Pensions Bill

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Danny Alexander: The amendments cover at least three important, but distinct, areas: first, the uprating of the limit, secondly, the ability to transfer in or out of personal accounts and, thirdly, whether, in addition, there should be a lifetime limit. I disagree with much of what the hon. Member for Eastbourne has said about the second and third of those. However, on the first of those, the uprating of the annual limits, he makes a great deal of sense. Amendment No. 77 seeks an annual limit of £3,600 at 2005 prices that should then be uprated in line with the relevant index in the future. To have that in the Bill, just to be clear of the Minister’s intention, makes a great deal of sense. I will now turn to other issues where there are some grounds for disagreement.
We have talked previously about particular groups of people such as those with small pension pots or broken work records. Let us take as an example someone who has worked for two or three years in a relatively low income job, with a company pension scheme, who has perhaps built up a small pot which would be significantly lower than the trivial commutation limit. After a period out of work, they might come back into work and have a personal account again but have only the income and the time to build up a relatively small pot. It would clearly make sense, in due course, to allow those small pots to be combined, within appropriate limits, to allow the transfers in.
I accept what the hon. Member for Eastbourne says, and he is right that this point has been made strongly by PADA. He is right that Parliament should be conservative about adding unnecessary bells and whistles to the scheme, because the more bells and whistles that are added, the more complex it becomes and the harder it becomes to keep the charges at a low level. That would then have an impact on the benefits that members will receive. However, the critical word has to be “unnecessary”. There are some additional ways of contributing to personal accounts which I would not characterise as unnecessary bells and whistles, but which are potentially necessary to allow personal accounts to achieve their full objective. There is at least a genuine question to be asked about allowing the transfer in of other small pots so that there can be a combination which allows a decent degree of income to be realised in retirement. I hope that the Minister can say that the 2017 review will be a real review that will look at those issues in detail with a view to ensuring that the interests of members, particularly those I have described who might have a number of small pots, are met. That is why I strongly oppose amendment No. 29.
I turn now to the idea of having some additional lifetime contributions limit, which is embodied in amendment No. 103. It suggests that
“A member may make payments that are not contributions for the purposes of provision under subsection (1) up to a maximum of 2 per cent. of the standard lifetime allowance.”
Standard lifetime allowance, as the Committee will know, is currently £1.6 million. Two per cent. of this would be £32,000, approximately twice the current trivial commutation limit. We had an interesting debate about trivial commutation in which I proposed an amendment that the trivial commutation limit be increased. Amendment No. 103 would add a degree of flexibility to the system while not allowing excessive contributions to be brought in from outside. That would allow people in the target group—and this has to be of interest to the Committee—who are on low incomes and may only be able to make a relatively small contribution to their personal account, to make use of any windfall, legacy or inheritance they may have to build up what will be, in many cases, the only pension they have to ensure an adequate income in retirement.
While the hon. Member for Eastbourne is absolutely right that there would not be an employer contribution attached to any such transfer in, the obvious reason for such a transfer would be to allow growth to take place in that money so as to contribute to the overall retirement fund. That would allow them to reach a level at which they are able to benefit from an annuity or a regular income stream as opposed to a lump sum, which is all that they would be entitled to in a very small pot. I must confess that I was not in the Committee when the questions about advice were debated, though I have read with interest the record of those discussions. However, to say that the fact that such people will not be in a position to have advice is an argument against allowing a lifetime contribution limit, is not quite right. If we are to get the advice regime right—it is my understanding that that is what Otto Thoresen has been asked to look into, and it is certainly the basis on which my party’s proposals for the advice regime have been made—we must consider that there are a number of different aspects of life where better access to financial advice is needed by a range of people who will potentially be in the target audience for personal accounts. This is not just advice about personal accounts. Advice is needed about personal debt, for example.
Our suggestion—a national network of financial advice centres, perhaps operating through citizens advice bureaux—would clearly provide a vehicle where, if someone wished to ask a question about this sort of decision, they would be able to do so. People would be able to receive generic financial advice, not restricted to personal accounts, but dealing with a range of other circumstances. Such an approach would allow relevant questions on this sort of decision to be asked. So that is not a genuine objection to amendment No. 103.
I am very pleased to see that a number of stakeholders, who follow very closely the Committee’s deliberations, also support amendment No. 103. I note, for example, the EEF’s belief that individuals should be able to make the occasional lump-sum payment, in addition to the annual contribution, into a qualifying workplace limit such as personal accounts, provided this does not add disproportionately to the cost of administration, which must be kept as low as possible.
I am also pleased to note the support of Which?. It says that the Government should introduce a lump-sum contribution limit now to allow consumers to pay in lump sums such as inheritance, redundancy payments or bonuses, separate from an annual limit. That would help people to save for a comfortable retirement in line with their aspirations, and allow millions of people to achieve their aspirations, which are not currently being fulfilled. That is the Bill’s principal political objective. Likewise, the TUC has noted its support for amendment No. 103. I could go on, but I suspect I would try your patience, Mrs. Anderson, if I continued to list organisations in support of this point.
Mr. O'Brien: I have considerable sympathy for some of the points raised by the hon. Member for Inverness, Nairn, Badenoch and Strathspey. He identifies the three key issues we are discussing: the £3,600 annual cap, the transfers in and out and the lifetime investment that people might make.
Our view is that transfers in and out should not be allowed at this time, but he will be aware from my evidence to the Committee that I have some sympathy for this idea in terms of small pots. Let us look at it after 2017, at a more appropriate time when we have reassured the industry—particularly the insurance-based, but also the trust-based pensions industry—that people will not transfer significant sums from one pension fund to another. At that time, the Minister and hon. Members can take a view on whether it is appropriate to allow small pots to be transferred in and out of personal accounts. Tim Jones indicated that there were some benefits in doing that but there is a need at this point to keep a level of reassurance for the industry and that would help with our aim of preventing levelling down, which is an important concern for all Committee members.
