With this it will be convenient to discuss the following amendments:
No. 208, in
clause 142, page 131, line 8, leave out subsection (3).
No. 209, in
clause 142, page 131, line 14, leave out '(whether' and insert 'where'.
No. 210, in
clause 142, page 131, line 16, leave out 'or any other factor)'.
No. 211, in
clause 142, page 131, line 17, leave out subsection (5).
No. 212, in
clause 142, page 131, line 26, leave out from second 'benefits' to end of line 28.
No. 213, in
clause 142, page 131, line 30, leave out 'all of'.
No. 214, in
clause 142, page 131, line 31, leave out from 'circumstances' to end of line 35 and insert
'money purchase benefits or defined benefits'.
No. 271, in
clause 171, page 148, line 35, leave out
'other than a cash balance arrangement'.
No. 272, in
clause 171, page 148, line 40, leave out subsection (8).
No. 278, in
clause 171, page 148, line 31, leave out subsection (6).
No. 287, in
clause 142, page 131, line 36, leave out subsection (9) and insert—
'(9) Where an arrangement may provide both money purchase benefits and defined benefits to or in respect of a member, the arrangement is to be treated as two separate arrangements for the purposes of this Part.'.
No. 288, in
clause 266, page 216, leave out lines 19 and 20.
The amendments are another genuine attempt at simplification of pensions taxation. Clause 142, which defines the meaning of ''arrangement,'' is the last of the definition clauses before we get to the chapter on registration. Instead of the two types of pension arrangement that are currently defined, the clause establishes four: defined benefits, money purchase, hybrid and cash balance. Cash balance is a new concept in legislation and certainly one that caught the industry by surprise.
Would not it be simpler just to have two arrangements: defined benefits and money purchase? That is the view of almost everyone in the industry with whom I have discussed the matter. The National Association of Pension Funds states that
''it seems an unnecessary complication in this already difficult document to isolate conditions for the arrangements described as cash balance, and we are not convinced that the cash balance provisions work consistently.''
My amendments are designed to remove the cash balance definition. I can see a problem, because one reading of the definition of cash balance appears to encompass everything that would come under the definition of a money purchase scheme. On the other hand, the definition of money purchase benefits includes nothing that would be included in the definition of a money purchase scheme. Perhaps we should remove the definition of money purchase benefits from the clause, and rename the cash balance benefits as money purchase benefits—I hope that hon. Members follow me.
The clause seems to say that a cash balance is an arrangement determined otherwise than wholly by reference to the payments made by a member. What pension scheme is made wholly by reference to payments made by a member? What scheme does not pay, for example, the expenses of experts such as fund managers? If a scheme pays expenses, an amount must be available that is not calculated wholly by reference to the payments made. There are also investment returns, which play a crucial part in determining how much money is available in a pot. The amount in that case is not determined wholly by reference to the payments made.
My amendments are designed to get rid of cash balance altogether, and leave it to the Government to ensure that the money purchase definition covers what we all recognise as money purchase arrangements. This is a complicated concept to convey to the Committee. At the moment, no schemes would come under the definition of money purchase benefits, and all money purchase schemes would come under the definition of cash balance benefits. If the Financial Secretary has understood what I am saying, perhaps she will comment on that.
There are other problems with the definitions in the clause. I shall highlight for the Financial Secretary those problems that have been raised with me by the industry. First, is a scheme that pays out only for death in service, and which is funded by the employer, covered under the definition of defined benefit arrangements? There are schemes offered by employers that pay out sums only on death; they do not pay out pensions. Secondly, if insured lump sum death benefits are provided under a money purchase scheme—whether paid for by an employer or an employee—are the death benefits defined benefits?
Thirdly, the definition of a hybrid arrangement does not seem to apply to alternative hybrids where there are separate sections within the same pension scheme, in which members may participate concurrently. As someone from the industry said to me, the Government seem to be stuck in a time warp. They have the rather old-fashioned idea that a hybrid
consists of a money purchase scheme with a defined benefit guarantee—for example, it will not be less than x 80ths of a final salary. These days, however, popular hybrids include schemes where the employer provides a certain defined benefit element, and there is a money purchase element on top. It is not clear where those increasingly popular schemes sit in the definitions. The NAPF raised that with me.
