My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
I shall also speak to the other amendments in the group. The amendments deal in particular with the treatment of the protected rights that members of contracted-out defined contribution schemes would have built up before contracting out on a defined contribution basis is abolished.
I should explain a little about contracting out and protected rights. We were going to hear about contracting out in defined benefit schemes. Clause 15, Schedule 4 and these amendments deal with contracting out in defined contribution schemes, also known as money purchase schemes. Contracting out allows people to opt out of the state second pension by saving in a private pension scheme instead. Those who contract out forego some or all of their rights in the state second pension scheme. In return, they receive a rebate of national insurance contributions.
In a defined contribution scheme, the national insurance rebate for contracting out, together with any associated tax relief, is invested in the person's pension scheme. That amount and its investment return are known as protected rights, and certain rules apply to those rights. They can be invested only in certain specified products. They may be transferred only to schemes that are contracting out, and annuities purchased with the protected rights must be calculated on a unisex basis. In particular, protected rights must provide for a survivor benefit if a scheme member is married or a civil partner at the time that an annuity is purchased.
The Government acknowledge that, because the protected rights rules do not apply to any other rights held in a person's pension pot, the separate tracking of protected rights can complicate scheme administration and restrict flexibility for members. In order to simplify matters, we want to remove as many of those rules as possible, but we need carefully to consider the potential impact, especially on women, of removing the rule requiring a provision of a survivor benefit. That is because such removal could result in a survivor not receiving a pension from either the private pension scheme or the state second pension.
In another place, the Bill was amended to insert a power to abolish or vary by regulations the rules applying to protected rights. The Government's intention was to take decisions on the use of that power in the light of the findings of the joint DWP/Treasury review of the open market option for annuities. One of the fundamental aims of that review is to ensure that people make informed choices about their annuity type and fully understand the consequences of their choice. In particular, it will consider the provision of joint life annuities.
However, the Delegated Powers and Regulatory Reform Committee considered that changes to the rules on protected rights were too significant for a regulation-making power. It recommended that the changes be included in a future Bill, once decisions on the policy had been made. I have written to the committee accepting its recommendation. As a result, the amendments will remove the delegated power in line with the committee's recommendation. At the same time, the amendments remove all the rules that apply to protected rights, except for the provisions concerning survivors. The consequence of those changes is that protected rights will be treated in the same way as non-protected rights when being invested or transferred.
Furthermore, at the point of annuitisation, members will no longer be required to purchase a unisex annuity. Unisex annuities are not required, or indeed generally provided, for non-protected rights. That change means that in future those who are not married or in a civil partnership will be able to buy just one annuity with their protected and non-protected rights. That will bring about some simplification for schemes and members. We acknowledge, however, that further simplification could be achieved by removing the rules on survivor benefits.
I am sure that the Committee will agree that it is right to consider the question of survivor benefits in greater depth and that a decision on protected rights and survivors must await the outcome of the review of the working of the open market option for annuities. When that decision is taken, any changes to legislation will be placed in a future Bill to allow a full discussion.
Contracting out is a complex matter which has given rise to many legislative provisions with multiple cross-references. In order to achieve the abolition of contracting out on a defined contribution basis, a number of amendments and repeals are being made to existing legislation by virtue of Clause 15 and Schedule 4. The minor and technical changes in this group of amendments allow cross-references to the provisions that are being amended or repealed to be corrected in other legislative provisions.
Amendment No. 54, in the name of the noble Lord, Lord Skelmersdale, seeks to remove all the protected rights rules, although I understand that he may not move it. As I have said, our amendments abolish most of the rules, but they will preserve the rule that requires the purchase of a joint-life annuity if the scheme member is married or in a civil partnership at the point of annuitisation. The Government acknowledge that the removal of this remaining rule would further simplify the schemes for members, but we believe that such an important matter must be looked at in greater depth before that decision is taken. I beg to move.
I tabled Amendment No. 54 in the spirit of inquiry to elicit the sort of information that the Minister has just given. I accept that, at this stage in the proceedings, it goes a trifle too far, but something of the remainder of that paragraph in Schedule 4 may well be found in the next pensions Bill. Anyone would think that there had been some collusion between the Minister and me, as we are in perfect agreement on this point. I assure the Committee that there has been no such collusion. When the time comes, I shall not move Amendment No. 54.
Far be it from me to join this genuine or implied collusion. I am sure there is none, but I will leave it to the Minister and the noble Lord.
moved Amendments Nos. 50 to 52:
Clause 15, page 19, leave out lines 10 to 15
Clause 15, page 19, line 21, at end insert "(but any power to make regulations conferred by those amendments may be exercised at any time so as to make regulations having effect as from the abolition date)"
Clause 15, page 19, line 26, leave out from "Schedule 4" to end of line 27
On Question, amendments agreed to.
Clause 15, as amended, agreed to.
Schedule 4 [Abolition of contracting-out for defined contribution pension schemes]:
moved Amendment No. 53:
Schedule 4, page 46, line 8, at end insert—
"In section 20 (transfer of accrued rights) in subsection (3) (regulations may provide for certain provisions to have effect subject to modifications) for "sections 26 to 33" substitute "sections 25A to 33".
On Question, amendment agreed to.
[Amendment No. 54 not moved.]
moved Amendments Nos. 55 to 61:
Schedule 4, page 46, line 16, leave out "or"
Schedule 4, page 46, line 18, at end insert ", or
(c) a registered pension scheme under section 153 of the Finance Act 2004—(i) which is not a scheme falling within paragraph (a) or (b), and(ii) to which the rights of a person who was at any time a member of a scheme mentioned in either of those paragraphs have been transferred."
Schedule 4, page 46, line 29, at end insert—
" After section 27 insert—
"27A Requirements in relation to giving effect to protected rights
(1) The rules of the scheme must provide that if, in the case of a member who is married or who has a civil partner, effect is to be given to the protected rights of the member by—
(a) the provision by the scheme of a pension, or(b) the purchase by the scheme of an annuity,the requirement set out in subsection (2) must be satisfied in relation to the pension or annuity.
(2) The requirement is that, in a case where—
(a) the member dies while the pension or annuity is payable to him or her, and(b) the member is survived by a widow, widower or surviving civil partner ("the survivor"),the pension or annuity is payable to the survivor in prescribed circumstances and for the prescribed period at an annual rate which at any given time is one-half of the rate at which it would have been payable to the member if the member had been living at that time.
(3) The rules of the scheme must provide that, if effect is to be given to a member's protected rights by the provision of a lump sum, the prescribed conditions must be satisfied.
(4) The rules of the scheme must provide that, if—
(a) a member has died without effect being given to his or her protected rights, and(b) the member is survived by a widow, widower or surviving civil partner,effect is to be given to the protected rights in such manner as may be prescribed."
Omit sections 28 to 29 (ways of giving effect to protected rights etc.).
For section 32A substitute—
"32A Discharge of protected rights on winding up: insurance policies
(1) Where an occupational pension scheme is being wound up, effect may not be given to the protected rights of a member of the scheme by taking out a policy of insurance (or a number of such policies) under which the member is the beneficiary unless the policy (or each such policy) satisfies the requirement in subsection (2).
(2) The requirement is that the policy of insurance makes such provision in relation to giving effect to the protected rights of the beneficiary as a scheme to which section 25A applies is required to make under or by virtue of section 27A in relation to giving effect to the protected rights of a member of the scheme.""
Schedule 4, page 52, line 11, at end insert—
"In section 2 of that Act (registration of stakeholder pension schemes) in subsection (2) (when Authority to register schemes) in paragraph (b)(i) for "to (10)" substitute "to (9)"."
Schedule 4, page 52, line 14, at end insert—
"In Schedule 5 to that Act (pension credits: mode of discharge) in paragraph 7(6) (disqualification as destination for pension credit) in the definition of "contracted-out rights"—
(a) in paragraph (a), omit "or (3)";(b) after paragraph (a) insert—"(ab) an occupational pension scheme constituting a money purchase contracted-out scheme for the purposes of that Act, or";(c) in paragraph (b), for "which is" substitute "constituting"."
Schedule 4, page 53, line 23, at end insert—
"In section 20 (transfer of accrued rights) in subsection (3) (regulations may provide for certain provisions to have effect subject to modifications) omit "and 43 to 45".
Omit section 31 (investment and resources of scheme)."
Schedule 4, page 54, leave out lines 35 to 38 and insert—
"(a) omit the definition of "appropriate flat-rate percentage";(b) for the definition of "the percentage for contributing earners" substitute—""the percentage for contributing earners" means 3 per cent;"; (c) for the definition of "the percentage for non-contributing earners" substitute—""the percentage for non-contributing earners" means 4.8 per cent.""
On Question, amendments agreed to.
Schedule 4, as amended, agreed to.
Clause 16 [Dispute resolution arrangements]:
moved Amendment No. 62:
Clause 16, page 20, leave out lines 26 to 33 and insert—
""(3) The procedure—
(a) must include provision requiring an application to which subsection (3A) applies to be made by the end of such reasonable period as is specified;(b) may include provision about the time limits for making such other applications for the resolution of pension disputes as are specified.
(3A) This subsection applies to—
(a) any application by a person with an interest in a scheme as mentioned in section 50A(1)(e), and(b) any application by a person with an interest in a scheme as mentioned in section 50A(1)(f) who is claiming to be such a person as is mentioned in section 50A(1)(e).""
Although this is a minor and technical amendment to the clause on dispute resolution arrangements, it is a necessary change because, without it, the time limits for making an application will not work as intended. The requirement for occupational pension schemes to have dispute resolution arrangements has been with us since 1997. From the start, there has always been a cut-off date for applications from people who no longer have an interest in the scheme. This is simply to protect schemes from complaints many years after the event, when there may be little prospect of a satisfactory investigation or resolution. Up to now, these time limits have always been prescribed in regulations but, in keeping with the wider policy on time limits, we want to replace the fixed six-month period currently in place with reference to a reasonable period. What constitutes a reasonable period is open to interpretation. The Pensions Regulator is required under Section 90(2)(a) of the Pensions Act 2004 to provide guidance in the form of a code of practice. In the dispute resolution arrangements, the requirement for an application to be made within a reasonable time is intended to apply in two situations: first, for applications where the person has ceased to be a person with an interest in the scheme; and, secondly, where a person is claiming to be a person with an interest in the scheme, but that interest is in the past. Unfortunately, the clause as drafted goes beyond what was intended in the second situation.
In the case of an application from someone claiming to have an interest in the scheme, new subsection (3)(b) to Section 50B, as inserted by Clause 16 as it stands, requires the arrangements to apply a time limit for every case, including those where the application is from a person claiming to have a current interest in the scheme. This amendment ensures that the requirement for a time limit for applications applies in those cases only where the claimed interest is in the past. Under the clause as it stands, it is difficult to establish when a reasonable period would start where the application is, for example, from someone claiming to be a current member. The amendment is necessary to ensure that the time limits work as intended. I am sorry if this sounds a little convoluted: in this case, the effect of the amendment is far simpler than the explanation. I beg to move.
This may be a rather nitpicking point, but in the amendment subsection (3)(a) of new Section 50B says "must" and (b) says "may". In the Bill, it is the other way around. This amendment is a technical replacement for the words in the Bill, so why have we had this—I think the word is probably—transvergence?
The noble Lord is as eagle-eyed as ever. I may just have to ponder a little to give him a full explanation on why those words have been transferred or transmogriphied or whatever, but I will revert to him.
moved Amendment No. 65:
After Clause 18, insert the following new Clause—
"Minimum retirement income
(1) The amount of the minimum retirement income in respect of each tax year shall be set by the Chancellor of the Exchequer by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c. 16).
(2) Before making an order under subsection (1), the Chancellor of the Exchequer shall consult such persons as he considers appropriate.
(3) An order under this section (other than the order that applies to the first tax year during which this section is in force) must be made on or before 31st January of the tax year before the tax year to which the order applies."
First, I declare my interest as a partner in the national, commercial law firm of Beachcroft LLP, as deputy president of the Chartered Insurance Institute and the other entries in the register, including my honorary fellowship of the Institute of Actuaries. We now move on to discuss a battery of amendments that touch on some profound and serious issues of principle. This debate has been well rehearsed in this House, in another place and beyond these precincts for many years. I am obliged to my honourable friends in the other place, including Nigel Waterson and Sir Malcolm Rifkind, for their hard work in helping to draft the amendments to which I now speak, including Amendment No. 65.
To summarise the thinking that lies behind these amendments, I concede immediately that annuitisation has its merits. It offers a simple and secure way of ensuring that a pensioner will be able to maintain a certain level of income throughout his or her retirement. There is nothing in these amendments that will stop pensioners looking for this simple and secure way of funding their retirement by continuing to buy an annuity at any point throughout their retirement. It is also palpably true that the guarantee of a certain minimum income, no matter how long one might endure, is to the general benefit of the taxpayer at large.
Annuities can of course prevent pensioners spending their pension pots too quickly and being forced to fall back on benefits such as pension credit. Again, I should like to point out that these amendments do nothing to weaken that guarantee. Instead, they give pensioners a choice. Pensioners would be able to exercise choice over their pension funds with the single limitation that they must not recklessly spend them so that they end up becoming a burden to the long-suffering taxpayer.
The largest amendment in the group, Amendment No. 66, allows for the establishment of a minimum retirement fund. In essence, this would be a savings scheme from which pensioners could draw down their retirement savings at a time of their choosing, as subsection (2) of the proposed new section makes clear. Subsections (3) and (4) of the new section ensure that a pensioner cannot draw out so much that the provider will no longer be able to guarantee a certain level of income for the rest of his or her life—a level that Amendment No. 65 establishes is set by the Secretary of State. The final two amendments are consequential.
The Parliamentary Under-Secretary of State for Work and Pensions in another place suggested that there was no real demand for this sort of scheme, but that is certainly not the case in other countries. In Canada, a similar scheme is chosen by around 50 per cent of pensioners; indeed, it is the most popular savings vehicle in the country, and I reckon that the popularity of a scheme is not a bad criterion by which to judge it. On that basis, surely the fact that not one other country in the developed world has a compulsory annuitisation scheme akin to ours tells its own story.
Ministers have already allowed those who find compulsory annuitisation unattractive a way out. The Christian Brethren must have set a record by now for the most references in parliamentary debates per capita. This tiny but admirable band of around 738 souls at the last count has a principled objection to the pooling of the risk of mortality, which is essentially how annuities work. Quite understandably, Ministers hold the opinion that religious convictions which do no harm to the general public or to the taxpayer should be permitted. Consequently, they have allowed members to take out alternatively secured pensions. What I find quite inexplicable is why the Government will not extend the same privilege to those who object to compulsory annuities on non-religious grounds. I hope that the Minister will be able to explain why a secular desire to avoid suffering the unnecessary costs and inflexibility of an annuity is considered less legitimate than the desire to avoid breaking a religious stricture.
Members on these Benches believe that a person's pension pot is his or her own property. Tax incentives for pension schemes are there to encourage people to save for their retirement; they do not and should not transfer moral or practical ownership of those schemes to the Government. Neither do they provide an excuse for the Government to interfere or meddle, beyond protecting the taxpayer from misconduct or maladministration, with how that retirement is to be enjoyed. These amendments would therefore re-establish control for our fellow citizens over their own hard-earned money. They would also protect the taxpayer from being forced to bear the cost of any reckless decisions and allow for a secure income throughout retirement. So I would contend that these amendments are all about choice, freedom and the right to property.
It is precisely—I must say to the noble Lord, Lord Oakeshott—because this is an issue of principle that I continue to harbour reservations about Amendment No. 80, which we are also debating. I look forward to hearing from him on that subject. This is because Amendment No. 80 concedes the all-important principle relating to freedom of action and seeks only to ameliorate the effects of a bad law. David Laws put it very well indeed at the Committee stage of this Bill in another place when he described the situation in the following terms:
"The problem here ... is that we have a rather antiquated and illiberal system of obliging people to take annuities".—[Official Report, Commons Pensions Bill Public Bill Committee, 8/2/07; col. 391.]
That was a fairly firm statement. I look forward to hearing from the noble Lord, Lord Oakeshott, whether in the light of that statement he might feel able to support this group of amendments because Amendment No. 80 would merely postpone the age at which this rather antiquated and illiberal system may continue.
There is always a temptation when in government to seek to expand one's sphere of influence by exercising control over areas of human activity which are best left alone. There is a consensus that what we need—indeed, what we want—is for people to invest more for their old age. I believe these amendments would enhance the incentive to save, with no ifs and no buts. I beg to move.
My name is attached to the amendment because my noble friend Lord Hunt is absolutely spot on. For several years now the position of the Conservative Party has been to abolish the obligation—like my noble friend, I highlight the fact that it is the "obligation" and not the "right"—to take an annuity at the age of 75. Nothing has changed in our determination and it remains our policy today.
