New Clause
22
Open
market option as the default for the annuitisation of personal
accounts
‘(1) An annuity
bought with funds saved through the scheme established under section 50
or a qualifying scheme is a lifetime annuity
if—
(a) it is payable by
an insurance company,
(b) the
member was required to select the insurance company from the open
market,
(c) it is payable until
the member’s death or until the later of the member’s
death and the end of a term certain not exceeding ten years,
and
(d) it is a level annuity,
an increasing annuity or a relevant linked
annuity.
(2) An annuity is a
level annuity if its amount does not vary from year to
year.
(3) An annuity is an
increasing annuity if its amount increases from year to
year.
(4) An annuity is a
relevant linked annuity if its amount varies from year to year but only
in line with changes in (or by an amount which does not exceed the
amount by which it would vary if it varied in line with changes
in)—
(a) the retail
prices index,
(b) the market
value of freely marketable assets,
or
(c) an index reflecting the
market value of freely marketable
assets.
(5) “Freely
marketable assets” means assets which are sold on the open
market at a price not determined by the
member.’.—[Paul
Rowen.]
Brought
up, and read the First
time.
Paul
Rowen:
I beg to move, That the clause be read a Second
time.
We have so far
rightly spent a lot of time dealing with accumulation and the measures
that people have to take to ensure that they have a pension worth
saving for. The new clause deals with what happens when someone retires
and how we should go about it. I refer hon. Members to proposed
subsection (1)(b) because that measure is different from existing
legislation. It requires the customer to select an annuity from the
open market, while the existing provision states that the customer has
the opportunity to choose on the open market. In other words, we
believe that people should go on the open market rather than simply be
covered by the provision saying that they may go on the open market,
and we want that advice linked to the information made available to
people with personal
accounts
Why have we
tabled the new clause? A comparison of the figures on the FSA’s
website for a different range of people shows that there can be up to
an average of 15 per cent. difference between the best and worst
annuity that a person could purchase. For example, let us consider a
single male with a five-year guarantee on a level income annuity. At
the age of 65, between the highest and lowest annuity available, there
was a difference of 10.45 per cent. For a joint annuity in respect of a
husband and wife, the spouse being three years younger, at the age of
65 the difference for level income is 18.89 per cent. and, escalating
at 3 per cent. per annum, it is 22.28 per cent. Those differences are
huge.
1.45
pm
Within the
companies on the FSA website, which are some of the most commercially
competitive and well-known in the country, such as Norwich Union, Legal
& General, Canada Life, Friends Provident and Reliance Mutual,
there is a huge range of
differences.
With
impaired life annuities, which are typically available to someone with
an impaired life, such as because they are a smoker or have suffered a
heart attack, there can be up to a 40 per cent. difference between the
benefits under such a scheme and the ones they could get with an
enhanced annuity. Those are staggering figures. If hon. Members
consider the original Turner report, we have gone down this road to try
to get a low-cost saving model that could give people an enhanced
pension, which is laudable. However, if we do not do so, when we come
to the decumulation phase, we will more than encourage people to use
the open market—we will make them use it. We will see all the
benefits from the savings that people have by going through the
personal accounts wiped away because they might be advised, perhaps by
the firm that they are working for, to go to a preferred annuity
provider that may not give the best rates. It is in everybody’s
interests, not least the state’s—given that any shortage
of income may have to been met through enhanced benefits—that we
encourage, nay require, retirees to get the best open market
option.
Mr.
Greenway:
I am entirely at one with the hon.
Gentleman’s objective, but I am slightly confused about why he
thinks that we need the new clause. I understand that the personal
accounts scheme would provide the same opportunities and entitlements
that apply to all other pension schemes, particularly personal pension
schemes, where the open market option already exists. However, we
should address how we can ensure that retirees are given that
information. Perhaps the Minister will consider including that in the
regulations to be made under clause
8(2).
Paul
Rowen:
The hon. Gentleman is right. He knows a lot more
about this than I do. We want to ensure that retirees get that
information and go down that route. However, we tabled the new clause
because we want that information to be required to be made available
under the Bill, rather than saying that it should be made available.
That is a matter of semantics, but it is important. For example, it is
estimated that in 2007 those buying an annuity lost £1.25
billion of pension and benefit by not accessing enhanced annuity rates.
At the moment there is insufficient information available for people
purchasing annuities and some relevant issues are not being addressed.