What about money purchase schemes that buy an annuity for a scheme member shortly before retirement? Will they become defined benefit schemes? If part of a member's benefits is vested under the scheme, is the part being vested treated as a separate arrangement?
I am not the only one who wants answers to those questions. They have been raised by all the representative organisations—the Association of Consulting Actuaries, the Association of British Insurers, the NAPF and the Chartered Institute of Taxation. If those organisations, which spend their lives looking at pensions legislation, are struggling with the definitions, and if they almost universally object to a cash balance arrangement, or believe that it is unnecessary, that illustrates a problem with the clause.
A broader point that is worth making concerns the problem with the significant shift from a system of discretionary approval with practice notes—we shall discuss that when we come to the next few clauses—to a legislative set of definitions that cannot be clarified when the Bill is enacted because they will be written into law. In other words, it will not be the Inland Revenue that decides through its current discretionary system exactly what arrangements best suit a scheme and how it will treat that scheme, and instead the matter will be argued over in the courts. The arguments and questions that I have raised with the Financial Secretary today are precisely the sort over which there will be a number of court actions in the years to come.
That is perhaps inevitable when moving from a system of discretionary approval, but it makes it all the more essential that, as we pass the legislation, we are clear about the definitions that we are putting in the Bill and reduce the scope for confusion. If the Financial Secretary does not agree with me, will she at least go away and think about that? I have spoken to quite a lot of organisations and to quite a lot of pensions tax lawyers and all have raised queries about the definition of a cash balance benefit. Surely it is worth the Inland Revenue thinking about that and deciding whether it is strictly necessary that it has its own special category in the clause.
There are two basic types of arrangement: money purchase arrangements, which are also known as defined contribution or DC arrangements, and defined benefits or DB arrangements. Two further sorts of arrangement are defined in the clause: cash balance arrangements, which are a particular type of money purchase arrangement, and hybrid arrangements, which are
arrangements under which someone may receive benefits of one type or another depending on the circumstances. Those arrangements exist in the current regime. We do not want to limit the freedom of members, employers or providers by dictating that particular arrangements should exist in future, nor do we want to restrict people's freedom to move between different types of arrangement. Although there will be a single tax regime, the legislation must recognise that different arrangements operate in different ways, so it is necessary in some places to provide rules appropriate to the way in which the particular arrangement works.
The hon. Member for Tatton directed his comments at the concept of the cash balance arrangement, which he proposes to remove altogether from the legislation.
Given that in her opening comments the Financial Secretary dealt with a number of existing formulations of what is a pension and then said that in future she wanted to maintain a regime of flexibility and interoperability, can she explain by what mechanism future adjudications will be determined as to which category a new pension product might fall into or when there is a difficulty with an existing product? My hon. Friend referred to the possibility of court proceedings, but I am sure that the Treasury would not want that as the sole determinant of what definition a scheme falls into.
In general, the Inland Revenue will decide into which category an arrangement falls. However, there will be a right of appeal under the arrangements. As I understand it, there will be a right of appeal to the Commissioners in the ordinary way, as now, and people can appeal if they feel that the Inland Revenue has operated inappropriately. That right of appeal is in fact being extended in the Bill.
I shall return to the point about the cash balance, to which the hon. Member for Tatton directed the majority of his remarks. There are very good reasons why the concept of a cash balance arrangement must be retained. We referred to the arrangement in the consultation document—it was raised by secondees from the pension industry to the Revenue. Under a cash balance arrangement, the individual is promised a capital sum at retirement to be used for the provision of benefits. It is similar to standard money purchase arrangements where the benefits are calculated by reference to an amount or pot that becomes available for the provision of benefits to the individual. In a cash balance arrangement, however, the amount is promised to an individual rather than depending entirely on the level of contributions and the investment performance of the fund. There is an element that is similar to DB arrangements.
