With this it will be convenient to discuss the following:
Government amendment No. 430.
Amendment No. 401, in
clause 201, page 168, line 26, at end insert
', multiplied in either case by actuarial equivalence factor.'.
Government amendments Nos. 431 to 433.
Amendment No. 402, in
clause 201, page 169, line 14, at end add—
'(12) In this Part, the actuarial equivalence factor is the factor certified from time to time by the Government Actuary which is appropriate having regard to the age of the individual.'.
Government amendments Nos. 436, 437, 439 to 444, 446 to 455 and 474.
New clause 16—Valuation assumptions—
'For the purposes of this Part the valuation assumptions in relation to a person and any benefits are—
(a) if the person has not reached such age (if any) as must have been reached to avoid any reduction in the benefits on account of age, that the person reached that age on the date, and
(b) that the person's right to receive the benefits had not been occasioned by physical or mental impairment.'.
This group of Government amendments and new clause 16 concern valuation rules. They ensure that there is a consistency of approach across the new regime in all areas where an individual's uncrystallised rights need to be valued. For example, it may be necessary to determine the value of those rights to determine the extent of borrowing that may be made by a registered scheme in respect of a particular arrangement.
Clause 171 provides rules on that point. The limit is set at 50 per cent. of the value of crystallised and uncrystallised rights under the arrangement. Amendment No. 426 ensures that the value to be used when valuing the member's uncrystallised rights is clear. The valuation is not to take account of any adjustment in benefit that may apply because of ill health or because of taking benefits early.
It is necessary to value an individual's uncrystallised rights for other purposes—to determine whether the unauthorised payment surcharge applies, to quantify the enhanced lifetime allowance where an individual has been non-resident or has made transfers into a
registered scheme from an overseas scheme, and to quantify the increase in pension rights in any particular year when applying the annual allowance.
The amendments and the new clause clarify the valuation rules in all those areas and give a simple, clear and consistent approach to valuation across the piece whenever individuals' uncrystallised rights need to be valued. They will give additional certainty in such important matters to individuals and to schemes. Indeed, we introduced them partly in response to Finance Bill representations that I received on the matter that asked for greater clarity. For those reasons, I trust that the Committee will accept them.
Amendment Nos. 401 and 402 concern clause 201, which itself concerns the 15 per cent. surcharge that applies to unauthorised payments, where such payments exceed 25 per cent. of the value of a fund. Clause 201 sets out how a member's uncrystallised rights are to be valued when determining whether the surcharge threshold of 25 per cent. for member's rights under the pension arrangements has been breached.
Rights are uncrystallised if a member is not yet entitled to a payment of benefits in respect of those rights. The value of the rights is calculated in different ways depending on the type of arrangement that the member has. Standard valuation factors, or market values are used in arriving at the value, so members will be able to self-assess whether the threshold has been breached.
The value of a member's arrangement means the value of that arrangement at the date that the unauthorised payment is made. For money purchase arrangements, that is the value of the assets and money held in relation to the arrangements. For cash balance schemes and defined benefit arrangements, the calculation is inevitably more complicated, because there is no actual fund held by the scheme directly related to the arrangements. The clause takes as the value the amount of benefit that would be provided by those schemes assuming benefits were taken at that date, with no reduction for the fact that the individual has not yet reached retirement age.
The amendments, which seek to increase the value of the money purchase fund to what it would be at the member's retirement age, are based on a misunderstanding of clause 201. The clause is designed to value the member's arrangement at the date that the payment is made. It is right that the payment is valued at that date. The charge relates to amounts taken out of the fund. It must relate to the actual amount of the fund and not a notionally increased fund.
To increase a fund by an actuarial factor would be unfair. If two members each had £100,000 in the fund and took out £30,000 as an unauthorised payment, they may get different tax treatments if one is 25 and the other is 55. An actuarial enhancement would increase the 25-year-old's fund far more than that of a 55-year-old.
The amendment is technically deficient. It provides only that the actuarial enhancement is based on the member's age. It does not provide details of the factor to which it is to be enhanced. Is it the normal
retirement age? Is it 65, 75 or even 80? We do not know. Therefore, given the uncertainties attached to the amendment and the correctness of the Government's approach, I ask Opposition Members not to press their amendments to a vote.
The Financial Secretary has taken a leaf out of the Prime Minister's book and made a pre-emptive strike on our amendments, which attempt to tease out a debate about the valuation of people's pots in defined benefit and defined contribution schemes and about the ways in which they are treated differently. With your latitude, Sir John, perhaps we will have that debate in several forms this afternoon.