Clearly it would be quite wrong for people to spend all their pension pot before they reached 75, or, indeed, before they died, and we propose the alternative of a retirement income fund so that they will not be able to depend on state benefits. As my noble friend said, the guts of this are to be found in Amendments Nos. 66 and 67. The retirement income fund has been criticised outside this Chamber for being far too complicated, but I do not believe that it is. I remind the Committee that a non-statutory fund can already be built up by way of independent savings accounts. Many people have these ISAs and the tax regime, though very different, is broadly similar in effect. ISAs can be spent tax free at any point. However, once they are spent, the previous owner may still be eligible for state benefits—pension credit, for example. The conditions attached to the retirement income fund avoid this.
The soon-to-be-former Chancellor has been both obstinate and quirky on this issue: obstinate, because to start with he would brook no argument on annuities; quirky, because he suddenly produced a new pension product, the alternatively secured pension, as a result of lobbying by the Plymouth Brethren, who persuaded him that taking an annuity was a form of gambling, which is anathema to their brand of religion. Although this pension was intended only for them, it was inevitable that pensions consultants would seek to use it to cover other people. So successfully did they do this that he had to rein in the alternatively secured pension in a subsequent Budget.
Even so, there is an obvious chink in the Chancellor's armour, which should now be broken cleanly and not only for the few. The Government like to give the impression that this set of amendments is only for the few. That is not so. The Bill is the precursor of the plan of the noble Lord, Lord Turner, for personal pensions, which we will be discussing later today. It will take 50 or more years to build a complete pension pot. Page 7 of the Pensions Commission's report reveals its belief that:
"On reasonable assumptions about rates of return and years of contribution this might secure the median earner a pension at the point of retirement of about 15% of median earnings".
The White Paper says a very helpful thing at paragraph 5.21:
"For those who do not make an annuity decision by the age of 75, it will be necessary for annuities to be purchased on behalf of individuals".
How much better it would be for the retiree to be able to pick his own annuity date. So long as he remains on total income above the pension credit level, no one can complain. Why, so long as people do not end up on state benefits, should they not be allowed to draw down their pension as and when they need it? The same rules should apply to everyone, as do those that apply now—those that we are determined to abolish.
I feel a considerable sense of déjà vu in this debate. The compulsory taking of annuities was the key issue at the end of our consideration of the previous Pensions Bill in 2004, which the noble Lord, Lord Skelmersdale, and I both remember well. We had repeated ping-pong, and eventually our joint amendment to increase the age for compulsory annuitisation, which ended up being 80, was lost by a small majority.
Our approach to the Bill is to see whether we can practically improve the situation for people who are compelled to buy annuities. We heard movingly from the noble Lord, Lord Hunt, the appeals to property, liberty and so on. They will not cut any ice with the Government, obviously, but in practice the points can be argued either way. He helpfully—and I was going to make this point—quoted my honourable friend David Laws, who went on to say that the problem,
"is largely built on the fact that we have a low basic state pension and a great deal of means-testing; therefore, the Government have stuck with these rules over time to try and protect the taxpayer interest. We understand the Government's concerns about compulsory annuitisation, but it is ... part of the price that we pay for having a low foundation".—[Official Report, Commons Pensions Bill Public Bill Committee, 8/2/07; col. 392.]
The top priority for us on these Benches is to improve the basic state pension as fast as possible and to get away from means-testing, which will reduce the problem. We and the Conservatives argued strongly and clearly last time that, even if one accepts the Government's argument that there should be some protection—and I think that there is a case for it—it makes no sense to have the age of compulsory annuitisation frozen in aspic at 75. That is the practical point where we can move.
I remember meeting the Minister at the other end at the time, Malcolm Wicks, with my colleague Steve Webb, and having a discussion during which, as he later did publicly, the Minister gave an undertaking that the whole question of compulsory annuitisation would be revisited after the Turner commission reported. The commission reported, but if there was a review we heard nothing about it, and there has been no change in the Government's position. I am bound to say that I feel fairly let down by that process, and I shall focus on holding the Government to account in our consideration of the Bill and forcing them at least to explain why their position makes sense when life expectancy is rising so fast. If it was right to take the decision back in the late 1970s to fix the age at 75, how can it possibly be right to maintain that position indefinitely?
At the time of the previous Bill, I had quite a discussion with the noble Baroness, Lady Hollis, then the Minister, about how fast life expectancy was increasing. At that time, it seemed common ground that life expectancy had increased by about six and a half years since the age of compulsory annuitisation was fixed at 75. It is now three years later and that figure has now risen to eight years, so the age of compulsory annuitisation would be 83 if one were to put it on the same basis as before. Our amendment suggests 85, but we are reasonable people and are putting that age forward as an initial shot. We would like to hear the Government's response on what a realistic figure would be, given that I thought that, in many ways, they accepted the principle of movement under pressure at the time of the previous Bill.
Our other problem with the Conservative proposals is that they are complicated. If there is political consensus in this country on pensions, it is that we want simplicity. Nothing could be simpler than to discuss and agree the age, whether 80, 82 or 85, to which the age of compulsory annuitisation should be increased. Everyone knows where they stand. I am afraid to say that when one looks through all the amendments on RIF tabled in the Commons and the Lords, the Conservative Opposition's way is more complicated. It is unrealistic to think that there is any chance of what they propose happening and it is complicated at a time when we all want simplicity. I shall not quote the people who are giving views too much, except to say that the Association of British Insurers is calling for a straightforward increase.
Let us be practical and put something forward in this House that tries to achieve a realistic way forward rather than something that tries to change the principle on which the Government work, which I do not think that they will change. Let us put something in that is based on the evidence of the change in life expectancy since the rules were last fixed, which is what we asked for in the previous Bill.
I am rather amazed by that speech. I seem to remember that at Second Reading the noble Lord, Lord Oakeshott, spoke about compulsory annuitisation. He laid down the gauntlet and said:
Having listened to that meandering speech, I am not quite sure what fight the noble Lord is in. As far as I can see, the most we can hope for is a brave abstention on the part of the Liberal Democrats. If the noble Lord is going to go for those sorts of policies, he should moderate his language when it comes to Second Reading debates. His option of adding a few years to the annuity age of retirement does not remotely begin to answer to issue.
It was the stomach for the fight for exactly this amendment, which we could have won last time when it was a joint Conservative/Liberal amendment. We are moving it this time and suggesting that now is a realistic time. It is very clear stomach for a very clear fight, not a different one.
The noble Lord has a selective stomach for a fight. I am sorry to say this to him because I am normally on his side, as he well knows, but I found his speech to be one of the more meandering and obscure speeches he has made on pensions for some time. His solution does not answer the principle at all. If it was accepted, it would increase the age for annuities, but it does not answer the principle enunciated by my noble friend Lord Hunt. The essence of his proposal is that it gives choice to the public. Many members of the public may well choose to go for the certainty of an annuity and a tax-free lump sum; that may well be attractive to many people. However, some people may want to exercise their choice in another way. They may want to choose not to have an annuity and to be able to leave some money to their children. It will probably not be a great deal of money, but it will be some money. Provided that the Bill does not come back on the taxpayer in terms of extra benefits—in other words, if someone manages to diffuse his resources in a way that means he becomes dependent on pension credit or other benefit—I cannot for the life of me see the objection. I thought that my noble friend made the case very powerfully.
We are trying to get more and more people to save for their future. I thought that was what the report of the noble Lord, Lord Turner, was about and what the Government's aim was. Here is a sensible incentive for people to save for their future. What my noble friend said about the Canadian experience was extremely interesting and shows the potential that exists. We have to decide whether we will simply use empty words about trying to get people to save for their future or whether we will take sensible action. This is not the most radical step ever invented. The Treasury has been taking the same stance year after year and its opposition to the proposal is quite ludicrous. The Government should think again, as should the Liberal Democrats.
Compulsory annuitisation was not discussed by the Pensions Commission, essentially because there were so many other issues we had to discuss that we were relieved to be able to leave some things aside. However, we need to address this debate somewhat more rationally than it has been addressed in the past.
It is fairly clear that there are two arguments, but two arguments only, for compulsory annuitisation. One is that people should not fall back on the means-tested benefits of the state; the other, which is also a legitimate Treasury argument, is that tax relief is given to pension contributions as they go into the scheme, and it is therefore reasonable that as money comes out of the scheme, those are taxed moneys out. The total tax treatment is not more favourable than is intended, allowing for the fact that the most favourable element of the tax treatment is the tax-free lump sum that already exists. However, if we took those two principles, we might well end up with a rule establishing a minimum level of annuity that people had to buy, plus an appropriate set of rules as to the tax treatment if people, at any stage, either through inheritance or taking a lump sum, took the lump sum out. I have found it difficult over the years to understand what the arguments against that approach are.
I have some concerns that the amendment in the names of the noble Lords, Lord Skelmersdale and Lord Hunt, is a little complicated. I am not sure why one should not end up with something that says that at the date of compulsory annuitisation one has to buy an annuity equal to some specified amount where that specified amount is enough, assuredly, to keep one out of dependence on the state—end of story, with appropriate tax treatment on top.
This is a debate with strange terms. I have never quite understood why that is not what we are trying to work out. However, I have sympathy with the belief of the noble Lord, Lord Oakeshott, that whatever else we do, we should accept the principle that as the state pension age goes up, the point of compulsory annuitisation should go up at least pari passu, and arguably more than that, to reflect the fact that it has not gone up for many years.
Whatever is resolved as a result of these amendments, there should at least be an increase in the age. The Treasury, the Government and all parties should think about a provision which goes back to the basic principles of an appropriate Treasury concern about tax treatment and appropriate concern that people are not dependent on means-tested benefits in retirement.
I, too, have a lot of sympathy with these amendments. I am not sure that I support them in the form in which they are currently drafted. I worry about their complexity, and in the remarks of the noble Lord, Lord Hunt, I did not notice any mention of the fiscal adjustment that the noble Lord, Lord Turner, identified, which would need to be made.
This is not about rights—it is about incentivising savings. What is increasingly happening is that annuity pots are no longer the prerogative of the rich—the upper 5 per cent or 10 per cent—and therefore nothing to do with the rest of us. As more of us go on to DC schemes, more of us will find that our pension is in the form of a pension pot rather than a lifetime annuity through a final salary scheme.
I have figures here that my noble friend was kind enough to give me in January, and they are quite remarkable. A man on median-average earnings over 40 years contributing 4 per cent plus 4 per cent—in other words, the level of the personal account, which is the lowest conceivable level that will exist—in a contracted-in scheme underpinned by a basic state pension and a state second pension would generate £240,000. A rate of 5 per cent plus 5 per cent, which is widespread in the voluntary sector, would generate a pot for that person of nearly £300,000 and, for a woman on median earnings, about £233,000. Those would be conventionally sized pots for people on median earnings in relatively low-contribution DC schemes—in other words, in 10 or 20 years down the line, most people.
The question then is how we encourage people to save. My criticism of the amendment is not only that it does not address the tax relief issue but that it is not bold enough. I very much liked the amendments tabled, perhaps to the 2004 Bill, that proposed a lifetime savings account. The two reasons why people are unwilling to pay into pension schemes are, first, because they would be gambling on their life expectancy and, secondly, particularly for women, if a catastrophe happens to them such as divorce or disability, they cannot get access to the money. It is tied up for 40 years. In the original Conservative proposals for a lifetime savings account, you could top-slice a fraction of it, as in Singapore and Chile, for possibly defined purposes, and rebuild that sum up again, so you would have an emergency savings fund embedded in your pensions scheme. That was an even more attractive proposition than the one proposed here today. The amendment leaves out part of what it should address and fails to be as bold on the savings issue as it might be.
I agree with the basic thrust of the argument made by the noble Lord, Lord Turner. The state's public policy, while encouraging savings, is to ensure that no one should have recourse to public funds. Those funds take two forms: recourse to benefits and recourse to unreasonable tax privileges. Let us go back to our person on median-average earnings, with his £240,000 at 4 per cent plus 4 per cent—as I say, a personal account. He will have a BSP and a state second pension, which would together generate £7,000 or £8,000 in today's terms. With £100,000 of that annuitised, it would produce a further £7,000 and an income of around £15,000, which by my calculations would float him off any conceivable recourse to benefits. Now add in a deduction for taxed extra gains—30 per cent or whatever—and that person would still be left with a very useful pot of some £100,000 or more.
What does it matter to the state what that person does with that money? There is no recourse to benefits and you have neutralised for the fiscal privileges, so why does it matter? I have tried to suggest to the Minister before, although I am not sure that I persuaded him, that the state would make a profit. That sum of money would go into an account—a conservative building society account, perhaps, which would pay interest, the tax on which would go to the Treasury. If some of the money was left in the person's estate, it would go to his children, on which they would pay IHT. So why is there a loser? It is win-win, surely. It is a win for the person who wants to save, a win for public policy for us taxpayers, and a win for the Treasury, which could under certain circumstances actually make a modest profit. Surely everyone is happy.
I am baffled about why there should be resistance. I could understand it if this was regarded as a perk for the "over-privileged rich" who are "already heavily subsidised" through higher rate tax relief on their pensions, but we are talking about people who are on median earnings or even on the basic personal accounts of the noble Lord, Lord Turner, and who will end up with pots of £239,000 or £240,000 and are contracted in, which means that they are unlikely to have recourse to public benefits. So why should we not do this with those provisos?
As I say, I cannot support the amendment in this form as it is much too complicated. I also wish that it was bolder by trying to introduce the element of a lifetime savings account. I do not know whether the right Bill to do that is this one or the Bill to be introduced next year, but we need finally to lay this shibboleth to bed.
When I retired from the opposition Front Bench as spokesman for work and pensions after eight years, I was clear that I was leaving that responsibility in the talented and admirable hands of my noble friend Lord Skelmersdale. I congratulate him on how he has continued to fulfil that role so diligently. It is a very onerous task.
At the same time, I resolved not to take part in debates on work and pensions. I should have known better than to sit in the Chamber this afternoon. Like my noble friend Lord Fowler, I was astonished by the speech of the noble Lord, Lord Oakeshott. I moved amendments very similar to those that we are debating now in the debate on the Pensions Bill on
If I was astonished by the speech of the noble Lord, Lord Oakeshott, I was even more astonished by that of the noble Baroness, Lady Hollis. She also spoke in the 2004 debate, when I had to point out that removing this limit or even raising the age limit—and I am in favour of getting rid of it altogether—would benefit not only the rich. People on lower incomes also would benefit from not drawing their annuity at a particular age and could well take the view that they could get a better annuity if they delayed than if they were forced into it on a particular date. I have taken the view for some time that interest rates will continue to rise and that annuity rates will be higher than they were when we debated the matter in 2004. However, that advantage, that choice, would benefit not only those with relatively large pension funds. I welcome the noble Baroness on this road to Damascus; it is good that she can now recognise that. Nevertheless, it is very difficult to reconcile her speech today with the one she made in 2004.
This has been going on far, far too long. Your Lordships' House has agreed to amendments of this type three times, and I very much hope that the Committee will agree to them again today. This matter needs to be resolved. It is absurd that people should continue—subject to the point made by the noble Lord, Lord Turner, about the tax treatment arrangements—to be denied that choice and forced to take an annuity at a moment that is disadvantageous to them, with absolutely no benefit to the Treasury. I hope very much that your Lordships will support this amendment, moved so admirably by my noble friend Lord Hunt.
The arguments have been laid out very powerfully. My noble friend Lady Hollis has come among us unmuzzled. Therefore, I shall briefly add an extra plea from these Benches to the Minister that the Government should look sympathetically and constructively at the case for ending the obligation to annuitise at 75 or, indeed, at any age. I am not attracted by the Liberal Democrat proposal to defer the evil day. The Government need to produce their arguments, if they have any, about what the difficulties would be. Why should people be required to annuitise at any age? Why should capital, over and beyond what is needed to keep people independent of social security, be passed to an insurance company? Why should a saver not be able to pass it on in his or her estate, provided that tax relief is repaid and inheritance tax is paid on that estate? The net sums may not be terribly large after all that, but I still think that the principle is right.
As has been argued, we should encourage people to save. It is essential that we get coherence into savings policy and ensure systematic encouragement for people to save, instead of policies which contradict each other at different phases of life—there is tax relief to encourage pension savings but then you are told that the capital sum built up in your pension pot will be taken away from you. That does not seem a rational policy. As my noble friend also pointed out, would not the Exchequer do rather well? What on Earth is the difficulty?
