James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge & Hyde, Labour)

It is a pleasure to welcome you to our morning sitting, Mr. Taylor.

The amendments will, I hope, help to allay the concerns about the treatment of contracted-out rights that have already been built up when contracting out is abolished for defined contribution schemes. Government amendments Nos. 51 to 55 insert a power to abolish or vary the rules on protected rights. This is the only area in which the Government are introducing a substantive amendment after Second Reading. Government amendment No. 59 is a separate, minor technical amendment, to correct a reference in schedule 4 to a section title in the Pension Schemes Act 1993.

Before I discuss the detail of the amendments, it may be helpful to explain a little about contracting out and protected rights. The amendments and clause 15 only relate to defined-contribution schemes, which are also known as money purchase schemes. We have already examined defined-benefit schemes.

As we have already seen, contracting out allows people to opt out of the state second pension by saving in a private pension scheme instead. People who choose to do so on a defined-contribution basis receive a rebate of their national insurance contributions. That rebate, together with any associated tax relief, is invested in the person’s pension scheme. That amount and any investment return are known as protected rights.

By contracting out, the person has forgone some or all of their rights in the state second pension scheme, so certain rules have traditionally applied to protected rights. Those rules are, first, that protected rights are invested only in certain specified products; secondly, that they are only transferred to schemes that are contracted out; thirdly, that annuities purchased with the protected rights must be calculated on a unisex basis, and fourthly, that the protected rights have to provide for a survivor benefit if a scheme member is married or a civil partner at the time that an annuity is purchased.

We recognise that those rules can complicate scheme administration and that they do not provide the flexibility for scheme members when they are choosing their annuity. By dictating that there must be a unisex annuity, we are restricting people’s ability to choose and they may have to make a choice that is not appropriate for them; that situation can apply for women as well as for men. The complexity in scheme administration is caused by the fact that the rules on protected rights do not apply to any other pension  rights that are held in that person’s pension pot, so that protected rights must be tracked separately in order for providers to comply with the legislation. We recognise, therefore, that the removal of those rules would simplify the schemes for members.

We consulted on this issue in significant detail, and we had a unanimous response from the industry, which strongly supported the removal of those rules. However, we did not receive any responses from people who represented women’s interests in particular, and we therefore wanted to obtain further information from them before tabling the amendment.

Following that further round of discussions, we thought that the appropriate way of introducing this measure was in the context of the joint Department for Work and Pensions/Treasury review of the open market option for annuities. That joint review was announced in the pre-Budget report last November and one of its central aims is to ensure that people make informed choices about their annuity type and fully understand the consequences of their choice. The review will include specific consideration of the impact of removing the requirement to take out a dual-life annuity with protected rights, as well as more general consideration of the question of joint life annuities, including how partners can make appropriate choices for themselves both as individuals and as a couple; a number of suggestions have already been made as to how that can be achieved.

That review of the open market option for annuities is expected to report towards the end of the year. Therefore, amendments Nos. 51 to 55 would provide a power to abolish or vary, by regulations, the rules on protected rights following the outcome of the review. We intend to introduce regulations, once we have fully explored the potential impact of removing the rule about survivor benefits in the light of the conclusions reached by the review. Of course, we will come back to Parliament with those regulations, as any regulations made under this power will be subject to affirmative resolution and therefore they must be debated by Members of both Houses.

I hope that the Committee agrees with our considered approach. Our amendments will allow action on the rules applying to protected rights to be taken at the right time and are based on the evidence. The amendments agree in principle with amendments Nos. 6 and 7, tabled by the hon. Member for South-West Bedfordshire. So his party agrees with us about the need to make the change; we are just proposing that it should be done in the context of the wider changes on annuities, which might come forward as part of that. I look forward to the debate and I shall be interested to see whether he wants to press his amendments.

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