The amendment is designed to remove a strange requirement that schemes with fewer than 50 members must purchase annuities to secure their pensions. First, it is strange because it is not in any of the consultation documents, and I do not think that views from the industry have been sought on what will be a very significant change to the way in which smaller pension schemes do business. Why has the requirement for schemes with fewer than 50 members to secure pensions by purchasing annuities appeared?
Secondly, it is a strange requirement because there is no explanation for the new policy in the explanatory notes; there is simply a statement of fact. There is no
attempt in the notes or in any Government consultation document to explain why the requirement is in the Bill. I have not heard a word from the Government about the problem that they seek to address. Is it about member protection and therefore an issue for the Department for Work and Pensions? This morning the Financial Secretary relied on the distinction between the role of that Department and the Inland Revenue. We know from debating the Pensions Bill that member protection is a function of the DWP.
I do not know whether the issue is one of member protection; that was my guess. Why the magic number of 50 members? There are perfectly well managed schemes with fewer than 50 members and desperately underfunded schemes with more than 50 members, so where does the figure come from? I have a hazy recollection of tabling a written question to the Financial Secretary before the recess, asking how many schemes have 50 or fewer members, because we have no information on which to base the change that we are being asked to make in Committee.
Thirdly, the requirement is strange because it could lead to some odd situations. What happens when a scheme suddenly gets its 50th member? Presumably, 49 of the pensions are secured as annuities, and the 50th is not. What happens if a member dies and the scheme suddenly falls below 50 members? Presumably all the pensions suddenly have to be secured. That situation will be fairly common. A new company might set up and start a new scheme. Over time, the company would grow, get more than 50 employees, and cross the threshold. Equally, there are schemes gradually withering on the vine as members die off, and they will fall below 50. That will not be unusual. How many schemes are affected by the measure?
Will the annuities with which the pensions are to be secured be bought in the member's name, or in the trustees' name as a scheme investment? As I understand it, buying out pensions in payment prejudices the statutory priority of a scheme winding up. What are the consequences of that? What will be the burden on the schemes? There has been no consultation; the Treasury did not float the idea in its two fairly comprehensive consultation documents. Buying annuities can be expensive, and it may not be convenient for a scheme suddenly to dispose of all its assets. What will the impact be? Until we are surer that the Government have thought the matter through, I will be tempted to press the amendment to a Division.
In looking at pension fund problems, I have perceived that a pension fund that may be solvent—according to the assessment of the actuary—on an ongoing portfolio basis may not be able to meet its commitments if it is obliged to buy annuities over the year. There is an important financial point: generally, there is a large difference between the funding required to annuitise all commitments and that required by the ups and downs of markets on an ongoing basis.
What struck me about this extraordinary requirement was that it will do immense damage to many smaller final salary schemes. If they are obliged
to fulfil the requirement, their members will be locked into a much lower pension than they might have had on the basis of an ongoing portfolio.
I note the points made by the hon. Members for Tatton and for Arundel and South Downs, and also the strength of feeling on the subject. Let me deal with some of the lesser issues before I come to the substance.
The amendments would remove the requirement for small schemes to secure a scheme pension, or a dependant's scheme pension, through an insurance company. A scheme pension should be secure for the life of the member. That might not be achieved if the scheme is small, as the small number of members means that the scheme runs an increased risk of a significant number of members living longer than expected.
The cost of annuitising pension benefits for pension schemes with less than 50 members, as opposed to paying benefits directly from the scheme, will vary from case to case. Relevant factors will be the level to which scheme benefits are funded and the relative ages and benefit entitlements of the scheme members. The amendments suggest that the proposed new requirement will impose an additional cost on pension schemes with fewer than 50 members, but it is far from clear that that will necessarily be the case.
When an insurance company provides the scheme pension, it will be necessary for the entire purchase price to be paid from the scheme to the insurance company, either as a one-off sum or in a series of payments. However, where the scheme itself is paying the pension, cash injections may be required from the employer to ensure that the pension is payable for the lifetime of the member. So in the long run, the insurance company route may cost no more—or may indeed be cheaper—than the in-house pension route. The relative costs of a scheme pension provided by an insurance company and an in-house pension would depend on the exact circumstances of each small pension scheme.
Where benefits are fully funded, buying out the promise through an insurance company should require little, if any, additional cost and will cap the employer's liability while providing security for the members. However, where benefits are not fully funded and the scheme membership is homogeneous, providing a scheme pension through an insurance company might have a cost—but then so would paying the scheme pension in-house.
