 would empower the Inland Revenue to insert a power of amendment into pension scheme rules that is unconstrained by the scheme's rules or by Department for Work and Pensions requirements under the Pensions Act 1995. I understand the hon. Gentleman's concern that certain schemes may not feel that they can adjust their rules in that way. For example, schemes could be prevented from changing their rules to fit in with the new regime, either because DWP rules prevent them from making the necessary changes or because the change would conflict with trust law or with existing scheme rules that prohibit any such changes being made. However, the amendment is unnecessary, because the Inland Revenue has agreed with the DWP that the DWP will make regulations under section 67 of the Pensions Act 1995 to suspend the requirements of that section and allow schemes to reproduce Inland Revenue modifications in their scheme rules.

On the narrow point of trust law, I do not believe that trust law would prevent schemes from making appropriate changes to their rules. Trustees will usually have a power in the trust deed to change the terms of the scheme. However, I accept that that power is usually exercisable only with notice or sometimes consent from scheme members. Sometimes it may be necessary to make a formal application to court. However, the processes of change are well known and should be achievable within the extended time limit allowed by the provision.

Under trust law, trustees will have a fiduciary duty to act in the best interests of all the beneficiaries. They would simply be fulfilling that duty and acting in line with trust law if they changed scheme rules to allow the scheme to move into the simplified regime without losing upper limits on payable benefits or becoming liable to make unauthorised payments. Furthermore, paragraph 3(1) already empowers the Inland Revenue to make regulations that modify scheme rules as appropriate. Such regulations can override any existing scheme rules that prohibit changes to the benefits payable by schemes, if they need to.

I have of course sent draft copies of these regulations to members of the Committee. The Inland Revenue will undertake a formal consultation on the most appropriate form for the regulations made under paragraph 3. We shall carefully consider any points that are made on whether the detail of the regulations covers all necessary issues. However, I urge the hon. Gentleman to consider seeking to withdraw the amendment, as it should be redundant.

 
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