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Earl Russell: The point of the noble Lord, Lord Higgins, about taking a pension at a particular moment's valuation in the stock market is a serious one. I recall a story of my father's--it relates to a legacy, but the basic point is the same--about someone who was bankrupted by inheriting £1 million in shipping shares. She inherited the shares and they were assessed for duty in April 1929. The duty was payable in October 1929. The case is no doubt extreme but it illustrates the point. Whether this amendment is the best way to deal with it I do not know, but I hope the point will be taken on board.

Baroness Hollis of Heigham: Whether the story is relevant to our debate is one matter, but it is a very good story, and a revealing one. Amendment No. 7 seeks to remove the need for purchasing an annuity with a stakeholder pension fund. Clause 1(4) provides for stakeholder pension schemes to provide money purchase benefits, as we discussed just now. We have also discussed the reasons why we think that should be so.

Under Inland Revenue legislation the funds built up in money purchase schemes must be used to purchase an annuity. Perhaps I could remind your Lordships why this annuity rule exists. It reflects the fact that the tax privileges accorded to pension contributions are given in order to ensure that the beneficiaries have an income throughout retirement. The Government encourage saving for retirement on the understanding that the fund will provide a stream of income during retirement. This avoids the risk of an individual having to rely on a low pension income and perhaps income related benefits because they have spent the proceeds of their fund in the early years of retirement.

There is some flexibility in the annuity requirement. We propose that the pensioner age for stakeholder pension scheme members will be between 50 and 75. A tax-free lump sum will be available. These rules obviously follow the rules for personal pensions. The point which concerns your Lordships, and which I entirely accept, is the problem of falling annuity rates. That is the core of this issue. As your Lordships know very well, annuity rates are set in the market and reflect factors such as life expectancy and long-term interest rates. Obviously what we would all like are high annuity rates, low inflation and long-term life expectancy. Actually it is not very easy to put all those things together.

It is true that annuity rates have fallen recently, as has inflation. The annuities purchased therefore will have correspondingly greater purchasing power and many people with pension funds have benefited from investment yields which have more than offset the fall in annuity rates, particularly as their funds have grown. The noble Lord, Lord Higgins, asks what will happen if in future inflation should rise and someone is caught in an annuity with assumptions of lower inflation and so on.

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As the noble Lord will know, there are products in the market place and people are certainly well advised to consider the appropriateness of buying an inflation-proofed annuity from which you expect a lower figure now in order to get inflation proofing later on. Currently the gap between those two is relatively narrow and could provide good value. Certainly the noble Lord will know that in the marketplace you can get an inflation-proofed annuity or you can get a level annuity. Under the latter you get higher figures to start with or you can get an inflation-proofed annuity and you start with a lower figure which is protected. You can choose which to have. At the moment my understanding is that the inflation-proofed annuities represent good value.

The best protection the Government can offer to those purchasing annuities is to maintain a framework of financial stability which will ensure lower inflation in the future. This is what we intend to do. We will ensure that pensioners will have a guaranteed level of pension and we have set out proposals in the Green Paper. We recognise that pensions are a rapidly expanding field. The power to prescribe exceptions, as discussed between the noble Lord, Lord Higgins, and myself a few moments ago, will give flexibility if new schemes should develop. I hope that in the light of these explanations the noble Lord will feel able to withdraw his amendment.

7.15 p.m.

Viscount Eccles: Would the noble Baroness just return to the 75-year age point, which I think applies to this whole scheme of personal pensions? She is clearly right that life expectancy is getting longer. Would it not be the case that regardless of annuity rates there is a case for raising that age limit from the present age of 75?

Baroness Hollis of Heigham: The Government are certainly considering the whole range of issues. I hope I shall not be misunderstood when I say that that might go alongside a rise in age in the European countries regarding the average age of state retirement and pension age. We think at the moment, given the current retirement age, the age of 75 strikes a reasonable balance between flexibility for the individual and the need to ensure they have a pension which is secure for the rest of their lives. I am advised that the effect of mortality on annuity rates means that it is unlikely that individuals would actually benefit from deferral beyond the age of 75 in terms of mortality rates. Clearly that could change in terms of inflation rates, but there the protection would be in terms of getting an inflation proofed annuity.