Generous tax relief is available for pensions saving, and it is right that pension funds are used for the intended purpose of providing a pension for the life of the member. The concern that small schemes may be unable to provide this guarantee is addressed by the requirement for them to insure members' pensions.
The requirement also prevents collusion between the scheme and the member to allow the member to draw an inflated tax-free lump sum by promising a high pension with no intention of actually funding for that. The amendments could therefore reduce
significantly the security of some scheme pensions. I will come back to the point about whether this is the right measure in which to provide that security.
The hon. Member for Tatton asks, why 50? It is not possible to say precisely what size of scheme would provide a large-enough pool for funds to be protected if, for example, all the members lived longer than expected. That might depend on a range of factors, such as the gender of the members or the type of occupation. However, we can say that it is very unlikely that a scheme with fewer than 50 members would be of sufficient size adequately to pool the mortality risk of the members. Therefore, there is a real security and protection issue for members.
What evidence does the Financial Secretary have for what she has just said about these small schemes being unable to secure the pensions of their members? Does she have many examples of smaller schemes failing to provide the pensions required? Are there small schemes in which everyone suddenly lives to the age of 110? What is the evidence base? One of the points that I made is that there does not seem to have been any consultation, and there is no information on this or any facts on which we can base these judgments.
Clearly, there is a judgment to be made. Although 50 is a relatively arbitrary figure, we believe that it is very unlikely that a scheme with fewer members would have sufficient numbers to be able to pool that longevity risk. If the figure is above that, schemes still may not be able to pool it, but the likelihood that they will be able to do so is greater.
The hon. Gentleman asked about when the membership of a scheme drops from 50 to 49. He wondered whether the scheme would have to buy an annuity for the remaining members and so forth, and he pointed out potential anomalies. I assure him that if the number of members were to fall from 50 to 49 we are satisfied that there would be adequate mortality cross-subsidy to ensure that the pensions of the remaining members could be paid. If, when a scheme pension first began to provide benefits, the number of members was 50 or more, we would be happy for the scheme to continue to provide benefits payable by the scheme administrator or an insurance company even where the number of members subsequently fell below 50.
The hon. Gentleman also asked how many pension schemes approved by the Inland Revenue have fewer than 50 members. I answered that in a reply to a parliamentary question this week, which he can refer to later. Although we do not have precise figures held centrally, the 11th survey of the Government Actuary, which covered occupational pension schemes with two or more members, suggests that between 86,000 and 98,000 pension schemes approved by the Inland Revenue might have fewer than 50 members.
I turn to more substantive points, and I hope that I can alleviate some of the concerns that have been raised. I understand that there is an argument that the
Department for Work and Pensions should have some role through its requirement to ensure the protection of scheme members. I also recognise that the DWP is in the process of making changes to its rules on scheme funding requirements and that, together with the pension protection fund, it should protect the pension funds of some small schemes. However, we are not yet in a position to know exactly what those protections should be.
I will, however, give a commitment to the Committee that once that has been fully decided and those rules are in the public domain, we will examine this again to see whether there is any overlap of regulation, and whether this is the appropriate way to ensure that members of smaller schemes are protected against longevity risk. In the meantime, I suggest that the provision remains in the Bill. We will be in close liaison with the DWP to ensure an appropriate degree of harmony between the different proposals. On that basis, I suggest that the hon. Gentleman consider withdrawing his amendment.
The problem that we on this side of the Committee face is that we are not in a position to judge whether such protection is a good or a bad thing, or whether it is necessary. As I said earlier, I sat on the Standing Committee on the Pensions Bill for week after week, and there was no particular focus on small schemes; that Bill was almost entirely about member protection. There was no debate about schemes with 50 or fewer members; indeed, many of the schemes that we talked about, such as Allied Steel and Wire, were very large.
We are not in a position to judge whether the provision is necessary because the Treasury has not consulted on it. It has produced no evidence, and it has only a rough idea of how many schemes will be affected with a margin of about 15 per cent. either side. There is no paper that says, ''Here is the problem. This number of schemes with fewer than 50 members have gone belly up, so we need to provide this protection.''
We do not know the views of the industry on this issue beyond its responses to the Finance Bill at the time of its publication. Its only response has been like mine: what is the point of the provision and why is it being introduced? Industry, and smaller schemes in particular, has not had the chance to see the evidence. Those smaller schemes will probably be the last people to know about it because they will not follow the changes to pensions legislation and the taxation of pensions as closely as some of the big schemes. This may hit them out of the blue. They may not even be aware of it because they will not have hauled through the Finance Bill clause by clause—and if they do read the explanatory notes, they will be none the wiser.
