With this it will be convenient to discuss amendment No. 424, in
clause 175, page 151, line 4, at end add—
'(5) No registered pension scheme may hold investments which are not prescribed as being investments which such a registered pension scheme may hold and section 10 of the Pensions Act 1995 applies to any scheme administrator or trustee of a registered pension scheme who has failed to take reasonable steps to ensure that that registered pension scheme holds only prescribed investments.'.
As the Committee will be aware, part of the new arrangements abandons the regime of investment restrictions that were tied to tax approval. Apart from one or two items, the new registration system will create an open house in respect of the investments in which pension schemes can invest in the future. We have touched on this before. I question the logic whereby the other main way of saving for retirement has been personal equity plans and, subsequently, individual savings accounts. The regime under which PEPs and ISAs have made investments has been fairly liberal, but it has been designed to shield out things that are likely to be extremely volatile and high-risk and by which people might get ripped off. As a simple example, it establishes what are, in essence, approved markets that are reasonably liquid and excludes equity markets that are sufficiently dangerous to be deemed unsuitable for ISA investment of monies for retirement.
As an economic liberal who broadly welcomes the ending of over-prescriptive regimes, I have concerns about the wisdom of moving to what is in effect a completely open regime for the large number of individual money purchase pension pots, be they structured as personal pension schemes or, as is increasingly the case, as various forms of occupational money purchase pension schemes in which the individuals who benefit are largely controlling the investments. At worst, such a regime
could expose people to exploitation by those who market unsuitable products. It will inevitably lead to scandals in the future, and people will ask, ''Why did the Government permit us to participate in investments that have gone bust and that were never particularly suitable for pension saving?''
There is a dichotomy, because I certainly do not want to clutter the arrangements with too much complexity. I commend the Government for biting the bullet and saying, ''Let's scrap the whole lot.'' For example, I have always felt it illogical that money purchase schemes could not invest at all in venture capital investments. It may not be appropriate for them to invest all their money in such investments, but a modest amount is perfectly justifiable.
We could get out of the frying pan and into the fire. Therefore, our amendments are prophylactic. They leave open the possibility of thinking about a regime that is somewhat analogous to the PEP and ISA regime: one that is broad and not a hassle but which screens out and protects individuals from deciding mistakenly or unwisely, or being conned into, investing in areas that are not particularly suitable for pension fund savings.
Another point relates directly to the two amendments but is slightly wider. The Committee may not be aware that if money purchase pensions are structured as insurance wrapped, life companies are the legal owners of the assets. If life companies fail, notwithstanding the insurance arrangements, what is guaranteed is typically a great deal less than what might be in an individual pension pot. I am not saying that life companies are going to fail, but there is a hidden risk, and the self-invested personal pension structure, which in the past was very much for a provincial elite who had significant amounts of money, is now perfectly usable on a corporate basis. A person can have a corporate SIPP analogous to a group personal pension scheme. It has the advantage that basically the beneficiaries own the assets, so there is not that additional risk.
SIPPs have been subject to some rather archaic investment rules that have put them at a disadvantage compared with group personal pension schemes. Does the Bill sweep away those investment disadvantages? If it does not, will the Government consider doing so? I have a feeling that this matter may be governed by regulations that are secondary to the Bill itself.
The first crucial point is that individuals who obtained protected rights from a previous employment—when the scheme that they belonged to was contracted out—cannot transfer those protected rights into SIPPs, whereas they can be transferred into a group personal pension scheme. I see no logic in the difference. It is a simple issue that needs to be addressed.
Secondly, the crediting of tax relief should be on the same terms whether a personal pension scheme is structured as a SIPP or under an insurance contract, whereas at present a person gets the money a great deal earlier if they have an insurance contract as opposed to a SIPP. Thirdly, SIPPs have been unable to
provide life insurance contract arrangements, whereas group personal pension schemes can. Finally, group personal pension schemes can invest in off-exchange market securities, whereas SIPPs will not be able to do so for another two years.