I wish to speak briefly to the four amendments in this group in the names of my noble friends. For the reasons set out by the noble Baroness, Lady Hollis, we have to recognise that the annuity rules are a major disincentive to people accumulating savings in a pension plan. Like her, I think that the best solution would be to move away entirely from this stricture towards a much more flexible lifetime savings account, and sooner or later we shall get there. However, I recognise that we are dealing with a Pensions Bill this afternoon, and it seems to me that dealing with annuities in this way is a sensible first step.
Reading these amendments, I anticipated that the kind of objection made by the noble Lord, Lord Oakeshott, about the complexity of these arrangements, would be raised. Therefore, it would be useful, if the Government are bringing up the argument about complexity, to know whether that is the sole reason for their objection or whether they would be open to dialogue on whether different arrangements could be made. For example, the noble Lord, Lord Turner, suggested that people should be required to buy a fixed annuity and then be free to spend the rest of the capital; alternatively, if the Government do not want to introduce those conditions, they could specify a minimum level of capital that had to be kept within the scheme at certain ages. There are lots of ways that those measures could be simplified to achieve the same end of ensuring that people do not fall back on benefits while dealing with the tax issue on other funds that are taken out. It is important that we know whether the Government are against annuitisation relief in principle or whether it is simply a question of finding a practical way round it.
I cannot sit down without making the further point that another aspect of the disincentive of annuities is the inability to pass savings in pension pots on to the next generation. If money is saved in a pension pot, surely others who will need a pension pot later could also benefit from it. Do the Government accept that it is beneficial to take money left in a pension fund at the end of a life and pass it into a pension fund of the next generation without tax being taken from it? I recognise that I am extending the argument slightly.
At Second Reading I was rather dubious about the benefits of raising the age at which you could take annuities, but the more I have listened to what has been said this afternoon, the more convinced of them I have become. We have the noble Baroness, Lady Hollis, on side, as it were. I have been through the same procedure with her on one or two other occasions, when I was told that my amendment, which will come up later, had no basis of justification. But now that we have heard from her about all the benefits that would arise from this measure, I am even more convinced. There will still be a pot, albeit a discriminatory figure, of some £233,000 for a woman who retires, compared with some £240,000 that an equivalent man would receive. Nevertheless, it is a lot of money and, as we have heard, it is highly likely that the sum will grow with inflation. If we can delay payment until as late as age 85, it is possible that by then no one will be able to argue that the gap between men and women has not closed in every sense; almost certainly, the ages at which men and women die will be closer together. For those reasons, I now very much support the amendment, not least because it will contribute a little to the arguments that I shall advance later.
Perhaps I may add two comments. First, I support and reiterate the words of the noble Lord, Lord Blackwell, who correctly asked the Government to be clear whether they objected in principle to the amendment or simply on the basis of detail and complexity. The noble Lord, Lord Hunt, said that the Government expressed concern in another place that few people would take up that option. It is somewhat strange to use that as an argument, given that the alternative assured scheme was introduced for the 750 wonderful members of the Plymouth Brethren, although they are small in number.
Secondly, we said in the Pensions Commission report that there is an issue regarding the total capacity of the insurance sector to write the scale of annuities for which there could be demand. As we shift from defined benefit pension schemes to defined contribution schemes, a previously implicit process of annuitisation within defined benefit schemes is becoming an overt purchase of annuities from insurance companies. There is an issue about the capital capacity of insurance companies to write the sheer scale of annuities that will be demanded. The bigger the imbalance is between demand for and supply of that capacity, the lower the annuity rates will be.
There is an interest for everyone who buys an annuity in ensuring that those who do not need to buy one do not push their demand into the market and therefore decrease yields. That is a serious point. It is a benefit not simply for those who have chosen not to buy annuities but for those who buy them, as the vast majority of people will.
I welcome the debate, although I feel a little lonely. I missed out on the debate in 2004—I had just arrived in the House during the final stages of that Bill. I will respond in particular on the Government's view on practicalities and on principle.
The Annuities Market, published with the Pre-Budget Report 2006, restated government policy on turning tax-privileged pension saving into retirement income by purchasing an annuity by the age of 75. It also responded to the views of the Pensions Commission. I reiterate our belief that pension saving is about giving individuals an income in retirement and nothing else. The Government provide tax incentives to encourage people to save for retirement. In 2006-07 those were in total some £16.3 billion. When an individual takes their pension benefits they can take up to 25 per cent of the pension fund as a tax-free lump sum, which is a not inconsiderable benefit.
In return for those generous incentives, the Government have required, as part of the deal, that the remainder of the pension fund is, by the age of 75, converted into a secure retirement income for life, or is used to provide for dependants' benefits. The Government believe that the most efficient way of doing this is by purchasing an annuity.
As we know, annuities provide the peace of mind of an income for life regardless of how long that may be. While they provide "simplicity", "security", "a guaranteed income" and "little risk", some feel that they are inflexible and represent poor value for money or prevent them passing on their pension to heirs on death. The Annuities Market responded to these issues.
In terms of bequests, more than half of a pension fund might consist of tax relief. There is no rationale for the taxpayer subsidising bequests. Individuals wishing to pass on assets at death have a number of non-pension vehicles to choose from. Individuals have flexibility to annuitise between the ages of 50—or 55 from 2010—and 75 to suit their circumstances. The noble Lord, Lord Higgins, referred to people being forced into an annuity at the wrong time, but there is a fair spread of years within which to make your choice. Consumers can now choose from an increasing range of annuities, including those that facilitate a flexible retirement or take on investment risk.
The noble Lord, Lord Turner, referred to pressures on the annuities market. In recent years, despite what I think is a threefold increase in the level of investment in annuities, the market has coped and innovated. The Government are keen to work with the market to see further innovation.
The most comprehensive UK pricing survey, published in 2006, showed that annuities are priced fairly. Today's annuity rates need to be seen in the context of the low inflationary environment and the fact that people are living longer. The Government welcomed what we perceived to be the Pensions Commission's endorsement of this broad policy. It stated:
"Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time".
Let me turn to the proposed new clause which would establish a "retirement income fund" as an alternative to annuities to deliver an income stream in retirement. The RIF has appeared in various guises in the past, but I would like to restate that it is incompatible with government policy. The RIF would remain invested and withdrawals between a minimum and maximum would be permitted. An "annual maximum withdrawal" allowance would be set by the provider for each member, based on an assessment of their life expectancy. A member's withdrawals from the fund could not, in a year, exceed that allowance. An "annual minimum withdrawal" allowance would also be set by the provider, and we presume that a member must withdraw at least this each year. In setting this, the provider would have to ensure that the member's total income was at least equivalent to a "minimum retirement income", as that is defined in the proposed new clause.
Nothing in the proposed new clause appears to stop the minimum allowance being set at zero. Provided that the member's income from other sources for future years is greater than an MRI, it appears that there is effectively no maximum withdrawal from the RIF—in which case the member can draw any income. Additionally, in such a situation, an individual might choose not to draw any pension income at all from the RIF in order to pass the fund on to heirs.
Like previous amendments, this proposal is silent on how RIF withdrawals will be taxed and what will happen on a member's death. I listened with great interest to the noble Lord, Lord Hunt, to see what he was going to say about that. My noble friend Lady Hollis picked up on that point. In a sense, I thought that the game was given away by the noble Lords, Lord Fowler and Lord Blackwell, who said that it is right that people should be able to pass something on to their children. Of course it is. However, to use pension tax privilege schemes of this nature to do so is not what the scheme is about. I presume that the intention is that RIF withdrawals would be taxed. RIF savings would be tax-advantaged compared with other forms of savings. Given the apparent ability to extract RIF savings below the annual maximum allowance, there is a danger that it would become a vehicle into which other savings are recycled for tax advantage rather than encourage new retirement savings.
Several noble Lords referred to the alternative secure pensions regime. Does not history prove that, where you create special arrangements and change the rules, people pile in and try to abuse the purpose for which the arrangements were created? One could see exactly that situation flowing from these arrangements, if we were to accept them. As such, I fear that the proposed new clause is designed to allow a small group of individuals to pass on their pension funds to their heirs on death and not, as intended, to secure a retirement income. Perhaps I may reiterate in a little more detail the deal on pension tax and why the RIF amendment clearly violates it. The Government provide—
I was going to raise this in relation to what my noble friend Lady Hollis said, but today's average annuity is purchased for around £23,500, with only 10 per cent of annuity purchases being over £50,000 and 3 per cent in excess of £100,000.
The people who could benefit from these arrangements are those who have significant pension pots. Research has shown that you need a pot of about £100,000 to be able to go down the alternative route of income withdrawal schemes, with all the asset management and associated costs that that entails, so it is not an arrangement that would be available to people in general.
Surely the Government's whole purpose is to try to create this kind of pot. The noble Lord is looking backwards but surely the whole point of his policy is to create a situation whereby people will have more than £100,000.
Of course we want that to happen, but I am not looking backwards; I am looking at where we are and at what pension pots are available today. My noble friend Lady Hollis is right about the sort of pots that people could accumulate under the new savings arrangements if one projects forward over 40 years, and we should welcome that. This situation does not necessarily continue for ever, but that is quite different from saying that today people on median earnings could take advantage of these sorts of arrangements. In my view, that is simply not the case.
The people who could use these arrangements are those in the 3 per cent group with pension pots in excess of £100,000. If the noble Lord is asking me the number of people involved, I do not have the precise figure but I shall be happy to return to the matter. The group is only 3 per cent of those with pension pots. He shakes his head; I am not sure whether he is disagreeing with the figure of 3 per cent or whether the figure is insufficiently focused to deal with the question that he raised.
The figures that I gave related to annuity pots and the percentage of people who benefited from those annuity pots. Of course, annuity rates change. As I think we all recognise, they are impacted by inflation and longevity assumptions and by what is happening with interest rates, so they are bound to change. I am not sure what point the noble Lord was pressing.
As I have already set out, I fear that the RIF would quickly become heavily marketed and used as a vehicle for saving funds for inheritance. That is clearly not part of the deal for giving tax relief. If I misunderstand the purpose—
If the Minister's major concern is the tax loophole, can he envisage our discussing tax arrangements which would close that loophole and ensure that money going in with a tax advantage was not improperly used? I do not think that anyone is arguing that the fund should be used as an improper tax loophole but, if that is the basis of his concern, can we not discuss how to find a solution to it?
I cannot support these amendments because of the way in which they are framed, but, in principle, if one could devise a structure that ensured that there was no recourse to public funds, but because you needed to take an annuity to float you off benefit levels at a sum to be determined by the Secretary of State and, on the withdrawals of money, there was a fiscal adjustment so that it was financially neutral, would my noble friend then withdraw his objections?
My answer to that is no, because the Government's starting point is, as I said, that the deal on pensions, and the tax structure that surrounds it, is tax relief on the way in, tax-free accumulation up to a point in time and then the need to convert that into secure income. My objections to this are several—I shall come to some of the practicalities, certainly the potential tax effects—and indeed it violates what we see as the clear principle in all this.
I would explain the attraction of the RIF for those individuals who could afford not to use their pension scheme to provide an income, but I shall skip that point, as I have already touched on it. However, if the noble Lord wants me to, I shall continue. Those who do not need to use their pension funds to provide an income could instead let it build up tax-free in their pension scheme and pass it on, in due course, to their heirs. Current tax rules do not permit lump sums to be paid out where a member dies after age 75, so any such payments will attract unauthorised payment charges of up to 70 per cent. In the context of the deal that I have just described, noble Lords will see that this charge recoups all reliefs given when the money went into the fund and on the income and capital growth while it was there.
As I have said, the amendment before us is silent on what payments can be made out of the fund on death and how those might be taxed. I do not know what the mover of the amendment had in mind—I would invite him to help us on that, but I am sure that he will do so when he winds up. It is clearly envisaged that a person can build up capital in their RIF without drawing an income. That leads me to conclude that the intention is that funds may be paid out of the RIF when the member dies after age 75 without unauthorised payment charges. As I have said, there is no rationale for the general body of taxpayers to subsidise bequests through tax relief on pensions. Those who want to save for bequests have a range of savings and investment vehicles available to them. The features of the RIF also give us a clue as to whom this amendment is aimed at.
Anyone taking out a RIF would need to absorb simultaneously investment and longevity risk and it is likely that they would need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than for conventional annuities. In many ways, the RIF resembles income drawdown—currently available up to age 75—whereby the pension fund remains invested and parts of it, within limits, can be withdrawn. It is likely to have a similar charge profile to the RIF's. We know, as this is documented in the Annuities Marketpublication, that income drawdown in its current form tends to be economic for funds of over £100,000—currently less than 5 per cent of pension funds. This is not a vehicle that will be of benefit or use to a whole range of pension savers.
I now turn to another aspect of the RIF. As I understand it, under the proposed RIF, no individual's total future income could fall below a minimum income requirement. We could have an entire debate on what constitutes a reasonable level, but I will limit myself to pointing out that such a process would be bureaucratic.
Another flaw of the RIF is the risk of running out of money in retirement. I note the noble Lord's faith in insurers' ability to predict accurately an individual's life expectancy. Surely no one can do that. Insurers can predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. The RIF seeks to take an individual view on an individual's life expectancy, which seems to me to be a very difficult thing to propose as being possible. One can envisage someone well into their 90s, whose pension pot has run out, pursuing their pension advisers, saying, "You told me I would only live to 85". Some very strange circumstances could flow from that.
Insurers efficiently spread, or pool, this so-called longevity risk across individuals. As some people in a pool of annuitants die earlier than expected, the insurer can carry on paying those living longer than expected. So early death does not result in "profit" for the insurer, but pays the pensions of those living longer than expected. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds.
I can only conclude that the RIF would be a complex product aimed at the wealthy at the expense of the taxpayer. By contrast, the Government are committed to promoting better outcomes for all pensioners in retirement. For example, the Government have set out proposals on personal accounts as a simple low-cost pension savings vehicle, which we hope and believe will lead to significant accumulation over time, as my noble friend Lady Hollis identified. The Government welcome innovative ideas for retirement income products for all.
Indeed we do, as noble Lords will see if they look at what has happened to the annuities market in recent years and the range of different products that have been developed. The Government are in continual discussion on these matters so that new products are in line with the principle of securing a retirement income.
The Government are clear, however, that innovation must take place in line with the principle of tax-privileged pension savings being used to provide a retirement income. We believe that RIF clearly violates that principle. The Government's opposition to this measure is driven by a matter of principle. I was asked to set that out. The proposal would also involve a cost to the Exchequer. In most cases I would expect the likely tax charge on RIF withdrawals to be less, often considerably, than the amount of tax relief enjoyed on these funds. It would be unfair to expect taxpayers to foot the bill for people who take tax relief for pension savings but who choose to spend the money on something else.
On the repeal of paragraph 16(1)(a) Schedule 29, value-protected annuities were permitted from
A common issue raised by consumers with annuities is the risk of dying soon after purchasing the annuity and the concern that the annuitant might not receive a financial benefit. Such concerns tend to misunderstand the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided that, even if an event did not occur and no claim was made, the income would be secure. But if the insured event does not occur—for example, in the case of someone living longer than expected—there is no return of the premium. So an annuitant's early death does not result in profit for the insurer, as I said.
Nevertheless, the Government have responded to concerns about early death by enabling providers to offer value-protected annuities in the early stages of retirement. This option expires at age 75. Abolishing the current age-75 limit would tend to benefit those more interested in using their pension fund for inheritance planning rather than for providing a retirement income.
I have taken some time to set out the policy on this matter because I was particularly pressed on it and because of the range of comments made. In essence, these amendments seek to benefit those who willingly take advantage of tax reliefs given for pension savings to build up a substantial pension pot, but who want to break their part of the deal and use tax-privileged moneys for other purposes. I therefore urge the noble Lord to withdraw the amendment.
I turn to the amendment on increasing the upper age limit of annuitisation from 75 to 85, proposed by the noble Lord, Lord Oakeshott. While this deals with a particular aspect of annuities policy, I fear that it is motivated by similar reasoning to that behind the RIF amendment, which I have already spoken about. As I set out, given that the Government provide generous tax incentives to encourage people to save for retirement, it is clearly important that we ensure that those moneys are used for the purpose for which they were granted. Annuities not only achieve this but provide the peace of mind of an income for life regardless of how long that life may be.
Within those overarching principles, people have considerable latitude on when to purchase their annuity. As I said to the noble Lord, Lord Higgins, they currently have a 25-year window between the age of 50 and age 75 in which to annuitise. Even after 2010, when the lower limit rises to age 55, people will still have a 20-year period in which to choose to annuitise best to suit their circumstances. That is close to a quarter of the typical male life expectancy. That significant current flexibility is little used at the upper limit. Only 5 per cent of people annuitise after age 70. The reason for that is that the vast majority of people need to draw on their pension savings in retirement—after all, that is why they saved in the first place.
