I beg to move, That the Bill be now read a Second time.
Although perhaps unusual, a touch of humility and candour from a Member of Parliament would not go amiss at this stage—particularly from this one. I am not sure whether I can feel the heavy hand of history on my shoulder as I move my Bill on Second Reading, but history has a habit of repeating itself. The Bill is not my idea: it is an almost exact replica of the Pension Annuities (Amendment) Bill, introduced by my right hon. Friend Mr. Curry in 2002, and it is very closely related to the private Member's Bill introduced by my hon. Friend Mr. Butterfill the year before.
The difference between my hon. Friends and myself is that they—through the application of their powerful intellects, industry, experience and pre-existing knowledge—were able to inform the House in a coherent fashion of what lay behind their Bills and why it was necessary and in the public interest to amend this aspect of pensions law. I will do my best, on this third occasion—perhaps ineptly and, I hope, briefly—to persuade the House that the policy behind the Bill is worthwhile and sensible and that the Bill itself is worthy of support.
I am very pleased that the promoter of the Bill has said that he wishes to present his ideas as succinctly and briefly as possible. Perhaps the Government have a plan to try to talk out the Bill today, thus preventing the House from reaching a decision on it and, equally importantly, on the Pensions (Winding-Up) Bill, which I hope to introduce a little later. Perhaps the Whips will rejoice that their schemes have met with short-term success, but does the hon. and learned Gentleman agree that those of our constituents for whom the greatest worry, apart from the war, is that their pension promise is being snatched away from them may have very different views about parliamentary procedure and those who are behind it if they attempt to prevent the House reaching decisions on the first, second and third Bills on the Order Paper today?
I am extremely grateful to the right hon. Gentleman for his intervention. The one shred of comfort that I will draw from today's proceedings if they are unsuccessful is that I have all-party support for the Bill and particularly the support of the right hon. Gentleman, whose reputation in this field is unsurpassed. I hope that, if not the Financial Secretary, at least the men Friday who sit all around her will pay some attention to what the right hon. Gentleman has said.
I congratulate the hon. and learned Gentleman on his success in the private Members' Bill ballot. Earlier, on a point of order, I sought to find out about the Bill's explanatory notes, and one of the reasons why I wanted to explore that was the status of recent correspondence that I and perhaps the hon. and learned Gentleman have received from the Association of British Insurers with regard to the consumer survey that it has undertaken on such issues. The hon. and learned Gentleman would help me to understand the purpose of the Bill better if he could tell me whether he has received that correspondence and what his reaction to it is in relation to the Bill?
I am always delighted when people take an interest in any legislation. I suspect that if the hon. Gentleman has done his homework, which I am sure he has, and read the Bill and related it to the Income and Corporation Taxes Act 1988, he will not be in any doubt about the Bill.
I wish to make some progress; I have only been speaking for about two minutes. I know that the hon. Gentleman is keen to get back to Scarborough and I do not want to delay him for any longer than is necessary, so if he will contain himself for a moment—
I shall give way in a moment, perhaps, but I want to make some progress so that other hon. Members, such as the hon. Gentleman, who have a lot to say will feel that enough time has been permitted for them to speak.
In moving my Bill on Second Reading, I am immensely encouraged by the support that it has engendered both inside and outside the House of Commons. In saying that, may I remind the House that the Bill introduced by my right hon. Friend the Member for Skipton and Ripon was given a Second Reading by a large margin and was not defeated in Committee? It simply ran out of parliamentary time. I would be the first to admit that this is not a perfect world and that this is not a perfect Bill, but its imperfections are mine, not those of my right hon. Friend or my hon. Friend the Member for Bournemouth, West. Any imperfections can be dealt with in Committee, and I hope that the House will let the Bill get to the next stage.
Like my predecessors, I have benefited from the invaluable help of the retirement income reform campaign and in particular from that of Dr. Oonagh McDonald CBE, a former Labour MP and shadow Treasury Minister in the 1980's, and Mr. lain Anderson of Cicero Consulting. I have received a large number of letters from my own and other hon. Members' constituents, wishing the Bill success and asking me why it has taken so long to reform this aspect of the law. Our constituents are suffering from the present low annuity rates, and share the concerns of so many of us that the pensions system in this country is now in a state of crisis and that the lofty complacency that this country has shown towards the pensions systems of continental Europe is no longer justified, if it ever was.
Hardly a day goes by without our reading of large public companies—many of them household names and bywords for integrity and financial probity— announcing that their pension funds are in deficit, that they do not have sufficient resources to honour their obligations to their present or future pensioners and that their boards' strategic and day-to-day decisions about the management and direction of the company are now governed as much by the needs of the company's pension fund as by the commercial needs of the company itself.
Clichés about dogs and tails, carts and horses come to mind, but this is the real world of modern industrial and commercial Britain: a sclerosis has beset our economy that is almost exclusively caused by the collapse in the pensions system. Added to the recession in the manufacturing sector and the export of capacity and jobs to Asia and eastern Europe, we now see at every level of the industrial and commercial parts of our economy enterprises that are in reality no more than overdrafts attached to pension deficits.
Young people years away from pensionable age are not investing in their future security through the pensions system, and the state recognises that before very long it will no longer be able to continue to pay tax-based benefits to pensioners at levels which by themselves will provide a living wage to those not at work. The need to deal with that picture is obvious, but the incentives and the vehicles to do so are either absent or have been damaged by the Government.
I do not want today's debate to become a party political point-scoring exercise because that is boring, it produces no new thinking and it is often unedifying, but it cannot go unremarked that the Chancellor's removal of £5 billion a year from the pensions system through his advance corporation tax changes has had a direct and immediate effect on the ability of this country, its citizens and its financial institutions to provide a sustainable and affordable pensions system through individual and corporate schemes.
I note that the hon. and learned Gentleman has already become party political in raising the ACT issue, but does he accept that by far the most important reasons for the difficulties in the pension regime are people's increasing longevity, meaning that their annuities have to last longer, and the collapse in the stock market?
May I just finish the sentence? I shall not impose an order of precedence on the factors that affect the current pensions market, but, clearly, annuity providers will be influenced by the increasing life expectancy of people at the age of 65, 70 or 75. That is not particularly controversial.
Does my hon. and learned Friend agree that those who are independent commentators, such as the Association of Chartered Certified Accounts, describe the Chancellor's tax raid as the most significant factor is the current troubles that we are experiencing?
No. I am sure that the hon. Gentleman will attempt to catch your eye, Mr. Deputy Speaker. He is a man of no few words, and I am sure that he will want to give full rein to all his concerns about the pensions system. He tabled, with Mr. Dismore, an amendment, which has not been selected, and I have a suspicion that he is itching to tell me all about it, but he can do so in his own time.
There are a number of difficulties facing the pensions system and, added to the matters that I have mentioned, the collapse of final salary and funded workplace schemes has brought to public attention the dangerous state of affairs in the pensions system. The ABI's latest estimate is that the savings gap is £27 billion and the savings ratio is at a 50-year low. The imposition of over-rigid accounting rule FRS 17 has been unhelpful, as has the Financial Services Authority's reluctance to deal with the current rules relating to the solvency requirements for insurance companies that have sold equities in the past 18 months, so impacting on pension portfolio values.
Millions of people are being forced to take out private defined contribution schemes and are thus forced into poorly performing annuities. On top of that, we learn of the Chancellor's decision to tax pensions savings of more than £1.4 million at 60 per cent., which will hit tens of thousands of people retiring on £100,000-plus salaries.
That may not affect many today, but as inflation increases feed into the system, that tax on pensions will hit millions of middle-income earners in 20 years or so.
No, I will let the hon. Gentleman make his own speech, as I am very worried about his train to Scarborough.
Set against a context in which public sector employees, including Members of Parliament, are protected from new rules designed to allow pension fund trustees to reduce the retirement benefits of workers who leave company schemes early, we have a recipe for public disenchantment with the governing class and the Government in particular.
Another reason why I do not want the debate to descend into party political point scoring is that the Bill has cross-party support, as we heard a moment ago. That is valuable in itself for a private Member's Bill, but when one considers the names of those who have agreed to sponsor the Bill, the calibre of that cross-party support is made clear. Mr. Field, an expert on welfare reform, whose writings and speeches on pensions and other aspects of the welfare agenda have proved to be insightful and thought-provoking, has put his name to this Bill, and I am most grateful to him. He has his own pensions measure on the Order Paper today, and I hope, as he does, and, I am sure, many hon. Members do, that the Government will permit it to be debated and passed. He rightly wants to help people trapped in distressed pension schemes that could be closed or have their terms altered, by giving them rights to protect their interests against companies that walk away from their pension obligations.
Mr. Webb, an acknowledged expert on welfare and pension policy, has also given my Bill his support. I am grateful to him for telling me that although he cannot be here today, he has asked Dr. Cable, an economist of no little repute, who spoke in favour of the last such Bill in January 2002, and in Committee, to speak for the Liberal Democrats. Mr. Allan has also signed the Bill.
From the official Opposition, I have the support of my right hon. and learned Friend the shadow Chancellor, my hon. Friend the shadow Secretary of State for Work and Pensions and my hon. Friend Mr. Hendry, who leads on issues relating to young people: the very people who will be most directly affected by the continuing crisis in the pensions industry. To underline the Conservative party's express support for the policy set out in this Bill, I am pleased that the shadow Chief Secretary to the Treasury, my hon. Friend Mr. Flight is here and will endeavour to catch your eye, Mr. Deputy Speaker. He is an expert in many areas of financial policy, and has a particular knowledge of the issues behind this Bill. Furthermore, he has knowledge of the concerns of the Christian Brethren, and he will speak about the measures in the Bill that assist them. Importantly, the Bill is signed by my right hon. Friend the Member for Skipton and Ripon and my hon. Friend the Member for Bournemouth, West, its parliamentary parents, and I am grateful to them both.
Formidable supporters, all of them, but I do not underestimate the difficulties that are in front of me. The Financial Secretary, in her short but highly productive life, both in politics and elsewhere, has probably forgotten more about pensions and annuities than I, in half a century, ever knew. She also has the resources of the Treasury and the Government machine at her disposal.
May I just finish off praising the Financial Secretary, as I am rather warming to it.
The Financial Secretary can crush this Bill in a trice by sheer force of numbers with the votes of her loyal and ambitious supporters, although I trust that she would not do so without at least considering the arguments, many of which she may have heard before.
First, may I say how much I support this Bill, not least as co-chairman of the all-party group on ageing and older people? Will my hon. and learned Friend tackle head-on, later in his remarks the only half-decent argument that the Treasury ever put forward on the series of similar measures: the worry that it purports to have about people falling back on the public purse if they are allowed, in effect, to dissipate their pension funds through relaxation of the rules on annuities?
That is dealt with pretty clearly in clause 2 on minimum retirement income, on which I shall touch briefly as we make progress this morning.
My hunch is that the Financial Secretary has much regard for the thrust of this Bill, not least because it is gender-neutral and recognises that the gap in life expectancy at 60, 65 and 70 nowadays is not so much between the sexes but between the different regions of the country. In 1970, a woman of 60 could expect to live six years longer than her male counterpart. By 2000, the gap was down to two years. Male life expectancy for a 60-year-old has been improving by three years every decade, and for a 60-year-old woman by two years. That suggests that before very long the idea of a unisex annuity rate may have little or no impact on either sex: it may also suggest that, with the increase in numbers of women working over that age, work is bad for their health, but I will not pursue that further. Men and women in Manchester have, according to a recent Office for National Statistics survey, the lowest expectation of life, whereas men in north Dorset and women in west Somerset have the longest expectation of life. There must be room for a sophisticated dating agency in the south-west.
The Financial Secretary represents a constituency that is by no means at the top of the income pile, and must realise that a measure such as this will do something, if by no means everything, towards solving the pensions crisis. I accept that the Secretary of State made a statement to the House at the time of the publication of the Green Paper charmingly entitled "Simplicity, security and choice: Working and saving for retirement" on
Pensions draw-down, to which the Government appear to have attached some importance, is not the only answer, since it is available in real terms only to those with very large pension pots, and in any event pensions advisers and consultants may start to take regional differences into account when recommending either an annuity or draw-down. It might be good advice to offer Mancunians draw-down and those in the south-west annuities: perhaps not my most serious point but an indication of the need for the Government to apply their collective mind to the pensions crisis sooner rather than later.
Let me now turn briefly to the provisions in the Bill. I accept that it is not a candidate for Radio 4's "Book at Bedtime" or even, if I look across at the Financial Secretary, "Listen with Mother", but perhaps that was well before her day. I do not want us to get stuck in a quagmire of interlocking sections and subsections, so I will not attempt to unravel the relationship between this Bill and the Income and Corporation Taxes Act 1988 more precisely than to say that clause 1 sets out the required amendments to the 1988 Act to end the current system that allows people to choose when to annuitise and what type of annuity can be acquired. It amends the sections of the Act relating to the purchase of annuities from a personal pension fund.
Needless to say, public interest in the part played by annuities in private pension schemes has grown considerably in the last few years because of the declining rates offered by annuity providers, mostly insurance companies, as a consequence of lower long-term interest rates and increased life expectancy. To give just one example provided by the Annuity Bureau, in 1990 a fund of £100,000 would have bought an annuity producing annual income of around £10,000. Now, it would produce only £4,500.
I have been following what the hon. and learned Gentleman has been saying, and, in the absence of explanatory notes, I have relied on information from the House of Commons Library. I am bit confused by what is being said, because the information from the Library states:
"the Bill as currently drafted would not alter the current arrangements for annuity purchase from defined-contribution occupational pension schemes, including AVC policies."
Given that information, will the hon. and learned Gentleman explain in a bit more detail exactly what the Bill will do in terms of changing the arrangements about annuities?
I have a suspicion, which may be unworthy, that the hon. Lady has read neither the Bill—[Interruption.] Yes, I can see that she has a copy of the Bill; nor do I believe that she has read from start to finish the very useful House of Commons Library brief. I suggest that she does so. In any event, if she wants further tuition, now is not the time to receive the kind of detailed information on the Bill that she might like. I will happily see her afterwards if she wants further assistance. Equally, if she volunteers to serve on the Committee, I shall be happy to see her there. I trust that, in due course, she will allow the Bill to proceed to Committee.
Some will say that steady economic indicators mean that falls in annuity rates are not as significant as they might appear to be, but my constituents' pensions are increasing less steeply than their council tax bills and their other day-to-day living costs. Although the immediate future may bring low inflation, they do not feel secure that their pensions will carry them through increased local and Treasury tax demands, evidence of which we see in every Budget statement under this Chancellor, or residential care costs. The pension prospects for a young person now are terrible compared to only a few years ago as a direct result of the fall in the stock exchange indices and rates of return on equities.
It is now compulsory for at least 75 per cent. of a money purchase pension fund to be used to buy an annuity by the age of 75. I and those who agree with me want that rule to go so as to allow pensioners the freedom to choose the method of funding their retirement that best suits their particular circumstances, so long as they maintain a minimum retirement income above the level of income support to prevent them from becoming a burden on the state.
Clause 2 would give the Chancellor the power to set the level of the minimum retirement income annually. It would be secured through an increasing annuity. I accept that further work needs to be done on the sensible level at which to set the MRI each year, especially if the Government's state pension credit, which starts next October, produces a complication. However, as a matter of principle, I am of the opinion that the concept can work to the advantage of both the pensioner and the taxpayer.
Tensions surely exist between family-based and individually based welfare benefits and single pensioner households, and married pensioner households. However, the issues are there to be discussed, and they should be creative, not destructive, tensions. They can be that if imagination and good will on the part of the Government is brought to bear.
Individuals with a pension pot in excess of that needed to meet the MRI would be able to invest their additional savings in a retirement income fund and there would be no restrictions on when and how much income could be withdrawn. The Bill would also require the MRI annuity to be gender neutral and would abolish the provisions relating to income draw-down—the main alternative to annuities at present—as the Bill's arrangements for the MRI and the retirement income fund would give individuals both security for a given level of income and freedom to invest and draw from the remaining fund. The RIF, as defined under Clause 1(7), would allow for withdrawals to be classed and taxed as income, albeit that the investment growth would be protected from tax as part of an approved pension scheme.
I dare say that the Bill is complicated for some people, but it contains one or two simple themes. It is time to put those themes into practice. I commend the Bill to the House.
On a point of order, Mr. Deputy Speaker. You will be aware that today's Order Paper contains notice of a written ministerial statement to be made by the Chancellor of the Exchequer. That statement has now been made, and it discloses that the Finance Bill will be published on
I hope that the right hon. and learned Gentleman will understand that I cannot instantly offer advice on his question about precedent. He has put his remarks on the record, but my first instinct is to suggest that this matter should be pursued through the usual channels.
Thank you, Mr. Deputy Speaker. [Interruption.] There they go.
I congratulate Mr. Garnier on securing such a high slot in the private Members' ballot. I am afraid that I will not be able to support his Bill, and I regret the fact that he did not choose the subject of the third Bill on the Order Paper selected by my right hon. Friend Mr. Field. That has rather more merit than this Bill.
May I offer my congratulations to my hon. Friend on the sterling job that he does every Friday? We have just had clear evidence of the effect that he has. Does he agree that when moving the Bill's Second Reading Mr. Garnier failed to get to its core? The absence of explanatory notes for such an important and technical measure does neither him nor the debate any credit.
I very much agree with my hon. Friend. The only option available to me is to do the job for the hon. and learned Gentleman, and go through the Bill and explain what the problems are. Unfortunately, that might take me a little longer than I like.
My hon. Friend Lawrie Quinn referred to the fact that Conservative Members have deserted their Benches, and that reinforces the point of order that I made. Conservative Members are not here to consider the Bill or to listen to the debate. They have been whipped in as Lobby fodder in an attempt to force the Bill through without their having any idea of what they are voting for.