There may be other issues that I am not aware of, but my simple point is that, if we are to have fairly open investment, there is no logic in SIPPs being disadvantaged on various fronts compared with group personal pension schemes. The playing field should be level. If anything, from the point of view of the pension saver, there is the matter of their having perhaps a marginal legal advantage in using the SIPP corporate structure as opposed to the group personal pension structure.
To some extent, these are probing amendments. As I said, my views are dichotomous, but I would interested to know whether the Government intend to have a complete free-for-all and not to think about offering the same sort of fairly relaxed protection for personal pension saving as is in place for ISA saving for old age. If they do not want to offer that protection, why have those prescriptions for ISA saving for old age? I just about come down on the side of thinking that the ISA rules are rather sensible and that without realistically restricting sensible investment, they protect people against imprudent investment.
I am closely following what the hon. Gentleman says. Is he sure that the amendments deal with the right Bill? Traditionally, things such as security for investors have been dealt with not in Finance Bills, but in legislation such as the Trustee Investments Act 1961. He seeks to provide protection for investors to some extent, and I understand that, but the Finance Bill might not be the right place to do that.
As I ever, I thank the hon. Gentleman for his suggestion. He may well be right. The issue comes up in the Bill because we are moving from a regime in which tax approval was the issue that controlled what people could invest in to a system in which registration has nothing to do with it. As far as I am aware, the Government have not had anything to say about the other areas of law that may be used to address the issue. That is why I made the comment that to some extent this is a probing amendment.
There is a fundamental issue about whether the matter is dealt with by the Department for Work and Pensions or by trustee legislation and so on. Do we want to move to a complete free-for-all for all forms of money purchase pension investment? Would it not be prudent to have a liberal protective regime, whether introduced in this Bill or in other legislation?
I understand the intention of the hon. Member for Arundel and South Downs to discuss whether a pension fund should be able to invest in any
asset without restriction, provided that it is on a commercial basis. As he said in the stand part debate on clause 143, we are moving from a system based on Revenue discretion, where there are lists of permitted and non-permitted assets, and schemes must seek Revenue approval for their actions, to the system that we are discussing today, in which schemes operate within a legislative framework. In practice, under the current tax rules, however, the vast majority of schemes have no controls on their investments; only a minority of small schemes are subject to any control.
Going forward, all schemes will—subject to any restrictions in other legislation, such as the Pensions Bill and a few other places that I am sure my hon. Friend the Member for Wolverhampton, South-West can think of—be able to invest in anything provided that it is on a commercial basis. The Bill aims to provide a comprehensive set of rules to cover all pension schemes, creating a simple and easily understood system and preventing anomalies. Different rules for different schemes create borderlines leading to complication, red tape and the need for advice, which in turn leads to greater burdens on the industry and the Revenue. We want to avoid that.
Very large schemes will invest in a wide range of assets, and we do not want to disadvantage them or their many millions of members by placing restrictions on their right to invest. Therefore, in a system designed for all schemes, it would not be right to impose unwanted new restrictions on them.
From a tax perspective, it should not matter whether a pension scheme invests in certain assets or not. The decision is a commercial one for the scheme and/or the members and the appropriate regulator. It is not for the tax regime to decide the scheme's investment policy. That accords with the DWP policy, which is that schemes should be free to invest as they see fit; it is not the place of Government to specify, for example, how much is invested in equities or other assets. It is up to scheme trustees or indeed members to decide what is prudent.
This is a deregulatory measure that will enable trustees to make their own judgment about what investments suit their scheme best. There are rules in the Bill to prevent that sensible commercial freedom from being abused by entering into non-commercial transactions that put scheme assets at risk or allow value to be taken out of those schemes.
The hon. Gentleman raised the question of the ISA regime. I know that he is familiar with this area, but I must point out that ISAs are different from pensions, having been designed to encourage personal savings by individuals in the short to medium term. To provide savers with flexibility, ISA regulations allow investment only in assets or schemes that are able to provide savers with instant access to savings. That is why investments are limited to those that are highly liquid and those that fall into the retail investment market, such as shares traded on recognised stock exchanges. The regulations also restrict the ability of savers to invest in less liquid assets such as real property.