However, a fortunate few who have made pension savings and taken the tax reliefs that go with them are able to delay annuitisation for a lengthy period post-retirement. They have sufficient wealth from other income and assets and are able to absorb the investment and longevity risks inherent in delaying annuitisation. Prior to annuitising, should the pension fundholder die, their nominated representative can inherit a tax-free lump sum, of which more than half could consist of tax relief granted for pension savings.
By raising the age limit by which a person must annuitise from age 75 to age 85, the amendment would significantly weaken the principle that pension funds built up with generous tax relief should be converted into a secure retirement income for life. Those who would benefit would be the small group who could afford to take advantage of the considerable latitude to delay annuitisation beyond age 75. There is no rationale for taxpayers subsidising bequests. Individuals who want to pass on assets at death have a number of non-pension vehicles to choose from.
I also draw the Committee's attention to the potential costs to the Exchequer of moving the age limit in that way. It is not possible to quantify that exactly because of uncertainties about behavioural effects, among other things, but although only relatively few people would benefit from the change, because they would typically be the better-off, the sums involved could amount to tens of millions of pounds, all for the benefit of the few individuals who would be using the relief given for pension savings as a means to pass on tax-advantaged lump sums to their heirs.
The Government do not believe that there is currently a case for changing the upper limit. As working longer is an integral part of reforms to meet the pensions challenge, the Government will of course continue to keep both the lower and upper limits under review.
In summary, the amendment, like the RIF, would undermine current policy on pension savings and decumulation. It would benefit those who willingly take advantage of tax reliefs given for pension savings to build up substantial pension pots but who want to break their part of the deal and use tax-privileged moneys for other purposes. Accordingly, I urge the noble Lord not to press his amendment.
I shall try to ensure that I cover all the points raised. Several noble Lords asked about choice. There is choice to act within or without a pension regime. Even within the pension regime, there is the 25 per cent tax-free lump sum, which is an added opportunity for people to save outside the scheme at some point. I understand the point made by my noble friend Lady Hollis, but I do not believe that it is right to say, as of today, that the issue affects people on median earnings. She is absolutely right to say that the landscape in 20, 30 or 40 years could be different and may well call for a change in the regime, but that situation is not with us now. I hope that I have covered all the points raised but, if not, I shall certainly try again. I urge the noble Lord to withdraw the amendment.
This has been a very important debate and I am very grateful to everyone who has contributed. I hope that the Committee will forgive me if I do not now make a detailed response to all the points that have been raised. The overwhelming majority of the speakers have been in favour of doing something. The sole exception has been the Minister, who has been, to use his own words, the lonely person in this debate. He has made my task much easier. I need not go into great detail, because he has made this test of opinion an issue of principle. He responded to the former Minister—the noble Baroness, Lady Hollis—and to my noble friend Lord Blackwell by saying that the Government are not to be persuaded, even if all the detail is supplied. Of course, once the Committee has expressed its opinion, it is perfectly possible to set out further details such as the tax, the fiscal adjustment and various other elements mentioned by the noble Lord, Lord Turner. That is fine, but let us now have a decision on the issue of principle.
As the noble Lord, Lord Oakeshott, recovers from the rather devastating criticism of him by my noble friend Lord Fowler—incidentally, was it not wonderful to hear the noble Lord, Lord Higgins, again on this subject?—I will quote again Mr Laws, his friend in the other place, who described the present system as "illiberal". If there is one word that can persuade him and his colleagues, surely it is that. I would now like to see whether the Committee agrees with Mr Laws, with me and with the majority of speakers that this present system is iniquitous and illiberal. I wish to test the opinion of the Committee.
moved Amendments Nos. 66 and 67:
After Clause 18, insert the following new Clause—
"Retirement income fund
(1) The Finance Act 2004 (c. 12) is amended as follows.
(2) After section 152 (meaning of "arrangement"), insert—
"152A Meaning of "retirement income fund"
(1) In this Part a retirement income fund means a scheme for the reinvestment of savings in retirement which—
(a) is operated by or on behalf of a person authorised to operate a registered pension scheme,(b) is a scheme in which investments are approved by the Inland Revenue, and(c) meets the conditions set out in subsections (2) to (9).
(2) The first condition is that, subject to the other conditions in this section, funds held in the retirement income fund may be invested and withdrawn by the member as and when he elects.
(3) The second condition is that an authorised retirement income fund provider must set an annual maximum withdrawal allowance for each member, based on an assessment of each member's life expectancy, and a member's withdrawals from the fund in any one year must not exceed that allowance.
(4) The third condition is that, in setting annual maximum withdrawal allowances, an authorised provider must ensure that no member's total future annual income falls below the minimum retirement income level, as set under section (Minimum retirement income) of the Pensions Act 2007, except in the circumstances provided for in the sixth condition.
(5) The fourth condition is that an authorised provider must set an annual minimum withdrawal allowance so that each member's total income is at least equivalent to the minimum retirement income level, except in the circumstances provided for in the sixth condition.
(6) The fifth condition is that where a member chooses not to declare his total annual income to the authorised provider he must withdraw funds equivalent to the level of the minimum retirement income level or his annual maximum withdrawal allowance, whichever is the lower.
(7) The sixth condition is that, where there are insufficient funds to enable the annual minimum withdrawal allowance to be set so that a member's total income is at least equivalent to the minimum retirement income level, the allowance should be set at the highest level consistent with the assessment of the member's life expectancy.
(8) The seventh condition is that the maximum and minimum withdrawal allowances must be set at the same level where a member's total annual income, including his maximum withdrawal allowance, is lower than the minimum retirement income level.
(9) The eighth condition is that a retirement income fund, and any income derived from it, must not be capable of assignment or surrender by the member.""
After Clause 18, insert the following new Clause—
"Withdrawal from a retirement income fund
(1) Section 165 of the Finance Act 2004 (c. 12) (pension rules) is amended as follows.
(2) In subsection (1) (which sets out the pension rules)—
(a) in Pension rule 4, after paragraph (a), insert—"(aa) a withdrawal from a retirement income fund,";(b) in Pension rule 4, after the second appearance of the words "scheme pension", insert the words "a withdrawal from a retirement income fund";(c) in Pension rule 6, after paragraph (a), insert— "(aa) a withdrawal from a retirement income fund,";(d) in Pension rule 6, after the second appearance of the words "scheme pension", insert the words "a withdrawal from a retirement income fund"."
On Question, amendments agreed to.
moved Amendment No. 68:
After Clause 18, insert the following new Clause—
"Financial assistance scheme: scheme manager
(1) The Financial Assistance Scheme Regulations 2005 (S.I. 2005/1986) are amended as follows.
(3) In regulation 5(2)(a) omit the words from "Secretary of State" to the end of that paragraph and insert "the Board".
(4) In regulation 5, sub-paragraph (2)(b) is omitted."
We turn now to a different but equally pressing and disastrous subject. I shall speak also to Amendments Nos. 69 to 76, and to Amendment No. 79, tabled by the noble Lord, Lord Oakeshott. There is no doubt that the Government have gone from bad to worse on the subject of pensions, as proven by all our debates over a number of years. From their reaction to the original mis-selling of occupational pensions to how they have handled the thousands of people who have lost their retirement income as a result, the Government have rejected expert advice and seem to be going out of their way to pay compensation in the most grudging manner possible.
Noble Lords will remember that the Parliamentary Ombudsman published a thorough and impartial study of the reasons behind the scheme's collapse and included a number of balanced recommendations for what the Government could be expected to do to remedy the mistakes that she found they had made. Her report showed that there was incontrovertible maladministration by this Government in their handling of occupational pensions. Government leaflets and press statements all refused to make clear the inadequacy of the minimum funding requirement but instead were "vague, incomplete or misleading". She specified occasions where the Government were shown to have known this and where they failed to inform the public, continuing to encourage pensioners to invest their salaries into schemes in which they were unable to afford to provide what they were promising.
To add insult to injury, it is apparent that one of the factors that weakened the minimum funding requirement was the Chancellor's decision to abolish the system of tax credits given to those pension schemes. I am sure we will hear, once again, how rising longevity and a weakened stock market were also to blame—and, of course, they were—but can the Minister really assure the Committee, as he tried to the other day, that he believes that a raid of £5 billion a year had a negligible effect? If he can, my response is that not only the ombudsman but DWP and Treasury officials do not agree with him. It is now clear that, like an amateur magician's attempt at the Indian rope trick, the Chancellor's figures simply do not stand up. The Government's promises were found to be hollow, the pension scheme's funding was found to be inadequate and thousands of pensioners are now without their retirement income.
The Parliamentary Ombudsman could not have been a more suitable, better qualified or more appropriate person to judge the unfortunate situation that these pensioners found themselves in, yet despite the evidence and expertise to back her up, the Government have persisted in mud-slinging and depreciation of her findings. They have been taken to court by a group of pensioners, have lost and have still not accepted the report's findings. Instead, we are witnessing the unedifying sight of endless appeals, rising costs and never-ending delays, while hope slowly dwindles that the Government will finally accept publicly what everyone knows and what the ombudsman has so clearly laid out.
The Government have consistently fought tooth and nail against setting up an adequate compensation scheme for those who have lost out. It was only in the face of enormous cross-party opposition that they set up the financial assistance scheme in the first place and, again, they have recently been forced to introduce a new clause to improve on that scheme. This new clause is still not enough. It pays out only 80 per cent of what the department calls the "core pension", which, by the Government's own admission, amounts to only 60 per cent of a person's expected pension. That is paid only from 65, ignoring the originally agreed pension age of the scheme and any other benefits, such as taking a lump sum, which may have been promised.
So far, the FAS is compensating less than 10 per cent of those who are eligible—that is, those who lost their pensions through their schemes being underfunded when their employers went bankrupt and who are over state pension age. I expect the Minister to reassure us that, now the set-up is complete and the computer is up and running, more payments will be made and the administrative costs will fall to a less shocking proportion of the total costs.
When the financial assistance scheme was set up, it had a budget of £400 million, which was meant to cover 15,000 pensioners. It was then extended to 40,000 pensioners and a few more billion pounds were put in. The scheme was then further extended to cover everyone and more money was put in. There are today some 125,000 pensioners. We on this side of the Committee have always said that £400 million was nothing like enough money. The Chancellor has finally, to a limited extent, agreed by setting aside £8 billion over the lifetime of the FAS. I accept that this money is of a quite different order of magnitude from the £400 million originally proposed in 2004, which, although finite, might have to last another 30 or more years. The £8 billion is meant to cover the lifetime of the scheme; it is, though, a headline figure. Will the Minister confirm that its net present value is quite a bit less, £1.9 billion on my calculations? Will he also tell us how much this represents on an annual basis; in other words, the cash flow from the Treasury? Will it still only cover 60 per cent of expected pensions; in other words, 80 per cent of core pensions? I know the Minister has the words "core pensions" graven on his heart, rather like Mary, Queen of Scots.
As a perfect example of how the Government have handled this issue from the start, they have now unwillingly accepted, as reported at col. 320 of Commons Hansard, that pensioners whose employers are still solvent, but whose pension schemes have been closed without sufficient funds, should be covered; that is, the FAS will eventually cover members of schemes that began winding up between
Some of those people, however, will not survive. Another example of unhelpful government action is that of survivor pensions. Will the Minister confirm that these amount to 50 per cent of the core pension; in other words, only 30 per cent of their partner's expected pension had they not died?
The amendment covers the arrangements of the Pension Protection Scheme. PPS survivors get a much fairer 45 per cent. The Government appear to believe that Clause 18 and its extra money will be enough to satisfy the pensioners, some of whom are demonstrating outside this Chamber. It quite clearly is not. First, there is still to be a cap, though a more generous one, on the amount paid out. Currently that is 80 per cent of core pensions. Why was 80 per cent chosen? Why not the 90 per cent payable under the Pension Protection Fund, which the 2004 Act sensibly set up? Over and above that, why make provision for the dissolution of the management of the FAS and move it over to the Pensions Agency? What is wrong with rolling it into the Pension Protection Fund, which is already doing a similar, though insurance-based, job? Why set up an inquiry to ascertain whether there are other sources of non-government funding available when we all know that money exists in the Unclaimed Assets Register, to which insurance firms and others belong?
We all know that the Government will, in the end, do more for FAS pensioners. The Minister will doubtless question that, but I remind him that when the will and the law are there, the money is always found. This year's statutory uprating of benefits cost the taxpayer £3.5 billion. I invite your Lordships to set that against the annual payment to the FAS.
It is against that background that the noble Lord, Lord Oakeshott, and I have set down this group of amendments. Amendment No. 68 is a paving amendment to amalgamate the management of the FAS with that of the Pension Protection Fund. Amendment No. 69 expands the FAS to apply to employees whose pension schemes have failed, even though their employer has remained solvent. That is what the Government are going to do, but rather quicker—a lot quicker, in fact.
Amendment No. 70 is the longest and most important of the group, which all together would set up a pension protection lifeboat fund. The fund would have several objectives: not only would it be run by the Pension Protection Fund, but it would make supplementary payments to eligible pensioners from their normal retirement age under their pension scheme, with no compulsory annuitising. That would be paid for in the first instance as loans by the Secretary of State and repaid under Amendments Nos. 70 to 74, which would set up an unclaimed assets recovery fund, the functions of which would be to ascertain whether non-governmental assets were available and then transfer them to the lifeboat fund. We already know that such assets exist in the insurance and pensions world, because at least one firm has admitted as much. We also already know that unclaimed assets of banks, which would have been suitable for the lifeboat fund, are being investigated by the Chancellor, and it is likely that he will use them for other purposes, not least for charities. Other sources, such as unclaimed premium bond prizes, could be included at the discretion of the Secretary of State. The lifeboat fund is to repay any assets that are subsequently claimed back by the missing owners.
In reply to the Statement about the Government's response to the ombudsman's report, I made the point that no Government could be expected to write a blank cheque. However, this is a source of non-government income for these pensioners at the right time because it will become available far more quickly than income under the Government's plan of investigating assets and then legislating for their use in a future pensions Bill. These pensioners need money as soon as possible and cannot be expected to wait a moment longer than is necessary. I beg to move.
I am delighted to stand shoulder to shoulder with the Conservatives on this amendment, and I am equally delighted to see them show as much vigour on behalf of some of the poorest and most destitute people in our society as they showed on the previous amendment for a rather richer group.
This has been a shameful story. The noble Lord, Lord Skelmersdale, identified very well some of the financial aspects of this problem, and I shall return to them; but there is also an issue of principle about democracy and how the Government have brushed aside repeated rulings from independent bodies and requests to think again. We have had a ruling from the European Court of Justice, a very serious and well argued ruling from the High Court, a thorough, well argued and comprehensive report from the ombudsman and a report, which went into considerable detail, from the Public Administration Committee of the House of Commons. Those bodies are four important pillars of democratic society in our country and in the European Union, of which we form part, and in each case the Government's attitude has been simply disgraceful. They have not accepted that anyone apart from them can rule on these issues, particularly when we are talking about a charge of maladministration. No one is suggesting that the Government are wholly responsible for these problems—far from it. However, it is arrogance of the highest order to suggest that they have no responsibility and that their view should prevail—almost saying that the ombudsman, in particular, has no standing—including the things that have come out recently about the defence that the Government are trying to put in the High Court against the ombudsman's case. That is where this Chamber of Parliament comes in. There is a wider issue: when the Government ignore these reports and rulings, we can say that they should and must think again. The issue is wider than the injustice and real hardship that these 125,000 pensioners have faced.
The Government have been forced kicking and screaming to improve, slowly, this miserable little scheme. During the passage of the previous Pensions Bill, we repeatedly pressed them to explain how the scheme was going to work, but we were given nothing. These Benches repeatedly suggested that it would be better to combine the scheme with the Pension Protection Fund, and the history of delay and incompetence in beginning to pay people because of having to set up a completely separate organisation has vindicated us. So far, about £3.6 million has been paid out to 1,200 people, an average of £28.80 for each of the 125,000 people who have lost their pensions; that is simply pathetic. Even today, at Prime Minister's Questions, we had the slippery—that is probably the fairest way of putting it—pretence that people under the present arrangements will get 80 per cent of their "core pension", the specious phrase that the Government have invented.
I was asked on television at lunchtime why we were so worried about the difference between the 80 per cent of pension that people will get under the FAS and the 90 per cent they will get under the Pension Protection Fund. We are worried because the difference is much greater than that. Under the FAS, people will not get 80 per cent of their genuine expected pension; there is no inflation-linking; the scheme starts from the age of 65, whatever the scheme pension age was; there is no tax-free lump sum; there is no ill-health benefit; and widows' benefits are far worse.