In due course, an additional 6 million to 10 million people will have a
personal account and will want to cash it in for an annuity, and it is
important that they go for the open market
option.
I will be
interested to hear how the Minister intends to ensure that that option
is made available. As the hon. Member for Ryedale knows, we have
laboured the point about information and advice quite a lot, because
the success of the personal accounts is predicated on the quality of
the advice that is available. By including the new clause in the Bill,
we would be requiring the
open market option to be used, because it has the benefit of forcing
people to go down that route, otherwise they may take the easy option.
We know what happens when people are visited in their homes by people
trying to get them to change their electricity or gas supplier: they
use the information that they are given because that is all they have
in front of them. The benefit of the new clause is that it says that
the open market option, with all the options available, is the route
that has to be chosen. I would be very interested to hear how the
Minister intends to ensure that that sort of benefit is taken advantage
of, if not by that
route.
Mr.
Plaskitt:
I am grateful to the hon. Member for Rochdale
for tabling the new clause. I am tempted to reply by referring him to
the hon. Member for Ryedale, who has almost dealt with the matter
already. Nevertheless, I have a few other things to add and some
reassurances to give, which I hope will address the thrust of the
argument made by the hon. Member for Rochdale and encourage him to
withdraw the new clause, which, as I will try to explain, is
unnecessary.
New
clause 22, as the hon. Gentleman said, would require all qualifying
pension schemes, including personal accounts, not only to offer, but to
require, their members to exercise the open market option. As he
rightly said, choosing annuities is one of the most important financial
decisions that a pension scheme member makes. It is a one-off decision
that can have a big effect on the value of income in retirement. For
this reason, the Government fully support the open market option, which
allows individuals to shop around to get the best annuity deals that
they can under the circumstances, rather than simply taking the annuity
offered by the provider. By shopping around, people can certainly make
a very big difference to the value of their pot—as much as 30
per cent, we
believe.
However, new
clause 22 is not required to ensure that members of personal accounts,
or any other qualifying scheme, can benefit from the open market
option. Under the Finance Act 2004, all tax-registered money purchase
pension schemes that provide benefits through the purchase of an
annuity must offer the open market option, or they would face tax
charges. As clause 14 requires all qualifying schemes to be tax
registered, that requirement, in effect, already applies to all money
purchase schemes into which employees can be automatically enrolled,
including personal
accounts.
As hon.
Members will be aware, the Government, working with stakeholders, have
recently conducted a review of the operation of the open market option.
That review reported in 2007 and set out a number of measures to help
and encourage more individuals to use it. We do not believe that it
would be right at this stage to go beyond that and to force members of
money purchase schemes to use the open market. Apart from anything
else, such an approach could add to costs and complexity, for example
if schemes had to check that the member had shopped around to avoid tax
charges.
We do not
believe that the Bill should create a separate set of rules just for
personal accounts. Additionally, we have said that within the
existing
framework, the detailed design of the process will be a matter for the
delivery authority, based on the conclusions of the review of the open
market. Regarding the
point of information that was raised by the hon. Member for Ryedale,
existing legislation already requires occupational pension schemes to
provide a wide range of information to members. The relevant parts of
the legislation will apply to personal accounts in the same way as to
any other pension
scheme.
Mr.
Greenway:
I must confess that I had not thought about this
point before. Could the Minister clarify how he thinks the personal
accounts scheme will be structured? If someone is in a group personal
pension scheme operated by a major insurance company pension provider,
and the default position is that that pension provider will convert the
cash in the fund to an annuity at their rates unless the person
exercises the option to purchase an annuity somewhere else on the open
market, is it the intention that the scheme will itself provide a
default pension, or will people simply take the money and buy the best
priced pension they can find? I think that the Minister takes my point
that there is quite a subtle difference between the
two.
Mr.
Plaskitt:
The hon. Gentleman is right to stress that. The
important thing is to ensure that individuals reaching this point are
aware of the need to shop around for their annuities and that they have
the right information to do so. As I said in response to the hon.
Member for Rochdale, we are making changes, which were reported in
2007, to the way the OMO
works.
The Pensions
Advisory Service is setting up a web-based, structured choice tool to
guide people. We are working with stakeholders to facilitate the
development of better focused information for customers about their
annuity options. The issue will also be for the Personal Accounts
Delivery Authority, which will be responsible for the detailed design
of how members can access their pension savings. That will include
consideration of the information that members will need when making
that important
choice.
