Schedule 32 - Registered pension schemes: benefit

Finance Bill – in a Public Bill Committee at 5:15 pm on 15th June 2004.

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Photo of George Osborne George Osborne Conservative, Tatton 5:15 pm, 15th June 2004

I beg to move amendment No. 407, in

schedule 32, page 451, leave out lines 1 to 23.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments:

No. 409, in

schedule 32, page 451, leave out lines 33 and 34.

No. 410, in

schedule 32, page 451, line 35, leave out 'increased' and insert 'percentage increase in the'.

No. 411, in

schedule 32, page 451, line 35, after 'pensions', insert

', or that part of all scheme pensions,'.

No. 412, in

schedule 32, page 451, line 36, at end add

'except pensioner members of a prescribed class'.

No. 413, in

schedule 32, page 452, line 8, leave out

'and calculation B gives the greater'

and insert

', calculation B and calculation C gives the greatest'.

No. 414, in

schedule 32, page 452, line 27, at end insert—

'(6A) Calculation C involves first increasing that annual amount to the annual amount which would have been paid if on each anniversary of the payment of the pension commencing, it had been increased by the permitted margin at that time, and second increasing that annual amount by whichever of the calculation A and calculation B gives the greater amount.'.

Government amendment No. 434.

Photo of George Osborne George Osborne Conservative, Tatton

I am sorry that my confidence in pressing for a Division was not borne out by the result, but at least I persuaded the hon. Member for Yeovil (Mr. Laws), who is the floating voter in the Committee and could go either way. He is the judge of the strength of our arguments.

The amendments are all slightly different, so I need to go through them one by one. Amendment No. 407 is, in effect, consequential on previous amendments. Paragraph 7 of the schedule would not be required if one defined crystallisation as the actual payment rather than the right to be paid. We have had that debate, so I shall move on to the other amendments.

The schedule provides an exception for the benefit crystallisation event when a particularly generous pension is paid; that is, a pension that increases by more than 5 per cent. or the RPI, whichever is higher. The exception is for schemes of at least 50 pensioner members. We certainly agree with the last part of the paragraph, which says that any exception should apply to all pensioners, but where does the 50-member cut-off point come from? It seems rather strange and is not explained. It is reminiscent of our previous debate about 50 members. Why deny the members of smaller schemes the bigger increases, or require them to gather up more of their lifetime allowance? What is the rationale for the 50-member cut-off point? Was there consultation on it? We certainly saw none, and that is why we tabled amendment No. 409.

Amendment No. 410 is on the same paragraph. It attempts to clarify the meaning of the provision. Again, there is the point about applying an increase to all members if a particularly generous pension is paid.

The Government use the word ''rate'', but it seems to be used to mean the amount of pension, whereas the point surely is whether the percentage increase in the rate is applied equally to all pensioner members of the pension scheme.

Amendment No. 411 applies to the same paragraph. There may be a defined benefit scheme in which the pension is partly a guaranteed minimum pension and partly an excess over that. One might give an increase only on the excess over the guaranteed minimum pension. Of course, the GMP revaluation is statutory and in part falls to the Government, but the schedule seems to prohibit giving an increase on the excess over the GMP. The amendment merely makes it clear that that is okay, provided everyone gets the same percentage increase in the same identifiable part of the pension. The Government have reasonable intentions. The amendment merely tries to ensure that the provision is not drafted too narrowly. My colleagues and I have done our homework. We have not just put ''in prescribed circumstances'' but tried to help the parliamentary draftsman with our amendment.

On amendment No. 412, for historic reasons, there may be circumstances in which the agreed increases of some classes of pensioner members are different from those of others, and one should not forget the change coming to the statutory indexation requirement for pension increases for future service. Some flexibility is required. There may also be cases of a member not wanting an increase. Most obviously, it could have implications for a member who elected for enhanced protection, which we will discuss under schedule 34. The Bill is not clear, so it is worth asking the question. An excess increase might have adverse effects on the continued enhanced protection in respect of other, not yet vested pension rights.

