With these amendments and this clause, we return to the familiar discussion about the relevant valuation factor; in other words, the factor of 20, by which a defined benefit pension is multiplied to calculate the lifetime allowance. As I have said, it allows someone with a defined benefit scheme to draw a pension of £75,000, while those with a defined contribution scheme are likely to be allowed a much smaller pension—some £20,000 less.
In case the Financial Secretary has not been persuaded by my arguments during the past fortnight—there is certainly no evidence that she has been—let me quote a senior Inland Revenue official who, before joining the Revenue, made a submission to the Treasury Committee. I refer to Mr. Edward Troup, who has just become head of the Treasury business unit, as my hon. Friend the Member for Arundel and South Downs reminds me. In a personal memorandum submitted to the Treasury Committee, he stated:
''The debate over the size of the cap on tax privileged pensions has over-shadowed the question of how that cap should be measured. The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefit schemes.''
That is a man whose judgment the Financial Secretary trusts enough to put him in charge of one of the important departments of the Treasury. It is surprising, therefore, that she has not listened to him on this matter. No doubt, once he gets his hand on internal policy advice, the Government's position may change, but for the moment he has had to put his position publicly.
There is also an element of inequity in the defined benefit pension world, because a 55-year-old with a pension of £75,000 has the same lifetime allowance as a 74-year-old, even the day before his or her 75th birthday. In other words, the system is generous to those who retire young, and not so generous to those who work longer and retire later. That runs contrary to everything else that the Government are trying to achieve—getting people to work longer or, as the Financial Secretary puts it, giving people the opportunity to work longer.
I already said that there is merit in having a simple 20 to 1 valuation. I know that the Association of Consulting Actuaries proposed it. I merely raise, through probing amendments, the question of whether there is a danger that it is too simple and unfair on older people.
My amendment would leave it to the Financial Secretary's best friend—the Government Actuary—to provide the valuation factor. I assume that he would group people by age, so, by way of illustration, for 55 to 60-year-olds, there might be a 25 to 1 valuation, for 60-year-olds a 20 to 1 valuation and so on. That would also allow the valuation factor, even if just a single factor, to be varied in light of changing mortality without the need to amend primary legislation.
Before the Government rubbish what I just said, I point out that it is exactly what they proposed in
December 2002 in their original consultation document. When they first considered the issue, it was their solution. The Financial Secretary explained the benefits and the simplicity of the 20 to 1 valuation factor. I agree with that and I have said so. Will she also let us into some of the thinking that went on in the Inland Revenue about the possible disadvantages of a single valuation factor, what perverse incentives it might have on people choosing early retirement dates and whether there is a degree of unfairness for older people in defined benefit schemes? I would be grateful if the Financial Secretary explained why the Government changed their mind.
Let me deal then with the amendments under consideration. The amendments seek to replace the 20 to 1 valuation factor that we have adopted on the basis of recommendations from the Institute of Actuaries and the Association of Consulting Actuaries, among others. An actuary was seconded to the simplification team from the private sector to work on the issue. The amendments seek to replace that simple approach with a much more complex one, where individual calculations are based on tables produced at intervals by the Government Actuary. A range of GAD tables would be needed for each age group. To be fair, it would probably be necessary to update those tables regularly. One might also argue that one had to factor in the period over which the benefit had accrued, and indeed perhaps to provide differentials between men and women. It is quite easy to see how those tables could become extremely complex over time. In fact, the use of tables could completely undermine one of the main purposes of pension simplification, which is to be as simple and understandable as possible. So, on that very narrow point, I suggest that hon. Gentleman withdraw his amendment.
It seems strange that the Financial Secretary says that my amendment would completely undermine the simplicity of the pension arrangements. If that is the case, why were tables originally the Government's idea? Let me read you the sentence, Mr. McWilliam, from the 2002 consultation document. The section on the lifetime limit says that
''the Inland Revenue will publish actuarial tables determining the capital value of defined benefit rights for people of different ages in different kinds of scheme.''
That was what the Government were planning to do. It then says that they listened to the Association of Consulting Actuaries, and I am glad that they did on this occasion, although they did not do so on some other amendments that we have advanced in this Committee, some of which the association proposed.
As I said when I introduced this amendment, I am not saying that the Government are wrong.
Thank you, Mr. McWilliam. I was merely wondering why the Financial Secretary and the Government had moved away from the scheme in my amendment, which was something that they had originally proposed. However, I have made the point, and I am looking forward to the lengthy clause stand part debate that we are about to have. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
We have had a debate on the amendment on simplicity, and I now turn to subsection (2), leaving aside for a minute the grossly inelegant wording starting with a conjunction, which was certainly not allowed when I did English language O-level many years ago.