I hope that I
have reassured the Committee about the Government’s commitment
to the open market option and that the personal accounts scheme, along
with other qualifying money purchase schemes, will be required to offer
that to their members. The appropriate support for information will be
in place, and I hope that the hon. Member for Rochdale will withdraw
the
motion.
Paul
Rowen:
I am grateful to the Minister for his remarks and
reassurance. I am happy to beg to ask leave to withdraw the
motion.
Motion and
clause, by leave,
withdrawn.
The
Chairman:
I advise the Committee that we have a revised
selection list. Although new clause 28 is starred, the hon. Member for
Stoke-on-Trent, South has spoken to me about it and I think that the
issue merits a brief debate. Bearing in mind that we are not under
pressure from the programme order, I am happy for the hon. Gentleman to
move his new clause.
New Clause
28
Financial
Assistance Scheme to cover certain pension
schemes
‘The Financial
Assistance Scheme shall cover those pension schemes which have
registered with the Department for Work and Pensions by 1st January
2008 and which would have been entititled to assistance by either the
FAS or the PPF but for decisions taken by the company sponsoring the
pension scheme or by the Trustees of the pension scheme where the
insolvency event occurred before the setting up of the PPF but the
winding up occurred after that date.’.—[Mr.
Flello.]
Brought
up, and read the First
time.
Mr.
Robert Flello (Stoke-on-Trent, South) (Lab): I beg to
move, That the clause be read a Second
time.
I will not
detain the Committee for more than a minute or two, especially as you
have been kind enough to exercise your discretion in calling my new
clause, Sir Nicholas, for which I am most
grateful.
There is a
small group of schemes, which my hon. and learned Friend the Minister
mentioned on Tuesday, that fall between the financial assistance scheme
and the PPF. Those schemes, such as that of Desmond and Sons, are ones
where the employer went insolvent before April 2005, meaning that the
PPF does not apply, but where winding up, for whatever reason, was
delayed until after April 2005, meaning that the schemes fall outside
the criteria for FAS assistance. A technicality has caused the
problem—I think that I am safe in assuming that it was not the
Government’s intention to exclude such schemes when the FAS was
set up. They are occupational schemes, just like others caught within
the FAS. The only difference is the date of winding
up.
Without detaining
the Committee much further, it is fair to say that such circumstances
would not have been foreseen at the time. It was not reasonable to have
expected pension schemes to wind up later than the employer’s
insolvency, yet we know that such schemes exist. Pensioners are not
getting either the pension for which they paid into the
scheme—the pension they expected to get—or any help,
which is a massive problem for the pensioners involved. A small number
of schemes are affected, and I understand that they have a mainly small
numbers of members, so I presume that the cost of putting this right
will be equally small. However, it is an extremely vital issue for
those people concerned with, or caught up in, such a
situation.
Mr.
O'Brien:
The FAS was designed to help
underfunded occupational pension schemes that started winding up
between 1 January 1997 and 5 April 2005. The Pension Protection Fund
was designed to help occupational pension schemes that were left
underfunded when their employer went insolvent from 6 April 2005
onwards. The new clause refers to a small group of schemes that fall
between the FAS and the PPF, where the employer went into insolvency
before 6 April 2005, but, for many reasons, the pension scheme,
although underfunded, did not start winding up until after that
date.
A small number
of schemes are affected. We know of three at the moment: Desmond and
Sons, which is based primarily in Northern Ireland but also in the UK;
Stanley Press Equipment; and Pinney’s. If we are to deal with
the issue, it would be useful to know
whether any other schemes are affected. It is an anomaly that those
schemes are not covered and I want to look at that in more
detail. 2
pm
I am
sympathetic to the claims put forward by Members who have made
representations, including my hon. Friend. We recognise that some
scheme members have suffered pension losses through no fault of their
own, despite their employer acting legally. I am hopeful that we might
find a way to assist them. I cannot give a guarantee at this point, but
I encourage my hon. Friend and his colleagues who have been pressing me
to continue to do so in the hope that we can find a way to resolve the
issue. I hope that he will feel able to withdraw the
motion.
Mr.
Flello:
I am grateful to my hon. and learned Friend for
his comments. I am reassured that the important issue is being looked
at seriously by him and his Government colleagues. While colleagues
might seek to bring forward similar amendments to the Bill on the Floor
of the House, I beg to ask leave to withdraw the
motion.
Motion and
clause, by leave,
withdrawn.
The
Chairman:
I congratulate the hon. Gentleman on his
brevity.
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