What the Financial Secretary said does not give me much confidence. She said that the DWP is working on the problem at the same time and coming up with a parallel scheme. She said that she hopes that there will not be much overlap, but if there is things will be changed, and the Treasury will be in close liaison with that Department. One would have thought that the
poor old DWP might have been consulted in advance. The almighty Treasury is once again taking over one of its remaining functions. All those Work and Pensions officials who say, ''At least we get to work on member protection—that's one piece of our territory that the Treasury haven't trampled all over,'' will suddenly find that the Chancellor's tentacles have extended.
The fact that the Financial Secretary assures us that the Treasury will consult the DWP is not a great reassurance. One would have thought that the Government would consult internally before introducing legislation. Of all the arguments that the Financial Secretary has advanced today, this was the area about which she seemed least confident. She said that she thought it was a good idea to keep the provision in the Bill, and if we do not need it, we can take it out. Perhaps there is an alternative approach. Let us decide over the next few months whether it is necessary, and then put it in the Bill. It could be included in the next Finance Bill, after we have decided that it is necessary and consulted on it, the Treasury has issued one of its nice consultation documents, which has had lots of responses, and the Secretary of State for Work and Pensions has received a letter from the Chancellor about it. That is how legislation should be put together.
We will have to vote against the provision, not because we think that it is bad, but because we are not in a position to judge whether it is good. There is time to make such changes later. Perhaps there will be more provisions on pensions in next year's Finance Bill, or in the intervening 12 months. A better approach is to remove the measure from the current Bill, consult properly, involve the DWP, develop a joined-up approach and, if it is necessary, introduce it next year. That is the way that a good Government should proceed. I shall have to press my amendment to a Division.
Question put, That the amendment be made:—
The Committee divided: Ayes 4, Noes 14.
Question accordingly negatived.
Amendments made: No. 301, in
schedule 28, page 421, line 25, after 'that' insert '(subject to sub-paragraph (4))'.
No. 302, in
schedule 28, page 421, line 30, leave out '(except in excluded circumstances)'.
No. 303, in
schedule 28, page 421, line 32, leave out sub-paragraph (4) and insert—
'(4) None of the following prevent the pension satisfying the condition in sub-paragraph (3)—
(a) if the ill-health condition is met when the member becomes entitled to the pension, the pension not being payable for a period during which the individual's physical and mental condition is no longer such as would, under the terms of the scheme, give rise to entitlement to the pension,
(b) a reduction in the rate of the pension which applies to all the scheme pensions being paid to or in respect of members of the pension scheme, or
(c) if the member becomes entitled to state retirement pension, a reduction in the rate of the pension which does not exceed the rate at which state retirement pension is payable (or, if the rate at which state retirement pension is payable is greater than the rate of the pension, the pension ceasing to be payable).
(4A) For the purposes of sub-paragraph (4)(c) the following constitute ''state retirement pension''—
(a) retirement pension under SSCBA 1992 or SSCB(NI)A 1992, and
(b) graduated retirement benefit under NIA 1965 or NIA(NI) 1966.'.
No. 304, in
schedule 28, page 422, line 2, leave out sub-paragraph (7).—[Ruth Kelly.]
I beg to move amendment No. 338, in
schedule 28, page 422, line 25, after 'changes', insert
'over that year or such other period not to exceed the lifetime of the policy'.
I put my hands up and say that this may not be the best way to draft the amendment, but we did not have the resources that are available to the Government to get it absolutely right. [Hon. Members: ''Shame.''] I do not know why the hon. Member for Ealing, North is scorning me. He has his own legislation, which we are all waiting for him to introduce in the House. If he needs help in drafting his Tony Martin Bill, I am sure that we can lend him some advisers.
This is one of the rare, and possibly unique, occasions when such chuntering as there was from the socialist Benches did not originate with me. It is possible that my old university colleague, who is sitting opposite me, is paying me back for impersonating him at a union general meeting in the summer of 1979.
I concede that the amendment is a rough and ready job that probably needs the help of a parliamentary draftsman to deal with our concern that variable with-profits annuities will be prohibited by the legislation. Paragraphs 3(3), (4) and (5) of schedule 28 define annuities as level annuities, which are annuities that do not vary from year to year, increasing annuities, which increase from year to year, or annuities that are linked to the retail prices index or to
the market value of freely marketable assets. The schedule seems to exclude with-profits annuities of the kind that are widely marketed these days.