Finally, amendment No. 413 is about the catch-up increases. The greater of RPI, or 5 per cent., is said to be acceptable, as I mentioned. We all recall from the Pensions Bill that the statutory indexation requirement is being reduced to RPI or, if lower, 2.5 per cent., so many schemes will opt in, at least in relation to any future accrual. I believe that there is an assumption in the Government's 20 to 1 factor—this is one of the reasons that they came up with it—about increases in single years of less than the permitted maximum. It therefore seems harsh that if the scheme wants to give a catch-up increase, say, because funding has increased, and the level of increases has been ''paid for'', it is assumed that one cannot get there if one has had a bad year. I think that that is pretty clear.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I intend to break this large group of amendments into four, taking first amendment No. 407, which would delete some of the rules in the schedule. I shall explain what those rules do and why they are necessary.

The situation catered for is where an individual starts to receive a scheme pension or a lifetime annuity before the minimum pension age has been reached. Such payments will not be authorised in the new regime, unless the benefits are taken early because of ill health, so any that are made when the individual is below minimum pension age will be treated as

unauthorised payments. All the payments made after the member reaches the minimum pension age will be authorised payments, however. We still need to cater for benefit crystallisation events in such circumstances. The schedule therefore provides that where an individual starts to receive a scheme pension or a lifetime annuity before reaching minimum pension age, a benefit crystallisation event will occur when the individual reaches that age.

Valuation rules are also provided. Where the early payment is of a scheme pension, the benefit crystallisation event that occurs on reaching minimum pension age is valued at 20 to 1, as applied to the first year's pension after reaching minimum pension age. The situation is slightly trickier where a lifetime annuity is involved, because the purchase price of the annuity is no longer current. Instead, the 20 to 1 factor is applied to the first year's annuity payments after minimum pension age has been reached. The amendment would delete those rules, but they are necessary to ensure that a benefit crystallisation event occurs in such circumstances and that it is appropriately valued.

Amendments Nos. 409 to 412 would change the rule in the schedule which allows an exemption from benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 applies where a scheme pension increases by more than the permitted margin, which is broadly the higher of indexation and 5 per cent., as the hon. Gentleman outlined. However, the benefit crystallisation event does not apply where there are excepted circumstances. The schedule sets out the excepted circumstances, which allow increases in scheme pensions in excess of the permitted margin not to be benefit crystallisation events where there are at least 50 pensioner members and the increase applies to all of them.

Amendment No. 409, which the hon. Gentleman tabled, would remove the requirement for the excepted circumstances to be available only where there are at least 50 members, presumably on the grounds of fairness. A small scheme will not have access to the excepted circumstances. However, we believe that the limit is appropriate to prevent opportunities for abuse. For example, without such a requirement, a small self-administered scheme with, say, just two controlling director members, would be able to circumvent the lifetime allowance charge by providing an artificially low pension, then in a later year increasing the pension by an enormous rate, to take it to the level at which it was always intended to be.

The hon. Gentleman asked about our consultation, which was set out in the document published in December 2003. Without the requirement for 50 members there would be a risk that large, uncommercial increases would be made purely for the purpose of avoiding the lifetime allowance charge. It is essential that that limit be in place to prevent such avoidance opportunities. We believe that 50 members is approximately the figure needed for that purpose.

Amendment No. 410 would remove the wording in the excepted circumstances rule that requires

''the increased rate to be applied to all . . . pensioner members''

and replace it with a requirement that the percentage increase in the rate applies to all pensioner members. That would narrow the scope of the excepted circumstances, because the provision in the Bill allows for flat-rate increases as well as for percentage increases. That allows greater flexibility. The amendment would remove that flexibility, limiting the excepted circumstances to percentage increases only.

Amendment No. 411 seeks to extend the excepted circumstances, so that the increased rate applies not only to all the scheme pensions paid under the pension scheme but to

''that part of all scheme pensions''

paid under the pension scheme. It is not clear what ''that part'' refers to in the drafting. I also do not see the need for such a provision.

