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“For the first time, everyone will have the same opportunity to make tax-relieved pension savings over a lifetime.”—[ Official Report, Standing Committee A, 8 June 2004; c. 427.]
She referred to the creation of a level playing field.
Stephen Hesford (Wirral, West) (Lab) rose—
Mr. Hoban: I will happily give way to the hon. Member for Wirral, West (Stephen Hesford) who pre-empted the Economic Secretary by a second. I am sure that the Economic Secretary will remember that in future.
Stephen Hesford: I am obliged to the hon. Gentleman for giving way—I think. Does he not accept that, by and large, as I understand it, the financial press did not really bat an eyelid about this measure? The only point that the financial press seemed to make was about the timings and implementation. That is why the Government have tabled the various amendments to schedule 18. Given that there was not really the clamour that he appears to be trying to make out that there was and given that the Government have tabled amendments Nos. 6, 7, 8 and 9 to schedule 18, does he not agree that those amendments are the best way forward and will he support them?
Mr. Hoban: I will not discuss the amendments at this point. I think that you indicated in your opening remarks, Sir Alan, that we may have a brief debate. We will support the amendments, because they help the Government to get out of a bit of a hole that they have created of their own volition. The Government dealt poorly with the transitional arrangements and there was a lack of clarity about the original statement that was made at the time of the pre-Budget report. That led to some concern and confusion about whether there would be relief for pension term assurance that was included within a pension policy and whether that tax relief would still continue. We have clarity now, whereas we did not have it in December. So, we will support the amendments.
I am a little perplexed by the hon. Gentleman’s remarks about the lack of concern in the financial press, because my reading of that press—particularly at the time of the pre-Budget report—was that there was a significant degree of concern among members of the industry. Certainly in conversations that I had in the aftermath of the pre-Budget report, there was quite significant concern, particularly given that so many industry members—I will come on to this later—had invested a significant sum in preparation for the launch of the policy. They are now left trying to administer a relatively small number of policyholders.
Ed Balls: To go back to the question of principle—it is important that we establish the principles that are guiding us in these debates—the hon. Gentleman quoted one of my predecessors, a former Financial Secretary, talking about tax relief for pensions. But term assurance is about not pension income but death benefit. It is a life insurance product. Does he accept that it was never our intention to tax-relieve non-pension savings in the manner that has transpired, or is he saying that introducing a tax relief for term assurance is his proposal to close the contributions gap—as he referred to it?
Mr. Hoban: That is slightly curious. If it was not the Government’s intention to introduce tax relief for pension term assurance, why on earth did they include it in the Finance Act 2004? The Government put the measure forward three years ago, in that Finance Act, but are now seeking to reverse it. If it was not their intention to have that provision, why did they include it in the first place? That is the problem that the Economic Secretary has to think about. The reality is that the measure was well understood by the industry. Perhaps the Economic Secretary will tell us why the Government included the provision in the Finance Act 2004, because the Committee would be interested to hear that. I would happily give way to enable him to give that explanation. [ Interruption. ] The Economic Secretary says that he will give an explanation in his speech. Well, we have heard that before.
If we go back to the Committee Hansard for the 2004 Finance Bill, it is interesting to note that there was no discussion whatsoever on the introduction of pension term assurance. According to my reading of Hansard, that clause seemed to pass through without comment. The then Financial Secretary to the Treasury did not give the merest warning that abuse could lead to the scheme being closed down; that is in stark contrast to the warning that she gave about alternatively secured pensions.
The Government introduced the tax relief back in 2004, and when one talks to people involved in the industry, one finds that their view is that the Government should have been aware of the impact of the relief on the life assurance market. As the Association of British Insurers said:
“Even before this change was made, the insurance industry told the government of the positive effect this could have on the term assurance market.”
It was an opportunity for that market to rejuvenate itself. That should have come as no surprise to the Treasury. Indeed, some people were so concerned that the change would lead to a large-scale re-broking of business that they started to lobby the Treasury. I once again point out what Vanessa Owen of Liverpool Victoria said:
“When I first read the proposed death benefit rules back in 2004, I wondered if boards of directors across the country would be turning pale at the risk of churning to in-force books. But after much lobbying, it became clear the rules were not going to change before A-day”.
There appears to have been plenty of discussion and debate before A-day, and what happened should have come as no surprise. Indeed, when I spoke to a group of industry experts in January this year, I specifically asked them whether the take-up of pension term assurance should have come as a surprise to the Treasury, and they emphatically said no; the Treasury should have been aware of the scale of interest.