If separate proof is wanted about how much worse the FAS is than the Pension Protection Fund, even under the present arrangement the estimate of the net present cost of giving PPF benefit as opposed to FAS benefit is £2.5 billion as against £1.9 billion. The FAS benefits are something like one-third less, so the figure of 80 per cent that the Government are bandying about is deeply dishonest.
We never would have got even this far in improving the financial assistance scheme had it not been for a roll of honour of campaigners for justice for these people, led by the indefatigable Dr Ros Altmann and the Pensions Action Group. The media have also been exceptionally effective. I pick out in particular Liam Halligan of Channel 4 and the Sunday Telegraph and Patience Wheatcroft of the Sunday Telegraph. There is no doubt that public pressure has played a great part in getting the Government to move even this far.
The key point for Liberal Democrats is that the PPF benefits should be guaranteed and the pensioners who have suffered for so long should know that they are going to get them. We talked in our manifesto at the 2005 election of more than 60,000 workers who were affected; that shows how little information there was and how much the figure has increased. We said then:
"We will bolster the Government's compensation scheme"— meaning the PPF, as it then was—
"to make sure that these workers are compensated at the same level available under the new Pension Protection Fund".
We were prepared to make a manifesto commitment; that has been our position all along. We would have preferred a straight commitment of that type—we believe that it is affordable. Obviously, we have to co-operate to achieve justice for the 125,000 people. On the basis that the amendments which were very nearly passed, with cross-party support, in the Commons are the only ones that will command support on the Conservative Benches and our own, we are supporting them. We very much hope that they will be agreed to today by a thumping majority which will make the Government think again—long, hard and often, if necessary.
The High Court, the European Court of Justice, the ombudsman and the Public Administration Committee have stripped away, one by one, the Government's threadbare defences against a charge of maladministration. Now Britain's new Prime Minister—Gordon Brown has been behind this all along—has no more clothes left with which to hide his meanness to these pensioners.
One would have to be stony-hearted not to be moved by the letters we have received and the deeply unhappy individual cases of which we are aware. But I want to be so insensitive as to raise a number of questions of principle and of practice and to ask my noble friend, when he comes to wind up, to comment on them.
What do the Government consider is the place of the principle of caveat emptor in pensions policy? Clearly, the Opposition do not think that it has a place. But is it not the case that we are looking at the consequence of business failures, of mismanagement of private funds by trustees? Is it not also the case that these unhappy and unfortunate pensioners would have contracted out of SERPS? Where is the line to be drawn between personal and private responsibility and the responsibility of the state? We know that it is the state's bedrock duty to provide social security so that people do not have to eke out an old age in destitution, but on what principle do we judge what more the state ought to do?
Can any reasonable person have supposed that the state was always going to underwrite the whole of the private pensions system? I think not. Clearly, literature was produced by the department which, unfortunately, gave people the impression that that might be the case. But will my noble friend tell the Committee on whose watch that literature was produced? Who were the Government and the Pensions Minister who let it out? What was the cost of that error, and what is the price tag on the ombudsman's recommendation and the High Court's ruling? How many schools and hospitals could have been paid for with that money?
The Government have chosen to be generous, and I am glad that they have. I hope that my noble friend will remind those listening to this debate of how many billions of pounds the Government have set aside for the financial assistance scheme, to which the noble Lord, Lord Oakeshott, referred as a "miserable little scheme". The noble Lord, Lord Skelmersdale, gave us some figures, referring to provision of £8 billion over 30 years with a net present value of £1.9 billion, but he clearly thought that that was not enough. How do we establish the appropriate limit for public expenditure, which is after all not an inexhaustible tap with which we can wash away all varieties of misfortune? Do the parties opposite consider that those who have lost their savings and pensions expectations through the collapse of Equitable Life should also be rescued? Who should be brought in? Where do we draw the line? How do we establish some principles in this regard?
Once upon a time, the Conservative Party understood that there had to be limits to public expenditure, but compassionate Cameronism gushes pound notes like an incontinent geyser. We are accustomed to the fact that the Liberal Democrats spend a penny on income tax and spend it again and again in their fairytale economics, and the Conservative Party used to deride them for that—but now they are "shoulder to shoulder". That I think was the expression that we heard.
I think that the noble Lord was here throughout the entirety of Monday, when I got some implied criticism for controverting amendments tabled by all sorts of people—not least the noble Baroness, Lady Hollis—exactly on the point of how much it would cost. Therefore, I do not think that that is a fair charge to level at myself.
The noble Lord seems to be a little selective in his application of these principles. He asked the Committee this afternoon to believe that the lifeboat that the opposition parties are proposing is a credible vessel, because it will be freighted with unclaimed or orphan assets from pension funds. He even said today that the Conservatives would lay their hands on people's premium bonds. Once upon a time, the Conservative Party had some respect for private property.
The Government's review will look realistically and I trust will report soon on what these orphan assets and unclaimed assets are and whether there is really scope to extract some more beneficial use from them. But in the mean time, I heard the noble Lord, Lord Skelmersdale, calling for immediate payments—so his contention that this lifeboat would not entail more public expenditure is simply incorrect.
We should recall that if the Conservative Government had not rejected Labour proposals for a central discontinuance fund—a predecessor fund, equivalent to the Pension Protection Fund, in the mid-90s—today there would be no need for the financial assistance scheme. The arguments that the noble Lord put forward about the so-called raid on pensions are also bogus. If he meant to be fair, he should have reminded us that the context of that policy change in 1997 was a restructuring of corporation tax to encourage long-term investment, improve productivity and competitiveness and therefore to improve profitability and the capacity to pay pensions. He might have reminded us that the shift from defined benefit schemes was already well under way by 1997. There were other very important factors that dwarfed the impact of the ACT change: the maturing of pension schemes, growing longevity, forecasting errors by the actuaries, declining interest rates, bad management of schemes, and, above all and on an altogether different scale, the stock market collapse of 2000 which wiped £250 billion from pension fund assets. Set that beside the £5 billion cost per annum of the change to ACT.
The case that the opposition parties have made on this is disingenuous. It is a politically motivated tactic against the Chancellor. It is posturing and opportunism. It exposes the difference between this Government, who have chosen to be generous within the limits of fiscal responsibility, and the recklessness of the Conservative and Liberal Democrat parties.
I support these amendments and do so simply on the grounds of fairness and justice. It is totally unacceptable arbitrarily to leave out one group of pensioners from the benefits of the Pension Protection Fund as it has now been established. These people had no choice. If they had had a choice, a real choice, that would be different; but they did not. Caveat emptor really does not apply in this case. These people were told that they should join the company pension scheme. They were told that the scheme was sound. They had virtually been guaranteed that it was sound and would look after them when they retired. Maybe that was wrong, but that is what they were told. These pension schemes have now failed them.
People were given that message when they were still at work. To treat them in this way now is unfair, undemocratic—as the noble Lord, Lord Oakeshott, said—and unjust, as well as being inhuman. It is totally unacceptable and the Government must rectify it. They have a duty to do so. Not that many people are involved. There will be a cost to the public purse but it is not a very high one. The Pension Protection Fund was a very welcome government initiative which rectified a social ill and many of us welcomed it with open arms. It was well done. It is an initiative that these people also must enjoy to the same level. I hope the Government will think again.
Following the noble Baroness, Lady Greengross, I am moved, first, to ask for confirmation that the people who went into these schemes did so not on the basis of a recommendation but because it was a condition of employment. Therefore, they had absolutely no option.
Secondly, many of the problems that arose from this mis-selling of pensions—no, not mis-selling; from this situation—resulted from these companies being taken over by other companies and raids on these pension funds. But the Government have not gone after them. We said to people in employment, "You have to take an occupational pension". However, successive Governments have managed to get away with paying—and I use the term advisedly—a state pension that is a pittance compared with those of other European countries while knowing that occupational pensions were there as a back-up. They probably genuinely thought that there would not be much hardship. However, when things went wrong and these companies were taken over by absolute pirates—another term which I use advisedly; I know some of them, and have discussed them previously with the noble Lord, Lord Oakeshott—nothing was done about it.
Now we rightly want a lifeboat. These people were forced into occupational pensions and expected a proper income in retirement. They have based all their life choices—where they live, saving for their children's university education and so on—on these pensions, but all of that has vanished like snow in summer. So it is essential that there is a lifeboat. However, I take issue with the funding of the lifeboat. I believe that the Government are responsible for that because of the point that I made. I do not think that the so-called unclaimed assets should be used because there are different types of unclaimed assets. There are unclaimed assets in banking, although I leave those to one side because a case could be made for that. There are also unclaimed assets in insurance companies, which are used to fund people on very low occupational pensions who get the state pension plus a little bit. Why should the Government again use the excuse that those people will get a little bit through these unclaimed assets and say, "Not my problem"? It is their problem. I am not really equipped to give the ins and outs of insurance companies' unclaimed assets, but as a question of social justice and fairness—this is the issue that we are dealing with—there is no excuse for the Government not to find the money. Goodness knows how many billions of pounds of public expenditure are wasted. The Government should take a proper look at public expenditure and fund the lifeboat from it, which would satisfy both situations.
The Conservatives have joined forces with the Liberal Democrats in tabling Amendments Nos. 68 to 73, which propose a lifeboat fund to enable the financial assistance scheme to be made more generous. Under Amendment No. 74 this would be funded through the so-called unclaimed assets of insurance companies. At this stage I retain an open mind on whether the financial assistance scheme should be made more generous. Having notified the Committee of my interest as a director of Prudential plc, I should set out why I think that the proposal to finance this scheme through so-called unclaimed assets is seriously flawed.
The mental map underlying this is that unclaimed assets in insurance companies represent a windfall source of profits, as they do for banks. As insurance companies are seen as having a dubious legal claim, and even less of a moral claim in this matter, it is argued that as a matter of public policy it is acceptable to take these gains away and use them for more deserving social causes. This is analogous to the principle of bono vacantia arising from people dying intestate. There are several objections to this line of argument. First, it represents a flagrant departure from the principle of evidence-based policy making. The Government have set up a review under Mr Andrew Young to go over all the arguments about the way insolvent pension schemes could be funded, yet these amendments, particularly Amendment No. 74, seek to change the legislation before we have the outcome of that review. That is like introducing the Dangerous Dogs Act without finding out whether dangerous dogs exist.
Secondly, it is not the case that unclaimed policies with no clear ownership are a windfall gain to insurance companies. In most insurance companies the policies in question are funded through a with-profits fund. By a longstanding convention, perhaps even law, the fund is 90 per cent owned by policy holders collectively and 10 per cent owned by shareholders. The Pru's practice is that if a policy is not claimed 15 years after it has lapsed following the maturity date, or when the policy holder would have reached 105, the amounts unclaimed are credited to an account within the with-profits fund. Then 90 per cent of that is added to the bonuses of the remaining policy holders. If someone subsequently turns up aged 106, they can get their money back. This has been the clear, legitimate expectation of policy holders for many years. Unlike with the banks, there is no vacuum around ownership.
The third objection concerns equity. The proposed new clause in Amendment No. 74 would remove from existing policy holders a longstanding part of their return and pay it to another group deemed to be suffering hardship. The ABI has described this as robbing Peter to pay Paul. As Robin Hood demonstrated, sometimes that is justified, but for this to have any morality, it should be established that those making the sacrifice, the "Peters", are significantly better off than the "Pauls", who would otherwise be putting up the money—in this case the generality of taxpayers. That test is dramatically failed. The average Pru ordinary branch policy amounts to some £20,000, which might, at current rates, buy an annuity of some £1,200 a year or £23 a week—no more than a quarter of the state pension. Some 3 million such investors are in the Pru's with-profits fund. Even worse, some 1.3 million industrial branch policyholders, dating from the Pru's door-to-door collections, have even smaller policies.
Let us consider the nub of the issue. The concept of unclaimed assets proposed by the noble Lord, Lord Skelmersdale, is a fiction. These are not bona vacantia where ownership is unknown. There is clear ownership of with-profits funds—90 per cent is owned by the policyholder and 10 per cent by the shareholder. When the state takes away someone's property through legislation, we call it taxation. It is questionable whether it is proper for an amendment, as a proposal to impose such a tax, (a) to be tabled in this House and (b) to be tabled by the Opposition. The other place should seriously consider invoking financial privilege.
Setting aside the legality, let us look at the morality and the politics. As a way of raising money to pay for greater compensation for those let down by their pension funds, such a proposal is grotesquely inequitable. It would take money from millions of policyholders, many of whom have no occupational pension at all and whose investments would yield an average income of £23 a week—less than one-seventh of what I could claim for making a speech here for 10 minutes. If Parliament decides that it must do more for disappointed pensioners, it must place the burden on some broader backs: taxpayers at large.
It is a mystery that the opposition Benches, after complaining loudly about pension grabs and stealth taxes, should support a proposal that exposes them to exactly the same charges. It is not too late for them to escape from a proposal that would provide serious political embarrassment for them. The right course is to vote against this group of amendments and allow them to be resubmitted at a later stage, shorn of the offensive new clause in Amendment No. 74.
I hope that the Committee will resist these amendments. The present situation has been shaped by two pieces of legislation: the Pensions Acts of 1995 and 2004. In the debates in 1994, the Government of the day introduced the minimum funding requirement. I led for the Opposition on that Bill. All of us knew exactly what MFR meant. It was a funding level that would generate a 50 per cent probability of meeting the pension promise if the company folded. The professional organisations, the trades unions and all of those who lobbied us at the time—and certainly the politicians, led, I believe, by the then Pensions Minister, William Hague, in the other place—knew well what MFR entailed. Precisely because of our worries, which were shared at the time by the Liberal Democrat Benches, including the late Lord Russell and the noble Lord, Lord Goodhart, we tabled an opposition amendment to introduce, as my noble friend mentioned, a central discontinuance fund—a PPF—on the ground that risk pooled is risk reduced.
Although some of the finest economists in the country, including my noble friends Lord Eatwell, Lord Desai and Lord Peston, spoke to and supported that amendment, and argued for not only its social justice virtues but its economic virtues, we could not persuade the Government to support it. I have to say that in my reading of the ombudsman's report on those debates, I did not fully recognise her account of them. I choose my words with care.
The problems of MFR were concealed for a few years by rising stock markets, until severe falls from 2000 on, together with statistics about longevity, started a chain of events that led to the PPF in the 2004 legislation. With the genuinely constructive help of noble Lords opposite, to whom I am grateful—I pay tribute in particular to the noble Baroness, Lady Noakes, the noble Lords, Lord Oakeshott, Lord Fowler and Lord Skelmersdale, and, above all, the noble Lord, Lord Higgins—we in this House came up with a scheme, the PPF, which continues to win plaudits. We all recognised that the failure of vision in 1994-95 and the failure to set up a central discontinuance fund had to be made good. We did that co-operatively by a levy on future schemes. The question that we then faced was: what about the schemes that had failed before PPF? I refer in particular to the period since the coming into effect of MFR in the 1995 Act—to those schemes from, say, 1997 onwards.
No one, but no one, believed—this point was well made by my noble friend Lord Howarth—that because of MFR or a couple of leaflets from the DSS, the Government were now committed to underwriting £900 billion in the occupational pension industry. If people had believed that on the basis of MFR and DWP/DSS leaflets—they did not—no employer would have needed adequately to fund their schemes, no trustee would have worried about what might happen and no trade union would ever have needed to press for better funding. Why would they bother? Talk about moral hazard. Of course they did not believe that, of course they did not act on that as though they had believed it and of course all parties and all players sought in different ways to meet the obligations of their pensions promise. I do not accept, and I do not really believe that anyone in this Chamber accepts, that the Government have any legal responsibility for commercial failure—for companies that failed adequately to fund their schemes. This involved the playing out of a calculated risk that the Government of the day in the 1995 legislation embodied in the MFR by coming up against commercial failure and at the same time refusing to underpin it with our request for a central discontinuance fund.
If the Government have no legal responsibility, did—or do—they have a moral responsibility? Not really, but they should promote benevolent public policy because people at the time did what we as a society wanted them to do—build a pension. We cannot retrospectively introduce a levy on the industry as though in effect the 1994 central discontinuance fund was in existence and working. The only alternative was to turn to the taxpayer, which involved asking taxpayers, including many low-paid, part-time women who have no occupational pensions at all, to insure the occupational pensions of those who had them—occupational pensions, incidentally, that had already received a substantial taxpayers' contribution through tax relief and a substantial employers' contribution. The contribution of employees in many if not all final salary schemes would be, I guess, about one-third of its final worth.