My hon. Friend will have heard how my genuine query was dismissed quite rudely by Mr. Garnier. I know that my hon. Friend will consider the matter in detail, so will he deal, at a relevant point, with my query in the way that I expected the Bill's promoter to do?
When I come to my comments on tax implications and annuities—I regret to say that that will be much later in my speech—my hon. Friend may hear the answer. If not, I am sure that she will remind me at the appropriate point.
I declare an interest: I have several money purchase policies from my previous life as a lawyer. When we debated a similar Bill last year, I had a couple of Equitable Life policies. I am pleased to say that I have been able to divest myself of them—albeit at great expense—and I am no longer locked into that company. I am surprised that the hon. and learned Gentleman did not declare an interest. I know that he is an eminent Queen's counsel, so he will probably have pension arrangements similar to mine.
I am very happy to sit here for the next five hours listening to the hon. Gentleman explaining the Bill. He is right: I have a number of private pension arrangements. However, I also pay income tax, and I do not declare that during Budget debates.
The Budget is of general application to us all. However, if one has a particular personal interest or personal pension policies—not everyone has them—it is incumbent on him or her to declare an interest, particularly if he or she is introducing a Bill. I am surprised that the hon. and learned Gentleman did not think it appropriate to do that at the start of his remarks. He has now put the record straight, and I am sure people will be grateful for that.
I accept the need for reform of the law on annuities. There is little doubt about that. The Select Committee on Work and Pensions, of which I am a member, has embarked on a wide-ranging review of future pension provision in the United Kingdom. I am absolutely amazed that not a single Conservative member of the Committee has raised the issue of annuities. I have raised the issue, and I hope that when we produce our final report, it will contain a mention of them. That remains to be seen.
I am grateful to my hon. Friend for not only declaring an interest but reminding the House of his expert work on the Select Committee. Has the Association of British Insurers been along to the Committee and made representations on the issue? Has he had an opportunity to consider the important research that it has conducted on consumer attitudes to the provisions before the House?
I am grateful to my hon. Friend for raising that. He has the briefing document with him and will be able to comment on it at length if he is called to speak, although I will touch on that subject tangentially. The ABI did give evidence to the inquiry, but I do not recall it spending much time on annuities. That may reflect how seriously it takes the problem.
I accept the need for change, but a private Member's Bill is not the right vehicle to introduce such a complex tide of reform. The hon. and learned Gentleman's proposals would have a series of ramifications for the tax system which he was unwilling or, I suspect, unable to explain properly. The changes would affect the pension rights of millions of people, for good or ill, but he skated over them. They would have implications for our benefits system that could cost billions of pounds, but he made no mention of that.
My hon. Friend is right to draw attention to the complexity of altering pension systems. What we do has an impact not only on pensioners today but on the pensioners and working people of tomorrow. The subject is important and the hon. and learned Gentleman's proposals would create a generational policy change. In those circumstances, it is unwise to nit-pick about aspects of the pension law. Does my hon. Friend agree that we need an holistic approach that can stand the test of time?
I very much agree. The Government have made a detailed series of proposals on the future of pension reform with particular reference to annuities. If there is to be reform, it is appropriate that it should be set out in a Government Bill. I understand, subject to the consultation procedure, that the Government intend to introduce a Bill in the next parliamentary Session—but more of that later.
My hon. Friend makes an important point. The Conservative party jumped up and down about the change to ACT, but failed to say whether it would repeal the provision. My hon. Friend is right to ask whether that is the root cause of what has become known as a pensions crisis.
Is it not also true that additional Government money for the health service serves, in part, to rectify the mortality differences in different parts of the country? That is essential if we are to give old people in parts of the country where people die much younger—my constituents are 10 years younger than the national average when they die—an opportunity to enjoy a retirement of any kind.
My hon. Friend makes his point in his usual erudite way.
It is clear that the hon. and learned Gentleman has cribbed the Bill from last year's legislation. Believe it or not, I kept a copy of last year's Bill and my notes on it. One never knows when such things might come in handy. Indeed, the second Bill that is up for discussion today, if we ever get on to it, is identical to an earlier one, and this Bill is identical to one that reached Report in the last Session. The only difference is its title.
I served on the Committee that considered the Bill promoted by Mr. Curry and must disagree with my hon. Friend. I do not think that Mr. Garnier has copied the earlier Bill because, if he had, he would certainly have done something about updating and producing the explanatory notes. He accused me of not doing my homework, but I wonder whether he did his homework or even talked to the industry.
My hon. Friend is right. The absence of explanatory notes is serious. Not only did the hon. and learned Gentleman not deal with the issue of updating the explanatory notes, but it has been almost a year since the previous Bill ran out of time and he has taken no steps to address our criticisms or the lacunae in the provisions. I would take him more seriously if he had considered some of the criticisms that we expressed last year and taken steps to deal with them, but all those criticisms still apply. Since then, I have studied the issues in more detail and now have new criticisms to put to him.
The hon. and learned Gentleman is in the Chamber to defend his Bill, but he does not seem interested in the arguments.
The hon. and learned Gentleman and my right hon. Friend the Member for Birkenhead mentioned the pensions crisis. The Select Committee's inquiry has been considering that and the overwhelming body of evidence leads one to say, "Crisis—what crisis?" The problem is that it is not a crisis in the true meaning of the word. A crisis is an immediate problem that requires action to be taken straight away to put it right, but we have a long-term problem that requires long-term solutions over the next five, 10, 15, 20 or so years. It is nonsense to think that without a knee-jerk reaction to the problem, everyone will end up in the workhouse when they retire.
Surely the real pensions crisis was when the Tories so liberalised the financial services industry that thousands of people were sold pensions that they should never have been sold in the first place.
My hon. Friend makes a telling point, which leads me to the matter of confidence. Although there may not be a pensions crisis per se, I accept the argument put to us by a number of people in the Select Committee hearings that there is a crisis of confidence in the private pensions sector. That is a different issue altogether. The evidence shows overwhelmingly that the fundamentals of pensions in Britain are sound. Compared to Europe and the rest of the western world, we have a well funded pensions industry that is sufficiently robust to cope with most of the trials and tribulations that bash it from time to time. We are in a much stronger position than anywhere else in Europe.
When the hon. and learned Gentleman goes on about the £5 billion pensions tax, he misses the point. My hon. Friend Mr. Bryant mentioned mis-selling. That is one of the problems at the root of the crisis of confidence. Equitable Life sold pension policies that were attractive at the time. Indeed, I bought its policies—
I am sure that that company sold policies to other hon. Members as well, but they could not be sustained in the long term. The failure of private sector work-based schemes when companies go bankrupt is another problem that has helped to generate the crisis of confidence in the pensions market. Couple that with the problems on the stock exchange and the falling value of pension company holdings, such as at Standard Life, and people inevitably start to wonder whether it is worth while saving for the long term. That is completely different from saying that there is a crisis in pensions themselves.
There is nothing in the Bill to increase the savings pot for anyone—except women, who will benefit at men's expense, and I shall come to that in a moment—unless the hon. and learned Gentleman's claims of tax neutrality prove not to be correct. The Bill is not a panacea for problems with annuities. Moreover, it would provide very little benefit to the overwhelming majority of pensioners who, if they do buy an annuity, have relatively small funds.
As you mentioned earlier, Mr. Deputy Speaker, my reasoned amendment was not selected, but that does not mean that the arguments behind it are not valid. I turn to those now in explaining why the House should decline to give the Bill a Second Reading. Clause 1(4)(c) provides that section 45 of the Sex Discrimination Act 1975 shall not apply to the minimum retirement income annuity, which is one of the hon. and learned Gentleman's inventions in the Bill. I shall deal with that in more detail later.
The purpose of the clause is to remove the defence allowed by that section for sex discrimination in annuity rates. It would prevent annuity providers from setting the annuity rate by reference to the different average longevity of men and women. I suppose that I ought to declare an interest as a man—at least, I was a man the last time that I looked. Perhaps the hon. and learned Gentleman ought to declare the same interest. [Interruption.] The hon. and learned Gentleman says that he has no sex at all.
There was some confusion earlier about the current differences in life expectancy. According to a useful House of Commons research paper, even in 2001 the difference in life expectancy between men and women was three years at age 65. Does my hon. Friend accept that that is a major difference, and it must be recognised?
My hon. Friend is absolutely right, and I hope later in my contribution to look at those tables in a little more detail and to point out some of the anomalies that the Bill throws up.
When we debated the previous Bill on this subject, my hon. Friend Mr. Gardiner eloquently described the effect of that difference on the arithmetic of calculating annuities. I assume that the hon. and learned Member for Harborough failed properly to prepare for his speech, because if he had he would have read those arguments, which are very cogent, in the Hansard account of that debate.
"What about the sex discrimination legislation and the double exemption? Is it the role of private sector provision to level up between Peter and Pauline . . . or is that the responsibility of the state? There is nothing wrong with the state's involvement in pooling risk between the sexes. I take the point that when each sex reaches the age of 65 the differences between life expectancy are somewhat lower. However, I question whether it is right for the private sector to adopt this position, bearing in mind how annuities are currently calculated for pooling risk."—[Hansard, 11 January 2002; Vol. 377, c. 848.]
That is the essence of the argument. The hon. and learned Gentleman is at risk of creating, rather than correcting, inequality between the sexes.
It may seem paradoxical that Labour Members such as myself should advocate a position that on the face of it is contrary to our deeply held belief in equality for everyone. To achieve that, however, we must recognise that people are not equal in certain biological respects, such as ageing, and that can be done within the existing annuities system. I passionately believe in equality, and the state clearly has a role to play in achieving it, but should we regulate private sector rights in this way? At the risk of going down the highways and byways of equal opportunities, I should say that the Bill points up the distinction between the right role of the state in trying to regulate the balance between the sexes, and the wrong role.
If a woman is doing work of equal value to that of a man, she should get the same rate of pay. If a woman buys an annuity, she should have the product of that annuity, and the same is true of a man, but to achieve the same amount as the man, year on year, the woman would have to pay more. The hon. and learned Gentleman is not trying to achieve equality through equal work for equal value or, in this case, equal pension for equal contribution. He is taking money away from the man to meet the aspirations of the woman for her annuity.
Is there not a difference between the pooling of risk between the genders by the state, which carries that process across the whole economy, and the pooling of risk between individuals who happen to be men or women? It is clear that it is part of the state's responsibility to consider the issue, but does not the hon. and learned Gentleman agree that as matters stand we run the risk of robbing Peter to pay Pauline?
I apologise to my hon. Friend, to Mr. Garnier and to the House for my late arrival, which was entirely the fault of the Mayor of London, whose policies are so successful that the streets are now full of cars.
Is there any evidence that people over the age of 75 want to buy annuities? I understand that research by the Association of British Insurers implies that, at most, 5 per cent. want to do so. Are we not in danger of creating a system that will be of interest to the more wealthy members of society, and of doing nothing for the majority of people who have real needs?
My hon. Friend presages my remarks. The Bill is a complex vehicle—the hon. and learned Member for Harborough claims simplicity for it, but it is far from simple—for solving a problem, which, if it exists, applies only to a few wealthy people, like the hon. and learned Gentleman himself perhaps.
The Bill does not recognise the differing life expectancies that insurers take into account in setting annuity rates. It would remove the right of insurers to underwrite personal pension annuities on the basis of sex or to allow sex to be taken into account as a risk factor. Instead, it would force providers to use composite annuity rates averaging male and female factors. Another effect would be that any provider, when setting a composite rate, would face the risk of the male and female take-up not matching the assumed mix, so it might build in a margin that would lower annuity rates in general for both men and women.
The Bill would also introduce inconsistency between different types of pension arrangement. If an annuity was bought to secure benefits from an occupational pension scheme or a retirement annuity contract, the Bill would not prevent the rates from taking account of the annuitant's sex. That is particularly important in view of the alleged flight from defined benefits to defined contributions as a basis for occupational pension schemes. The Bill would, I assume, apply to pension schemes based on defined contributions. We understand from the media that there is a groundswell of movement towards such schemes, but the evidence taken by the Select Committee shows that the movement is not as great as one might believe. The assumption seems to be that no more than a quarter of pension schemes would move in that direction, which would not necessarily be a bad thing—it would depend on the total contributions to the scheme. The Bill introduced by the hon. and learned Member for Harborough would have an unfair effect on an employee on a defined contributions scheme working alongside a colleague on a defined benefits scheme, as it would catch one but not the other.
Does my hon. Friend accept that a major factor in the shift away from defined benefits to defined contributions pension schemes is the pension holidays instituted under legislation that was introduced by the previous Government?
My hon. Friend makes an important point. I am not entirely sure that the case he sets out is correct, but I can certainly understand why people might think it is. There would be a great injustice in an employer avoiding his responsibilities if, when times were good and the value of investments was rising, he kept the pension fund topped up but, when their value fell, he said that he could not afford to maintain it, perhaps because of the pension holiday—the point made by my hon. Friend. He might then stop maintaining the defined benefits scheme and switch to defined contributions.
As I have said, there is nothing inherently wrong with the defined contributions system. The problem is that employers are using the defined contributions switch as a sneaky way of cutting their wage bill. They often pay only 2 per cent. towards the defined contributions scheme, when they may have been paying 8, 9 or 10 per cent. to the defined benefits scheme. In other words, there is a wages cut behind the scenes, and the Opposition may wish to consider whether they need to talk to their friends in the City about that.
The Library has produced a useful briefing on the issues, including unisex annuities. It says:
"The Bill required annuities to be provided on a unisex basis, instead of the present rules, under which annuities are calculated separately for men and women. As female life expectancy is longer than men's, the level of income women can expect for a given pension fund is significantly lower. According to the Annuity Bureau, a man aged 65 with a pension fund of £100,000 will be able to get a level annuity of £7,556.40 a year, but a woman would only get £6,948.00. However, as the annuity would on average be paid for longer to the woman, the capitalised value of the annuities is the same."
I am not sure that that is correct, and I shall give a different set of figures later.
I served on the Committee considering the Bill introduced by Mr. Curry, when our hon. Friend the Financial Secretary tabled a relevant amendment. Has my hon. Friend had an opportunity to study the arguments deployed on that occasion? Is it not lamentable that Mr. Garnier has failed to deal with the key arguments that the Government made then, and should he not have altered the Bill instead of producing a copycat measure?
My hon. Friend is right, and I have with me copies of Hansard recording the Committee stages of the Bill introduced by the right hon. Member for Skipton and Ripon. The hon. and learned Member for Harborough may care to borrow them. He has obviously not read them, otherwise, as my hon. Friend said, he would have altered his Bill. He simply copied his right hon. Friend's Bill without any consideration of the cogent arguments made by my hon. Friend the Financial Secretary, who I am sure will speak about them later.
Returning to the capitalised value of annuities, as has been said, women receive a lower annual sum because of their longer life expectancy. I have briefly referred to the table on page 13 of the Library briefing, and hon. Members may find it a useful illustration of my argument. It demonstrates clearly how the gap has developed and how long it will take for changes to be made. One hundred years ago, the difference in life expectancy for men and women was much smaller. In 1901, there were 10.6 males to 11.6 females at age 65, showing a difference of only 1. If the hon. and learned Member for Harborough had introduced his Bill 100 years ago, he might have had a case for equalisation, but in 2001, there is a different life expectancy beyond 65 for men and women, with 16 males to 19.1 females—the difference has increased to 3.1. In the next 20 years, that figure is predicted to fall by only 0.3, so the hon. and learned Gentleman's reasons for introducing the Bill simply do not stack up. The differences are not predicted to change dramatically in the medium or long term. In the past 100 years, the differences have grown, as the chart in the Library briefing shows.
The key issue is how that translates into pensions. Under the top rates currently available, as shown in the annuity direct rates table for March 2003, a 65-year-old man who purchases an annuity for £100,000 may receive £603 a month. The comparable figure for a female purchaser with £100,000 to invest is £565 a month. For simplicity's sake, I am working with figures for level annuities. To look at the whole range of annuity products would only complicate matters, and would not change my basic argument. Over his expected remaining lifespan of 17 years, the male would receive £123,046, whereas the female over her remaining lifespan of 20 years would receive £135,720 because of the accruing interest on the capital in the investment period. The Library briefing was therefore not quite right. Although the value of annuities is the same for men and women, the net product is better for women even though their annual annuity is slightly lower. Women are quids in at the end of the day.
Does my hon. Friend accept that sometimes men do very well from annuities? My father bought an annuity for £5,000 and, as he approaches his 96th birthday, has received £102,119.
My hon. Friend makes an interesting point, and I ask him to give my heartfelt felicitations to his father when he reaches his 96th birthday. However, he is not typical, as 96 is not the average male life expectancy. Annuities work on the principle of pooled risk across age, gender and a range of other factors. It is swings and roundabouts—if people die younger, the money goes back into the annuity pot for payouts to people who live longer. I believe that that point has been missed.
Before my hon. Friends entered the battle of the sexes, I was saying that women would receive about £12,500 more than men over their lifetime on an initial investment of £100,000. As I said, that is because of the accruing interest on capital during the investment period, which would be longer for women. Interest and inflation rates play a large part in assessing the value of those respective amounts, but the figures demonstrate that the value of a woman's annuity is no less than that of a man. Other aspects being equal, although an annuity payable to a woman may be smaller than that payable to a man, on average it will be paid over a longer period, producing a higher figure. The hon. and learned Gentleman's argument is that women get a raw deal because the annuity rates that they receive are lower than the men's. It is not difficult to see that unisex annuities would generally favour women and disadvantage men. On average, a man will not live as long as a woman, so a man's annuity will be paid for a shorter period than a woman's for the same outlay.
That is simply demonstrated by looking at the reverse side of the coin. If a unisex annuity paid £580 a month for an outlay of £100,000, a man would receive £118,320 over his expected lifespan, whereas a woman would receive £139,200. In round figures, the man would receive £5,000 less and the woman would receive £4,000 more. The difference is probably explained by the exorbitant charges that those who run annuity schemes sometimes levy. However, the net result is that for the same outlay, through the unisex pension, the man is £5,000 worse off and the woman is £4,000 better off. The Bill would prevent a man from entering into a personal pension annuity contract and buying with his own money a pension that reflected his own life expectancy. Unless and until the hon. and learned Gentleman can introduce a Bill to equalise life expectancy, the Bill before us would rob Peter to pay Pauline. In the end, there is no extra money in the pot.