The effect of the A-day change was to encourage people to think again about life assurance, as they could pay their premiums net of the basic rate of tax, if they were basic rate taxpayers, or net of the higher rate of tax, if they were higher rate taxpayers. When consumers went to see their financial adviser or someone at the bank, the person giving them financial advice would have been remiss if they had failed to point out that they could take out pension term assurance at a lower cost than normal life assurance, because of the generous tax relief introduced by the Government in their Finance Act 2004. It is worth considering one insurer and the rates that it was offering. According to an article in The Times, a male non-smoker buying £300,000 of level-term cover from Legal & General would pay £27.25 a month in cover. If he chose pension term assurance, he would pay £25.25 a month in cover if he was a basic rate taxpayer, but if he was a higher rate taxpayer, he would pay only £19.39. I suspect that the hon. Member for Wolverhampton, South-West (Rob Marris) is thinking about the difference between £27.25 and £25.25 and saying to himself, “That does not sound like the basic rate reduction,” and indeed it is not. There is recognition in the industry that the cost of pension term assurance cover was higher than the cost of basic cover, if we exclude tax relief.
There were significant caveats about pension term assurance cover. As Richard Eagling, the editor of Investment, Life & Pensions Moneyfacts says:
“Although price is not the only differentiating factor to be considered when choosing between the two, the cost savings cannot be ignored, and for those clients who have no existing cover in place, the case for PTA is compelling.”
Consumers were warned that the policy might not be for them, as an article in The Sunday Telegraph said:
“For a start, only basic life insurance is available with these PTA packages. The tax-breaks do not apply to extras that are often added on to conventional term assurance products, such as critical illness cover which pays out if you suffer a serious illness that leaves you unable to work. Family income benefit is not covered either—this product pays out an annual income on death rather than a lump sum.”
So there were caveats in respect of the sale of such policies; it was not a straightforward slam dunk, as it were, to sell the policy to clients. There was a proper process that had to be gone through. Certainly, the increased affordability of term assurance would enable people who had previously found life cover prohibitive to take greater personal responsibility for their family, but as I said earlier, it also gave those with existing life cover the chance to see whether their cover could be re-broked.
Again, Vanessa Owen made some perceptive comments about what happened in the industry at the time. She said:
“What we did find was that, although not a storm, life protection volumes started to pick up from all channels. Consumers were interested in the tax relief message which was clearly stimulating demand although, judging by our average premium levels, it was not wealthier clients who were buying but people on more modest means.
In other words, it was not just the wealthy who were taking advantage of another opportunity to claw back higher-rate tax relief but also regular policyholders looking to take out life cover at a competitive rate.”
What about churning—the re-broking of in-force life protection? Vanessa Owen said of the in-force life protection book:
“It has remained largely intact, with rebroking activity at a minimal level”,
so it appears from her evidence that people on low and moderate incomes were taking the opportunity to put in place cover that they may have considered too expensive before.
The interest in pension term assurance should have been apparent at the time. It certainly seemed to attract new customers. Has the Minister asked his officials to conduct any research into who purchased the products, and did the research that the Government conducted reflect Miss Owen’s perception of the change of business in the market?
If so many businesses were thinking of taking advantage of the introduction of pension term assurance—clearly, the Liverpool Victoria thought about it—why was that not obvious to the Treasury? Plenty of people seem to have told the Treasury. Why did not the Treasury realise sooner what the take-up rate would be, or was it so naive that it did not think it would happen after all, or so incompetent that it did not think of taking action prior to A-day?
It is worth noting the cost of the Government’s failure to take action. According to the regulatory impact assessment, the estimate of lost tax revenues if the clause is not reversed would be £160 million, out of a total estimated cost of £250 million for A-day reforms. What was the Government’s original estimate of the amount of tax relief that would be claimed as a consequence of introducing pension term assurance? Presumably, in their calculation of the £250 million,
they would have produced an estimate back in 2003-04. It would be interesting to understand the difference, from the Minister’s perspective, between the original estimate and the current revised estimate, as set out in the regulatory impact assessment. If the Minister knows, I should be grateful if he enlightened me and the Committee about the difference between the estimate at the time that the A-day reforms were consulted on and the £160 million cost referred to in the regulatory impact assessment.
Ed Balls: I fear that the hon. Gentleman is in danger of misleading the Committee. The regulatory impact assessment refers to the cost that would arise to the Exchequer, had we not taken action at the time of the pre-Budget report. As I said, it was never the Government’s intention to incentivise through pensions tax relief what became a rapid switch to pension term assurance. It was to prevent that cost from arising that we acted. I am still trying to work out whether the hon. Gentleman is supporting our action to protect the revenue base, or advocating a reversal of the 1984 decision not to tax advantage life assurance. On that question of principle, he still has not given us any clue.
Mr. Hoban: I am only up to page 6, so there is plenty of time before we discuss that.
I hope I did not inadvertently mislead the Committee. I am clear that £160 million is the Government’s estimate of what the costs would have been in the future. It would be interesting to know what they think the cost is now and what they thought the cost might have been. [Interruption.] The Economic Secretary says from a sedentary position that the cost at present is none, but we have had nine months of sales of the products. In a parliamentary answer, he told me the number of sales in the quarter to June and the quarter to September, so there would be some indication of the cost to the Exchequer. I am keen to understand what the Government’s estimate of cost was at the time that they conducted their pre-A day consultation. The Minister still has not responded to that question. I happily give way to him.