Dickens may have done, but he did not have an English O-level.
In that subsection the Government are departing from 20 to 1, but what concerns me, as a non-practising solicitor, is that there appears to be no adjudication process built into the provision as to what happens if the Inland Revenue and the scheme administrator are unable to agree on a departure from 20 to a number greater than 20. It does not appear that the individual prospective pensioner, about whom the valuation would be made, has any say in the matter. I would like some clarification from the Minister on that.
First, I will deal with some of the other points made in the debate on the amendment which are more relevant to the stand part debate. Let me return to the hon. Member for Tatton's contention that we should somehow depart from the 20 to 1 valuation factor. He points to the quote from Edward Troup, a fine man who has recently been hired by the Treasury rather than the Inland Revenue, I believe, to add his considerable expertise to our deliberations. It is true that we have integrated private sector secondees into the pension simplification team over the last few years when looking at this sort of question, and they are convinced, as are we, that 20 to 1 is the right valuation factor to use. We do not want to introduce extra complications for the pension providers by departing from that simple factor. I do not want to re-run the debate that we have had in previous sittings, but the move away from our original proposals to the
20 to 1 factor has been widely welcomed throughout the pensions industry, although I know that the hon. Gentleman's colleague has a different view as, I am sure, do some other hon. Members. However, in general, the proposals have been widely welcomed.
The Financial Secretary skirted over the point about Edward Troup, who is a fine man. He was a special adviser to the last Conservative Chancellor and I am delighted that he is now advising the Government. He said:
''The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefits schemes.''
That is in a public document that he submitted to the Treasury Committee. Does the Financial Secretary agree with her Treasury official?
Mr. Troup was certainly not a Treasury official, and if he expressed those views, I am sure that he has been persuaded by his colleagues in the Treasury since he joined them. Mine is the right valuation factor.
We have highly experienced representatives of the pension industry on the simplification team and they are firmly of the view that 20 to 1 is the right valuation factor to use. It is the most simple and accurate method available and they recommended it.
May I follow up the point raised by the hon. Member for Wolverhampton, South-West? Subsection (2) says to me that it would empower the Revenue and the administrator to say that people retiring at 55 in a defined benefit scheme should have a 25 to 1 factor applied. What does it mean if not just that?
I shall come to that in a moment after addressing the point made by my hon. Friend the Member for Wolverhampton, South-West.
Should we apply a lower factor to, for example, older people such as the hon. Member for Arundel and South Downs, who, if I dare say so, has a keen personal interest in these issues?
I have already explained to the Committee how it is possible for individuals to switch between DB and DC schemes to suit their personal circumstances, but we are not prepared to over-complicate the system to assist the tax planning of a very small minority of people who have pensions at or around the level of the lifetime allowance. A lower factor of, for example, 15 to 1 for people to take their pensions late would encourage them to use registered pension schemes not to provide a pension but merely as a tax-free savings vehicle for as long as possible. That is all very well for those who do not need to crystallise their funds at the usual age, but it would complicate the system for the vast majority of people.
The hon. Member for Tatton made the case that 20 to 1 favours people who take their pensions at 50 compared with 75. We are merely replicating the
system that was introduced by his party in 1989 under which individuals were able to draw up to £70,000 whether at the age of 50 or 75. We are merely replicating the previous regime.
Is my hon. Friend aware that in personal injury law, which I have practised for many years, a series of actuarial tables known as the Ogden tables set out the multipliers to be used for loss of earnings? If a 35-year-old man, for example, earning a certain amount net each year were sufficiently seriously injured never to be able to work again, the tables show what the multiplier should be. They cover people in such circumstances, who are, I strongly suspect, far fewer than the number of people who retire each year.
My hon. Friend makes an interesting point, but he will agree that we should design the system to benefit as many people as possible rather than complicate it just to assist tax planning for a few individuals.
To return to the previous point made by my hon. Friend and the hon. Member for Arundel and South Downs, a higher factor would apply only when both the scheme and the Revenue agreed to it. If there were no such agreement and the scheme rules did not fall within the parameters assumed by the factor of 20, when increases in pensions in excess of inflation of 5 per cent. occurred, scheme members would be subject to the benefit crystallisation event rule. There would be no advantage for schemes or individuals in not negotiating a higher valuation factor were that to be appropriate. I think I have covered the points raised, and I therefore urge the Committee to agree to the clause.
Question put and agreed to.
Clause 263 ordered to stand part of the Bill.
Clause 264 ordered to stand part of the Bill.