I am delighted that the hon. Gentleman has studied this issue so closely. During the 35 minutes or so in which we have been listening to him, I am sure that we have all been greatly assisted. Is the short point that he is against choice, whereas I am in favour of choice? The Bill does not require people to buy an annuity except for the purpose of a minimum income guarantee. They can do what they like with the remainder of their finances. The hon. Gentleman seems to be suggesting that people should not be allowed to do what they like with their own money. Is that right?
All that I can say is watch this space. I shall certainly be coming to the issue of compulsion. The Bill would create a new raft of compulsion for the vast bulk of people who are in the position that we are discussing, while providing freedom for a tiny proportion of people, including the hon. and learned Gentleman's rich friends. He has a cheek to raise the issue of compulsion.
Does my hon. Friend agree that it is not really a question of choice? However, there would be choice for the few individuals who would benefit by exercising choice at the expense of the taxpayer. That would be the choice.
As always, my hon. Friend is right.
I would challenge the hon. and learned Gentleman's argument about choice. I suspect—we have had the argument before—that he has not read his Bill. He did not write it, and he has obviously not read it either. Clause 1(4)(c) says:
"after subsection (6) there is inserted—
'(7) Section 45 of the Sex Discrimination Act 1975 shall not apply to the annuity provided under subsection (1A).'"
In other words, there is no choice. The provision of the Sex Discrimination Act is removed, so the only choice is to buy one of the hon. and learned Gentleman's unisex policies. He is entirely wrong in that respect, and he has obviously not read his own Bill.
Is it not the case that people do have the freedom to put their money where they want, but not if they want my taxes or anyone else's to provide them with a tax benefit in return?
My hon. Friend makes a useful point. I shall be dealing with tax implications later in my remarks. However, the issue goes beyond that. Why should my pension contributions pay for my hon. Friend's pension? That is my big issue in terms of my personal pension. I would be compelled to make those contributions whether I liked it or not. I take objection to that. The hon. and learned Gentleman is entirely wrong when he talks about compulsion. As I have said, his Bill is full of compulsion for the average, ordinary working man and woman, but there is no compulsion for the very few rich people with multi-million pound pension schemes. That is at the nub of the Bill. I shall say a little more about that in a while.
In the end, there is no extra money in the pot. The Bill takes money away from a man to give it to a woman—a woman whom he probably does not know and has never met. Money would be taken from one gender unjustly to enrich the other.
As we know, the Bill has been introduced by an hon. and learned Member.
Given the Bill, the hon. and learned Gentleman could have fooled me, too.
I suspect that the hon. and learned Gentleman has not done his legal homework, either. The Bill undoubtedly has a human rights implication. I am sure that the hon. and learned Gentleman has not considered the implications of the Human Rights Act 1998, especially part II of the first protocol, article 1, which deals with the protection of property. The provision is straightforward and it bears reciting to the House. It reads:
"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."
The Bill would not achieve the hon. and learned Gentleman's objective through the state mechanisms of taxation, national insurance or the benefits system, which would be permitted by the Human Rights Act; it would effectively deprive men who have made contributions towards their annuity costs of their possessions, namely, their annuity fund. That is because their possessions include their stake in the fund. There is little doubt that the hon. and learned Gentleman is falling foul of human rights legislation.
The hon. and learned Gentleman is no doubt an avid reader of the law reports.
I apologise for disturbing the flow of my hon. Friend's speech. However, he knows that I am but a simple engineer. From my professional perspective, to ignore central core tenets of a profession by disregarding major legislation and major statutes would have the most serious consequences. If I ignored principles while designing the foundations of a bridge, I would be construed within my profession as being negligent. My hon. Friend is from the legal profession. Would he go so far as to accuse Mr. Garnier of being negligent in ignoring the key, central tenets of his own profession by ignoring such an important part of statute law and of the British legal system that involves human rights?
My hon. Friend makes a telling point. I would not accuse the hon. and learned Gentleman of professional negligence in the Chamber. He sits in the Chamber in connection not with his part-time job as a QC in the law courts, but with his other part-time job as a Member of Parliament. However, I would say to the hon. and learned Gentleman that had he advanced his argument before a judge without dealing with all the relevant points under the Human Rights Act and the case to which I shall shortly refer, his clients would at the very least have had something to say about it.
I shall again use the analogy of designing a structure. Is my hon. Friend saying that the very foundations of the Bill are flawed and that the case is undermined? Is it not deeply regrettable that the hon. and learned Gentleman did not provide explanatory notes, did not do his homework—
Order. I have dealt with the question of explanatory notes. The hon. Gentleman has repeated the point more than once, which is unnecessary. We would do better dealing with the substance of the Bill.
In response to my hon. Friend the Member for Scarborough and Whitby—not on the question of explanatory notes, but on his engineering analogy—I would simply say that the hon. and learned Gentleman's structure is built on foundations of sand.
I am grateful to you for calling us to order, Mr. Deputy Speaker. You are right to say that we are all parliamentarians. That is the point I was making before the intervention from my hon. Friend the Member for Scarborough and Whitby—if the hon. and learned Member for Harborough had been speaking in his other capacity, his clients might have had something to say about it.
I have dealt with the Human Rights Act implications, but there is another legal aspect that we should consider. I do not know whether the hon. and learned Gentleman reads The Times—he probably does. This morning, he may well have read, as I did, yesterday's edition of The Star Sheffield, which reports an important case that is not on all fours with his argument for equalisation of the pension rules between the sexes. The newspaper reports the judgment of Mr. Justice Elias on a judicial review application by Barnsley equality campaigner Mr. David Moody, who claimed that recent increases in pension unlawfully discriminated against men, in that women started collecting their retirement pension at 60, whereas men have to wait until they are 65. Mr. Moody and another man, both in their 60s, sought judicial review of the decision of the Secretary of State for Work and Pensions. Mr. Moody argued that the increases were unlawful and that women benefited from them while men of the same age got nothing.
That is the mirror image of the argument in the Bill. The Times reported that the High Court judge, Mr. Justice Elias, threw the case out as lacking in merit. I believe that there is an argument for equalisation of state benefits, based on the material to which I referred, but if that does not apply, it surely does not apply with knobs on to private sector pension arrangements, which is what we are discussing today, in the context of the Human Rights Act.
Gender is a recognised factor in the setting of risk premiums by insurance companies in many contexts, not just in relation to annuities. I do not see women queuing up to argue against better car insurance rates, for example, because women as a group are less likely to commit motoring offences. As far as I am aware, the gender differential has not been contested in other areas where women do better than men out of insurance arrangements.
However, gender is but one factor that insurance companies take into account when setting annuity rates and determining risk premiums. When a person requests an annuity, they also consider general health, lifestyle, and whether he or she has a disability. Over the years, there has been much coverage, of people who are at risk of contracting HIV and their relations with the insurance industry, which has often tried to be intrusive in these matters when it comes to setting annuities. Insurance companies may also take into account whether someone is a member of a certain ethnic minority. Indeed, insurance companies have been specially designed and set up to cater for certain ethnic minority groups, as they are able to offer higher rate annuity products to those people, recognising that generally speaking, they have, a shorter life expectancy.
The fact remains that as far as they can, insurance companies set rates on the basis of what they consider to be individual risk premiums. When they cannot set individual risk premiums, they look across broad classes, use proxy and set risk premiums on that basis. Insurance companies' ability to determine risk and to attach it as closely as possible to the individual determines their competitive advantage in an extremely competitive market. That is how insurance companies and the insurance market work.
To wander into such terrain without well-thought-out and coherent proposals would be foolhardy. It would have ramifications and implications right across the insurance industry. The hon. and learned Gentleman has neglected to examine how risk is assessed by insurers. It is important to consider the impact that the imposition of unisex annuity rates would have on individual insurance companies. If insurance companies were forced to offer unisex rates, as the Bill provides, and only unisex rates, they could face an unpalatable choice. For the reasons that I explained earlier, they might have to set cautiously low annuity rates, so everyone would lose out. The reason behind that is that companies could not be sure that take-up of their annuity products between males and females would match the risk that they assumed at the outset. In the end, everybody would lose out—not just men; women would not gain as much as the hon. and learned Gentleman envisages.
Alternatively, insurers could face risks to the solvency of their businesses. With all the problems facing the insurance industry, this is hardly the time to consider any risk or threat to the solvency of any of the life insurers. Everyone would risk losing out. As I mentioned, I lost out dramatically from Equitable Life, and we see from the press that one or two other insurers potentially face the same problems.
Why is it desirable to force insurance companies to discount just one factor, when they can take account of so many other factors? Why should they discount only the gender of the annuitant, yet still be able to take account of whether people smoke, or their occupation. For example, if somebody is a fit SAS man, he may have a long life expectancy, as opposed to a fat, overweight Member of Parliament, who is doing his best to improve his health. My life expectancy may be very much less, and that factor may be taken into account.
I apologise for interrupting the grand, glorious stream of my hon. Friend's argument, but I felt summoned to speak on the subject of overweight Members of Parliament and appalling ill-health. Has my hon. Friend studied the December 2002 working paper by the magnificently named Continuous Mortality Investigation Bureau of the Faculty and Institute of Actuaries, which concluded that life expectancy is changing so rapidly that what was once a science is becoming extremely difficult to map? We get into dangerous waters on this subject, because life expectancy is varying so quickly that even the Continuous Mortality Investigation Bureau has had to recast its figures—the last time in 1999, and again as recently as 2002.
My hon. Friend makes a telling point. Should he catch your eye later, Mr. Deputy Speaker, he will no doubt be able to develop his argument at length. There are so many factors in play that it is very difficult for insurers to set annuity rates. To add one more complication would make the job more difficult and potentially threaten their solvency or put even greater pressure on the net annuity product, which in the end is what we should all be concerned about.
Another factor that is taken into account is where people live. The hon. and learned Member for Harborough mentioned that people in Devon live longer than people in Manchester. That might have something to do with the fact that people often retire to the coast. The Country Life survey shows that Devon was the most popular county for retired people to go and live in, as opposed to Staffordshire—
We can check that tomorrow, but Devon definitely came first, and Somerset came second. I remember, because I was surprised to see that Yorkshire, my home county, was fifth or sixth. I always thought that everything was bigger and better in Yorkshire, and that Yorkshire would undoubtedly be No. 1—after London, of course.
It was interesting that in the introduction to the debate, no mention was made of social class as a determinant of life expectancy. Perhaps my hon. Friend could tell us how important social class is in that regard.
My hon. Friend is right. Socio-economic indicators are extremely important. Occupation is probably the principal determining factor. A miner who suffers from emphysema has a very short life expectancy, whereas a lawyer, or better still a judge, seems to go on forever.
Indeed. Occupation is relevant not only to life expectancy for the calculation of annuities, but to the size of the pot that people are likely to have to invest. I shall come to that later.
Does my hon. Friend recognise that pensioners are the largest group of national health service recipients? It is interesting that the Bill not only seeks to reward the few against the many, but is being promoted by an hon. and learned Member who wants 20 per cent. cuts in public services. Undoubtedly, that would affect the NHS—
My hon. Friend was addressing health inequalities according to class and their clear effect on mortality rates in particular areas. He also referred to miners. Mining constituencies have some of the worst mortality rates not only because men had to work in the mines, but because of all the other social and economic factors that affect those areas. Does my hon. Friend think that more could be done to ensure that those people get a decent retirement?
My hon. Friend is right. All I say to the hon. and learned Member for Harborough is that his Bill does nothing to help people such as my hon. Friend's constituents. Indeed, I suspect that most miners were in the miners' pension fund, which raises all sorts of arguments about surpluses. I also suspect that any who opted out and bought their own private pensions would be significantly worse off as a result of the hon. and learned Gentleman's proposals.
Has my hon. Friend had an opportunity to study some of the mortality figures from the recent census? I was horrified to see that mortality rates among women who live in coalfield communities are significantly higher than the national average. Does my hon. Friend agree that the workplace eventually shortens the lives not only of the men but of the women? They often had to clean the men's backs, and they also inhaled coal dust and had the same industrial disease visited upon them, which means that they have lost out in terms of life expectancy. Is that not a national scandal?
My hon. Friend makes his point eloquently and I do not think there is anything that I can add. As I mentioned, when an insurance company sets an annuity, it takes into account variations in respect of where people live. My hon. Friend refers to precisely the sort of factors that are relevant. It is a question not only of whether people live somewhere nice beside the sea now, but of where they lived all their working-age lives and the stresses and strains relating to that area, their diet and so on.
I do not think that the action that the hon. and learned Member for Harborough proposes in trying to interfere with such arrangements will create a more favourable environment for insurance companies. He proposes stringent regulation of an industry that can currently offer diversity of service to its customers. If an insurance company wished to pursue his proposals, and thought it commercially viable to do so, it would be free to adopt such a policy. However, not a single company wishes to take that course of action. As a good free marketeer, I should have thought that the hon. and learned Gentleman would agree that that is one reason why his proposal is wrong. There is a good reason why a company would not adopt such an approach—it would go out of business extremely quickly, as it would not be meeting the needs of its customers, whether they were men or women.
Getting rid of the Sex Discrimination Act 1975 in respect of the provisions raises another issue—retrospection. The hon. and learned Gentleman's proposals are entirely silent about that. As I mentioned, I was with Equitable Life for 20 years. Others have been in pension funds for longer. Mercifully, I transferred out at great expense, but that is another story. When I joined Equitable Life in the late 1970s or early 1980s—I forget exactly when—I entered into the arrangements on the basis of the projections at that time. Obviously, we have since found that they were wrong for reasons that were not envisaged. Are we now to say that all the people who entered into contracts on that basis 20 or more years ago should accept that those numbers have to be unscrambled and rescrambled to meet the requirements of the proposed change in respect of the Sex Discrimination Act, or is the provision intended to apply only to new insurance contracts that take effect 40, 50 or 60 years into the future?
The hon. and learned Gentleman may not have thought through the implications of his measure in that respect. If it would be retrospective and apply to annuities paid for over the past few decades but not taken out, it would have major implications for people's lifestyle projections. Most people approaching their late 40s will start to think about the age at which they can afford to retire and what their annuity will be. We know that, in practice, people now have to work longer and retire later, but they start to think about such things as their 50s approach. They will have been making their contributions throughout their working lives on the basis of where they want to be when they retire.
We know from problems in the pensions industry that many people have to think about topping up their policies, whether they are endowment policies, life policies or whatever, because of the falling value of the funds. On that basis alone, people have to think about topping up their policies. Are we now to say to people not only that they need to consider topping up their pensions for those reasons, but that they have to top them up because of the redistributive effect of the hon. and learned Gentleman's Bill? Is he telling me that I must now put in more money not for my benefit, but for that of a woman whom I have never met? That is what his Bill implies, because it does not deal with retrospection.
Does my hon. Friend agree that poorer women in our society get pitifully low pensions, that even those with a moderately good income may still receive a very low pension because of career breaks and that, far from helping women in that regard, the Bill harms them?
My hon. Friend is right; the Bill does nothing about that. There are many other things that we should be doing and I hope that the forthcoming work and pensions report will address some of those issues. As things stand, the Bill does nothing except perhaps add to the pensions myth by telling people that they will be better off than they will be. The hon. and learned Gentleman has issued a press release saying how wonderful things would be if the Bill were passed. That raises expectations, which is one of the problems that we face in the pensions industry these days. We should be doing entirely the opposite. We should be bringing people down to earth with a bang and saying, "Unless you start to put more money into your pension scheme, you will be in trouble when you retire." The hon. and learned Gentleman's Bill is a con trick; my hon. Friend's intervention was entirely correct.
The problem extends further, as it also affects insurers. Does the hon. and learned Gentleman suggest that a person's insurance provider should have to recalculate the figures and share out the money to ensure equality between the sexes? Under such an arrangement, men might find that the projections of future pension provision, on whose basis they have been living their lives, were drastically wrong, while women in a similar position might find themselves better off. The proposals do not deal with retrospection or sorting out decisions often taken decades ago.
The disincentive to save is another important aspect of the Bill. The Select Committee on Work and Pensions has been carrying out a detailed study of pension reform and we have heard a lot of interesting arguments from experts and from the Minister. Professors have given us a detailed analysis of why some aspects of the pension credit might be an incentive and others a disincentive. The matter became extremely complicated. I am sure that the hon. and learned Gentleman would have been entirely lost, bearing in mind how little information he has given us about his Bill today. None the less, I can be sure of this: if we tell a man that he can put a pound into his pension fund but will get back only 80p when he retires, while the other 20p will go into the pension of a woman whom he may never have met to ensure that she receives the same provision, for much longer, that will be a disincentive to save.
The fact remains that the Bill would create a serious disincentive to men that would deter them from providing for their future. In the end, the breadwinner, who even in this day and age is generally the man of the family, must make such provision. If there is a disincentive to save, he simply will not do so. A terrible confidence gap already exists, for the reasons that we have discussed, and it is already difficult to convince people that they should not live on credit but put money aside for their retirement. It will be much more difficult to persuade them that they should be putting away far more money if this proposal is adopted. It would achieve entirely the opposite effect and incorporate a huge disincentive to save.
I have come to the end of my first point on the Bill and now move to my second, which concerns the Bill's effect on the size of the pot. I repeat that the Bill is a con trick. Today's pensioners face much lower nominal annuity rates than did earlier pensioners. The expectation of low and stable inflation, incorporated in the bond yields underlying annuity rates, means that they face less inflationary risk. Their income will retain its purchasing power much better than has been the case in the past. Nevertheless, the perception remains that it is unfair for people to retire with annuity income based on rates half those of 10 years ago.