Ed Balls: The estimate would have been that it was a negligible cost, because it was not the Government’s intention to tax-advantage term assurance. The hon. Gentleman is not answering the question whether, as a matter of principle, he supports the extension of tax relief to life insurance and term assurance products to close what he has called “the coverage gap”. Until he answers that question, it is hard for the Committee to understand whether he supports or opposes our proposals. At the moment, he is just drifting in the middle.
5 pm
Mr. Hoban: In my political career, I have never been accused of drifting in the middle on anything.
Mr. Philip Dunne (Ludlow) (Con):
My hon. Friend is ploughing a steadfast course through the middle of the Economic Secretary’s argument, and he is right to press the Economic Secretary. I struggled through the Red Book in an attempt to find an estimate of the current cost of relief to the Treasury, but I could not find
anything. The Economic Secretary tells us that the amount was negligible in the past, which suggests that the Treasury had no idea not only what the relief would amount to, but that it was allowing it in the first place—he has just told us that it was unintentional relief. My hon. Friend is doing a noble thing in getting to the bottom of the matter.
The Chairman: Order. The hon. Gentleman is making a very long intervention.
Mr. Hoban: It is remarkable that the Government introduced a change that happened to slip unintentionally through the legislative process and past the eagle eyes of the Treasury and Her Majesty’s Revenue and Customs and that it will cost nothing. That does not stack up. I cannot understand whether the Treasury was naive or incompetent when it introduced the measure and failed to understand the ramifications. My hon. Friends are encouraging me to believe that it was both naive and incompetent—I am a generous man, and one or the other is enough for me.
The Economic Secretary has raised the question of the future cost of the policy. I assume that the £160 million figure is an annual cost, and I am intrigued to know what assumption he made on how that cost would build up. Does he expect growth to continue at the rate of the increase in sales that took place towards the end of last year prior to the closure of the schemes? Does he expect the rate of growth to plateau? Or was there simply pent-up demand out there, because people who could not previously afford to take out such cover suddenly rushed to do so?
The regulatory impact assessment does not make it clear how the Government reached the £160 million figure—I presume that the logic is more robust than the estimate of negligible cost, which the Government made when they introduced the pre A-day consultation. It will be interesting if the Economic Secretary elaborates in his answer on how officials calculated the cost of £160 million.
Mr. Hoban: The Economic Secretary has nodded, and I am delighted that we will be furnished with that information.
I want to refer to a broader point in that context. At one level, this Government, more than any other Government, understand the behavioural impact of changes to the tax regime; otherwise, the Chancellor would not meddle in the tax regime quite as frequently as he does. At the same time, there has been a fundamental failure properly to think through the behavioural impacts of those changes and the extent to which increasing reliefs, cutting rates or increasing allowances would change people’s behaviour. The Association of British Insurers indicated prior to A-day that those products would have a positive impact on the term assurance market, with new policyholders taking advantage of the increased affordability of products.
The Treasury does not seem to have responded. It does not seem to have thought through whether the situation would encourage new participants to enter the market and offer new policies to try to close the
protection gap. One of the problems is that the Government have not properly thought through their A-day reforms; that is why this is the third U-turn on those reforms since they were enacted in the Finance Act 2004. Slowly but surely, the Economic Secretary is unpicking the work that one of his predecessors, the right hon. Member for Bolton, West, did when, as Financial Secretary, she was responsible for the same areas. I feel sorry for her at times. She must be wondering why on earth she spent so much time working on these reforms only for the Economic Secretary, who was at the Treasury at the time advising the Chancellor in some capacity, to conduct a series of U-turns once they were on the statute book.
We can see how, and how quickly, the Treasury’s approach to pensions has unravelled over the course of the past couple of years in moving on from the intention that was set out in the then Financial Secretary’s speech in Standing Committee only three years ago. In the context of the Pensions Commission report, the 2006 Budget said that one of the five tests that the Chancellor set to see whether these reforms were acceptable to him was whether they would promote personal responsibility. Yet here we are with a product that would appear to promote personal responsibility and reduce dependency on the state but that the Government are seeking, through this clause, to abolish.
In last year’s pre-Budget report there is a section headed “Fairness for tomorrow’s pensioners”, where, at paragraph 5.77, the Government casually say that they have
“become aware that, at a result of the flexibilities that the new pensions tax regime has brought in, life insurance policies that provide lump sum death benefits alone are being offered as personal pension arrangements eligible for pensions tax relief.”
If the industry knew about it prior to 2004 and A-day, why did the Treasury just happen to become aware of it? Surely it should have played a much more active role in understanding what was happening in the market and what would be the impact of the legislative changes that suddenly crept into the Finance Act 2004.
In this year’s Red Book, we have greater amplification of the Government’s approach to pensions tax relief so that no one can be in any doubt about what might happen in future. It sets out some key principles that have guided and continued to underpin the Government’s approach to pensions tax relief, one of which the Economic Secretary repeated in his brief opening remarks. It says that
“generous tax relief is provided for pension saving to produce an income in retirement. Pension saving is not, however, provided to support pre-retirement income, asset accumulation or inheritance”.
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