Was it right to ask someone earning £10,000 a year without a penny of savings to cross-subsidise someone with earnings of, in some cases, four times that? Would we accept the same principle in the travel industry, so that it had a general levy on each person in the population rather than simply, as with PPF, holidaymakers taking out relevant insurance? It is because of that dilemma that, as a society, we wish to be seen to be supporting people who are doing what we wish them to do—that is, saving—but we must also recognise that in the funding of the scheme some people did not have the opportunities that those in the PPF now have to enjoy the benefit of a forward-looking levy.
In 2004 we devised FAS. I am the first to admit that we devised it in this House rather than the other place as the Bill went through various stages. Again, the Opposition played a genuinely valuable and constructive role, which I much appreciated, in what were admittedly daunting circumstances. We all shared the common objective—I believe that that is the phrase used by the noble Lord, Lord Oakeshott—but there was some concern about some of the structures involved. It was always intended that FAS would be paid for by some people who had no pensions at all. As a result, the claims should not be paid at the same rate as with the PPF, which was funded by the industry; in other words, at 80 per cent in FAS rather than 90 per cent in PPF. We understood that very clearly in 2004.
In 2004 it was also understood in our debates that additional money would be made available, but only as the scale of need became clear. What stopped us being able to assess that was dirty data. The bulk of potential claims on FAS came from deferred pensioners—people who had worked for companies for three or five years and had since moved on once, twice or three times. Employers and trustees may have weak or incomplete records of contributions, age profiles, length of stay and so on; some companies—for example, asbestos-related companies—may have changed hands several times. The dirty data problem means that it has taken longer than anyone would wish to get the flow of payments going. I was taken aback, when meeting some of the companies and trade unions involved at the time, by how little responsible individuals associated with their companies knew about their pensioner profiles and what the implications would be for FAS.
It was always understood that the precise structural links between FAS and PPF would be revisited at a later date; at one stage I even suggested that that might be seven or 10 years down the line. That additional money has been forthcoming from the Treasury, which I am delighted about. I firmly believe that the Government's approach is the right and decent one. Of course it would be nice if FAS could be made financially more generous still, but only if we are willing to ask those without pensions to finance that generosity. Of course we want the Government to move faster on pension payouts but, believe me, it is not the professional Civil Service that is being incompetent; the problem is due to the unbelievably amateur record-keeping of some of the companies and trustees involved.
Finally, as DB schemes close, DC schemes will cover more pension arrangements, including personal accounts. Is anyone today suggesting that if the Government encouraged people into personal accounts, as we will, with an opt-out arrangement rather than opt in, as we will, they will have some legal or moral obligation to guarantee those investments—investments in and disinvestments out—to insure against the risks of inflation, annuity rates or projected longevity rates? I think not. What security, as my noble friends said, are we willing to offer Equitable Life policyholders? Pensions are volatile. Final salary schemes carry a risk associated with the viability of the company and the PPF now will pool the risk on that. DC schemes—money-purchase schemes—carry a much greater risk of full exposure to the markets, and we are doing nothing at all about that. I am not persuaded—I feel even more strongly, having listened to the noble Lord, Lord Turnbull—that there were genuinely freebie assets out there; I refer to assets that are corralled to improve the conditions of FAS. The ABI, the noble Lord, Lord Turnbull, and pension professionals have poured cold water on that. Those assets are already built into the cash flow of major companies. For those in DC schemes, an 80 per cent guarantee of core pension, which is what FAS offers, must look pretty enviable.
I understand that there is a review of unclaimed assets in lieu, which should report in July. If there are any such unclaimed assets, or if the industry voluntarily wishes to contribute to FAS, as the 2004 legislation made clear it should be encouraged to do, that would be fine. But, in practice, a lifeboat scheme would turn out to be a government loan, interest free, without, I suspect, much possibility of repayment—in other words, a covert taxpayers' additional contribution to FAS. That is what is being proposed here, and we should face up to that. I am not persuaded, in all the circumstances that I have outlined, that it would be right, fair or proper for all the parties concerned to go down that path. I shall therefore oppose the amendments.
Provided that I am in order, I wish to speak to Amendment No. 69 in this group. It performs the essential and important function of removing the necessity for an employing company to be in a state of bankruptcy before it can transfer into the lifeboat fund. I declare an interest in that I speak from practical experience of this situation, having been chairman of a company that passed through this process, but that is all resolved and there are no outstanding issues relating to this matter.
There was once a British company listed on the London Stock Exchange that had traded successfully for a great many years until it was tempted to make a very large investment in purchasing a series of parallel manufacturing businesses in the US, for which purpose it borrowed $1 billion. That venture did not prosper and, very rapidly, the group's consolidated position was one of borderline insolvency. The American bankers were consulted separately from the British ones and agreed to write off $400 million and inject an additional $200 million to sustain the American business, provided that they were allowed to have unencumbered ownership of those assets. Separate pension schemes had applied to both the US and British arms, and at that time the British pension scheme was in deficit by £96 million.
Members of the Committee will rapidly have understood the problem. If the Americans were to put in $200 million of new capital, it would have to pass through the parent company in London and that money might have been attacked by the pension trustees in Britain with a view to filling the £96 million hole. The Americans did not think that that was very funny, so they decided that they should make certain conditions. They offered the British pension scheme a £10 million contribution to their deficit and 10 per cent of the equity of the new company which they would create in America.
The pension trustees were initially happy to do that. We reached the point when the whole deal was to come out of escrow and be signed at nine o'clock the next morning. Incidentally, I should add that this happened to be the first day of the only honeymoon of my life, which made for very interesting proceedings.
Yes, I am, and I express my appreciation to the Government for what I can describe only as a character-building experience for my wife and me. By dawn, at seven o'clock the next morning when we had resolved the matter, my wife was convinced that she had married into a madhouse, and, indeed, she had in terms of what the law was bringing about.
During that last night, the trustees lost their nerve in relation to the British pension scheme because the pension beneficiaries of the British company threatened to take proceedings against the trustees personally if they did not succeed in getting the company into the lifeboat, which they could do only by bankrupting the British company. So, by insisting on the bankruptcy of the British company, they lost the benefit of some 1,500 jobs and the potential value to our economy of any future recovery that that company might have produced. Therefore, there was a complete distortion of the priorities that should have flowed from the decision processes forced through by this action.
Amendment No. 69 would remove that problem so that it could never occur again. I am sure that there will be many variations of it but the demands that it imposes on trustees are too unpredictable and completely irresponsible. Therefore, I wholly support the amendment.
I support the amendment along the lines of the views expressed by my noble friend Lady Greengross. We are all upset to know that this group of people has been severely disadvantaged. I know that many Pension Acts have been passed since I was on the board of Legal & General. I also sat on its pension fund and often asked why the company was taking a pension holiday. Now there are incentives for companies to do that in good times, and I am told that there might even have been penalties if the company had not done so.
Anyone who reads the letters that have been sent to noble Lords on this subject will feel a sense of responsibility. It may be that none of the proposals in the amendments provides the perfect method for making appropriate compensation, and perhaps the answer is that such compensation should come from all the groups that have been mentioned, including those of us who will also lose out on our pensions in due course. Hundreds of letters have been received and they have all been individually written. They are not the sort of letters that one puts straight into the waste paper basket—the type of letter which someone writes out for you and which you send on. These are heartfelt letters from people who had imagined that they would have a reasonable retirement with not huge sums of money but enough to live on. The letter that upset me most was from a woman who felt that she had to lie to her husband on his deathbed by saying that she would be all right. She said that she had never lied to him in her life and feels sad that she had done so, but she lied so that he could die feeling that everything would be all right for her.
We must find some way of doing the right thing by this group of people. It cannot be right that they are getting only 60 per cent of what was promised to them. The situation has been going on for a long time and many of them have died in the mean time. These may not be the right amendments but they convey the general feeling. At one stage, under the previous Government, we were all encouraged to move out of the state system and into the private sector, and a lot of the people whom we are talking about today became victims as a result of that. They were told that what they were doing would be more beneficial to them in the long run. However, things have not turned out that way, so I hope that we will think again.
I have some difficulty with this series of amendments. First, I have considerable sympathy for the people who have written to me, as they have to all noble Lords, about their situation concerning the FAS and so on. However, I point out to my noble friends who have queried whether the Government have any responsibility that I think that there is a moral responsibility.
We have to remember that our pension system in this country, even from the time of the Castle scheme, has been built on the basis of a partnership between state and private provision. That was specifically stated in relation to the Castle scheme and, rightly, successive Governments have encouraged occupational pension schemes. Therefore, in that respect, we have some responsibility for failures in our part of the partnership. I remind my noble friend Lady Hollis that, when the MFR was introduced, some of us pointed out that it would give people a false sense of security because it would not provide the security that people imagined it would.
So far as concerns the present situation with the FAS and so on, as I said, I have considerable sympathy with the idea of a lifeboat fund. My only concern relates to the way in which it is proposed that it should be funded. I draw attention to the article by my right honourable friend Frank Field in the current Pensions Weekly. He supports the idea of a lifeboat fund but says that it is very important that the right sort of amendment is carried in this House. He is very much against any possibility of trying to use unclaimed pension assets. He points out that that is not at all reasonable: pensions are held in trust and therefore there is no possibility of claiming any assets in that regard. However, he does not say that there is any objection to using unclaimed moneys in banks and building societies and says that that is a possibility.
I certainly believe that there is a strong case for dealing with this fairly immediately, because making people wait for a review will cause further agitation and lobbying. That is a problem. I agree with the idea of a lifeboat fund but I am not at all happy about these proposals for funding it.
The Government have great sympathy with all pensioners who lost out in very unfortunate circumstances. That is why we are committing some £8 billion of taxpayers' money to seek to address the issue. The noble Baroness, Lady Howe, referred to correspondence that she has received. It is incumbent on us all to think of those situations when we address this problem.
Having said that, I think that it is a bit rich of the noble Lord, Lord Skelmersdale, to try to get political capital out of the issue. The Conservative Party was criticised by the ombudsman. The ombudsman's report spanned 10 years from 1995, when the Tories introduced the minimum funding requirement, to which my noble friend Lady Hollis referred, in the Pensions Act 1995, in the wake of the Maxwell pensions scandal. Of course, William Hague, who is now shadow Foreign Secretary, was the Pensions Minister dealing with that matter. We should put these party-political scoring points behind us so that we can address the issue seriously.
The Minister does not exactly encourage me to do that. I remind him that this Government have been in power for 10 years and even up to 2004 they had had plenty of time to deal with the situation.
This Government introduced FAS, which introduced the PPF. There was nothing near it under the previous Government. Our record in helping pensioners is far superior to theirs. We have lifted 1 million pensioners out of relative poverty since we have been in office, which puts the previous Administration's record to shame.
These amendments appear to me to cover three issues. First, many of them represent a potential call on the public purse well in excess of the £8 billion already committed by the Government. The noble Lord, Lord Skelmersdale, asked me about the £8 billion; he is right to say that it has a net present value of £1.9 billion. The cost of the proposals that he supports, in cash terms, would be in excess of £10 billion, and there is an extra net present value associated with that of £640 million, which I believe is effectively a public expenditure commitment.
Secondly, many of the amendments would replicate work that the Government are already undertaking to ascertain whether funding can be found from non-public expenditure. Thirdly, none of them would mean more money for more members immediately. Indeed, their effect might very well be to slow down payments for members, which I know is not the intention of the supporters of the amendments.
The noble Lord, Lord Oakeshott, said that we are ignoring the findings of the ombudsman's report. He will be well aware that we placed a detailed response to the report before Parliament in June of last year and that in November we published our response to the report of the Public Administration Select Committee on the same issues.
I also remind the Committee—I believe that the noble Lords, Lord Oakeshott and Lord Skelmersdale, referred to the High Court—that the High Court upheld the DWP's decision to reject the ombudsman's finding of maladministration in respect of a change made to the minimum funding requirement in 2002 and it upheld the DWP's decision to reject the ombudsman's conclusions that the maladministration identified led to the losses incurred by all members of the schemes that went into wind-up between 1997 and 2004.
Amendment No. 68 would transfer responsibility for managing FAS from the Secretary of State for Work and Pensions to the board of the Pensions Protection Fund. That gives me an opportunity to talk about the substantial work that FAS is, and has been, doing and to explain why transferring responsibility for the scheme to the PPF would not, in fact, be in the best interests of members. I know that some noble Lords remain convinced that the PPF could run the FAS better than it is run under the current arrangements. Let me remind the Committee that the review of FAS administration carried out at the Government's behest last year did not agree. That review, which benefited from input from the PPF, concluded that, while lessons could be, and have been, learnt from the PPF's approach to proactive data gathering, there are significant constraints on its ability to manage FAS operations. I see no reason at this point to revisit that conclusion. I do not rule out looking at this again should the review of pension scheme assets identify a different approach to funding FAS, but I do not think that it is sensible to pre-empt those findings.
Perhaps at this juncture I could update the Committee on what is happening. In most cases, FAS money is not paid until a member reaches 65. That means that there are not 125,000 people waiting to be paid at this moment. We estimate that there are around 10,000 individuals who are over 65 and should qualify for payments under the current scheme rules, but the Operational Unit has already carried out assessments on around 4,100 people: of those, 1,624 are eligible for payments of FAS; 1,236 are being paid now; 68 will be paid as soon as the members have confirmed their personal details; and 320 will be paid as soon as they reach 65. There are 2,482 who are currently ineligible because of the de minimis £520 a year constraint and other factors such as the relatively high funding level of their scheme. The legislation requires applications made by trustees, as only they can provide the data that are needed to assess payments.
One factor limiting payments is relatively high levels of scheme funding; for example, schemes are able to make payments higher than the FAS initial payment level of 60 per cent. However, the Bill raises the level to which FAS will top up any interim pension being paid by a scheme that is still winding up from 60 per cent to 80 per cent. That will enable us to provide assistance with immediate effect from Royal Assent to hundreds more people who currently receive 60 per cent from their pension scheme.
Other factors may prevent trustees from making applications and providing us with the data that we need to make payments, but some will have worked out that their members will not receive FAS due to the de minimis level of pension already in payment and so have chosen not to apply for payments on their behalf. We expect that to change once the FAS rules are amended to benefit such cases, as I have outlined. Other trustees will be close to completing wind-up and so will be reluctant to supply data for initial payments when they will have to submit final data for annual payments a short time later. Others are anxious to await the outcome of a current court case—the Dubery case—which will impact on how they treat their members, and do not wish to provide us with data that may turn out to be incorrect and lead to overpayments.
While those are legitimate reasons for caution, they are delaying people receiving help, so we are working with trustees and administrators to help to resolve those issues. I can truthfully say that we are paying all those members for whom appropriate data have been provided and will continue to do so, but we are conscious that it is individual members who suffer if they are due to receive money at 65 and, for whatever reason, are not getting it. I can announce today that we are introducing arrangements so that, rather than relying on trustees to make applications on their behalf, individual scheme members who believe that they are eligible for payment can advise the FAS Operational Unit direct, which will then contact the scheme trustees to seek to arrange a payment. I shall shortly be writing to all noble Lords to explain the new arrangements. The Government will be seeking help from campaigners and trade unions to ensure that everyone eligible for assistance receives it as quickly as possible.
Given the appalling delays we have had for all these years, why has it taken so long for the Government to take this absolutely simple step?
I have tried to outline the difficulties in getting payment through the system more quickly. My noble friend Lady Hollis touched on issues of data. We have had to rely on trustees. We will still have to rely on trustees, but we are creating this extra avenue of approach to try to speed things along. I hope that the noble Lord will support that.
The effective use of taxpayers' money to revisit the operation of FAS will undo the very real efforts made by the FAS Operational Unit to improve performance since its inception and since the review of administration. We have invested in training for staff, working with a leading provider of services to the pensions industry to ensure our people are able to deal with the complexities of the schemes with which they come into contact.
I will identify briefly the sort of cases that the FAS Operational Unit deals with on a daily basis. This demonstrates the difficulties of dealing with the sorts of pension scheme that qualify for FAS, which are very different challenges from those facing the PPF. It also demonstrates the commitment and determination of FAS staff to secure the best possible outcomes for members. I will not name the pension scheme in question but it began to wind up with 24 members in 2001. Only eight pensioner members received payments from the scheme at first, and these ceased in 2002. Since then no payments have been made to any scheme members. It having been accepted as a qualifying scheme for FAS, we requested the scheme records to assess FAS eligibility and payments, only to be told that most of the member records had been lost. The records that did exist were insufficient to determine payments.
Since then, FAS staff have worked to trace the whereabouts of members and to piece together the data they need. This has involved contacting known members, former administrators and actuaries, the Pensions Regulator, HMRC, and other parts of DWP. Not all those avenues would be readily available if FAS were administered outwith the department. Most of the scheme members had given up hope of seeing their scheme pension. In many cases they were not even aware that their scheme had been submitted to FAS for consideration. To date, we have awarded payments ranging from around £1,000 to £4,000 per annum, with arrears of up to £8,500. This is making a real difference to people who had given up hope and it is a testament to the dedication and skills of FAS staff.