Research by the Association of British Insurers stresses the extent to which the determination of income in retirement is a two-stage process, encompassing annuity rates and pre-retirement investment growth. People retiring today face low annuity rates, but their pension funds will have benefited from high growth in equities in the period before they retired. The net effect of those countervailing forces is that, for a given level of contributions relative to average earnings, an individual retiring at the end of the 1990s has a higher income in retirement than someone who retired at the start of the decade. The coincidence of high pre-retirement growth and low post-retirement returns may not continue. Life expectancy is important in that regard and I will return to the life expectancy tables from the Library to illustrate that point.
Earlier, we considered the tables on the differences between the sexes on page 13 of the research paper. I want to use the same tables to consider the differentiation over the decades for each sex. In 1901, a man's life expectancy was 10.6 years, but the projections for 2021 show a man's life expectancy to be 18.1 years. In other words, male life expectancy has gone up by 7.5 years.
My hon. Friend is correct. None of us would have been here, based on what I said. In 1901, men lived to the age of 65 plus 10.6 years, which is 75.6. In 2021, men are projected to live to 65 plus 18.1 years, which would be—[Hon. Members: "83.1."] That is O-level maths for you.
I am not sure that I could.
Between 1901 and 2021, the differential is 7.5 years. In other words, in 2021, men will live 7.5 years longer than they were living 100 years ago.
For women, the differential is even greater. In 1901, women lived 11.6 years beyond 65, to 76.6. In 2021, they are expected to live 20.8 years beyond 65, to 85.8. The differential between 1901 and 2021 for women is 9.2 years. As life expectancies continue to improve for each sex, they affect the annuity pot necessary to provide for long-term retirement.
The actuarial expectations in the 1930s and 1940s, notwithstanding the second world war, of how long people who were born in 1926 would live, have been far outreached. People who were born in 1926 have lived far longer than was expected. It is therefore especially difficult to make clear and unambiguous forecasts.
My hon. Friend makes a good point that goes back to the vagaries of the actuarial market when it comes to how annuities should be calculated. The Bill does nothing to address his point or increase the pot.
To increase the pot, and so allow a greater distribution for most people, one has to do one of several different things. One could increase one's contributions during one's working life. We all know how difficult it is to convince young people of the need to invest for their future. I made my pension arrangements when I became a partner in my law firm. I did not do that voluntarily, but because it was a requirement of the partnership. When I was in my late 20s, my partnership share was not sufficient for me to consider it easy to make those contributions, but in those days interest and annuity rates were high, as shown in all the research material made available to us by the Library, although not by the hon. and learned Member for Harborough.
Other sources of additional money are tax breaks—I will refer to taxation later—and better investment of the overall pot. The latter suggestion is far better than the proposals in the Bill for annuity reform. We will have to consider other forms of annuity. An annuity does not have to be purchased from the firm with which an individual has saved for their pension. We now have the open market option, which allows individuals to compare different annuity providers to maximise their retirement income. It is estimated that 90 per cent. of people would receive a higher annuity income if they exercised their open market option, but only around 30 per cent. of people who purchase annuities do so.
Like all hon. Members present, I have been educated by my hon. Friend's speech as he approaches his record. He has clearly done an enormous amount of homework—perhaps unlike some people—but has he considered the impact of the state pension credit? Everything that we are discussing will have to be recast because of the introduction of the state pension credit in October 2003. That will be immensely significant, will it not?
I am afraid that my hon. Friend will have to wait a little while yet.
I have considered alternatives to the Bill's proposals for annuity reform. I think that the alternatives would achieve far greater benefits for a far greater number of people. They require little, if any, legislative reform.
The Government have taken the view that many of the perceived problems with annuities could be addressed by product innovation within the existing legal framework. The Treasury economic and fiscal strategy report 2001 states:
"The Government . . . welcomes recent moves by annuity providers to develop more flexible annuity products that will enable those pensioners for whom it is desirable to remain invested in equities. As the annuity market grows, it should aim to meet the demand for greater investment choice and higher returns. The Inland Revenue will continue to work with the industry to ensure that the tax rules do not unnecessarily restrict the development of these products and this market."
Those variable or investment-linked annuities go some way to increasing the investment choice of annuitants. Recent growth in the market has been rapid, with investment-linked annuities' share of the overall pension annuity market rising from 5 per cent. in 1998 to nearly 20 per cent. in 2000.
More recent innovation has focused on schemes that enable annuitants to purchase an annuity consisting of a series of temporary and deferred annuities. The deferred annuity guarantees income throughout retirement—a key Inland Revenue requirement for annuities purchased from approved pension schemes—while the series of temporary annuities enables annuitants to choose from a range of investment strategies appropriate to their personal circumstances and stage of retirement.
The aims of such products, from the annuitant's viewpoint, would be to increase potential lifetime income through greater freedom to choose optimally performing assets; to vary that choice during retirement to reflect any change of attitude to risk and reward any change in financial circumstances; to provide insurance against longevity, but with flexibility as to the extent of the cover chosen; to generate stable income but allow flexibility about the level of income generation; and, to allow transparency, which is extremely important in a stakeholder culture.
Will my hon. Friend comment on the risk and reward of the new flexible annuity products, which are based on equities and the stock exchange? There is anxiety that risk may overtake reward, and that the traditional annuity may be a better product.
Most people who hold annuities have small ones. I shall deal with that point later. The products that we are considering are vehicles for the better-off. People should not get involved in them without good, independent financial advice. However, the Bill is supposed to help the better-off. My hon. Friend made a telling point about the alternatives that I was describing, but they are genuine alternatives to the proposal of the hon. and learned Member for Harborough. Unlike the Bill, they provide greater flexibility for the people whom he is trying to help without screwing things up for everybody else.
Let me give some examples. The flexible annuities that the Prudential and Canada Life offer provide increased freedom for individuals to alter their income in retirement. The Canada Life annuity growth account enables individuals to purchase five-year annuities while the rest of the fund is invested. If an individual survives the five-year period, a survival bonus is added to the account. That is the cross-subsidy from other individuals who die during those five years. At the end of the five years, another temporary annuity can be bought at a different level of income. At age 85, the fund must be used to purchase a life annuity.
The Prudential flexible annuity allows individuals to continue to invest in the stock market and vary their income within limits until the age of 90. Had the products been around at the time, they might have been of interest to the father of my hon. Friend Martin Linton, although he appears to have done well out of his investment.
The insurer London and Colonial launched a different sort of annuity, which financial advisers have welcomed as an even more revolutionary form of annuity provision. The open annuity offers a range of investment options and manages an annuitant's fund in isolation rather than pooling funds, which the traditional annuity product does. The product has been structured in such a way that any capital that remains on death can form part of the investor's estate. The Inland Revenue's approval of the annuity suggests a new flexibility in dealing with the problems that the hon. and learned Member for Harborough identified but failed to tackle. I have therefore shown that there is much better way of achieving the honourable and learned Gentleman's objective and that his Bill is not necessary.
My third point, which is the longest and most important, deals with the honourable and learned Gentleman's definition of minimum retirement income. It is the key to the Bill because without it, the measure falls apart.
It has fallen apart in other ways, but I shall put another nail in its coffin.
The honourable and learned Gentleman announced the Bill in a press release, which stated:
"In order to prevent or discourage pensioners from wasting their funds and becoming dependent on the state, the Bill provides for a minimum retirement income annuity that is designed to give pensioners a guaranteed income for life above the level of state income support. The income from this will come from a retirement income fund."
Of course, that prompts the question of whether there is sufficient money to buy the fund in the first place. The honourable and learned Gentleman has lamentably failed to give a figure at which the minimum retirement income threshold should be set. Not only does he fail to do that, but the right hon. Member for Skipton and Ripon also failed to do so throughout proceedings on an identical measure that he promoted. They have not got a clue because they do not understand the way in which the benefits system works for real people. I suspect that the honourable and learned Gentleman rarely comes across real people.
I have had to fall back on the Library briefing, which gives a best guess at a figure, should the Bill be enacted. I am happy to give way to the hon. and learned Gentleman if he would like to say what he has in mind. He does not want to intervene, so he obviously has no figure in mind. We therefore have to fall back on the Library briefing's best guess, based on the work of the retirement income working party, to which the honourable and learned Gentleman paid great tribute.
The RIWP considered three broad options for setting the minimum retirement income. The first was based on the minimum income guarantee for a single pensioner. It was £75 a week at the time, but as of this month, it will be £98.15. From April, it will be £102.10. That shows the Government's generosity to the least well-off pensioners. However, the RIWP rejected that option because it would not provide certainty that the annuitant would remain off means-tested benefit throughout retirement. After retirement, the components of an individual's retirement income will increase in line with inflation. For this Parliament at least, the Government are committed to increasing the minimum income guarantee in line with earnings. When we are re-elected, the policy will undoubtedly continue. A minimum retirement income set at the level of the minimum income guarantee at the date of an individual's retirement would quickly fall below it during retirement.
The second option that the RIWP considered was setting the minimum retirement income at a level that represented the average income from the basic state pension and membership of an occupational scheme. At the time, the figure would have been £220. It was rejected as being too high to secure the required flexibility. Is £220 too much?
My hon. Friend is right.
The third option was setting the MRI at a level that represented the income produced by the basic state pension and the state earnings-related pension scheme for someone who was formerly on national average earnings. At the time, the figure was £140 a week, and will be £160 from 2003. The RIWP recommended that option on the ground that it struck a suitable balance between flexibility and certainty and marked a link between the income from contracting out SERPS and the income that would be produced by remaining contracted in.
However, £160 a week would not achieve the honourable and learned Gentleman's express policy objective of preventing dependence on the state, as I am about to demonstrate.
Will my hon. Friend explain how MRI could take account of high levels of housing benefit, which are often paid in constituencies such as mine and his? How could it take account of the fact that many people do not receive full state pension? It is impossible to predict precisely the contribution that every individual will make during their lifetime to entitle them to a full state pension.
My hon. Friend is ahead of me. I am about to develop that point at some length to explain to the honourable and learned Gentlemen where he has gone wrong in his definition of dependence on the state. His press release includes the words
"becoming dependent on the state".
Using the minimum income guarantee or the other options that the RIWP considered will not plug the gap or prevent people from depending on the state.
As I understand the honourable and learned Gentleman's policy objective, the purpose of MRI is to ensure that anyone who buys one of the products that he is promoting will not have to fall back on the state's resources. I question that because of the wording of the Bill, which appears contradictory. Clause 2(1) states:
"The amount of the Minimum Retirement Income shall be set for each financial year by the Chancellor of the Exchequer by order before 31st January in the preceding financial year, and he shall set the amount for the financial year in which this Act comes into force within two months of the date on which this Act is passed".
In other words, the Bill passes the buck to the Chancellor. However, we will put that to one side.
Clause 1(4)(c) introduces subsection (8) to proposed new section (1A) of the Income and Corporation Taxes Act 1988. It states:
"The income provided each year from the annuity under section (1A) must increase by reference to increases in the retail price index, so far as not exceeding 5%."
That is a rather convoluted way of describing it. My question to the hon. and learned Gentleman is this: is the Chancellor's discretion under clause 2 fettered by this 5 per cent. RPI rule? The Bill is entirely silent on the interaction of those two provisions.
Is my hon. Friend aware of the detail of the letter that every hon. Member has received from the Association of British Insurers? It states that the minimum retirement income would have to be set at a level in excess of £200 a week if individuals were not to find it necessary to claim a means-tested benefit during their retirement. Should not Mr. Garnier have done his homework and been conscious of this, and should he not have factored it in to the significant repair work to the original Bill proposed by Mr. Curry some time ago? These were the key points that we made on many occasions in Committee at that time.
My hon. Friend is absolutely right. This is one of the major criticisms of the hon. and learned Gentleman's Bill: he has entirely failed to say what he thinks the figure should be. He has passed the buck to the Chancellor, while giving the Chancellor conflicting provisions that say neither one thing nor the other and do not interact. He has given no explanation whatever for that. If he is seriously asking the House to approve his Bill, I hope that, when he responds to the debate—which may not happen for some time—he will at least have thought up a figure which he thinks is the minimum that someone should be expected to live on.
Perhaps the hon. and learned Gentleman could also comment—he did not do so during his speech—on the issue raised by my hon. Friend Mr. Pound in relation to the pension credit. This important new benefit is now being introduced, but it does not seem to figure anywhere in the hon. and learned Gentleman's calculations.
My hon. Friend is entirely correct. There is a whole series of questions relating to the detail of the pension credit, which I am afraid I shall have to pose to the hon. and learned Gentleman, because he took so little time to introduce his Bill and made no effort to deal with these issues.
My hon. Friend Lawrie Quinn referred earlier to repairs to the Bill. May I urge my hon. Friend Mr. Dismore to exercise great caution on the issue of repairs? Of course, Mr. Garnier could, if he were still interested in this debate, say that these issues could be repaired in Committee. Is not the truth, however, that the failure to consider the issue of how the MRI might stand goes to the very heart of the Bill? Is that not a reason why the Bill should not go any further, and should not go into Committee at all?
My hon. Friend is right. This repair job needs to involve demolition and complete rebuilding. The hon. and learned Gentleman might be left with the façade of the long title, but everything else will have to go. He should start again. Frankly, the House would be well advised to reject his Bill in those circumstances.
Getting back to the point about minimum retirement income, I am concerned that the Bill contains no provision to require the Chancellor to consult anybody about what rate he should set for the MRI. In these days of political inclusiveness, I am surprised that the hon. and learned Gentleman has not included in the Bill a suggestion that the Chancellor should consult the insurance industry and pensioners' groups, some of which are very active in private sector pension provision, before deciding what rate should be set. All sorts of different figures have been suggested already, before I even started to outline the problems involved.
I am also surprised that the hon. and learned Gentleman suggests that the appropriate rate should be linked to the retail prices index. I am sure that he is serious about making sure that the provision that people make is sufficient to ensure that they are not dependent on the state, but the Bill simply would not achieve that. He might not like to hear it, but the Government have been very generous to the least well-off pensioners through the minimum income guarantee, which increases every year in line not with inflation but with earnings. We know that the intention is to increase it to more than £102 a week for 2003, and it will continue to increase and overtake the RPI increase.
The hon. and learned Gentleman and his party are not keen on the earnings link. They abolished it for the basic state pension in the early 1980s. If, at some remote date in the distant future, the Conservatives should return to government, it is possible that they might not continue this Government's policy of generosity to the least well-off pensioners by maintaining the earnings link for the minimum income guarantee. I would be happy to take an intervention from Members on the Opposition Front Bench, if they would like to give us an assurance that they would continue that policy. I see no one seeking to intervene, so it would seem that my assumption that they have no intention of continuing that policy should they ever return to government is correct.
Assuming that the present Government's policy continues, the Bill in its present form would mean that pensioners would quickly find themselves falling behind the hon. and learned Gentleman's targets and becoming dependent on the state. I am about to come to the point about housing and council tax benefit raised by my hon. Friend the Member for Battersea, but before I do—
I thank the hon. Gentleman for giving way. Does he agree with the Government's own proposals in section 5 of the revenue Green Paper to end the obligation to buy an annuity?
If the hon. Gentleman is patient, he will hear me refer to the Government's policy at some length, because it is important that we understand where the Government are coming from. However, I am afraid that he might have to wait a little while—possibly quite a long while—for me to get to that.
I am grateful to my hon. Friend for giving way to me, I think for about the eighth time. May I remind him that he has been on his feet for almost 90 minutes? Does he not agree that Mr. Flight has scored a classic own goal, just as the Conservatives did during their 18 years of government through their terrible treatment of pensioners?
My hon. Friend is right. I am grateful to him for drawing my attention to the clock. If the hon. and learned Member for Harborough had introduced his Bill properly, I might not have had to take so long to expose all the loopholes and failings in it. As things stand, however, I am about halfway through, so I am afraid that we have a little way to go yet before I finish with the hon. and learned Gentleman's Bill. It has so many loopholes, and they all have to be pointed out.
Before that last intervention, I was talking about minimum retirement income and dependency on the state. The assumption behind the hon. and learned Gentleman's Bill seems—although we do not know, because he did not tell us—to involve something around the minimum income guarantee level. But dependency on the state comes in a variety of forms. My hon. Friend the Member for Battersea mentioned housing and council tax benefit, and that is an important point. The hon. and learned Gentleman might think that such benefits may not be of much interest to the kind of people who would have the policies that he is talking about, but a relatively large number of well-off people in London choose to rent their property. Indeed, luxury property in London is often available only for rent and not for sale. If such people were to fall on hard times, they could be thrown back on to state provision, and the Bill makes no provision for housing benefit, let alone council tax benefit, in its consideration or definition of what is or is not dependency on the state.
Dependency on the state does not simply involve central Government; it can also involve local government. Many benefits that people get from local authorities are passported through the minimum income guarantee. Should social services charges be levied, for example? In my own area, if pensioners want to get their gardening or decorating done but are physically unable to do it themselves, the council will pay for that work to be done—or it used to when it was under Labour. I do not know whether that will still be the case following the massive cuts being brought in by the Tory council in this year's budget. That could be dependency on the state, and there is a price-tag attached to it. Social services make a charge, but not for those who cannot afford it: further dependency on the state. The hon. and learned Gentleman's Bill is entirely silent on these matters.
I now come to the biggest problem of all. What about the cost of long-term care for the elderly? That issue has taxed the House at great length over the last few years. Such care is phenomenally expensive, as we all know from our debates on the royal commission reports and the changes that have come in since. We also have the added complication that, although taxation arrangements are United Kingdom-wide, different arrangements for long-term care pertain—for good or ill—in England and Wales, compared with Scotland, as a consequence of devolution. In Scotland, it has been accepted that the state will meet the cost of long-term care. I am not sure whether the Scottish Parliament has the money to do that, but that was its policy decision.