Pension organisations are much larger. Most cover more than one individual and many cover many individuals. Individuals have limited rights to access their pension funds. That allows schemes to invest in a wide range of long-term investments that would not be appropriate for an instant access ISA. Rules relating to ISAs cannot therefore be directly applied to pension funds. I am sure that that is not exactly what the hon. Gentleman is suggesting. However, I am also sure that he will recognise the different designs of the ISA regime and the pension fund regime.
There is a huge difference between an ISA and a large, ongoing defined benefit scheme, where no one would suggest that there is any need for such protection. However, I suggest to the Financial Secretary that there is not that much difference between a pot of money built up under the tax rules for a pension fund and a pot of money built up under the different—we could argue about which is the more attractive—tax rules for an ISA. From the perspective of an individual, both pots are there to build up assets for their retirement. That is how most people see them. Indeed, outside this Room, there are all sorts of debates about what the tax rules should be and what the mixture might be. That is a false distinction in the case of personal pots of money.
It is interesting that the investment rules relating to ISAs are, as they were with regard to pension saving, related to tax approval. So, the idea that we are all saying, ''You can't have any investment constraints where it is a question of tax approval,'' is not right. In one of the main areas of savings, we continue to have such constraints related to tax approval.
I think that there is intellectual inconsistency in the area of an individual's personal money pots. I repeat my point that those pots are no longer just personal pension schemes. In no time at all people's occupational schemes will amount to being personal money pots under an employee-sponsored umbrella.
Order. While I appreciate that there is some validity in making comparisons, we are not, in the context of the clause, considering the tax regime for ISAs or any other savings product. We are confining our consideration to pension schemes.
Further to the point made by the hon. Member for Wolverhampton, South-West, I also make it clear that we are considering only tax approval in relation to pension schemes. It may be that investment constraints would be imposed by other legislation. That is a matter for the House when it considers that other legislation. We are simply dealing with tax approval for pension schemes in this area of the Bill.
As usual, Sir John, you make excellent points. Indeed, they are ones that I could have made myself.
To summarise briefly, the ISA account is an instant access account. Pension funds are clearly meant to provide income for retirement and are locked away until the person draws down their retirement income. Therefore, it is appropriate to have different schemes in place.
Will the Financial Secretary explain why the one restriction that is still in place, and in the Bill, is for a property investment limited liability partnership? As I understand it, there are already ways round that restriction by, for example, creating an exempt unit trust.
I will come to the issue of property in a moment. We partly dealt with it under a previous clause.
The hon. Member for Arundel and South Downs tried to make a case that trustees or members of pension funds were vulnerable to mis-selling of risky and inappropriate products but, as you rightly rule, Sir John, schemes may be restricted in various ways through other legislation—such as the Pensions Bill—and not necessarily through the tax relief provisions before us. Identifying and avoiding mis-selling is the responsibility of the Financial Services Authority with its conduct of business rules. That is the best place for that sort of regulation to take place.
The hon. Member for Tatton asked why income derived from investment held as property through a limited liability partnership is not exempt from tax. That type of income is not investment income but trading income, and the investment rules are not designed to exempt from income tax income that is derived from trading activities. Therefore, it is right in that case that the income is not exempted from tax. Exclusion replicates the rules under the current regime.
Why is that one kind of investment—investment held as property through a limited liability partnership—which the Financial Secretary says produces trading income, included in the Bill? Presumably, there are similar examples. It seems rather strange that there is that one exception in a catch-all, open-ended clause that gives all sorts of freedom, of which in many ways we approve. Would not other forms of investment fall into a similar category? They are not included in the Bill.
As I understand it, the provision catches all limited liability partnerships, not just those in which investments are held as property. I will be happy to clarify that formally and to write to the hon. Gentleman if it proves not to be the case that the clause applies to all limited liability partnerships.
Members of the Committee may be worried about the pension funds of members. Trustees are required to act prudently and sensibly in administering pension funds. They have done so, and we have no reason to believe that they will not continue to do so . I have already made it clear that, under the current rules, the vast majority of pension scheme members are in schemes for which there are no controls under tax rules about the type of investments that they can hold.