In a cash balance arrangement, the promised pot grows by a fixed, ascertainable amount each year. At its simplest, it may promise the individual that on retirement a fixed sum, say £10,000, will be put into the pot for each year of service. It would be inappropriate to treat cash balance arrangements in the same way as
money purchase arrangements for all purposes. For instance, for annual allowance purposes, the individual's annual pension savings in a standard money purchase arrangement are measured by reference to the contributions made; in a cash balance arrangement there may be no annual contributions whatever. The promise may be fulfilled in the scheme providing a promised pension pot in the final year. We must measure the growth in the promised pot and not the contributions.
Wherever possible, cash balance arrangements are dealt with in the same way as other money purchase arrangements, but for fairness and to reflect the different level on which cash balance arrangements operate in certain areas, it is necessary to have different treatment.
In similar areas such as the transitional provisions and the unauthorised borrowing provisions, it will be necessary to distinguish between cash balance arrangements and other money purchase arrangements, both of which we will address when debating the pension simplification proposals. In order to make the necessary distinctions, we must have a definition of the cash balance arrangement, and that is what the clause provides.
The hon. Gentleman raised several other points, which I will try to address. He will forgive me and perhaps give me a reminder if I fail to respond to all of them. Insured lump sum death benefits provided under a money purchase scheme will be treated as defined benefits, as long as they are themselves defined benefits—that is, the sum on death is a designated amount. In this case, the arrangement is likely to fall within subsection (9). The retirement benefits are money purchase benefits and the death benefits are defined benefits, so they will be treated as two separate arrangements.
The legislation caters for modern hybrids, dealing with the situation in which there are separate sections within the same pension scheme in which members may participate concurrently. For example, where on retirement both money purchase and defined benefits will be paid, under subsection (9) they will be treated as separate arrangements.
The points that the hon. Gentleman made sometimes touched on how pensions are treated between different arrangements. I am happy to discuss further with him, perhaps through correspondence, particular areas of the legislation where he feels that the definition is not sufficiently clear. However, we feel confident that it is clear enough for people to understand how their pension arrangements should be treated.
I am not convinced about the need to provide a separate definition of cash balance benefits. I am merely trying to simplify the legislation. If the category becomes redundant and sits there in the legislation, so be it—we have just wasted a few more trees by printing it.
I am not convinced by what the Financial Secretary said. She said that the idea was recommended to the Treasury by secondees from the industry during the consultation. They were clearly not the people in the
industry who spoke to me. One of the striking things when I prepared for the Committee, as one does, meeting various representative organisations and speaking to individuals who offered to help with the drafting of amendments and so on, is that every single one of them asked why there is need for a separate definition of cash balance benefits. They asked whether that would not simply complicate matters and make them more confusing, and nothing that the Financial Secretary said has cleared that up. I suppose we shall just see whether it becomes a widely used definition.
The Financial Secretary covered some of my specific questions such as the one concerning death-in-service benefits. She assured me that modern hybrid arrangements would be covered. She was very proud of subsection (9), which is one of the most complicated and convoluted subsections in the Bill. It says:
''Where not all the benefits that may be provided under an arrangement to or in respect of the member are of the same one of those varieties of benefits, the arrangement is to be treated for the purposes of this Part as being two or three separate arrangements one of which relates to each of the two or three varieties of benefits that may be so provided.''
I forgot to mention earlier that amendment No. 287 would radically simplify that subsection and is a model of how such things should be done. It is very straightforward: everyone can understand it and read it. I am so confident of its simplicity—even though the Financial Secretary will not accept it here and now—that I am sure that the matter will arise again on Report.
The hon. Gentleman has alluded to amendment No. 287. Presumably, its drafting is slightly defective, because there could be more than two arrangements.
It was drafted in the hope that the Government would accept my other amendment. If they had accepted the entire package, it would be correct. One always approaches Committees in the spirit of optimism that everything one proposes will be accepted. I am not going to press the matter to a Division. We may wish to return to it on Report, and the Government should give further consideration to it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 142 ordered to stand part of the Bill.