3.15 pm
There has been lively debate for some time around the lifetime limit. There are strong views on both sides. I do not propose to close that debate down now. I hope that, in due course, a wider consensus will emerge. We certainly do not have that now. Closing down the debate on the £10,000 limit at this time would not be the right way forward.
Danny Alexander: I am pleased that the Minister does not wish to close down that debate. He is right that there is a divergence of view within the stakeholding community. What steps would he take to bring consensus on that important issue? Clearly, if there is to be a consensus, it would require the Bill to be amended. If such a consensus emerges, is he willing to bring forward an amendment at a later stage in the Bill to allow that to happen?
Mr. O'Brien: First, we would not have to amend the Bill in order to enable that change to take place. Subsection (1) would allow that. Therefore, there is scope to allow that. It does not need to be in the Bill.
We do need to have a clear view by 2012 because there may well be people who wish to transfer into personal accounts a sum that is perhaps held in a non-pension saving pot. I am sympathetic that there is an argument but I want to look at the detail so, therefore, I am not disposed at this point to put it into the Bill.
Danny Alexander: The Minister has been very generous in giving way. To be clear on the first point he made, is it his view that, should a view come forward that a lifetime limit is desirable, that it can be done by regulation and not by primary legislation?
Mr. O'Brien: Yes. Subsection (1) we believe enables us to do that. Therefore, we would not need primary legislation. We are clear that our aim is that personal accounts should complement rather than replace good-quality pension provision, in order—[Interruption.] I am sorry. I believe that subsection (3) rather than subsection (1) would enable us to do that.
As far as our overall aim is concerned, we are not seeking to replace any good-quality pension provision. That has never been our intention. Indeed, the whole process is to complement not compete or replace current provision.
In order to achieve this we have taken some specific measures to focus personal accounts on the target group. An annual contribution limit of £3,600 and a prohibition on transfers in and out of personal accounts, at least in the initial stage, are part of that process. We have consulted widely on the level of annual contribution limit which involves a trade-off between focusing personal accounts on the target group and providing individuals with flexibility to save. We have been quite clear that we intend to set the contribution limit at £3,600 in 2005 figures. We have reached a broad consensus with stakeholders that this is appropriate.
We have not put the actual amount in the Bill for a number of reasons. First, the level of the limit will not be £3,600 in 2012 because we have undertaken to uprate this figure in line with earnings from 2005.
Of course, I hear what the hon. Member for Eastbourne says about how we could have a figure in the Bill and a mechanism for adjusting it. That is possible and is certainly done in Finance Bills, but it is much easier in Finance Bills as they come around annually. We are looking at a Pensions Bill that we hope will still be looked at in 2020. Having such a figure in the Bill becomes much odder.
It is better to say that the figure will be annually uprated in line with earnings, so we are clear about where we are. We do not have any proposals to change that, and I know that the Opposition Members, should dire things happen at election time, would have no wish to alter it either. I think that the industry has the level of reassurance that it needs about the political consensus.
We have said that we would consider a higher limit of £10,000 in the first year and subsections (1) and (3) provide scope for that limit. As we have said in earlier debates, we are making pension policy for the long term. Without the benefit of 20:20 foresight, we believe it is important to retain an element of flexibility in setting the level of the contribution limit. We believe this approach makes clear our intention but does retain flexibility at the same time, and it is the right approach. So the industry knows our intention—it is all very clear—but I do not think that we need to put it in the Bill.
We are considering—as I have indicated—the £10,000 limit, but we are not in the position yet to close down that debate. We have asked the delivery authority to advise us on the cost and implementation issues around a higher contribution limit in the first year of the scheme.
Amendment No.29 would pre-empt this work, categorically ruling out a higher limit in year one. We also recognise that there will be some individuals with irregular contribution patterns who may want to make one-off payments to their personal account to boost their pension savings. Consumer groups in particular have been keen for members to have this facility. I have already indicated what our view is and I do not propose to close that down now.
As far as amendments No.30 and No.103 are concerned, both affect the development of a limit—such as a lifetime lump sum—but in diametrically opposite ways. Amendment 30 would prevent the ability, whereas amendment No.103 would prescribe a limit of £30,000—significantly undermining the purpose of the limits.
As an additional measure to protect existing good quality schemes when personal accounts are introduced, Amendment No.29 seeks to put a blanket ban on transfers in the Bill. We have made clear our commitment to banning most pension transfers into and out of personal accounts. However—as always—we must allow the flexibility for exceptions. There are some very limited circumstances—such as pension sharing on divorce and, as I have indicated previously, the small stranded pension pots—where we would want to have the ability to look at these issues. Paving powers for this ban are at clause 100 of this Bill, and we plan to set out the detail in the scheme order. We will therefore have the opportunity for some further discussion at a later date.
I would like to make clear that we are committed to carrying out a review of the contribution limit and the ban on transfers in 2017. In answer to the question asked by the hon. Member for Inverness, Nairn, Badenoch and Strathspey—we intend it to be a real review. Quite what happens in 2017 will depend on the Government at the time. But our intention is certainly that that would be a real review.
These measures are important to protect good quality provision when the personal account scheme is introduced. But they do have cost implications for the scheme, and therefore it is right that we should review them once the reforms have bedded down to see whether they remain appropriate. It is right that, following a review and a debate in the House, the Secretary of State has the power to remove the requirement for a contribution limit. Amendment No. 58 would remove that flexibility and require primary legislation should the review conclude that no contribution limit is necessary. I believe that we have the balance right in the approach we have taken to this legislation.
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