The Government are reviewing the progress that the occupational pension industry has made in implementing the recommendations of the Myners report. I wish to make just a couple of points on that, as I am aware that it does not touch directly on the amendments. We are making it a legal requirement for the first time that pension trustees must have familiarity with the matters before them. Our policy
intent is to upgrade the skills of trustees, so that they understand investment issues and the scheme design of the pension fund of which they are trustees. That is combined with replacing the minimum funding requirement with funding requirements that are more scheme-specific. Those provisions, which are being introduced as a result of the Myners recommendations, sit well with the new simplified tax regime. I hope that I have reassured hon. Members on those points.
On the points that the hon. Member for Arundel and South Downs made on self-invested personal pensions, I can confirm that we are sweeping away the investment rules for SIPPs, which will be subject to exactly the same investment rules as other schemes under the tax legislation. I do not accept his points about tax relief. It is up to the schemes themselves when they claim tax relief. However, if he wishes to follow up a particular point, I will of course follow it up with him.
The hon. Gentleman asked whether SIPPs would be able to invest in off-exchange shares. As he well knows, it was originally proposed that the scheme should come into force in April 2005. That has been delayed for a year in response to the consultation, as people asked for more time to change their systems and so on. Some people would like schemes to be able to invest in off-ex shares as soon as possible. However, given the concerns that were raised by many employers and pension providers about the practicalities of introducing the new systems, we believe that it is best to legislate this year and introduce the new regime in its entirety on 5 April 2006. I therefore ask the hon. Gentleman to consider withdrawing his amendment.
As I said earlier, the amendments were intended to stimulate debate on the subject rather than a vote.
I thank the Financial Secretary for her comments but the reality is not entirely as she has described. First, money purchase pension schemes do not have to have trustees any longer. Secondly, the role of the trustee as a policeman of potential investments for most money purchase pension pots is pretty much non-existent. Some personal pension schemes are packaged into lifestyle funds and are reasonably safe mixtures, but many money purchase pension schemes leave it entirely up to the beneficiaries to determine how they want to invest the money.
The Financial Secretary responded to my saying that I wanted to protect people from mis-selling by stating that that was the job of the FSA. That is true to some extent, but the FSA has not been particularly successful. The issue is not just mis-selling. The reality of investment is that individuals must realise that they are responsible for investment decisions. Many of the problems of the past few years have arisen from individuals thinking that, if something were regulated, they could never lose money. The truth is that many individuals may—out of lack of knowledge or in the hope that they will make lots of money—make unwise decisions for their money purchase pension pots. I see nothing to protect them.
I say to the Financial Secretary, fine, sweep away the restrictions on tax approval, even though that is inconsistent with the ISA regime, but are the Government proposing any other effective limitations that may be analogous to those in the ISA regime? As far as I know, they are not and it will be a free-for-all.
As a liberal, I do not want to put the issue to a vote, because the arguments are finely balanced. However, all of us can be sure that, in the next few years, large numbers of personal pension pot investors will say, ''Why were we allowed to invest in these assets in which we have lost a lot of money? Why have we a regime that didn't protect us from either mis-selling or unwise decisions? We didn't know what we were doing.'' That is the price that one must pay for a liberal economic regime. It would be inappropriate for me personally to oppose that, but we need to focus on the reality of what that will mean, not the glib assumption that everything will be fine and dandy because the trustees will keep an eye on things. That will not be the reality of a money purchase pension investment.
In that case, we will not discuss that. I think that that debate was fairly well out of order. On the role of trustees, hon. Members will be pleased to know that, as far as our own trustees are concerned, we have been taking the Pensions Management Institute examinations and the majority of us have passed.
I am obviously confident in the drafting abilities of counsel and our team. However, given that my hon. Friend has drawn attention to that point, I promise to respond to him in writing to ensure that the clause is correct.
Question put and agreed to.
Clause 175 ordered to stand part of the Bill.
Clause 176 ordered to stand part of the Bill.