There is no evidence that the PPF, which, let us remember, has no experience of dealing with schemes that have long since wound up or where records are hopelessly outdated or even non-existent, would prove more capable of dealing with these problems. The PPF is finding that even the task of dealing with pension schemes newly entering the assessment period is more resource-intensive than anticipated. We are working to share the lessons across FAS and the PPF. We continue to strive to improve our processes.
Amendment No. 69 removes the provisions of the FAS regulations relating to employer insolvency event qualification conditions. The purpose of this amendment appears to be to ensure that schemes, and therefore their members, are not excluded from the FAS solely on the basis that their employer is solvent. In its fifth report, published on
We have great sympathy for any member of a defined benefit scheme faced with the loss of their pension through no fault of their own. However, in developing FAS to provide help for such people, we have been careful to ensure that taxpayers' money is not used to provide assistance for pensions that could and should be funded by relevant employers. We believe that even where employers have no further legal obligation to fund their scheme, there remains a moral obligation that should be followed. In its report, the PASC sympathises with this aim, saying it understands,
"the Government's unease that the taxpayer is having to provide pensions which were promised by employers and should be honoured by those employers".
We aim to ensure that all members of relevant schemes receive at least 80 per cent of their expected core pension, subject to the cap, wherever employers are unable to fulfil their pension promise. That is why the definition of "employer insolvency" for FAS purposes is designed to be sufficiently general to capture schemes where the sponsoring employer no longer exists and where insolvency may have occurred some time after scheme wind-up had started. We continue to look closely at schemes that are excluded even under this generous definition, which is why we announced on Report in another place that we will extend the FAS to cover members of schemes that began winding up between
The noble Lord, Lord Skelmersdale, asked how quickly we would be able to come forward in that. We intend to include such schemes in regulations to bring about the extension of FAS announced in the Budget, and hope that this will come into force by the end of this year.
Despite these changes—and I think this is the point touched on by the noble Lord, Lord James—we are aware that there may be some schemes not covered by this proposal in which members may face a comparable loss to their pension in similar circumstances. Therefore, we have asked the review into pension scheme assets to consider representations on behalf of members of such schemes. It would not be right to provide assurances that all schemes, irrespective of their solvency position, should be able to qualify for the FAS now before the review presents its findings. For example, some of these schemes will still be winding up and hoping to bring pressure to bear on employers to make contributions to the fund. If the Government indicate that their members are likely to be helped via FAS, there would be little incentive for trustees to rigorously pursue such cases or for employers to respond sympathetically. It would not be right to ask the taxpayer to bear the price of this amendment without careful consideration of this risk.
The next amendment calls for supplementary payments at PPF levels to be made to FAS recipients. The Opposition attempted to float their lifeboat fund in another place and, if I may say so, it remains as full of holes now as it was then—a leaky vessel, in which I could not encourage scheme members to place their trust.
Of course, the Government sympathise with the aim of getting more money to people who have lost their pension. We have committed £8 billion of taxpayers' money to the financial assistance scheme and have set up a review, led and advised by experts, to investigate whether additional funding can realistically—I stress "realistically"—be found. What we will not do is to make rash promises to members which might very easily result in yet more public money being spent on assistance.
The amendment would require the Secretary of State to make loans to the lifeboat fund so that it could top up pension and FAS payments. Without a guarantee that there are sufficient funds within unclaimed assets to cover these loans, this amounts to nothing more than an open-ended spending commitment. The noble Baroness, Lady O'Cathain, was very happy with that proposition. She did not want to dip into lifeboat-fund assets, as I understand it, and was quite happy to support public expenditure funding this increase. I wonder therefore whether she will desist from voting with her colleagues who propose another solution today. Given that the loans are interest-free, there is an element of public spending even if they are eventually repaid.
Even without the question of funding, the issues are complex. A commitment to a process and structure that has been cobbled together without proper consideration of the legal and administrative difficulties, however well intentioned, could very possibly simply make things worse. The amendment fails in its aim of getting money to members more quickly. As envisaged by the Opposition, the lifeboat fund will top up actual pensions and FAS. This means that members could conceivably receive income via three separate streams and from three different agencies—their scheme pension, FAS and the lifeboat top-up. That is a recipe for confusion and delay.
The Government have pledged, if the assets review concludes that it is workable, to raise assistance levels towards 90 per cent. We are providing more money for more people immediately through changes to initial payment levels in Clause 18. Unlike the lifeboat fund, those are real commitments on the basis of evidence and backed up by action.
I now turn to Amendment No. 71, especially its proposed new subsection (6), and Amendments Nos. 73 and 74. These amendments make provision for yet another institution in the pensions protection arena to be funded by the taxpayer. I consider that setting up a pensions unclaimed assets recovery agency exemplifies precisely the sort of waste to which the noble Baroness, Lady O'Cathain, referred on Second Reading and again this afternoon.
The functions of the agency are to obtain information about such classes of unclaimed assets as may be prescribed by the Secretary of State, to provide the Secretary of State with information on those assets and to administer a scheme for the transfer of those assets. Significant progress has already been made on those objectives, without the need for all the rigmarole and expense that would inevitably surround the launch of a new government agency.
At this juncture, I make the Committee aware that a meeting has been arranged with Andy Young, who is leading the review. We heard today that we have fixed it for
We may reflect on what the so-called orphan assets are that seem to be floating around on which the Conservatives and Liberal Democrats base their claim to change the FAS scheme provided for in Clause 18. We have heard from the noble Lord, Lord Turnbull, about the issue of assets of long-term with-profits funds of life companies. As he rightly said, they are not free assets. I ask the noble Lord, Lord Skelmersdale, whether he sees assets of that nature as being fair game for the agency that he seeks to establish. Are those assets that he believes can be garnered to support his proposed scheme, or does he accept that those assets are not available and not free?
On banking assets, is the noble Lord saying that we should revisit the proposition already advanced and consulted on that unclaimed banking assets should be made available for community use, especially youth projects? Is part of his proposition to redirect some of those funds? Is he saying that there are free assets in defined benefit occupational schemes written under trust? We are entitled to know, because that goes to the heart of whether his amendment is real or a fiction.
The Government are fully engaged in exploring the potential of unclaimed assets within relevant failed pension schemes. We will, if it would make a real difference to members and not present an unacceptable risk to the taxpayer, use them to supplement FAS payments. It is not sensible to pre-empt the findings of the review, it is not desirable to set up an organisation paralleling the core business of the review, and it is not fair to further raise the expectations of members about the level of assets that might be out there.
Amendment No. 75 would provide that the Secretary of State must make regulations that prevent trustees of FAS qualifying schemes from the purchase of annuities for nine months from
We believe that annuity purchase provides some flexibility over the nature of the benefits that are secured for members. For example, annuities might be secured that provide certain guarantees in the event of the member's death. It might not be appropriate to deny individual members such flexibility before we can establish that halting annuitisation would bring greater benefits across the FAS membership as a whole.
Furthermore, halting annuitisation might also mean that the payment of pensions to affected members is delayed. Most qualifying schemes will contain some members who stand to receive an annuity that will cover the full pension that they were expecting. Some of those members may already have reached their normal retirement age. Would it make sense to stop annuity purchase for those members now?
The amendment puts annuity purchase on hold only for nine months. It is not clear what would happen after that. If annuitisation were to restart from that point, annuity rates may well have gone down. The resulting extra cost of the annuity would be borne either by the member, in losing some of his pension, or by the taxpayer, in providing a higher amount of FAS top-up. Those are complex and delicately balanced issues that need to be carefully considered, which is why we have asked the review to look at these points.
In the Statement made on
Trustees must of course take decisions in the best interest of their members but they should bear in mind the deliberations of the assets review. I take this opportunity to encourage trustees to co-operate with the review team in its investigations. I also assure the Committee of our aim that, should the review identify an alternative way of using assets in failed pension schemes, scheme members should not lose out because their pension scheme has completed the wind-up process.
Given our commitment to look at the issue of annuitisation by way of the review, the perils of halting annuitisation without proper consideration of the risks, and our aim to ensure that members of schemes that annuitise will not lose out, I ask the noble Lord to withdraw the amendment.
Amendment No. 76 deals with on-account payments. The amendments that noble Lords have proposed to the Bill on the FAS testify that there is divided opinion on the level of assistance that should be provided to affected members and, more especially, the means of funding that assistance. However, I think that we are all agreed that affected members should receive payments as soon as possible. New Clause 18(10) appears to have that intention at its root. However, I fear that the amendment will not achieve that aim and could in fact have the opposite effect of threatening the timely delivery of assistance to qualifying members. The amendment is intended to shift responsibility for the delivery of payments from the FAS operational unit to pension schemes and allows funds for those payments to be provided by FAS or the lifeboat fund, whether by loan or by retrospective repayment.
The problem with the amendment is that pension scheme administrators would need to learn a new set of procedures to make such payments. That could cause significant delays. It is surely better to use the expertise that already exists in the FAS operational unit rather than to reinvent the wheel and require scheme administrators to learn new skills from scratch.
The amendment would mean asking hundreds of scheme administrators to learn skills already developed elsewhere. Those administrators would expect to be paid for doing so, further depleting the value of scheme assets available to members. That in turn would eventually mean higher top-up payments, the cost of which would ultimately be borne by the taxpayer. It would not even do away with the need for FAS, as many of the pension schemes which fall within the remit of the scheme have already wound-up and have no trustees to administer the sort of scheme envisaged here.
The amendment's rationale for funding on-account payments by means of loans or repayments from FAS resources is also opaque. To apply for such loans, schemes would presumably have to assess whether on-account payments were affordable, given their funding position, and would presumably have to make loan applications if they were not. There might be some logic to this approach if significant numbers of a scheme's membership did not stand to benefit from the FAS. It might then be important to ensure that assets of schemes were not being used to make payments to members that might cause younger members' benefits to be cut; but given our commitment to guarantee that all members will receive at least 80 per cent of their expected core pension, this part of the amendment seems to be particularly unnecessary, as well as burdensome. The expertise for delivering FAS payments quickly lies with the FAS Operational Unit. Currently, where data are received from trustees, FAS payments are assessed within a month. This amendment would be likely to decelerate payments and at some cost.
On Amendment No. 79, tabled by the noble Lords, Lord Oakeshott and Lord Kirkwood, I note that the consensus between the Conservatives and Liberal Democrats appears to break down here, although I believe the noble Baroness, Lady O'Cathain, is with the Liberal Democrats on this one. I assume that the lack of consensus is because this amendment puts upfront an extra public spending commitment. It calls for FAS assistance to be raised to PPF levels and to be paid for, presumably, from public funds. I have every sympathy with the intention, but the laudable aim of raising FAS benefits needs to be balanced against the considerable cost of doing so. We have made very clear our plans to raise the cap to broadly PPF levels and to abolish the current de minimis rule; so the noble Lords' intention to modify the FAS to bring payments up to PPF levels in essence means the FAS providing a top-up to 90 per cent for non-pensioner members, along with some limited indexation.
We estimate that this change would cost the taxpayer an additional £2.7 billion, or £640 million at net present value, which is a third more than the scheme that we are currently proposing. We believe that current FAS benefits, at 80 per cent, are the most that the taxpayer can reasonably be expected to bear. However, our rejection of PPF-level benefits is not simply on the grounds of cost. There are important differences between the principles of the FAS and the PPF, which should be maintained. The PPF is a compensation scheme, funded by a levy on schemes that seeks to provide protection for pensions in the future. In effect, some scheme members benefiting from PPF payments have paid an insurance premium, from which they benefit on employer insolvency. This premium increases the net cost of providing pensions, hence the employment costs of the employers of these scheme members. There is no public money in the PPF compared with the £1.9 billion of public money in the FAS.
The Government do, however, agree with the noble Lords' aim of getting more money to people who have lost their pension. We have set up a review into pension scheme assets to consider precisely whether that aim can be achieved through better use of the funds held by qualifying schemes. We have said that the review will present its initial findings in July. It appears that the amendment might not actually meet its apparent purpose. It would require the Secretary of State to make regulations to ensure that payments made to people by the FAS will equal the amount that would be payable if that person were entitled to compensation under the PPF. It does not take account of an essential difference between FAS payments and PPF payments. Given the Government's aim to increase FAS levels of payments through the review of pension scheme assets, and the increased public spending commitment that this amendment would entail, part of which would be unintended, I will urge the noble Lords not to press their amendment.
These are serious issues; we are dealing with the pensions of thousands of people. My noble friend Lord Howarth asked about caveat emptor. It is absolutely right that we are dealing here with schemes that are not government schemes, where government trustees are not involved and where the Government did not set the investment policy of the schemes. My noble friend Lady Hollis put it very well when she said that the Government have no legal responsibility. We do, however, have a responsibility to promote benevolent public policy. The noble Baroness, Lady Greengross, said that it was wrong to leave one group out but, as I have tried to explain, there is a difference between the FAS and the PPF. Before 1997, neither of these two schemes existed. If people lost out on their pensions, they simply lost out. I remind noble Lords that the High Court found that there was no causal connection between maladministration and the losses of employees.
I will not range over issues of repayable tax credits; my noble friend Lord Howarth has dealt with those. The noble Lord, Lord Skelmersdale, made some points about survivors' benefits. I should properly write to him about those. The noble Lord, Lord Oakeshott, made a point about the 80 per cent expected core pension and the differences that arise from that. These are serious matters, as I said. The Government have gone a long way to address what is a real difficulty for thousands of our fellow citizens. We believe that we have drawn the line in an entirely reasonable place and that it is as much as the taxpayer should bear. We are looking further to see if other use can be made of other assets, but we will not mislead people into thinking that there is a pot of gold out there and will not make commitments against that until we know the assets are there. On that basis, I ask the noble Lord, Lord Skelmersdale, to withdraw his amendment.
I am grateful to all Members of the Committee who have spoken in this debate. Many of your Lordships, in particular the Minister and the noble Lords, Lord Oakeshott and Lord Howarth, have spoken of the dire straits for the 125,000 pensioners who, to quote the Minister,
"through no fault of their own", have seen their pension savings disappear. That is why the FAS was set up. The noble Baroness, Lady Hollis, reminded us of this, but I should remind her that we are where we are now—not then. This Government have had to be pushed every time and every inch of the way on improving the FAS.
This group of amendments amounts to another improvement, which is quite a large improvement none the less. However, for the vast majority of these pensioners the money is too little, too late. It is too little because of the amount of the "core pension", as we have heard it described many times in this debate, and too late because, unlike the PPF, it is paid only from the state retirement age of 65. Some of these pensioners will die before the money comes through. Others are sick and disabled. The inadequacies of the FAS have been well aired in this debate, which is exactly why we put down these amendments.
I was criticised by the noble Lord, Lord Howarth, for resorting to government spending. I remind your Lordships that this money will be repaid well before the government spending review period. Two main arguments have been put up against these amendments, not least by my noble friend Lady O'Cathain. Yes, the knife from behind is usually the sharpest, as the Minister will know. But I would remind my noble friend that the White Paper says that 75 per cent of private sector employees have no pension scheme. Therefore, it cannot be a condition of employment.
The first charge that has been levied is that the lifeboat scheme is robbing Peter to pay Paul. There are no Peters. The unclaimed assets that we are saying should be used do not come from mutual funds. They come from non-trust schemes. If anyone subsequently appears to claim the money that has gone into the scheme, they will have it repaid. So I say again, there are no Peters. The second charge is that there is no money anyway, which is not so, as I said earlier. The Unclaimed Assets Register to which insurance firms and large pension firms belong has identified £15.3 billion of such assets, £3 billion of which are attributable to pension funds. The noble Lord, Lord Turnbull, very properly declared his interest in Prudential plc. I note that that firm is a member of the Unclaimed Assets Register, so I found some of his remarks curious, to say the least.
Lastly, the Government intend to extend the FAS to those people who have lost their pension because their scheme was underfunded and whose employer was still solvent but no compromise agreement was reached. They will do this by order after this Bill is passed, but not until the end of the year. Amendment No. 69 does this now because now is when the lifeboat fund is needed for these impecunious pensioners. I wish to test the opinion of the Committee.
moved Amendments Nos. 69 to 76:
After Clause 18, insert the following new Clause—
"Financial assistance scheme: qualifying pension schemes
(1) The Financial Assistance Scheme Regulations 2005 (S.I. 2005/1986) are amended as follows.
(2) In regulation 9, sub-paragraph (1)(c) is omitted.
(3) Regulations 11 to 13 are omitted."