The policy has not, however, been accepted in England and Wales, where the means test still applies to the personal care element of long-term care for the elderly. As we all know, and as Opposition Members frequently point out, that cost continues to rise. The hon. and learned Gentleman provided no answer to that problem and we do not know whether he believes that the cost of long-term care for the elderly should be borne by the state or by setting his minimum retirement income at such a level that individual pensioners could absorb the cost. The Bill is entirely silent on that point, as it is on everything else to do with the definition of minimum retirement income.
I am sorry that my hon. Friend the Member for Ealing, North is not in his place at the moment because I am about to deal with his point about the pension credit to be introduced in October. We canvassed that issue during debates on the Bill promoted by the right hon. Member for Skipton and Ripon last year, and I should have thought that the hon. and learned Member for Harborough would at least have studied those debates and provided some answers to the extremely difficult problems related to pension credit.
The starting point for that issue is the Library briefing paper. If the hon. and learned Gentleman had done nothing else, he could at least have read that document before he came to the House, as it would have given answers to important questions. The briefing paper states:
"The introduction of the State Pension Credit in October 2003 complicates the situation further, by splitting means-tested provision for pensioners into two parts. The guarantee credit will be broadly equivalent to the MIG and will be £102.10 for a single pensioner in 2003; the savings credit would top-up the incomes of pensioners with modest incomes other than the basic state pension, and is expected to be payable to single pensioners with incomes of up to £139 in 2003. It is not clear whether the policy intention of ensuring that the MRI provides an income above means-tested levels refers to the level of the guarantee credit or to the level at which entitlement to the savings credit would run out. As the current government is committing to increasing the level of the guarantee credit in line with earnings, the cut off point for the Pension Credit will continue to increase. Therefore the rate of the MRI would have to be significantly higher than the upper limit of the Pension Credit to reduce the chances of someone falling on to the Pension Credit after a number of years, as the MRI annuity will only be increasing in line with inflation not earnings."
But what about the savings element of pension credit, which is equally important? I do not understand whether the hon. and learned Gentleman thinks that the subsidy from the pension credit, which is aimed especially at middle-income pensioners, should be covered by his MRI figure, or whether that figure should be set at a level such that people who purchase an annuity under the MRI should not have to make provision for that so that they could maximise their entitlement to pension credit.
At present, there is no incentive for that sort of fiddle because one can arrange one's affairs so as to maximise one's entitlement to pension credit. Either one is entitled to it, through the purchase of an annuity, or one is not. The hon. and learned Gentleman's provision could enable people to make a benefit planning arrangement whereby they set their annuity under the MRI at a level that maximised their benefit, which could increase the burden on the state in respect of the people to whom the Bill is supposed to apply.The pension credit raises complicated questions for the hon. and learned Gentleman and, so far, he has lamentably failed to answer them, as the right hon. Member for Skipton and Ripon also failed to do last year.
The system that we inherited from the Tories was simple: there was the basic state pension and a low level of what was then supplementary benefit—now the minimum income guarantee. I do not know whether the hon. and learned Gentleman has kept up with the times. The Labour Government have been generous to the least well-off and are about to be generous to the next band of pensioners. The questions for the hon. and learned Gentleman arise from the pension credit, long-term care of the elderly and ancillary benefits such as housing and council tax benefits. If the Bill is to be revenue neutral, he must answer those questions.
How will couples be treated under the Bill? The difficulty that the hon. and learned Gentleman must face is that couples are taxed independently, but benefits for the elderly, including pensions, are assessed on a family basis. He has not dealt with that problem. I refer him again to the Library briefing, which states:
"The treatment of pensioner couples is a further complicating issue. The MRI proposals—like the income sources which would constitute any MRI—are based on the individual. However, the means-tested benefit system which the MRI seeks to maintain pensioners above is based on the family. The interaction between individual income and family assessment of benefit entitlement raises the issue of the MRI over-providing for couples where both have pension entitlements from the defined-contribution pension scheme."
Let us assume an illustrative minimum retirement income of £140 per week. For taxation purposes, both partners
"would be required to purchase an annuity sufficient to provide them with individual income of £140 per week, producing a joint income of £280 per week. Given that to avoid dependence on the MIG, they only require a joint income of £155.80 in April—
May I remind the hon. Gentleman that if he wishes to cite quotations and read extracts from documents, such extracts and quotations should be reasonably short? The purpose of that, as "Erskine May" explains, is to maintain the cut and thrust of debate, which depends on successive speakers meeting in their speeches, to some extent, the arguments of earlier speeches. I hope that for the convenience of the House as a whole the hon. Gentleman will bear those rulings in mind.
It is now just over 100 minutes since my hon. Friend began his speech. That is a reflection of the complexity of the Bill. Is not it sad that the hon. and learned Member for Harborough did not take the time to explain all the ramifications—
Order. I have been extremely generous to the hon. Gentleman; more than 100 minutes passed before I intervened to make that point. However, he will be testing the patience of the House if he continues to read extracts at length, and I have therefore reminded him of what "Erskine May" says on that subject.
I fully understand that point, Mr. Deputy Speaker. I should like to develop the argument that comes from those extracts.
The Library briefing illustrates that the tax system is based on the taxation of individuals, unless the hon. and learned Member for Harborough proposes that we should return to a joint taxation system, which would have a series of other ramifications and would open up a huge can of worms. Each member of the couple would have to have £140 a week, if we assume that to be the illustrative figure. The problem is that that would create a combined income of £280, which would be an over-provision if the hon. and learned Gentleman's test is the minimum income guarantee limit. If my previous arguments are correct and one has to take account of housing benefit, council tax benefit, long-term care for the elderly and so forth, £280 a week may not be sufficient. However, the Bill is silent on that point, which is part of the problem.
The hon. and learned Gentleman challenged me on the question of compulsion. He said that I was in favour of compulsion, and in a press release announcing the Bill, he stated that it would get rid of compulsion. I want to develop some of those arguments. The press release stated that at present it is compulsory to buy an annuity at 75 years of age with a pension pot that has been saved up over the contributory years, subject to a 25 per cent. tax-free lump sum. I stress that point: the hon. and learned Gentleman states that it is compulsory to buy an annuity at 75. However, that is not correct. It is compulsory to buy an annuity by the age of 75, but not at the age of 75. At present, one can buy an annuity from the age of 50—from 2010 that will rise to age 55—until the age of 75. There is flexibility during two decades as to when one buys one's annuity. The Bill compels everyone, whether they like it or not, to buy their annuity at the age of 65.
There is a reason for the choice of age 75. It is something called "mortality drag". Some people believe that it is better for a pensioner to wait to buy an annuity because annuity rates are higher for older people. That is a false conclusion, as that feature is only part of the story. Annuity providers set their rates by judging the life expectancy of their customers. That judgment determines how much capital they can afford to return each year along with interest to people who buy the annuities. Because older people are more likely to die, the provider can give a bigger capital boost to its older annuity customers. That is why annuity rates rise with age.
If someone decides to start taking their benefits from their pension savings, delays buying an annuity and draws income from their fund while part of the fund remains invested, after a period they could use the residual fund, with any investment growth, to buy an annuity at the rate for their age then. The residual fund needs a strong growth rate if it is to allow that to happen, and the optimum maximum age, because of mortality drag—bearing in mind your constraints, Mr. Deputy Speaker, I shall not quote at length from the large amount of source material that I have to justify this—is 75. The critics of the present system, who have said—at length—that age 75 is an arbitrary figure, plucked out of thin air, simply have not studied the actuarial evidence that justifies it.
Compulsion at age 65 is at the heart of the Bill for all but a wealthy few. I believe in flexibility. We need to work towards the flexible decade of retirement. People increasingly live longer and want to work beyond 65. We have received plenty of letters from people who object vehemently to being forced to retire at 65. They think that that is the worst sort of ageism, and I agree. In some jobs it may be appropriate to retire at 65, but in others it may not. By specifying 65, the Bill does not provide the flexibility that the modern age requires.
Being an hon. and learned Gentleman, the promoter of the Bill will be aware of the requirements of European Union law. I am not sure where he stands on the Eurosceptic front, but the Government are developing proposals to outlaw age discrimination in employment and vocational training by December 2006. The hon. and learned Gentleman has failed to address that serious point. The present system provides 20 years' flexibility; his provides none at all.
The Bill would remove people's current choice and instead force them to buy an index-linked annuity for each personal pension arrangement that they hold. That may not be what they want. It certainly may not be in their best interests. The opportunity, if a very small pension arrangement is held, of taking different annuity types at different times to spread risk would be removed. Using their open-market option for annuity purchase, people have the freedom to decide which type of annuity best suits their needs. The proposals in the Bill would take away that choice.
The Bill would also require the annuity to be bought by age 65, so that most people would have no option but to draw all their pension benefits from that age, whether retired or not, again limiting choice. That would introduce inconsistency and unfairness, as the requirement to annuitise by 65 applies only to personal pensions and not to retirement annuity contracts or defined contribution money purchase occupational pension schemes, which are not affected.
The age 65 rule also introduces a much larger issue. People who were saving in a personal pension scheme would not be able to contribute it to it past 65, and would have to take an annuity from that age. Those who have not made provision earlier in life or are still active and working would be allowed to continue in employment but not to save any of their earnings in a pension scheme for their future retirement unless they have a retirement annuity contract or are in an occupational pension scheme.
As my hon. Friend Caroline Flint said, this is a typical Tory Bill—for the few, not the many. In fact, most people would be considerably disadvantaged by a requirement to use their fund to purchase an index-linked annuity. It would remove choice, hitting particularly those with small funds who might need to maximise their income. At present they can choose whether to have a higher-income flat-rate annuity or a lower starting income but index-linked annuity, or they can utilise a number of with-profits or investment-linked annuities that are available on the market. The Bill would force everyone to buy an index-linked annuity whether or not it suited their preferences or needs.
A major criticism of the Bill is that it benefits only rich people. We have been accused of bringing the politics of envy into the debate, but I am not bothered whether the Bill would benefit only rich people; my main concern is whether it is fair between the different income groups, and between the annuitant/taxpayer and the Exchequer. If the measure is genuinely revenue neutral, I am quite laid back about it—there is not a problem. My concern is whether the proposal could penalise the less well-off, which takes us back to the relationship between pension credits and the minimum guaranteed income.
I am also concerned about whether there is equity between the different income bands. I pray in aid the comments of the ABI, which were reported as long ago as
"The Association of British Insurers said that this was a contribution to the debate on the compulsory purchase of annuities. However, association spokeswoman Emma Grainge said: 'Our general fear is that most people will have insufficient savings to take advantage of it.'
She said that to get an income of more than £140 a week people would have to spend around £50,000 on any annuity, and many people's retirement funds were less than this."
We have seen that £140 has already been overtaken.
However, if the yardstick—we do not know what it is—were an income equivalent to the full minimum income guarantee amount, the fund needed to buy an annuity income equivalent to its April 2003 level of £102.10 a week, or £5,309.20 a year, for a male aged 65 would be around £70,000. Assuming that people would take their maximum tax-free lump sums, the necessary fund size would be some £94,000. If the annuity were to be index-linked, a fund before lump sum of about £120,000 would be needed. If the minimum income required to be secured under the Bill were only the difference between the state retirement pension and the minimum income guarantee—£24.45 a week or £1,281.80 a year—the fund needed before the lump sum is taken in order to provide an index-linked annuity would be about £129,000. None of those examples, which come from the hon. and learned Gentleman's previous briefing materials, would necessarily suffice to protect the state as the minimum income guarantee is earnings linked and would increase at a faster rate than the minimum pension income.
Who would benefit from all this? Most of those retiring now have pension funds of far less than those amounts. ABI figures show that in 2001 the average fund used to purchase an annuity was about £25,000, and that around 45 per cent. were less than £10,000. Incidentally, that shows why pension credit is so important. Precisely those sort of people will benefit from the pension credit. The ABI's evidence shows that most people do not have more than one pension pot. The changes proposed in the Bill would therefore benefit only the wealthier sections of the population who are able to build up larger funds. The vast majority would remain compelled to use the whole of their pension fund to buy an annuity and would gain nothing from the changes except the compulsion that removes the freedom of choice that they already have.
My hon. Friend is making a very important point about people who may have funds in the region of £5,000, £7,000 or £10,000. Is he attracted to the idea of allowing them greater choice of serious ill-health commutation for instance, so that they could receive their amount as a lump sum, which is not of course allowed for in the Bill?
My hon. Friend makes a very important and telling point. We could have proposed a series of flexibilities if the hon. and learned Gentleman had thought about the benefits to the whole population, as opposed to the relatively few millionaires whom the Bill is intended to help, and that point was echoed by my hon. Friend the Member for Don Valley. This is not a Bill for everyone; it is for a relatively small number of people.
Order. I have now formed the judgment that the hon. Gentleman is engaging in a great deal of repetition. I remind him of the powers of Chair under
In that case, Mr. Deputy Speaker, perhaps I can move on to deal with income draw-down, and I can do so in a relatively short time. The Bill would remove the choice of income draw-down—a benefit currently available to rich people, not poor people. I shall not deal with the draw-down provisions at great length because of the very fact that they do not affect most people.
Under the draw-down provisions, a policyholder may take a tax-free lump sum from an accrued personal pension fund, draw income from that fund subject to specified limits and defer the annuity until the age of 75, but, in practice, relatively few people use income draw-down policy to defer annuity purchase—about 16,000 people in each of the past three years. According to the Inland Revenue, the average annuity is bought with a fund of £25,000, but funds used for draw-down average about £140,000. The Bill would remove that important choice, but that would affect only relatively rich people, so I do not intend to dwell on it.
I shall now move on to my next main, substantive point, which relates to a very important minority: the Plymouth Brethren. I understand that Mr. Flight may also want to deal with this issue because he was very exercised about it previously. Last time round, we had a lengthy debate on Report on several different biblical references, and Mr. Leigh found the right one in the end.
The Plymouth Brethren are a group of about 14,000 people who are believers in the Lord Jesus Christ and seek to maintain faith and a good conscience, living by scriptural principles. The basis of their objection can be found in St. Paul's first letter to the Corinthians, chapter 6, verses 19 and 20:
"What? know ye not that your body is the temple of the Holy Ghost which is in you, which ye have of God, and you are not your own?
For ye are bought with a price: therefore glorify God in your body, and in your spirit, which are God's."
Nevertheless, they believe that they are under an obligation to provide for their retirement, on the basis of St. Paul's first letter to Timothy, chapter 5, verse 8.
My hon. Friend brings to mind the debate in Committee on the previous incarnation of this legislation. Indeed, we had a considered and full debate. The Christian Brethren have proposed certain solutions to the theological problems that they have. Is it not surprising that the hon. and learned Gentleman was not prepared to take interventions or scrutiny on that point, which is important to a key minority group?
My hon. Friend is right. The problem is that the Bill purports to suggest a proposal that would deal with the position of the Plymouth Brethren, but it would create a series of other problems. We have to understand where the Plymouth Brethren are coming from, so we can understand that the hon. and learned Gentleman's proposals do not deal with their problems and how alternatives, if he had had the courtesy to engage with them and consult them, might have achieved that objective if incorporated in the Bill. In fact, those alternatives would have achieved a much wider benefit for rather more people.
The Plymouth Brethren believe themselves to be under an obligation to provide for their future through St. Paul's first letter to Timothy, chapter 5, verse 8:
"But if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel."
That is the basis of the Plymouth Brethren's problems, and if we do not understand the basis of their views, how can we be sure that any vehicle to cater for them is properly designed?
Of course there are no votes in this—the Plymouth Brethren do not vote—but we must protect minorities, and the problem goes back to 1828. We ought to pursue a dialogue with them to try to find a way to meet the requirements and tenets of their faith, while satisfying the requirements of the Inland Revenue, which has its own tenets and, I am afraid to say, they are sometimes even more obscure than those of the Plymouth Brethren. In the end, however, we must try to satisfy their requirements. In their submission to the Select Committee on Work and Pensions, as part of our present inquiry, they set out in some detail—which I will not go through—alternative proposals for a locked-in individual savings account. The ISA proposals that they have put forward are something that the Treasury ought to consider as of more general benefit that just for the Plymouth Brethren. The Bill—I am afraid that the hon. and learned Gentleman in charge of it has now left the Chamber—proposes what is called a retirement failsafe fund, which is exactly the same as was proposed last time. As with the last time, however, the retirement failsafe fund is not defined within the Bill. I would have thought that hon. and learned Gentleman would have his tackle in order by now, but the Bill is silent on that point. It simply provides a Henry VIII clause to allow the retirement failsafe fund to be defined by, I presume, the Financial Secretary, through regulation. It is simply not worked out.
The proposed features of the failsafe fund, as I understand it, although they were not included in the Bill, were as follows: 150 per cent. of the fund would be required to purchase the mini annuity or the whole of pension savings would be sufficient; there would be an annual requirement to withdraw the minimum retirement income from the failsafe fund, the remaining fund would be kept separate but could be withdrawn at any time, and once an individual reaches 80 the two funds would be combined; the annual income would be the remaining fund divided by the number of years, until the individual reached 100—
What I am confused about in relation to the position of the Christian Brethren is that the first letter of St. Paul to Timothy, which they cite as the basis for their concern on the issue, is about Church discipline and the treatment of widows. As my hon. Friend has said, they cite verse 8:
"And if anyone does not make provision for his relations, and especially for members of his own household, he has denied the faith and is worse than an unbeliever."
I do not see how the pooling process that is inherent in the process of annuities is a problem, unless one believes that that injunction is only to look after members of one's own household—
Order. There is a convention whereby matters raised on Second Reading are of a more general nature. "Erskine May" advises that too much detail should not be attempted, as that is for a later stage of the Bill, if reached. I rule the hon. Gentleman out of order, as he is going into too much detail on a particular point in an intervention at this stage of the proceedings.
I am grateful to you, Mr. Deputy Speaker, for rescuing me, as I would hesitate to engage in a theological debate with my theological hon. Friend the Member for Rhondda. He was also quoting from a different version of the Bible, which made it even more difficult. I was working from the King James version; I am not quite sure what he was working from but no doubt we can talk about that afterwards.