Viscount Eccles: I thank the noble Baroness for that answer. I do not want to prolong this but I was hoping that choice would come into the matter. I have an uneasy feeling that the Treasury does not like the idea of the deferment of income which would follow from raising the age of 75.

Lord Higgins: I think my noble friend is right in supposing that to be the Treasury view. I was somewhat

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astonished by the noble Baroness's statement that index linked annuities are very good value at the moment. There are some strange implications in that for the Government's view on interest rates, as against the market's view on interest rates.

Baroness Hollis of Heigham: All I meant was that if somebody seeking to buy an annuity shared the noble Lord's concern about future inflation rates they would have the option to purchase an annuity which protected them against any possible changes in inflation to their disadvantage. I absolutely was not making any suggestion that the Government's economic policy will not keep inflation at the present unrivalled low level which we all enjoy and which will do so much to strengthen our economy.

Lord Higgins: I shall read carefully what the noble Baroness has said--but anyway I shall assume that it was a DHSS brief rather than a Treasury one! Be that as it may, I am rather disappointed by the noble Baroness's reply. This is a serious problem. Everyone is looking at it in a broader context so far as pensions generally are concerned. It seems rather a shame not to build this flexibility into the stakeholder pension scheme in the way the amendment suggests. I would like to give further thought to this. One would have hoped that the deliberations which have taken place otherwise would not rule out this particular amendment. However, I beg leave to withdraw the amendment now but I may well wish to return to it at a later stage.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees (Lord Strabolgi): Before calling Amendment No. 8 I must inform your Lordships that if this amendment is agreed to I cannot call Amendment No. 9.

Lord Higgins moved Amendment No. 8:

Page 1, line 22, leave out subsection (5)

The noble Lord said: I think I am right in saying that Amendment No. 8 is linked with Amendment No. 9. I therefore beg to move Amendment No. 8 which asks to leave out subsection (5). That subsection is concerned with the extent to which the income from a stakeholder provider can be used to defray the administrative expenses of the scheme--I presume whether it is a scheme written under trust or otherwise.

The other amendment seeks to restrict the expenses to 10 per cent. I was slightly surprised by that figure. Perhaps the Minister could give us some idea of what they expect the administrative expenses to be. This raises a whole series of questions as to what the "operating costs" of particular stakeholder pensions are likely to be. The Government have suggested that the limit should be a maximum fee of 1 per cent of funds under management. This produced a reaction in the press--perhaps not wholly surprising--from some of the potential providers who said that this was a very restrictive figure. Of course it has repercussions also for the issuers of advice, to which we will turn on a later

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amendment, and exactly what it is that the providers of the stakeholder scheme are producing for the potential pensioner.

I notice that Pensions Weekly states that the Government are suggesting that providers should perhaps make a loss in the early years of the schemes that they provide. Front-end-loaded costs are a feature of most conventional schemes. Therefore if one takes out a scheme and then withdraws from it in the early years, one may not even get one's money back, let alone anything on top. Will the Government indicate how they envisage expenses being spread over the life of a scheme? Some people may decide to take out a stakeholder pension and then subsequently withdraw from it. I refer to the competitiveness of the stakeholder pension in this regard vis-a-vis other schemes.

There are considerable problems here. I was rather surprised to notice the words which appear at the end of the subsection which I seek to delete which state,

    "may be used to defray the administrative expenses of the scheme, to pay commission or in any other way which does not result in the provision of benefits for or in respect of members". Many criticisms have been made about the level of commission which is paid and the fact that charges are front-end-loaded. Therefore, conventional pension schemes are not good value unless one contributes to them throughout the entire life of a particular asset. I notice that the noble Baroness opposite nods in agreement. I do not refer to the noble Baroness on the Front Bench opposite, but the "back-up team", as it were.

I hope that the Minister can explain to us in what circumstances commission will be paid and why it is considered that it should be subject to a limit. One of the advantages--I concede that there are advantages--of the stakeholder scheme is that if such a limit is set, that is likely to put competitive pressure on conventional schemes, and perhaps to some extent encourage them to spread their expenses over the life of a scheme. This is an important point which it is right to raise. I believe that the noble Baroness, Lady Castle, has another amendment in this group which refers to a figure of 10 per cent. I hope that the Minister will also comment on that amendment. I beg to move.

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