After Clause 18, insert the following new Clause—
"Pension Protection Lifeboat Fund
(1) There shall be established as soon as reasonably practicable a Pension Protection Lifeboat Fund ("the Lifeboat Fund") which shall be administered by the Board of the Pension Protection Fund ("the Board").
(2) The purpose of the Lifeboat Fund shall be to make supplementary payments to persons who are qualifying members of qualifying schemes as defined by the Financial Assistance Scheme Regulations 2005 (S.I. 2006/1986) (or who would be qualifying members if the qualifying age for the Financial Assistance Scheme were set at the level of the qualifying scheme retirement age), in addition to the sums payable in any event under those regulations.
(3) The supplementary payments made to any person in accordance with subsection (2) shall equal the amount that, taken together with any amounts payable to that person under the Financial Assistance Scheme and amounts payable to that person as scheme benefits under the qualifying pension scheme in respect of which he is a qualifying member of the Financial Assistance Scheme (or would be a qualifying member if the qualifying age for the Financial Assistance Scheme were set at the level of the qualifying scheme retirement age), is the amount that would be payable to that person if that qualifying pension scheme were accepted into the Pension Protection Fund.
(4) The Secretary of State shall make such loans to the Lifeboat Fund as are necessary to allow the discharge of its functions and in particular its obligation to make supplementary payments under subsection (2).
(5) The Secretary of State shall make such loans from time to time having regard to—
(a) requests for such loans received from the Board;(b) the amount of assets transferred or to be transferred to the Lifeboat Fund under the Scheme (as defined in section (Transfer of unclaimed assets) ("the Scheme"));(c) the level of any claims on the Lifeboat Fund in respect of assets transferred to it under the Scheme.
(6) Loans made in accordance with this section must be repaid to the Secretary of State as soon as, in the reasonable opinion of the Board, it is prudent to do so having regard to—
(a) the obligations of the Lifeboat Fund;(b) the amount of assets transferred or to be transferred to the Lifeboat Fund under the Scheme; and(c) the level of claims on the Lifeboat Fund in respect of assets transferred to it under the Scheme.
(7) Loans made under this section shall be interest free.
(8) The assets of the Lifeboat Fund shall be held separately from the assets of any other fund under the control of the Board.
(9) The Secretary of State may by regulations make further provision in connection with the Lifeboat Fund.
(10) A statutory instrument containing regulations under this section is subject to annulment in pursuance of a resolution of either House of Parliament."
After Clause 18, insert the following new Clause—
"Pensions Unclaimed Assets Recovery Agency
(1) There shall be a body called the Pensions Unclaimed Assets Recovery Agency ("the Agency").
(2) The Agency must be established no later than three months after the passing of this Act.
(3) The Agency shall consist of not fewer than six nor more than twelve members to be appointed by the Secretary of State, and the Secretary of State shall appoint one member to be the chairman, and another member to be a deputy chairman, of the Agency.
(4) In appointing a person to be a member of the Agency, the Secretary of State shall have regard to the desirability of appointing persons who have knowledge of, or experience relating to, matters relevant to the functions of the Agency.
(5) A member of the Agency may hold office for such a period as the Secretary of State may determine, but not exceeding—
(a) six years, in the case of the chairman, and(b) four years, in the case of other members.
(6) The Secretary of State may make payments to the members of the Agency by way of remuneration and make payments to them in respect of expenses incurred by them in the performance of their duties.
(7) The Secretary of State may also defray any other expenses of the Agency."
After Clause 18, insert the following new Clause—
"Functions of Pensions Unclaimed Assets Recovery Agency
The functions of the Agency are—
(a) to obtain such information about such classes of unclaimed assets as may be prescribed by the Secretary of State by regulations;(b) to provide the Secretary of State with that information and any other related information held by the Agency which the Secretary of State may from time to time require;(c) to administer the scheme to be established by virtue of section (Transfer of unclaimed assets)."
After Clause 18, insert the following new Clause—
"Pensions Unclaimed Assets Recovery Agency: provision of information
(1) Subject to subsection (2), the Agency may, by notice, require any person to supply it, within a specified period or at a specified time or times, such specified information as the Agency considers it needs for the purposes of carrying out its functions under section (Functions of Pensions Unclaimed Assets Recovery Agency).
(2) This section does not authorise any requirement in relation to information to be imposed on any person unless that person carries on a business in the United Kingdom; but a requirement may be imposed under this section on a person in relation to information in the possession or control of a connected person or undertaking outside the United Kingdom.
(3) Any person who, when required to do so under this section, fails without reasonable excuse to supply any information, shall be liable on summary conviction—
(a) to a fine not exceeding level 5 on the standard scale; and(b) in the case of a continuing offence, to an additional fine not exceeding £200 for every day during which the offence continues.
(4) Any person who knowingly or recklessly supplies any information which is false or misleading shall be liable—
(a) on conviction on indictment, to imprisonment for a term not exceeding two years, or to a fine, or both; and(b) on summary conviction, to a fine not exceeding the statutory maximum."
After Clause 18, insert the following new Clause—
"Transfer of unclaimed assets
(1) The Secretary of State shall by regulations, not later than twelve months after the passing of this Act, establish a scheme ("the Scheme") for the transfer of such unclaimed assets as the regulations shall prescribe to the Lifeboat Fund.
(2) Regulations made under this subsection shall provide for—
(a) a definition of those unclaimed assets to which the Scheme applies, including the extent to which the Scheme is applicable to assets whose ownership is known, or can be determined;(b) the transfer to the Lifeboat Fund of a prescribed proportion of such unclaimed assets as the regulations shall prescribe, and the manner and timing of such transfers;(c) the transfer to the Lifeboat Fund of liability for any claim in respect of assets transferred under the Scheme to the Lifeboat Fund;(d) penalties to be imposed on any person holding assets prescribed under subsection (1) or (2)(b) who fails to transfer them or such proportion of them as is prescribed in accordance with the Scheme.
(3) The power to make regulations under this section is exercisable by statutory instrument.
(4) A statutory instrument containing regulations under this section is subject to annulment in pursuance of a resolution of either House of Parliament."
After Clause 18, insert the following new Clause—
"Purchase of annuities
The Secretary of State shall, as soon as is reasonably practicable, by regulations require the trustees of qualifying schemes as defined by the Financial Assistance Scheme Regulations 2005 which have not yet completed winding-up to desist from purchasing (except where, on or before 18th April 2007, they have entered into a binding contractual commitment so to do) or making binding commitments to purchase, annuities on behalf of scheme members, for a period of nine months from 18th April 2007."
After Clause 18, insert the following new Clause—
"Duty to make on-account payments
(1) Pursuant to his powers under section 286(3)(d) of the Pensions Act 2004 (c. 35), the Secretary of State shall as soon as is reasonably practicable make regulations requiring trustees of qualifying pension schemes to make on-account payments to qualifying members, or persons who would be qualifying members if the qualifying age for the Financial Assistance Scheme were set at the level of the qualifying scheme retirement age.
(2) The Secretary of State may make such loans to trustees of qualifying schemes as appear to him to be expedient to enable them to make such on-account payments where adequate scheme assets appear to him not to be available to them and regulations may prescribe for the recovery of such loans upon completion of wind-up of a qualifying scheme.
(3) Regulations made under subsection (1) shall provide that on-account payments shall equal the amounts that would be payable if the qualifying scheme were accepted into the Pension Protection Fund.
(4) The regulations shall provide for payment to trustees of a qualifying pension scheme of payments due to a qualifying member of that pension scheme (or a person who would be a qualifying member if the qualifying age for the Financial Assistance Scheme were set at the level of the qualifying scheme retirement age) by the Financial Assistance Scheme or by the Lifeboat Fund (as defined in section (Transfer of unclaimed assets)) in respect of periods for which on-account payments to that member have been made in accordance with subsection (1)."
On Question, amendments agreed to.
moved Amendment No. 77:
After Clause 18, insert the following new Clause—
"Application for pension sharing order by those resident outside the United Kingdom
(1) The Matrimonial and Family Proceedings Act 1984 (c. 42) is amended as follows.
(2) In section 15(1)(c) at the end insert "or any pension arrangement within the meaning of section 19 of the Welfare Reform and Pensions Act 1999 (c. 30)"."
I shall speak also to Amendments Nos. 78 and 165. We move on to a different subject, connected with the previous one only because it stems in part from the 1994-95 Bill. It covers leftover business not just from then but from the Welfare Reform and Pensions Act 1999, which established pension-sharing on divorce, after many years of campaigning around the entire House led by the much missed Baroness Young and Baroness Seear.
Why are these amendments necessary? Essentially, if a British couple retire to Spain and a few years on get divorced, their only assets may be the home and an occupational pension. Part III of the Matrimonial and Family Proceedings Act 1984 allows English courts to make property adjustment orders following a foreign divorce. A wife can still get a fair share of the home even though the divorce between two British citizens is taking place abroad. But sharing those assets would not include sharing the pension, even though it was earned in Britain and provided by a British company. Many EU and other countries cannot legislate to make pension-sharing orders, and even if they do they are invariably not recognised by UK pension arrangements and so are not implemented. I shall give an example. A couple I was told about moved to France, using their savings and family home to buy a new house there. No further assets apart from the husband's occupational pension were available. He then left her, they sold the house, shared the proceeds and divorced in France. The French court cannot make a pension-sharing order, and even if it did it would not be honoured by British companies. The wife is in her 60s and finding it hard to get a maintenance order from the French court. She is struggling to survive on casual work as a gardener.
I suggest to my noble friend that a simple amendment is needed to put pension-sharing on the same footing as the former matrimonial home, so that the jurisdiction is dependent on where the asset is based not on the residence and domicile of either of the parties. This is a loophole left over from the previous legislation, and I am as guilty about that as anyone, that is for sure.
A second issue, unconnected to the foreign jurisdiction point but also left out of the 1999 Act by mistake, is the need to be able to make an order attaching death-in-service benefit, which is a lump sum, and a pension-sharing order in relation to the same pension. It is becoming increasingly common that where the court orders payments of spousal or child maintenance, the recipient, usually the wife, will seek to ensure that the payment is covered should the former husband die in service before it is made. However, insurance policies are an expensive way to deal with this. An attachment order to the death-in-service benefit would achieve the same thing in an inexpensive and straightforward way. We should certainly do something about this as well.
Amendment No. 78 covers leftover business from the Pensions Act 2004. We decided, in part because we ran out of time, to exclude pension-sharing provisions from the Pension Protection Fund and the financial assistance scheme. Technically this was done because moneys from the PPF or FAS were compensation or a contribution to loss rather than the original pension. None the less, under the PPF an individual may receive 90 per cent of the original pension, and under FAS 80 per cent. That may represent a significant asset, one as valuable as the matrimonial home. For example, a PPF pension of £20,000 requires a pot of nearly £300,000. That sum would be excluded from any formal divorce pension-sharing arrangements. In other words, if you divorce before your company comes into the PPF, or even if you divorce during the assessment period, pension-sharing would be honoured. If you divorce a month or two later, after the company scheme has come into the PPF, it is not. The spouse's access to a share of the pension, which may be more valuable than the home, is determined not by the circumstances of the divorce, not by the size of the assets involved, and not by any offsetting that may have taken place, but by the timing of the company's fortunes. I do not think that that is fair. Virtually all other UK pensions are open to pension-sharing, including the basic state pension by substitution rules and the state second pension. It is unfair that pension pots coming through the PPF and FAS, which may be infinitely more generous than S2P, are excluded.
I ask my noble friend whether there is any possibility that in the course of this year or even in next year's Bill we could bring forward regulations or whatever is necessary to rectify anomalies which, while they may affect only a small number, for those who are so affected are quite serious and were certainly never part of the intention and spirit of the original legislation, which had the support of the entire House. I beg to move.
I am grateful to my noble friend for raising the important issue of the part the Government play in enabling fair and equitable settlements on divorce. Indeed, she was the Minister responsible for introducing in this House the relevant provisions in the Welfare Reform and Pensions Act 1999. I am disappointed that the Chamber is slightly less full than it was earlier because I thought this would be a good moment to pay tribute to my noble friend on her record of campaigning for women's pension rights. If they were still in their places, I am sure that other noble Lords would join me in that tribute.
I shall deal with Amendment No. 78 first. As my noble friend has described, it seeks to introduce new legislation to enable compensation from the Pension Protection Fund or assistance via the financial assistance scheme to be shared upon divorce. Of course, divorce settlements should be fair, which is why the legislation already ensures that the value of Pension Protection Fund compensation is taken into account by the court as an asset. The legislation also provides for situations where a court has already issued a pension-sharing order and enables the Pension Protection Fund to implement such orders notwithstanding that the pension scheme has been drawn into the Pension Protection Fund. Current legislation allows the value of a pension to be shared on divorce; however, once a party to a divorce is already receiving compensation, or assistance instead of a pension, the court has no powers to share any part of that with the other party.
I have great sympathy with my noble friend's amendment and I am very interested in the cases she describes. Although the Government are not aware of anyone losing out currently, we are actively looking at what we can do to ensure that problems do not arise in future. As my noble friend is aware, this involves engaging with the devolved Administrations in Scotland and Northern Ireland to ensure that any measures we take work effectively across the different family law jurisdictions of the United Kingdom.
We also need to ensure that such provisions would work as intended and would not add unnecessary costs or burdens to individuals, the Pension Protection Fund or taxpayers. For this reason the Government do not believe that it is appropriate to introduce the relevant provisions into this Bill. Instead, any necessary legislation would form part of a Bill in a future Session when we have had time to consider properly what would be required to enable court orders to be made and implemented.
I hope my noble friend will accept my assurances that the Government are aware of the issues she raises and are working across government and with the devolved Administrations to identify fully any legislation that is necessary to ensure fair settlements where financial assistance scheme assistance or Pension Protection Fund compensation is involved.
Amendment No. 77 seeks to extend pension-sharing to those who have a pension arrangement within the terms of the Welfare Reform and Pensions Act but who live abroad and are divorced abroad, as my noble friend described. All current jurisdictional requirements require one or both of the parties to have been domiciled or habitually resident in England and Wales at some point during or since the marriage, or to have a matrimonial home here, hence providing a personal connection with England and Wales. We need to understand further why my noble friend considers that being a member of a UK occupational pension scheme is analogous to the condition of having a beneficial interest in a dwelling house. The latter requires the couple to have resided as a married couple in England and Wales at some point, while the former does not. I am advised that if this were the case it would open up our courts to applications for domiciliary relief on divorce abroad from those whose only connection with England and Wales is where their pension is based.
Amendment No. 165 would allow the court to make both a pension-sharing order and an attachment order for a death-in-service lump-sum payment in respect of the same parties to a marriage and the same pension arrangement. As my noble friend knows, since the introduction of pension-sharing, divorcing couples have had to choose between attachment and pension sharing. Those who choose pension-sharing achieve a clean break and will become entitled to an income regardless of the circumstances of the other party. Income from an attachment order is not so secure; hence the issue of insurance raised by my noble friend.
The Government's current interpretation is that to allow a former spouse to benefit from both a pension-sharing order and an attachment order would cut across the principle of a clean break. It would also add significantly to the complexity of administering the pension on divorce provisions, particularly if either party subsequently remarried and divorced again. By choosing pension-sharing a former spouse acquires an asset in her own right, which provides security of income at normal benefit age. Having made this choice, a former spouse cannot expect to retain the link, having made a clean break with the other spouse, that an attachment order implies. However, we are willing to consider this matter further to see if there is a substantive issue. Again, this needs to be discussed in more detail.
Having made my points on Amendment No. 78 in regard to FAS, and taking note that the issues my noble friend has raised are seen as interesting and important, I hope that she will consider withdrawing her amendment.
I am extremely grateful to my noble friend. She has taken on board the substance of the point that there are small loopholes left over which, in the flurry of activity, we did not necessarily cover at the time, and suggested a way forward. One is not asking for action tomorrow on this; none the less, some of these issues will grow in seriousness and notoriety as more and more people avail themselves of pension-sharing and then find themselves coming up against these little roadblocks, if I can call it that.
I am grateful to my noble friend, both for the warm way in which she has responded and for her suggestion of future talks, which, obviously, will engage the professionals who have to counsel people on how to handle divorce settlements. With my appreciation, I beg leave to withdraw the amendment.
moved Amendment No. 79:
After Clause 18, insert the following new Clause—
"Financial Assistance Scheme: payment
The Secretary of State shall by regulations ensure that payments made to any person under the Financial Assistance Scheme as defined by the Financial Assistance Scheme Regulations 2005 (S.I. 2006/1986) shall equal the amount that would be payable to that person if that person were entitled to receive benefits under the Pensions Protection Fund."
On Question, amendment agreed to.