The problem with the retirement failsafe fund is that one can call it a proselytising or evangelical fund. There are only 12,000 Plymouth Brethren in the entire United Kingdom at the moment, but if this proposal were to go forward, that number could increase dramatically. The people who are trying to back it up might find that there was a certain loophole, which clearly could not be confined to the Plymouth Brethren but would have to be more broadly and generally available. A large number of millionaires might suddenly sign up, and the net result might have damaging consequences to the Treasury.
My main concern about the proposal is therefore that, although, on the face of it, it is a vehicle to achieve a particular purpose, it does not specify in any way how that purpose should be effected. It says to my hon. Friend the Financial Secretary, "We want you to do something to achieve broadly this effect, but we are not going to tell you how to do it." That is perhaps one of the benefits of being in opposition: one can simply say that it is for the Minister to work out the nuts and bolts. It is very irresponsible of the hon. and learned Member for Harborough to put the proposal forward without making any effort to define what it is, how it might operate, or, having consulted the Christian Brethren, whether it is what they would like. In fact, they have made clear that they do not want it after all.
My hon. Friend makes a point in connection with the number of people who might join the Brethren. From my knowledge of the Brethren, they are not an aggressive, proselytising group—
In fact, the Plymouth Brethren have proposed a different solution to their problem in their submission to the Work and Pensions Committee. They propose a locked-in cash ISA, which would not be accessible until retirement: payments into the plan would be made out of tax income, but withdrawals would not be subject to tax.
Bearing in mind your previous ruling, Mr. Deputy Speaker, I do not propose to go through the Select Committee evidence in detail. However, if the Bill goes forward, the hon. and learned Gentleman would be well advised—instead of copying slavishly from the previous Bill—to consider the evidence from the Plymouth Brethren. They offer an attractive solution not only to their own problem but to the problems of those with limited means, the people in whom I am interested. At a time of falling stock markets and equities, an alternative to an annuity would provide a useful mechanism for cash investment and would probably have a rather better yield. Similar schemes operate in countries such as America and Australia. The evidence can be found in volume III of the Select Committee minutes.
I now turn to the issue of taxation. In his very short introduction to the Bill, the hon. and learned Gentleman claimed that it was tax neutral. However, he is asking us to buy a pig in a poke. The Bill makes no detailed mention of tax provisions. The proposed new section 637B(5) of the Income and Corporation Taxes Act 1988 says:
"Any withdrawal from the Fund by the member under subsection (2) shall be regarded as 'income' within section 1 of this Act."
That is about as far as the Bill goes on the issue of taxation.
Although the hon. and learned Gentleman may claim that the Bill is tax neutral from the Inland Revenue's point of view, we have no way of knowing that other than in extremely general terms. We have no way of knowing whether it is tax neutral at an individual level. Even more important, we have no way of knowing whether it is revenue neutral across the piece. Although a reform may be tax neutral for the individual concerned, it can have very different consequences for the bigger global picture. That point should be borne in mind in relation to pension tax relief generally.
At present, the tax relief on pensions exceeds the tax on pensions by a huge sum—£13 billion a year. On average, £30 of every £100 paid into people's pensions contributions comes from the Chancellor. More than half the tax relief on pension contributions goes to higher rate taxpayers who make up only 15 per cent. of the contributors. Removing the current annuity purchase requirement for those aged 75 and permitting the remaining funds to be withdrawn at will or to be passed on to the pension fund member's estate on death—which is what the Bill provides—could encourage the well-off to increase their pension fund contributions substantially, even with the tax charge that the hon. and learned Gentleman has talked about in general terms. However, that charge is not referred to in the Bill and was not mentioned in his remarks today. People currently saving for a private pension use only a fraction of the possible amount of pension scheme tax reliefs available with the potential take-up of another £14 billion of reliefs within the current tax limits.
I am listening closely to this point. Is not the key question whether there is fiscal neutrality linked to the important issues of consumer behaviour that were clearly identified in the letter that I mentioned? The hon. and learned Gentleman appears to fail to recognise that point in the context of this debate.
My hon. Friend is right. The hon. and learned Gentleman has not thought through the real-life consequences. Although one can create a great superstructure in theory, how people react to it might be very different. Some £5.6 billion of the unused tax relief relates to the high rate taxpayers who are likely to have substantial sums in other forms of savings and investment—big houses, for example. If only a small proportion of those savings were switched into pension schemes, the public cost of the pension scheme tax reliefs could rise by hundreds of millions of pounds each year, with the benefit going only to wealthy pensioners.
That would inevitably raise the question whether we should continue with higher tax relief for pension contributions. The only way in which the circle could be squared would, I suspect, be by abolishing higher rate tax relief. That would create far more problems than the hon. and learned Gentleman's proposals could possibly solve.
Although there could be tax charges many years down the line, when the funds finally revert to the member's estate on death there would be significant cash-flow problems for the Exchequer. Little, if any, of that extra up-front Exchequer cost would benefit the majority of people with modest pension funds who hold only limited amounts in other forms of savings.
Pensions should not become a tax-favoured savings vehicle for non-pension purposes. Tax-privileged pensions savings must be used to provide retirement income for life from no later than 75. For those with personal pension schemes, the most financially efficient way of achieving that is to buy an annuity. That is because annuities pool people's risks and ensure that they continue to receive an income from savings no matter how long they live, even if they have the great longevity of the father of my hon. Friend Martin Linton and, I hope, my hon. Friend in due course.
The press release issued by the hon. and learned Gentleman also covers what happens on death. It states:
"On death, the capital sum, rather than going into the pensioner's estate for distribution under his/her will, is returned to the annuity provider."
That simplifies the true position to such an extent that it is just plain wrong. Any money that is left over becomes part of the overall pooling arrangement. So if someone dies early, the money goes back to the annuity provider for redistribution to people like my hon. Friend's father. It is a case of swings and roundabouts. The moment we begin to interfere with that, we start to undermine the whole system of pension funding in this country.
The hon. and learned Gentleman has come up with little more than a sophisticated inheritance tax avoidance scam. The proposals' underlying aim is to allow access to a fund that is not used in order to secure the minimum pension or to stockpile it for inheritance by heirs. The majority of people have pension funds way below the amount needed to provide the minimum income and would not benefit from the Bill's proposals. It would be elitist in effect, allowing the affluent to build up tax-privileged bequests in addition to providing a retirement income. That is not the purpose for which the pension tax reliefs, which are to become even more generous, are given. Research by the ABI on reasons for delaying the purchase of annuity funds found that only 1 per cent. of those who deferred cited inheritance motivations as a reason for delay. That suggests that the problem of inheritance is not widespread, but confined to a relatively small number of extremely wealthy people.
Having said that, it is an understandable concern that the funds used to buy an annuity could be completely lost on early death. That is addressed in the Inland Revenue's simplification review, which includes the proposal that pensions that start before age 75—the vast majority begin many years earlier—will be value protected. In the case of an annuity, the death of an annuitant before 75 would, subject to a tax charge, return the difference between the original purchase price and the total of annuity payments made before death.
The Government have produced sensible alternative proposals, which is another reason why the Bill is inappropriate. I am sure that you, Mr. Deputy Speaker, have had the opportunity of reading their proposals on simplifying the taxation of pensions in the Treasury document published at the same time as the pensions Green Paper. I am equally sure that the hon. and learned Gentleman has failed to read it because, if he had, either he would have drafted his Bill differently or he would have given it up entirely. When coupled with the Green Paper, the document proposes a series of important changes to the tax regime and future pension provision which will completely change the pensions landscape.
Does my hon. Friend agree that the time spent on the debate and, indeed, the time that the hon. and learned Gentleman put into the Bill would have been better spent composing a response to the Government's consultation paper, given that we have until
My hon. Friend is entirely right, and many people have made representations. Had the hon. and learned Member for Harborough not been so bull-headed, or so lazy as to pinch somebody else's Bill without even considering all the problems that arose from it, he might have done some homework and come to the same conclusion. As my hon. Friend says, the Treasury document is still open for consultation, and those who are concerned about annuity provision can still make representations. Both that and the Green Paper, which also deals with the reform of annuities, provide credible, practical alternatives that would benefit all, not just the few very wealthy people who would benefit from the Bill.
I do not intend to go into those other documents in great detail, Mr. Deputy Speaker, bearing in mind your earlier constraint, but I will indicate a few things that will happen. The Treasury document proposes radical simplification, which will sweep away the existing complexities of the tax rules and replace them with a straightforward lifetime limit on the amount of pension savings that can benefit from tax relief. It will allow top-ups to adjust for the vagaries of the market that we discussed earlier, and it will provide greater choice and flexibility. For the vast majority of people, the tax rules will cease to be a consideration in their pension planning.
If things go to plan and the proposals find general favour in the consultation, we will not have to wait long for reform. The Government have said that they will change the tax regime in the 2004 Finance Bill. The open-market option to which I referred earlier will become more widely available, enabling people to shop around and purchase a pension that is more advantageous to them. There will be tax simplification, including the lifetime limit of £1.4 million, which should be enough for anybody—except perhaps the hon. and learned Member for Harborough. There will be limited-period annuities and value-protected annuities. Income draw-down, which was referred to earlier, will be reformed.
The one proposal that the hon. and learned Gentleman should have been aware of, because it is the direct alternative to his Bill, is the permission to use income from unsecured funds in certain circumstances. People will no longer have to purchase an annuity when they reach 75, but their pension fund will still have to be used for pension provision. That is the answer to the Bill, as the hon. and learned Gentleman would know if he had bothered to read the Inland Revenue's taxation proposals. I have to assume that he has not read them; otherwise he would not have introduced the Bill.
My hon. Friend seems to be recommending preparation that the hon. and learned Member for Harborough may want to make before the Bill goes into Committee. Will my hon. Friend join me in commending to the hon. and learned Gentleman the important document, "Annuities—The Consumer Experience", produced by the Association of British Insurers? For me, that underpins the debate on the future of annuities, but obviously the Member promoting the Bill has failed to recognise that.
I am sure that my hon. Friend makes his point exceedingly well, and if he catches your eye, Mr. Deputy Speaker, he will be able to develop those thoughts at length.
It would be regrettable if the Bill were to reach Committee stage because it requires so much heavy engineering that it would make the railways pale into insignificance. [Interruption.] I thought that that would wake up the hon. and learned Member for Harborough. The Bill is so flawed that if it reaches Committee, it will never come out again. The Inland Revenue proposals and the Department for Work and Pensions document "Modernising Annuities" will make it necessary to table so many amendments that it will take for ever to deal with them all.
For the purposes of the debate, I made an assumption earlier about multiple policies, but the Bill is entirely silent on the subject. At the last count, I had four private pension plans. The last time that we debated this matter, Mr. Greenway said that he had 11 pension plans. We do not know whether we would have to put all our policies into the system proposed by the Bill or whether we could pick and choose. I can see that there would be many cunning tax-avoidance schemes—I could put one policy in the system but withhold the others to maintain my annuities. There could be all sorts of juggling as people bought different policies, which would not be sensible. If the Bill reaches Committee, I urge the hon. and learned Member for Harborough to consider how multiple policies ought to be dealt with.
I urge the hon. and learned Gentleman to consider transitional arrangements because, as far as I can see, there are none in the Bill. It will straddle the introduction of pension credit and the continuing growth of stakeholder pensioners, so there is inevitably potential for loopholes to be created. There is also the problem of people's existing policies. It is incumbent on the hon. and learned. Gentleman to tell everyone with a pension policy where they stand and whether their policy will have to be changed. On the other hand, he may wish to introduce transitional arrangements, in which case the Bill would apply only to pension funds to which people sign up from next year or the year after, giving them time to adjust. Perhaps the hon. and learned Gentleman intends to introduce retrospective legislation, of which the House has almost always fought shy. I think that there have only been two pieces of retrospective legislation—I can remember the name of one but not the other.
Regrettably, the hon. and learned Gentleman has failed to examine the security of investments. The Bill refers to schedule 10 of the Insurance Companies Regulations 1994, which specifies permitted investments. However, those investments could be risky. We have already discussed certain aspects of investment, and annuities are generally secured against gilts. Schedule 10, which could be used to liberalise the investment regime, may go too far the other way, so I urge the hon. and learned Gentleman to consider restricting his implementation of that provision. That matter is very serious. We have seen, for example in Equitable Life, what happens when projected returns from investment are too high. We have seen the problems that arise when pension funds rely too much on equities, and we have read in the financial pages of the Sunday papers about scandals. However, the hon. and learned Gentleman's proposal, instead of providing more security of investment, provides less. He is in favour of a wild west form of annuity, not the security that people want for their retirement.
As I draw my remarks, regrettably, to a close, I shall return to the hon. and learned Gentleman's press release, in which he sets out what he hopes to achieve in his Bill:
"I have tried to design a Bill whose principles are simple to understand and which is free of unnecessary technicalities or detail . . . Whilst it does not cure all the problems faced by pensioners it goes some way to offering practical assistance."
I have demonstrated that the Bill achieves none of that. It is not easy to understand—although there is nothing in the Bill to understand—and is riddled with Henry VIII clauses. Definitions and figures are entirely absent. From the hon. and learned Gentleman's point of view, it is conveniently free of technicalities and detail, because he has not had to deal with them. However, when one is dealing with such issues one cannot help but get into technicalities and detail.
I am listening carefully to my hon. Friend, and regret that he is coming to the end of his speech. Obviously, longevity is an important part of our debate. Does he agree that that press release can only be characterised to use the language of my own industry, as a shoddy piece of cowboy workmanship?
I would not go down my hon. Friend's line, except to say that perhaps it is negligent with a small "n", or misleading with a small "m", or perhaps with a capital "M", to suggest that the Bill is simple to understand and free of unnecessary technicalities. The hon. and learned Gentleman has skated over all the technicalities and details that inevitably have to be addressed. I hoped that when he introduced the Bill he would fill in some of the gaps, but he lamentably failed to do so.
The hon. and learned Gentleman says that the Bill does not cure all the problems faced by pensioners, but that it goes some way to offering practical assistance. What utter poppycock! It does not provide practical assistance to 99 per cent. of pensioners. It may provide practical assistance to a tiny minority of extremely wealthy pensioners, but that practical assistance can be delivered much more effectively through taxation changes on which the Government are consulting. Such changes will not remove the flexibility and the existing practical assistance that it is available to everybody, and will not impose great restrictions on the majority for the benefit of the wealthy few. How can it be right to remove compulsion at the age of 75 from a few millionaires, and to introduce compulsion at the age of 65 for everyone else? That is not meeting the hon. and learned Gentleman's objectives.
We have no real way of knowing whether the Bill would provide practical assistance because there is no detail. The hon. and learned Gentleman has not defined his minimum retirement income. Perhaps he might have provided some benefit to the Plymouth Brethren, but the hon. and learned Gentleman has not defined his fail-safe retirement fund. We have no way of knowing about that. The fact remains that the Bill is a shoddy piece of work. It should never have seen the light of day in the previous Session. I should have thought that the hon and learned Gentleman would do a bit of learning and realise that the Bill cannot be allowed to proceed.
I know that I have spoken at great length. I had to, because the hon. and learned Gentleman wasted time in his relatively short introduction. That time would have been far better spent in setting out some of the detail, instead of engaging in party political point scoring, which he said he would not do but which he inevitably did. I think I have been extremely restrained in avoiding such point scoring. I have tried to present a logical and basic analysis of the Bill. Apart from one or two occasions when I wanted to make sure that the hon. and learned Gentleman was awake, I have not engaged in the party political wind-ups in which he engaged at the beginning of his remarks, when he advanced silly arguments. Had he wasted less time on that and spent more time on the substance of the Bill, he might have made much more progress and I might not have had to speak at great length in posing so many questions to him. The fact remains that he has done a shoddy piece of work.
There are one or two other aspects of the Bill to which I should refer before I resume my place. The starting point is the commencement date. It is not a major point, but it is an important one. The commencement date for the Act will not be set by the Minister by statutory instrument or by other forms of delegated legislation, as normally happens. Clause 3(2) provides for the Act to come into force on
The Bill cannot be allowed to proceed. I am sorry that I have had to speak for so long, but I hope that hon. Members will understand the reasons for my doing so.
I declare an interest as a beneficiary of a money purchase pension scheme.
I congratulate my hon. and learned Friend Mr. Garnier on securing the Bill. Mr. Dismore entirely missed the point. The purpose of the Bill and the intended purpose of the debate is to allow a constructive discussion about abolishing the obligation to buy an annuity.
The Government proposed that that be abolished. Paragraph 5 of the Green Paper on revenues clearly sets out the proposal that draw-down should continue beyond the age of 75 until death. The capital protected annuity that the Government allegedly support is a slightly different way of meeting part of people's objections to the present compulsion. The hon. Member for Hendon, who is obviously a keen authoritarian, ignores the fact that people object to compulsion. For the past 10 years, I have campaigned on that issue of principle. It is a great pity that as a result of the hon. Gentleman's extreme long-windedness, the House has lost the opportunity today to discuss how we could sensibly pull together the strands that are in place.
It is extraordinary that the hon. Gentleman endorsed the Inland Revenue's approval of a Gibraltar-based offshore annuity contract that costs 3.5 per cent. and effectively achieves the underlying objectives intended by abolishing the obligation to buy annuities. That is contrary to the objection on the part of the Government and the Financial Services Authority to over-expensive insurance wrappers. Furthermore, it is pathetic to support a product that is both expensive and outside the control of the UK authorities, even though it meets the objective, rather than considering how to address the underlying problem.
My hon. and learned Friend the Member for Harborough said that I would say a little about the Plymouth Brethren. For better or worse, the religious principles of the Brethren mean that, as a matter of conscience, they are not permitted to buy insurance products, and the failsafe alternative to the retirement income annuity referred to in the Bill would be a simple cash pot that would need to be substantially greater than the retirement income annuity, with rules to ensure that there would always be sufficient in it so that people could not blow the money and become dependent on the state.