The Government like to believe that they are creating a single regime for pensions; indeed, the Financial Secretary said so at the beginning of our discussions on these clauses. PricewaterhouseCoopers says that in fact they are creating six regimes. I am doing a bit of triangulation—[Hon. Members: ''Triangulation?''] Well, it was invented by Dick Morris, and we all had better pay attention to him these days.
My basic point is that there are two regimes. Defined contribution and defined benefit schemes are treated very differently because of the way in which the pension pots and rights, whether crystallised or uncrystallised, are valued. We are having this debate now because the amendments have been selected for this clause, but they really apply to clauses 201 onwards.
A person who is in a defined benefit scheme and who is entitled to a pension of £75,000 a year from, for example, a final salary scheme, is deemed to have a pot worth £1.5 million. That is because of the 20 to 1 valuation factor that will be discussed later under clause 263. The official Opposition—I am always a bit nervous when I speak for my hon. Friend the Member for Arundel and South Downs (Mr. Flight), but I am sure that I do so correctly on this occasion—believe that that factor is a good, simple way of valuing a pot. It is particularly generous if someone is 50, particularly mean if they are 70, but fair if they are 60.
Someone who is entitled to a defined benefit pension of £75,000 a year is deemed to have a pot of £1.5 million. However, someone with a real pot of £1.5 million—someone with a money purchase pension with £1.5 million in it—is unlikely to be able to draw from that pot a pension worth £75,000 a year. Yesterday, I checked out the Financial Services Authority website. That is the sort of exciting thing that I do for a living these days. I checked out the circumstances for a 60-year-old male who is a non-smoker—I am sorry to disappoint my hon. Friend the Member for Arundel and South Downs—with a spouse who is three years younger, looking for a two-thirds spouse's pension and a five-year guarantee that rises with inflation. That is roughly what many defined benefit schemes would offer. If that person had a £1.5 million pot, they would be able to get a pension worth £54,840 a year. That is more than £20,000 short of the £75,000 a year that the person with a defined
benefit scheme and a nominal pot of £1.5 million is able to claim.
Did the hon. Gentleman check the figures on the website for cases in which the survivor's pension would be 50 per cent., rather than the two thirds that he cited? The figure of 50 per cent. is much more common in defined benefit schemes, particularly in the public sector.
To be honest, I did not, but as part of the letter that I am about to send the hon. Gentleman and copy to the hon. Member for Ealing, North (Mr. Pound), I will be happy to do that. I checked a number of variables. For example, a 55-year-old male in similar circumstances could draw a pension of only £48,960. If we included a 50 per cent. spouse's pension in our calculation, we would still be far short of the £75,000 a year that the Government say a £1.5 million pension pot secures for someone in a defined benefit environment.
One pension adviser said to me, ''You might as well tie a leper's bell around the defined contributions member's neck.'' At a time when more and more schemes outside the public sector are becoming defined contribution schemes, what we are seeing is very unfair and creates more resentment of the generous public sector defined benefit arrangements.
Of course, we are talking about people on very large pensions, but what we are seeing sends out a message about the way in which the different types of schemes will be treated and the unlevel playing field that the Government have produced for the two different types of pension arrangement, one of which—the defined contributions scheme—is becoming much more popular than the other.
My amendments are to clause 201, which is about the valuation of uncrystallised rights for the purposes of levelling an unauthorised charge. I listened to what the Financial Secretary said and take her point that this may not be the best place to make my point. It would be unfair to level an unauthorised charge on what someone should have in theory, rather than what they actually have. There are circumstances in which people could be overcharged as a result. For that reason, I will not press my amendments. However, although the arrangement is clear, simple and fair for defined benefit schemes, for which the 20 to 1 valuation factor is used, the same degree of fairness does not apply to defined contribution schemes. We will return to that point later in our deliberations.
My hon. Friend has put the underlying point in relation to our two amendments extremely well. We are dealing with difficult territory to which not enough thought has been given. As he said, there are two entirely different arrangements: one for defined benefits and one for defined contributions. In the main, the defined benefit situation turns out to be enormously more generous, but there are even variations within that, in that the value of a defined benefit pension taken at 55 is clearly a great deal higher than one taken at 65. The Committee should
think very hard about this issue. It will come up more in relation to clause 205 than in relation to this clause.
I have always been broadly in favour of rough justice if it works and if the differences are not too great, rather than cluttering up systems with too much complexity. However, it has been illustrated that there is potentially a yawning gap that will work out in favour of defined benefit schemes and against the interests of defined contribution schemes, when virtually everyone in the private sector is being driven down the road of defined contribution and when, for the time being at least, those in the public sector are essentially in defined benefit arrangements.