Someone sent me a package that one can get from the Pru. I should say that the Pru did not send it to me. I am not speaking for it or for any other life insurance company. The package is about its with-profits annuity, which is a popular product with some people. Perhaps my reading of the legislation is wrong, but it appears that the Bill will prohibit such annuities. Is that the case? If so, why? What is the problem with with-profits annuities? If they are to be banned, has the industry been consulted? What will be the impact on companies that run such products and on the people who already have them? I wanted to draw out those points with the amendment, and I would be interested to hear what the Financial Secretary has to say about them.
I hope that I can reassure the Committee that it is not the Government's intention to prohibit the sale or purchase of with-profits annuities. Our main concern is that the member must not be able to direct the investment or determine the value of the assets with which the annuity is linked. With-profits funds, which are based on movements of the investment markets and actuaries' calculations, can be said to move by reference to an index of freely marketable assets, although a time delay may be involved. Provided that the variation is not at the member's direction and is by reference to market conditions, we would accept that such an annuity would fall within the definition of a relevant linked annuity. I hope that I have reassured the hon. Gentleman on that point and convinced him that the amendment is not needed.
I am interested in the way that the amendment is worded. The Financial Secretary said that there will not be a ban on selling with-profits annuities, but surely the real problem in recent years has been the exceptionally low payout on such annuities. I am amazed that the Opposition did not raise that issue. The Government should consider it as well, because it should have been made clear to people who are tied into such low-paying annuities what they were likely to get; otherwise, such sales really amount to mis-selling. Surely, the Opposition should be raising that issue.
I take the hon. Gentleman's point. By the way, it is one of the arguments against annuities in general. We have had lengthy debates during which he could have caught your eye, Mr. McWilliam, and made that point. We were trying to establish whether the Government were getting rid of, or making illegal,
Amendment, by leave, withdrawn.
I beg to move amendment No. 224, in
schedule 28, page 426, line 21, after 'impairment', insert ', or
(c) has reached that age and is continuing in full-time education which commenced before the child reached that age.'.
The amendment is to do with people in full-time education. It is a bit more than a probing amendment. It would amend the meaning of a dependant to include those in full-time education beyond the age of 23, with the important caveat that the education began before the age of 23. As I understand it, that is current Inland Revenue practice. In other words, the child remains a dependant as long as they are in continuous full-time education. That is reflected in many schemes.
Why are the Government changing the definition of a dependant? What will be the impact on young adults? How many people are we talking about? These days, people seem to spend longer and longer at university and college—although once the Government's new tuition fees come in they will probably leave earlier. At the moment, however, people stay in full-time education longer and longer. What impact will the change have on them and on schemes that currently define dependants as children of members, including young adults beyond the age of 23 in full-time education? Why have the Government suddenly made this change?
The age of 23 is used because it is simple, certain and clear. The intention behind pension simplification is simplicity. The hon. Gentleman's proposal would merely add unnecessary complication to the rules. It could create problems for schemes. People would need to decide how to define full-time education and whether a child had started full-time education before the age of 23. It would create anomalies between children who started full-time education after they were 23 and those who started before they were 23, and between children who were in full-time education and those who were in part-time education, perhaps because they needed to work to support their parents.
It is possible to make a fairly plausible case that the rules should change, but it is equally plausible—it is also straightforward, clear and provides certainty—to argue that there should be a clear cut-off age of 23. I therefore urge the hon. Gentleman to withdraw the amendment.
I am not adding complexity to the scheme of things. The definition already exists in current Inland Revenue rules. I have been told that it is currently within those rules that people over the age of 23 in full-time education can be classed as dependants. The Government are removing a current right and are changing an arrangement that works satisfactorily, as far as I am aware. It is not really good enough for the Financial Secretary to say, ''Well, we
don't want to make things too complicated.'' She must explain why the Government are removing something that currently exists. Have they consulted on the matter? I do not know whether she has anything to say.
I can certainly say that we have not received representations on this matter. Very few responses were received on this point. On the whole, people seemed to welcome the simplicity and certainty that having a cut-off age of 23 provides. As I said earlier, trying to amend the Bill in the way in which the hon. Gentleman suggests would add complexity to the administration of schemes. Therefore, I suggest that we stick with the current legislation.
We are not sticking with the current legislation—we are changing it through the Bill. The Financial Secretary said that she has not received many representations, but that may be because people have not spotted the provision. It struck me that many organisations have basically gone on what was in the consultation paper and the Government's assurances that nothing new was being included, but a few things are new: one is this measure and another is schemes with 50 members or fewer.