Times have changed as the debate has gone on. The big issue is the pensions crisis, which has many aspects but is, above all, about millions more people ending up with money purchase pensions, the fact that fewer than four in 10 final salary schemes are now open to new members, and the failure of stakeholder pensions, which have achieved only 2 per cent. of the market of 5 million people earning between £10,000 and £20,000.
All that has been caused by several factors, principally the weakness and decline of corporate profitability under excessive taxation and regulatory costs. The UK market has underperformed America's by 50 per cent., substantially as the result of the Chancellor's famous £5 billion tax on pension schemes. There has been a dramatic fall in annuity pension yields.
When the subject was last debated, the Minister referred to the Inland Revenue paper on modernising annuities and in particular to graph 2, and argued that, although that showed that annuity yields had fallen from some 14 per cent. to 8.5 per cent. since 1986, in real terms, the pensions delivered for 30 years of money purchase pension saving had risen.
Given that I spent 30 years of my career in this territory, I found those figures strange, so I asked various questions of the Treasury. Although it had not been disclosed at the time, it turned out that those data were based on the extremely unlikely assumption that, over the last decade of a money purchase savings scheme, 10 per cent. per annum would have been moved into gilts, ensuring that the fund would be 100 per cent. invested in gilts on retirement. The truth of the matter is that very few people proceed in that way. The much more typical balance will be 50 per cent. gilts and 50 per cent. bonds.
Even on the basis of the assumption that was used, which should have been disclosed at the time, the pension in 2001 was the lowest in real terms since 1994 and 1990. However, in answer to my question about the position on the assumption of a balance of 50 per cent. gilts and 50 per cent. equities over the five years prior to retirement, I was told that the pension delivered in real terms was 20 per cent. lower than in any year since the Government table started in 1986, and was indeed the lowest for 40 years. With the greatest respect, overlooking the fact that the annuity pensions available from money purchase pensions have fallen dramatically is a major issue at a time when the majority of the population—some are privileged because they are in the public sector—are being forced into money purchase savings. Candidly, that is ridiculous.
What is this all about? Why is there a view out there—the ABI survey subtly reflects this position, and as it represents annuity providers, it obviously wraps it in a particular way—that it is wrong for people to be forced to buy annuities? First, there is an objection to compulsion, but there is also an objection to the risk of loss when people die shortly after retirement. Of course, people can buy annuity contracts that cover such eventualities, but the overwhelming majority do not and buy a straight annuity. There is a fear that all their pension savings can quickly be lost if they should die shortly after retirement.
Labour Members used a great deal of the time of the House and I wish to finish my speech fairly briefly, so I am afraid that the answer is no; the hon. Gentleman has had his turn.
The second great fear is that people are being forced to buy annuities at or near the bottom of a long-term inflation and interest rate cycle. Nobody knows what the future will hold, but it is self-evident that people who bought annuities when even straight annuity yields were 14 per cent. or more bought them at a favourable time after which there was an era in which inflation was not as high as expected, so they did very well. Indeed, people were mainly happy to buy annuities for that reason. At present, people fear that in five or 10 years' time, or perhaps sooner, inflation will rise, the purchasing power of their annuity will contract and they will have bought a product at the bottom of the market. Indeed, until and unless the Government address that problem, there is a risk that, in 10 years' time, a whole generation will feel that they have been profoundly mis-sold to as a result of Government compulsion.
The straight annuity yield is down from 14 to 7.5 per cent. However, there is a better illustration of what faces someone who is retiring. Consider a man with a wife of 62, who retires at 65, and consider that he wants a pension that will provide 50 per cent. for his wife and a degree of escalation of 3 per cent. for five years. In 1990, £100,000 bought an annuity pension of £12,500, but now it would only buy one of £4,500. That illustrates the magnitude of the increased cost of annuities and of the long-term economic cycle risk.
We must take into account the rising tide of money purchase pension savings. The amount going into annuities is already around £12 billion each year and it is growing compound at 20 per cent. As I have already said, the final salary schemes have closed in a rush after the Chancellor's £5 billion pension tax. More and more people will have money purchase pensions and it will be essential for us to work out the best way for money purchase pension savings to be converted into pensions.
There was a concern that the yields on gilts that underlay annuity investments were artificially low; there was a rising tide of money but the supply of new gilts was relatively frozen. However, the Chancellor's wrong estimates, and the potentially excessive borrowing that will now be required, look as though they will solve that problem. There may end up being an over-supply in the volume of gilts. The return on an annuity reflects gilt yields as well as longevity. Real gilt yields are in essence about the supply and demand of gilts.
The other powerful argument for addressing this issue is that the Government and the country want much greater private sector pension saving. We remember the famous objective of moving from 40 per cent. private to 60 per cent. private, and not moving in the reverse direction—although that is what we are now doing.
Fifteen years ago, when Canada effectively abolished the obligation to buy an annuity on a pension product that is very close to the stakeholder pension, and when it put in a retirement income fund that is essentially similar to the one proposed in the Bill, a product that had had no support suddenly became extremely popular. A total of 40 per cent. of Canada's population now save through the equivalent of a stakeholder pension. In Canada, it was found that the main psychological problem—until the obligation to buy an annuity was abolished—was that people had a fear and dislike of the perceived risk of losing all that they had saved in their pension vehicle if they were to die early.
South Africa, as a result of the miners' union quite rightly having had no truck with the apartheid Government, has now had for 25 years a clean and straightforward money purchase saving regime with no obligation whatever to buy annuities. That has had substantial success in delivering capital for people who are retiring—in particular, from the mining industry—to allow them to start their own businesses.
The Government's arguments against a radical approach have been that such an approach would only benefit the better-off. The underlying case is that, if anything benefits only the better-off, it should not be considered. I want to illustrate why I consider that wrong thinking. Three constituents of mine had a self-administered pension scheme that went with the business for which they had worked. The scheme had invested in all sorts of local businesses. It was extremely successful as a venture capital investor and had accumulated far more than would ever be needed for those people's pensions. They wrote to me saying that it was wicked that they had to abandon supporting small businesses simply because they were 75. They have to sell the scheme, put the money into an annuity and cannot do as much as they did in the past. That example shows why forcing people is wrong.
The Government's second argument is that the Bill would encourage too much pensions saving, but their first problem is too little pensions saving. They could not even get the figures for it right. A universally applicable exit tax on capital that leaves a pension fund renders anxieties about avoidance and excessive pensions saving by the better-off false. People's natural behaviour shows that they tend to save what they can afford for pensions. If so-called clever schemes that can use pensions saving to avoid tax are outlawed, the motivation for avoidance goes away.
The key development in the Green Paper is the Government's acceptance of the principle of the argument. I have already referred to their proposal that people should be able to continue to engage in draw-down schemes after the age of 75. I believe that the Government also accept capital-protected annuities—an annuity product that allows people's estates to get back the capital if they die early.
For some extraordinary reason, the Government's position on both those matters is to require that any capital that remains after a person has reached 75 should go to the pension provider and not the beneficiary's estate. I do not understand why it can go to the estate before but not after the age of 75. Subject to a universally applicable pension exit tax, which is currently 35 per cent.—inheritance tax is paid on top of that—why is there anything wrong with allowing the residual capital to go to the estate?
As the industry pointed out, the proposals in the Green Paper are almost unintelligible. They say that the capital should revert to the provider. Can the trustee of a statement of investment, who is the provider, pay the tax and pay on the proceeds to the beneficiary's estate? That is not stated. The pension actuaries to whom I have spoken consulted the individual who wrote the Green Paper, and even he does not appear to know the precise intention.
Again, we are considering an issue of principle. There is nothing wrong with people saving for pensions and, subject to paying a fair amount of tax, for any residue to pass to their estates, which suffer inheritance tax. For some reason, the Government take a dogmatic view that, beyond the age of 75, it is morally wrong for any pension savings, even after adequate tax, to pass to someone's heirs.
The purpose of the Bill and the debate is to tell the Government to get a move on and sort out their proposals. They have introduced a bit here and a bit there, but they do not fit together or work. If the Government end the obligation to buy an annuity on draw-down and allow people to get capital back through annuity contracts, there is no logic for having one rule up to the age of 75 and another afterwards. There would also be no problem involved in tightening the tax regime to ensure full and fair taxation of any capital that exits from a pension scheme.
It is a great pity that the House has not had the opportunity today constructively to debate the issues that the Bill exposes. I hope, therefore, that it will go into Committee to enable that to be done.
I am grateful for the opportunity to speak in the debate on the Bill, not least because it seemed a bit ungracious of Mr. Flight to condemn the House for not allowing proper debate when he took no interventions himself. Anyway, be that as it may, I should make some declarations, although I am slightly uncertain as to exactly what level of declaration one has to make when talking about pensions in the generality. If I get to the age of 65, I anticipate drawing pensions from the BBC, the Labour party and the Church of England.
A church mouse, I fear, rather than a fat cat.
I do not think that there can be many who have that combination of pensions. I also have some AVCs with Equitable Life—sadly—and with the Prudential, and a private pension with Virgin. I do not know whether there are any financial advisers in the House who can tell me whether that is good provision or not, but if there are, perhaps they could see me afterwards.
I am not sure that it is very comprehensive.
The important thing that we have to decide today is whether to send the Bill forward into Committee. As in all Second Readings, the important question, first and foremost, is: is the Bill necessary in the present context? If a Bill is necessary, is this the right Bill? Is it legally correct, and, for that matter, is it politically desirable? Finally, is it amendable? If it were broadly acceptable but needed just a few amendments, it would be right for the House to send it into Committee, where we could amend it, do our bits and pieces and come up with the perfect Bill. I note, however, that when Mr. Garnier introduced it at the beginning of the day, he said that it was not perfect. It is unusual to hear Members start such a speech with an announcement that their Bill is not perfect. When we consider that this Bill has been before us in various different forms over the past few years, one might have hoped that it might have achieved a sufficient degree of perfection by now for him to have the confidence to stand up in the House and say that he had got it at least pretty well right. Clearly he did not feel that confidence.
Let me go through the issues. First, is the Bill necessary in the present context? I believe that it is not, first for the obvious reason that divergent mortality rates are significant in the United Kingdom. Several hon. Members have referred to the divergence of mortality rates between men and women and noted that there is roughly a three-and-a-half-year difference between them. It is also significant that there is a dramatic difference between mortality rates in different parts of the country and different types of constituency. My own constituency is a former mining constituency, as many hon. Members will know, and many people would assume that the poor mortality rate in the Rhondda is directly associated with the fact that people worked in the mines, even though the last mine closed in 1991, in Maerdy. In fact, industrial disease is not the sole, or even the primary, reason for the difference in mortality rates. The primary reason is the socio-economic conditions in which many people in the Rhondda live. Historically, through the rough and tough 18 years of Conservative rule, people found it very difficult to live in anything other than poverty. For many young people brought up in households with not one but two generations of unemployment, there was a general supposition that a life on benefit was the best that people could aspire to. That has meant that many people growing up in the Rhondda suffer from a whole host of medical conditions, which have led to our mortality problems. For example, there are high rates of coronary heart disease, partly due to poor diet and partly due to smoking and other problems associated with poverty.
In the Rhondda, 86 per cent. of households own their home—
I am grateful to you, Mr. Deputy Speaker, for steering me away from steering away from the Bill.
The point that I am keen to make is that the divergences in mortality rates, which are obviously essential to the process of establishing an annuity, are important in determining whether hon. Members should choose, on unwhipped business, to support the Bill. The pooling of mortality rates, which is essential in buying annuities, is an important principle and we should adhere to it, contrary to the views of the Plymouth Brethren to which some hon. Members referred earlier.
The establishment of a separate annuity rate for men and women, as opposed to the Bill's provisions, is also important. About 40 per cent. of my constituents are pensioners and many of them are women who live on their own. The maintenance of divergent annuity rates for men and women would be very much in their interests.
As the hon. Member for Arundel and South Downs pointed out, we have low annuity rates at present. That is the second important point to explore in considering whether the Bill is necessary. However, inflation is also low. That is a double-edged sword. Low inflation means that there are low gilt returns, which affect annuity levels, but, because the majority of people who buy annuities buy a fixed annuity, the prospect of low inflation in the future means that their annuity is likely to be worth more in the years to come than would otherwise have been the case. At present, there is an unusual convergence of good and bad news for annuities. I think that the vast majority of pensioners would assert that low inflation can only be a good thing for pensioners and that the Government should be congratulated on their running of the economy.
As many hon. Members would agree, we also have a strong and effective annuities market. There are more than 100 annuity providers although the majority of annuities are sold by the top 10 or 20 companies. However, the market shows that those companies provide good value and that there is strong competition. None of the changes proposed in the Bill would be of assistance in maintaining that strong and competitive market.
A further point to consider in relation to any private Member's Bill is whether other changes declared or proposed by the Govt are already in the pipeline and would make the suggested legislation unnecessary or wrong. Several changes have already been enacted, or will come into force, which make the Bill both unnecessary and wrong.
The first is the introduction of the minimum income guarantee. Several hon. Members have referred to its provisions and have pointed out that the relationship between it and the minimum retirement income suggested in the Bill would be extremely problematic. The Government have committed themselves, in the lifetime of this Parliament, to raising the MIG not in line with prices but with average earnings. I hope that that commitment will continue into another Labour term. It would be very difficult to match that commitment with the provisions in the Bill, which are very sketchy regarding the increases in minimum retirement income; the Bill simply provides that the Chancellor of the Exchequer will decide annually the level of the minimum retirement income. Despite a concerted campaign over the past 10 years for reform—which the hon. Member for Arundel and South Downs mentioned—that has been waged by certain organisations in certain parts of the industry, and despite considerable discussion on the Floor of the House and in Committee of issues relating to a minimum retirement income, a major problem with the Bill is that it makes no clear and direct provision as to how the Chancellor of the Exchequer should determine that minimum retirement income.
It is not only the minimum retirement income that gives rise to difficulties. The second difficulty arises from the pension credit, which will come into force later in the year. The credit will be of advantage to many of my constituents, who have argued for a considerable time that one of the bedrocks of pensions policy must be the fact that it rewards, not penalises, those who have set a little bit aside during their lifetime, otherwise we shall be sending young people the message, "Spend as you go; do not worry about the future because in the end the state will provide." That is another danger with the Bill. Its broad message is, "Do not worry about the future. Spend. We shall try to ensure that there is some kind of failsafe arrangement, but broadly speaking use your money as you want and do not worry for the future." It is a vital and essential principle of all our pension policy that we should encourage our young people to make long-term and secure financial provision for themselves; the Bill does the opposite.
Thirdly, and perhaps most importantly the clause relating to how the Chancellor of the Exchequer would set the rate of minimum retirement income each year does not say how that would fit with the pension credit. The pension credit was deliberately intended to increase the amount of money in the household, and not to impact on benefits. But if the minimum retirement income is intended to ensure that people are not reliant on the state, as a result of not having used the whole of their pension fund to buy an annuity but having used some of the additional capital for some other projects, or for some other form of investment, how would one ensure that individual pensioners did not fall foul of the pension credit provisions?
The other problem that I have with the Bill in terms of legal changes relates directly to clause 3, which is the provision for the short title and commencement of the Bill. It says:
"This Act shall come into force on 6th April 2005"— one year after many of the provisions that we hope will come along as a result of the changes in "Simplicity, security and choice: Working and saving for retirement", the Department for Work and Pensions document, which I am sure that all hon. Members have read. It seems very curious to suggest that the Bill should come into operation in 2005, before things that are already in the pipeline have been legislated for.
If asked for my analysis of whether the Bill is necessary in the present context, I would have to say no. Is this the right Bill? No hon. Member who supports the Bill—only two have spoken so far—has said this, but, as far as I can see, the aim of the Bill is, broadly speaking, to avoid the pooling process that occurs by virtue of people taking out their annuities and, instead, ensure that people can either use their money for other investments of whatever kind or hand on money to their estates.
What would the Bill do for the people of the Rhondda and ordinary working families in return for that change? It seems clear that the first and perhaps most dramatic effect of the Bill would be to deprive the Chancellor of the Exchequer of a significant amount of taxation. The two Conservative Members who have spoken referred to the notorious £6 billion—or was it £5 billion?
I can tell the hon. Gentleman; perhaps it is about time that we started to inform him that £1 billion could make a dramatic difference, especially to the people of Wales and, for that matter, 20 per cent. could make a difference to them.
It is a pity that the hon. Gentleman lacks a sense of humour. I was pointing out that it did not seem to matter to him whether the sum was £5 billion or £6 billion.
I merely note that adding £1 billion to £5 billion increases the sum by 20 per cent. I am sure that the hon. Gentleman is well used to that percentage. He accuses me of not having a sense of humour, but he might at least smile at that.
If the hon. Gentleman wants to take out of public finances £5 billion or £6 billion, I would dramatically contest what he says, for the very simple reason that investment in our public services is absolutely essential to the livelihood of my constituents, who rely in very large measure on the health service, education services and so on. However, Mr. Deputy Speaker, you might suggest that I am veering rather far from the Bill, so although I should be very happy to debate that issue with the hon. Gentleman at great length elsewhere, it is important that I return to the Bill.
None the less, the important point for the people of the Rhondda is whether it would be good to remove that money from the Exchequer because it would deliver another benefit to society as a whole. [Interruption.] The hon. Member for Arundel and South Downs is chuntering from the Front Bench. I think that he says that no money would be taken from the Exchequer. I therefore assume that he is trying to assert that the proposal is wholly tax neutral, and we shall hear from other hon. Member who want to contest that assertion at considerable length and with the benefit of secure figures.
The second half of the equation—this is important—is that given the way that the Bill has been drafted as opposed to the way that last year's Bill was drafted, it would leave more people eventually dependent on the state for the very simple reason that the process of determining minimum retirement income allowed under the Bill is so woolly, imprecise and ambivalent.