Clause 205 inter-relates to the two amendments. The main thrust of our principle is to at least examine valuing defined contribution on the same basis as defined benefit by converting the lump sum of money into whatever annuity pension it would buy on the same basis as defined benefit. That is one measure of achieving relative parity, which we will debate later.
Although there may be arguments that the first stage of the proposals for uncrystallised benefits is not appropriate, it is important to flag up the arguments as we move on to the clauses that deal with what happens when people take pensions. I am extremely uncomfortable—hence our upcoming amendments—about having a system that is fairly arbitrary and, in terms of valuation for the purposes of the tax charge to be levied, one that has a tremendous bias against defined contribution and in favour of defined benefit.
Rough justice has its price, and the price in the provisions before us is a little bit too high. When we get to the later clauses, I look forward to the Minister elucidating how the provisions allow flexibility of interpretation within the 20 to1 ratio.
I rise first to ask for your guidance, Sir John. Practically all Opposition comments have been directed towards the general debate on the valuation factor, 20 to 1, and how it affects DB and DC schemes. I am very happy to respond to them now with your permission, Sir John. Of course, we do not want to re-run the debate this afternoon, so with your permission I will continue.
Great. In which case, I will deal with it now. The hon. Member for Tatton (Mr. Osborne) falls into a trap. First, he says that there are six types of tax regime. We have already had that debate, and there is one simplified tax regime, however the pension tax rules must recognise that pensions are taken in different ways. He seems to assume that there are only two ways in which pensions are taken—either as a defined benefit, or, through a defined contribution scheme, as an annuity.
Clearly, there is a third way, which is income draw-down. When considering those issues, one must always consider how one would treat income draw-down. For example, were we to choose to have a valuation factor for DB schemes of 20 to 1, or whatever the hon. Gentleman might prefer, and equally to decide to apply that factor to DC schemes, we could not use the same method for valuing funds in income draw-down, because annual income varies. There may be no income to apply to that valuation factor in a particular year, so we will need more than one way of valuing benefits. It is simply not possible to use the same mechanisms to value all the different benefit crystallisation events. We designed the valuation rules to give broadly accurate results in the most simple and straightforward way possible. The amendment that we may turn to in discussing how the valuation factor applies would undermine that. It would not give the same level of fairness or equality.
The second point is that we consulted widely on the regime. In the first round of consultation on pension simplification, the UK actuarial representative bodies supported the use of a single valuation factor for DB pensions. The Association of Consulting Actuaries firmly recommended a single factor and, after considerable research, proposed 20 to 1 as the most appropriate if there was an appreciable margin in the level of the lifetime allowance. In setting the lifetime allowance at £1.5 million, we have given that margin.
''the factor should not attempt to accurately reflect market conditions at the time of calculation, as that would unnecessarily complicate retirement planning.''
The most accurate result for those taking pensions around the age of 60 was 20 to 1. That is the age at which the majority of people take their pension.
The hon. Member for Arundel and South Downs tried to persuade the Committee that we are giving much more support to DB schemes than to DC schemes. There are some in the House who may think that that would be a good idea, but I am sorry to disappoint them. It is perfectly clear to me that, if there is an incentive to take a DB scheme rather than a DC scheme in one year, that may well change in future years as annuity rates change, and the relative attractiveness of each option may change over time.
If someone feels that they are disadvantaged in a money purchase scheme, they can always transfer to a scheme pension run by an insurance company and use the 20 to 1 valuation factor, if insurance companies decide to offer that vehicle for the non-corporate market. Under our plans, there is no reason that they could not offer such a vehicle. If the reverse were true, and someone felt disadvantaged by being in a DB scheme rather than a DC scheme, as could happen, of course they could switch to take advantage of annuity rates.
I do not think that the measure is unfair. I think that it is by far the easiest, most transparent and simplest way of approaching the problem. It is the way that has been suggested to us by the actuarial
profession as striking a fair balance and giving a reasonable level of pension for those in DB schemes. That presents the case for the valuation factor of 20 to 1.
My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) asked about paragraph (a) and what date it refers to. It refers to the date at which the benefits need to be valued. All the clauses that depend on new clause 16 will make it clear what that date should be. I hope that my hon. Friend rests assured on that point.
Amendment agreed to.
Clause 171, as amended, ordered to stand part of the Bill.
Clauses 172 to 174 ordered to stand part of the Bill.