I shall not press the amendment to a Division, but I want to put on the record that it is strange that the Government are withdrawing this right. I suppose that they are working on the assumption that when tuition fees come in very few people will be in full-time education beyond the age of 23, so it will not apply. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 305, in
schedule 28, page 426, line 43, after 'that' insert '(subject to sub-paragraph (3A))'.
No. 306, in
schedule 28, page 427, line 9, leave out '(except in excluded circumstances)'.
No. 307, in
schedule 28, page 427, line 10, at end insert—
'(3A) Neither of the following prevents the pension satisfying the condition in sub-paragraph (3)—
(a) a reduction in the rate of the pension which applies to all the dependants' scheme pensions being paid in respect of members of the pension scheme, or
(b) if the dependant becomes entitled to state retirement pension, a reduction in the rate of the pension which does not exceed the rate at which state retirement pension is payable (or, if the rate at which state retirement pension is payable is greater than the rate of the pension, the pension ceasing to be payable).
(3B) For the purposes of sub-paragraph (3A)(b) the following constitute ''state retirement pension''—
(a) retirement pension under SSCBA 1992 or SSCB(NI)A 1992, and
(b) graduated retirement benefit under NIA 1965 or NIA(NI) 1966.'.
No. 308, in
schedule 28, page 427, line 14, leave out sub-paragraph (5).—[Ruth Kelly.]
I beg to move amendment No. 309, in
schedule 28, page 427, line 32, leave out from first 'annuity''' to end of line 33 and insert
'and ''increasing annuity'' have the same meaning as in paragraph 3 and ''relevant linked annuity'' has the meaning that it would have in that paragraph if the reference to the member in sub-paragraph (6) were to the dependant.'.
I have already spoken about clause 157 and the second part of schedule 28, which, as the Committee will recall, provide the rules that will apply to all dependants' pensions paid by registered pension schemes. These amendments introduce a minor change to the second part of the schedule to clarify the definition of a dependant's annuity and a dependant's short-term annuity.
The pension rules allow the payment of an annuity when the annual amount of that annuity varies by the market value of freely marketable assets. That term is defined in respect of a member's annuity as a relevant linked annuity and in that context requires that the member must not be able to determine the value of the assets to which the annuity rate is linked. The first amendment ensures that when the definition of a member's relevant linked annuity is applied to the dependant's annuity, it is the dependant, rather than the member, who is not able to determine the market value of the freely marketable assets.
The second amendment ensures that the amended definition of a dependant's relevant linked annuity also applies to the dependant's short-term annuity.
The amendments clarify the position regarding the dependant's annuity and ensure that the dependant may not determine the amount of the annual income from the annuity. I commend them to the Committee.
Amendment agreed to.
Amendment made: No. 310, in
schedule 28, page 428, line 8, leave out '3' and insert '17'.—[Ruth Kelly.]
Question proposed, That this schedule, as amended, be the Twenty-Eighth schedule to the Bill.
The Association of British Insurers is opposed to short-term annuities and suggested some amendments, which we did not feel that we could table in our name, but it is right to raise its concerns with the Government.
Short-term annuities are a new development and the Government argue that they will provide additional flexibility for consumers who want to plan ahead for periods that they can foresee reasonably well. The ABI believes that the introduction of short-term annuities is unnecessary, would introduce further complexity and could leave consumers vulnerable to investment and interest rate risk and perhaps reduce the level that they are likely to achieve when they eventually purchase a lifetime annuity. The association also fears that there is a real risk of mis-selling of short-term annuities, not least because they are likely to appeal to consumers who perceive annuities to be poor value but do not have a pension pot that is large enough for income withdrawal.
Those points were put to us by the ABI, but we did not want to table them as amendments. However, this is probably the right place to raise the whole issue of short-term annuities with the Financial Secretary. Perhaps she could explain what is behind the Government's thinking and how they intend to address the ABI's concerns.
I am glad that the hon. Gentleman is taking the proposition of compulsory annuities at the age of 75 seriously and that he recognises the merits in that. That is what drives the ABI's concerns on that point. Originally, when we had that debate, representations were made to me about the high charges involved in income draw-down. Limited period annuities were presented as an alternative to income draw-down. They allow people who would otherwise wish to defer annuities to the age of 75, or before that, to take out a more temporary form of annuity and to reassess their financial needs at the end of that period. That provides them with additional flexibility. When they were originally proposed in the consultation document on annuities they were widely welcomed, including—I think—by the Opposition. They are a welcome innovation as an alternative to income draw-down and show that we are listening to the demands of people who are looking for greater flexibility in their retirement fund.
Question put and agreed to.
Schedule 28, as amended, agreed to.