My hon. Friend is making an excellent job of demolishing the case for the Bill and he did so in commenting on the intervention, which I saw on a monitor elsewhere, made by Mr. Flight. In listening to the earlier speeches, was my hon. Friend able to form an impression of whether supporting the Bill is the official policy of the Conservative party or whether just one Member and some of his hon. Friends support it?
I am grateful to my hon. Friend. It is always rather difficult to determine precisely what is Conservative party policy on any individual issue. I noted that a considerable number of Conservative Members were in the House at the beginning of the day, which, clearly, was a delight. It is good to see a full House, and parliamentary scrutiny of Bills is very important. It is only a sadness that so few Conservative Members have chosen to stay and listen to or engage in any of the debate, or, for that matter, to take interventions. It seems to me that that is an essential part of the rightful parliamentary scrutiny of a Bill.
There is only Dr. Cable in the Chamber. He has been the only Liberal Democrat present, and he is standing in for the hon. Gentleman who should be here.
On the face of it, the Bill is attractive. It was described as all about choice. Who could vote against choice? It is meretricious, however. As we know from "The Merchant of Venice", all that glitters is not gold. That is certainly true of this Bill, as it does not provide choice for everyone. There are many areas where we could extend choice of pension provision and how people buy annuities. In my constituency, very few people will manage to achieve the £150,000 fund that Conservative Members think of not so much as a fund but as a salary. For my constituents, a pension fund may be in the region of £5,000 to £9,000. For miners or people who have diseases that are likely to lead to their death in the next three to five years, it seems patently unfair that they cannot take the whole figure as a lump sum and be able to do whatever they want with it.
To be honest, I am grateful that the document, "Simplicity, security and choice" includes the suggestion that we should allow for commutation of the whole pension fund sum for long-term and serious ill health. I hope that the Government will make proposals along those lines, as that will be in the interests of the poorest and the most vulnerable in society. The chairman of the Conservative party, who as one of the most vulnerable members of her Front Bench is speaking on behalf of the vulnerable today, may advance arguments to that effect. I only wish that there were such arguments about choice for poorer constituents such as mine and for those who have not accumulated enormous pension funds because they have not had enormous salaries throughout their lives. Unfortunately none of that is in the Bill.
It would also be nice if not just those with serious ill health but those with small funds, which would probably not fall foul of any benefits anyway, were able to commute the whole of their pension fund. Again, that provision is not in the Bill. The only people who are to be allowed greater choice are those who will have significantly larger amounts of money in their pension funds.
Absolutely. I am proud to call myself a socialist, and I happen to believe that the present system of annuitisation—not an attractive word—is in principle socialist, as it makes provision for all on the basis of need and the length of their lives. In contrast, 100 years ago, before the Liberals introduced the idea of a national pension, and before the Tories went through two general elections and battled through the House of Lords to make sure that we did not have pensions for everyone, what people did was what the hon. Member for Arundel and South Downs wants: they had an amount of money, and they spent a bit of it until they died. They hoped that they would have accumulated enough by the time that they retired or by the time that they could no longer work—keeping their noses to the grindstone—to keep them going for enough years before they died. If, by good fortune, they lived for many years, they would fall into abject poverty. Conservative Members would be quite content if such a system continued today.
Although my hon. Friend will be aware that I have not had the pleasure of visiting his constituency—[Hon. Members: "Not yet."] Not yet. There are probably considerable differences between our constituencies, but I am sure that the problems of our constituents are not that dissimilar. People do not come to my surgeries or to street stalls in my constituency to raise the concerns that have been expressed by the Bill's supporters. I hear the concerns of those who have very small occupational pensions. They fear that they will be disadvantaged in comparison with others. Does the Bill do anything for them?
I am happy to extend an invitation to my hon. Friend to come to the Rhondda, especially in the next few weeks. We will be delivering leaflets tomorrow morning in Tonypandy so, if she wishes to join me, she will be very welcome.
My hon. Friend is right. It is fair to say that not many people approach one at street stalls and start to ask about annuitisation rates. However, people are clearly concerned about pensioner poverty, and an element of that is fuel poverty. Many of my constituents live in houses that are not well insulated. Many of them still do not have gas central heating and some have outside toilets. We have a long way to go to make sure that we prevent pensioner poverty.
I know that pensioners in my constituency say, "To be honest, if my grandmother knew how well off I am now as a pensioner thanks to all the measures that the Government have introduced since 1997, she would be amazed." They are proud that this country has taken dramatic steps forward. However, there are still things that we need to do to encourage more people to stand on their own two feet. I cannot remember which pop singer sang about—
I apologise for that, but I came in especially to listen to the hon. Gentleman's speech. It has been extraordinarily interesting so far, but an absolute travesty of the truth.
I declare an interest: my stockbroking firm advised the National Coal Board's pension fund for many years from the 1950s. One reason why the widows of miners have such relatively good occupational pensions is that that pension fund was excellently run. The Conservative party's achievement over a long time is reflected in the fact that, when I entered politics, very few people had occupational pensions but, by 1997, about 80 per cent. qualified for them. That great social advance is now under enormous threat.
The hon. Gentleman is suggesting that the people of Rhondda are particularly delighted with the Conservative Government's record in mining communities. If he wants to join us on the street stall tomorrow, proclaim himself to be a stockbroker and explain to the people of Rhondda what the Conservative Government did for them through denying miners compensation—
Indeed, but the hon. Gentleman suggested that he did such a good job by the miners that we should be downright grateful. He mentioned travesties. He should be ashamed of himself and, for that matter, of his Government's record in mining communities.
My hon. Friend Mr. Dismore and I tabled a reasoned amendment to the motion, although it has not been selected for debate. We did that partly because we were worried about how the Bill would affect the way in which men and women are treated in pension provision. Superficially, the Bill seems attractive, but the arguments are meretricious and all that glitters is not gold. By guaranteeing one annuity rate for men and women, the implication is that we would establish parity between them. The present system sets annuity rates separately for men and women. On the whole, men have a higher rate for the obvious reason that they are likely to die earlier, while women are likely to outlive their husbands and other male contemporaries.
According to annuity director rates of March 2003, a 65-year-old man who purchases an annuity for £100,000, which is rather more than many of my constituents would spend, might receive £603 a month. The comparable figure for a female is £565 a month, a difference of £38. I use those figures for simplicity's sake. They are for level annuities, but I could give other annuity figures because, broadly speaking, the same principle arises. It seems unjust that a women would receive less than a man on a monthly basis, but a man's total payments for his expected lifespan after retirement—about 17 years—would come to £123,012, whereas a woman could expect to receive £135,720 for her life expectancy in retirement of 20 years. That puts her ahead by some £12,500, which makes a significant difference.
Far from the present system militating against women, I contend that the many thousands of women in my constituency who have long outlived their husbands have done better under the present system than they would under that suggested by the hon. and learned Gentleman. If we were to pay on a unisex basis, as the Bill recommends, a man would receive a mere £123,012 and a woman would receive £144,720 if they lived to their life expectancies, but the annuity companies would say that they could not afford that and would cut annuities for men and women. As a result, the men would do considerably worse than the £123,012 and annuity rates would be cut overall.
I asked what the Bill would do for women and for men. The simple answer is that it would militate against the best interests of men and it would not improve the prospects for women. Women would not get higher annuity rates; instead, they would probably receive the same annuity rate that they get at the moment. At the end of the period, they would not have increased their amount of money and the men would probably have lost out. On the basis of justice for men and women, the Bill might seem just and desirable, but it would be wrong.
Does my hon. Friend agree that the measure may prove to be a disincentive to saving, and as there is already a savings gap of between £20 billion and £30 billion, that would be of concern to the Treasury?
I wholly support what my hon. Friend says. It is important that the Treasury and Labour Members who are concerned about these matters rigorously pursue them and give them due scrutiny.
I started my speech by asking three basic questions. The first was whether the Bill is necessary in the present context. I simply believe that it is not, for several reasons, including not least the fact that the minimum retirement income process it lays out is so woolly and non-specific that it would be counter-productive. Secondly, I asked whether it is the right Bill to be advancing at this stage. I do not believe that it is legally correct, because it would be difficult to make it work with the pension credit, the minimum income guarantee and any of the other changes likely to be made in the next year.
Thirdly, I asked whether the Bill is politically desirable. For me, to be politically desirable, a pensions Bill would have to deliver to the people of Rhondda a choice equal to that of everyone else in the country. As a socialist, I want a system that makes sure that we abolish pensioner poverty rather than simply benefiting the wealthiest in society who have accumulated funds in excess of £150,000. That is why I say that the Bill is politically wholly undesirable.
In addition, I ask whether the Bill is amendable. Despite the fact that many Tory Members are suddenly appearing in the Chamber, there is no Whip on a private Member's Bill. That means that the House must simply ask itself whether the Bill is broadly okay, even it has some imperfections, as the hon. and learned Member for Harborough admitted earlier. I do not think that the Bill is amendable. The fundamental principles on which it is based are wholly inequitable, and it is in the interests of the few and not the many. Hon. Members should not give it a Second Reading because it cannot be amended to make it acceptable to the vast majority of people in this country.
I am grateful to you, Mr. Deputy Speaker, for rewarding my four-hour wait by giving me an opportunity to put my views on the record. I congratulate Mr. Garnier on introducing the Bill, although I suspect that by now he is wishing that he had taken the more cowardly route that some of us took when we drew a high place in the ballot on private Members' Bills and checked out his Bill with the Government Whips.
Perhaps I should also congratulate Mr. Dismore on his great ingenuity and stamina. Most hon. Members will be gratified that he did not get his hands on a document that I started reading to keep myself sane during his speech: "Reinventing Annuities", by the Staple Inn Actuarial Society. [Interruption.] Oh, the hon. Gentleman does have it, does he? It contains a world history of annuities, and I was having nightmares about him starting to read it to us.
That document equipped me with one or two party political points. I was not aware, until I read it, that apart from Lloyd George's contribution on pensions, William Ewart Gladstone, the great Liberal Prime Minister, took the first step to introduce state annuities in 1864; however, the Tories repealed the measure in 1928. The document also reminds us that although today we are talking about compulsory annuities, for a long period in British history not only were annuities not compulsory; they were illegal because of the attitude of the Church. Of course, we now have an historical echo of that in the attitude of the Brethren.
Of course, the history of annuities goes back much further. I am sure that the hon. Gentleman could have reminded us that a similar debate reverberated around the Roman Senate, where annuities policy was a major issue as a result of changes introduced in 40 BC, so we have a long lineage of argument on the subject.
Indeed. In fact, I think that there is only one, but the spirit is there none the less.
I want to emphasise the fact that there is a serious problem. There has been an attempt to caricature the Bill as a measure that is only of interest to the rich. However, there are about 4 million private pensioners and about 1.4 million occupational pensioners on money purchase schemes, many of whom are affected by the adverse trend in annuities. Not all of them would necessarily benefit from the Bill, but the number of beneficiaries would be millions rather than tens of thousands, so it is not simply a Bill for the rich.
First, I should stress that although the debate has been party political, there has been a good deal of convergence. The hon. Member for Hendon rightly pointed out that the advocates of reform have effectively abandoned the moral high ground, as they no longer argue for the abolition of compulsion, which is written into the Bill. Indeed, it would start at 65 instead of 75. The Bill therefore goes a long way in trying to meet the Government's concern. The Conservative spokesman pointed out that the Government have gone quite a long way towards accepting the need for annuities reform. I do not know whether the Financial Secretary will have a chance to confirm that, but the Library briefing says of her proposal for income draw-down:
"It will be possible for individuals not to purchase an annuity when they reach 75".
Compulsory annuitisation is implicitly withering away as the result of the changes, which is welcome.
The problem associated with annuities is serious and is getting worse. The hon. and learned Member for Harborough spoke about the annuities calculation, and gave the example of the £100,000 pension pot which produced a £10,000 annuity in 1990. By the late 1990s, when we first started to debate the issue in the House, its value had gone down to £5,500. Now it is worth £4,500, so the position is deteriorating. The counter-argument is that people who retired in 1990 did not have such a large pension pot because they did not have the opportunity to benefit from the stock market appreciation of the 1990s. We are therefore not comparing like with like. None the less, a generation of pensioners have been ravaged by a combination of the stock market collapse of recent years and low annuity rates, and are now seriously disadvantaged.
Secondly, it is not simply the nominal rates that have fallen—there is also a problem with the real annuity rates. In previous debates, we heard the complex reasons why there is a low return on annuities. The combination of increased demand for annuities and reduced supply is to blame. In other words, the Government are not borrowing as much because of their fiscal policy. The problem will get worse, because more annuities are coming on to the market. There is currently about £2 billion-worth of annuities, which will probably rise to about £12 billion-worth by 2005. It is predicted to go on to rise to £35 billion-worth. With the collapse of defined benefits schemes and the rise of defined contributions schemes, the annuities market will grow and drive down real annuities even further, adding to the problems that have been described.
Thirdly, on the deteriorating position, for the first time it is becoming clear that there is a genuine risk associated with annuities. Until recently, annuities were seen as a safe investment. There are risks associated with inflation, but we know from the Equitable Life experience that annuities can be savagely cut. Although they are underpinned by Government securities they depend on the viability of financial institutions. If they are dodgy like Equitable—many others are drifting towards insolvency—people's annuities can be substantially capped. There is therefore a risk associated with annuities, as well as poor returns.
The hon. Gentleman has shown that he has done considerable preparation for his contribution. Did he study the important ABI document entitled "Annuities—The Consumer Experience", which suggests that only one in 20 pensioners will benefit from the measure? What is his party's position on that?
The hon. Gentleman is right that as of now only a small minority of pensioners would benefit. However, more and more pensioners are being thrown into money purchase schemes. For that reason, in five or 10 years' time, the number of people affected will have grown. The hon. Gentleman is also right that I spent some time preparing for the debate. I know that I am stretching your patience, Mr. Deputy Speaker, and I would like to bring my remarks to an end. I am happy to debate these matters but I believe that I am required to draw my remarks to a conclusion, so I will.
I know that the Government want to deal with the issue by developing the annuities market. That is their solution to the problem. It is—[Interruption.] I know that I could speak for 80 minutes, but I am trying to be fair to other Members. I know that there are many Labour Members who would like to speak. The Government wish to deal with the issue through the annuities market, and there have been positive developments there. I noticed in the Green Paper that there are attempts to introduce new, more flexible, instruments, and that is welcome. There are attempts to extend the income draw-back scheme in ways that are also welcome. The problem is precisely the problem that is raised in objection to the reforms proposed from the Opposition Benches. The proposed flexible annuities can really only be accessed by people with very large pension pots. They are also very expensive—the fees are expensive and the annuities are complex. Precisely the same objection can be raised to the Minister's approach as can be raised to the Bill.
The effectiveness of annuities depends heavily on people having access to good financial advice. We should be having a debate—I do not think that we have ever had it in the Chamber, although we have numerous debates on pensions—on what is happening to independent advice. The Financial Services Authority is moving in directions that seem to me to bring to an end, or threaten to bring to an end, genuinely independent advice. I am also concerned that the Government, having declared their intention, I think two years ago, of trying to introduce the genuinely enlightened idea of pro bono advice, working with the citizens advice bureaux, seem now to have dropped the idea. That would be a useful adjunct to pensions policy to help people navigate their way through the complexities of annuities.
I have already taken 10 minutes, and I have much else to say, but I shall be happy to give way to Labour Members—
I would rather give way to the hon. Lady to enable her to make a speech, which I am sure she wishes to do.
I start by congratulating Mr. Garnier on his success in the ballot. However, I would say that even before the ballot had taken place, Mr. Willetts had made it clear that the Conservative Member who achieved the highest place in the private Members' ballot would have the privilege of relaunching the Bill that was introduced last year by Mr. Curry. That being so, I am not quite sure that congratulations are in order. Perhaps I should extend my commiserations to the hon. and learned Gentleman.
The hon. and learned Gentleman introduced his Bill eloquently but also with great brevity. Indeed, he did so with such brevity that I am tempted to wonder whether he learned anything from the debate that took place on these matters last year. Indeed, he admitted that the Bill was an exact replica of the measure that was introduced last year. He has not even attempted to correct any of the obvious deficiencies that became apparent during last year's debate.
I shall mention a few. I intend to expand upon them in greater depth as I develop my argument. First, there is the cost to the Exchequer, which could run into hundreds of millions of pounds. Secondly, there is the restriction of choice for the vast majority of pensioners, albeit with the extension of choice in certain directions for a few privileged pensioners. Thirdly, there is the impact on the gilts market. It is not at all clear that the gilts market would in any sense be able to cope with the hon. and learned Gentleman's requirement for index-linked annuities for everybody at the age of 65. Fourthly, there are arguments surrounding the compulsory introduction of unisex annuities, and those were well rehearsed by my hon. Friend Mr. Dismore. Fifthly, there is an inherent conflict between the Bill and the Government's desire for flexible retirement and active ageing.
Despite those obvious deficiencies in the Bill, it is helpful to have the debate in order to set out the Government's approach to some of the issues. I was interested to hear Mr. Flight admit that the Bill's purpose was to provoke debate, and that he did not stand by the substance and detail of the Bill, despite the fact that the Bill is, as far as I understand it, current Conservative party policy—a surprising admission.
As hon. Members know, the Government encourage people to make private pension provision for their retirement by offering generous tax incentives. Contributions paid by both individuals and employers to occupational and personal pension schemes, including stakeholder pension schemes, get full tax relief, as do pension fund investment returns and capital gains. After—
On a point of order, Mr. Deputy Speaker. One Lobby has been emptied but there seems to be a delay in the other Lobby. Is there any chance of checking that out?
On a point of order, Mr. Deputy Speaker. I have been here since early this morning for the whole debate, except for a few minutes when I left the Chamber. I represent a northern seat, and I feel that more representatives in the House should have had an opportunity to speak in the debate.