Amendment No. 412 seeks to extend the availability of ''excepted circumstances''. It would provide for the excluded circumstances to be available when an increased rate is given to all the pensioner members, except those of a ''prescribed class''. The intention appears to be for regulations to list classes of pensioner members to whom the increased rate may be denied. I will not go into whether the hon. Gentleman is correct in using the word ''prescribed'' in such circumstances. We could have a long debate on terminology. We believe that it is technically deficient. I am sure that he will take my word for that.

More important, the amendment would allow individuals to escape a benefit crystallisation event in circumstances where not all the pensioner members were given the same increase. That contradicts the policy intention of the excepted circumstances rules.

I have some better news for the hon. Gentleman on amendments Nos. 413 and 414. As he explained, those amendments seek to extend the meaning of ''permitted margin'' as it applies to benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 is triggered when a scheme pension is increased by more than the permitted margin. The permitted margin is, broadly, the higher of 5 per cent. and indexation as applied to the rate at which the pension was previously paid.

Amendments Nos. 413 and 414 seek to extend that permitted margin, so that it takes into account not only the increase in the rate at which the pension was previously paid but the overall increase in the pension since it commenced. I have reflected on the amendments and I sympathise with their aim. Unfortunately, they are defective, as they would be inserted in the wrong place in schedule 32.

I am unable to accept the amendments. However, I assure the hon. Gentleman and members of the Committee that I will consider the point further and introduce a Government amendment if that is appropriate. I am delighted that he is pleased with his victory. However, I ask him not to press his amendment or the others that I dealt with.

That brings me to Government amendment No. 434. It clarifies the valuation rules in the area of the lifetime allowance. When an individual becomes

entitled to a scheme pension, the relevant valuation factor of 20 is applied to the first year's pension as a means of valuing the fund. The amendment simply clarifies that the first year's pension used in that calculation must not take into account any reduction in pension payments made by the scheme to fund tax payable on the lifetime allowance charge.

The amendment is another example of the clarity and certainty that have been provided by the rules in valuing individual's rights under such an arrangement. I commend it to the Committee.

Photo of George Osborne George Osborne Conservative, Tatton 5:30 pm, 15th June 2004

There we go. Towards the end of the day, we get a little laughter. The reason, I can reveal, is that I told the Financial Secretary earlier that I voted for her as Minister of the year when I was presented with a ballot paper at lunchtime. There were four choices. One of them was the Chancellor of the Exchequer, but I think that he has an eye on gaining a different title in the next year. I was happy to vote for her. She has obviously repaid the favour by accepting in principle amendments Nos. 413 and 414.

However, as is always the case in Committees such as this, one is never allowed to enjoy the victory—there is always a reason why the Government cannot accept it. That happened to me on a couple of occasions during debates on the Pensions Bill when, having been rejected, lo and behold, my amendment, word for word, turned up on Report, but presented as a Government amendment. We do not mind, because the victory is one of principle and we are delighted that the Government have accepted that.

Amendment No. 407 is a consequential amendment. On amendment No. 409, I still question

the 50 limit, which seems both arbitrary and large. A scheme of 40 members is pretty large, and is unlikely to be the kind of small scheme that the Financial Secretary is concerned about. I take what she says, but the debate about schemes with more or fewer than 50 members will probably continue. We have already had it in different contexts in Committee, and we might well have it on Report, so I shall leave it for then.

On amendment No. 410, I take the Financial Secretary's point about the flat rate increase, and as I have been trying all day to give the Inland Revenue more flexibility, I do not want to reduce it now. I thought that I explained what I was talking about on amendment No. 411, which was about whether an increase can apply to part of a pension in a situation in which part of a pension is guaranteed minimum pension. I am sure that it can, and at this stage I am not that interested, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 434, in

schedule 32, page 451, line 29, at end insert—

'(2) If the amount of the pension which will be payable will or may be reduced so as to reflect the amount of any tax under section 204 to be paid by the scheme administrator, that reduction is to be left out of account in determining the amount of the pension which will be payable for the purposes of sub-paragraph (1).'.—[Ruth Kelly.]

Schedule 32, as amended, ordered to stand part of the Bill.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at twenty-two minutes to Six o'clock till Thursday 17 June at half-past Nine o'clock.