Open market option as the default for the annuitisation of personal accounts
‘(1) An annuity bought with funds saved through the scheme established under section 50 or a qualifying scheme is a lifetime annuity if—
(a) it is payable by an insurance company,
(b) the member was required to select the insurance company from the open market,
(c) it is payable until the member’s death or until the later of the member’s death and the end of a term certain not exceeding ten years, and
(d) it is a level annuity, an increasing annuity or a relevant linked annuity.
(2) An annuity is a level annuity if its amount does not vary from year to year.
(3) An annuity is an increasing annuity if its amount increases from year to year.
(4) An annuity is a relevant linked annuity if its amount varies from year to year but only in line with changes in (or by an amount which does not exceed the amount by which it would vary if it varied in line with changes in)—
(a) the retail prices index,
(b) the market value of freely marketable assets, or
(c) an index reflecting the market value of freely marketable assets.
(5) “Freely marketable assets” means assets which are sold on the open market at a price not determined by the member.’.—[Paul Rowen.]
I beg to move, That the clause be read a Second time.
We have so far rightly spent a lot of time dealing with accumulation and the measures that people have to take to ensure that they have a pension worth saving for. The new clause deals with what happens when someone retires and how we should go about it. I refer hon. Members to proposed subsection (1)(b) because that measure is different from existing legislation. It requires the customer to select an annuity from the open market, while the existing provision states that the customer has the opportunity to choose on the open market. In other words, we believe that people should go on the open market rather than simply be covered by the provision saying that they may go on the open market, and we want that advice linked to the information made available to people with personal accounts
Why have we tabled the new clause? A comparison of the figures on the FSA’s website for a different range of people shows that there can be up to an average of 15 per cent. difference between the best and worst annuity that a person could purchase. For example, let us consider a single male with a five-year guarantee on a level income annuity. At the age of 65, between the highest and lowest annuity available, there was a difference of 10.45 per cent. For a joint annuity in respect of a husband and wife, the spouse being three years younger, at the age of 65 the difference for level income is 18.89 per cent. and, escalating at 3 per cent. per annum, it is 22.28 per cent. Those differences are huge.
Within the companies on the FSA website, which are some of the most commercially competitive and well-known in the country, such as Norwich Union, Legal & General, Canada Life, Friends Provident and Reliance Mutual, there is a huge range of differences.
With impaired life annuities, which are typically available to someone with an impaired life, such as because they are a smoker or have suffered a heart attack, there can be up to a 40 per cent. difference between the benefits under such a scheme and the ones they could get with an enhanced annuity. Those are staggering figures. If hon. Members consider the original Turner report, we have gone down this road to try to get a low-cost saving model that could give people an enhanced pension, which is laudable. However, if we do not do so, when we come to the decumulation phase, we will more than encourage people to use the open market—we will make them use it. We will see all the benefits from the savings that people have by going through the personal accounts wiped away because they might be advised, perhaps by the firm that they are working for, to go to a preferred annuity provider that may not give the best rates. It is in everybody’s interests, not least the state’s—given that any shortage of income may have to been met through enhanced benefits—that we encourage, nay require, retirees to get the best open market option.
I am entirely at one with the hon. Gentleman’s objective, but I am slightly confused about why he thinks that we need the new clause. I understand that the personal accounts scheme would provide the same opportunities and entitlements that apply to all other pension schemes, particularly personal pension schemes, where the open market option already exists. However, we should address how we can ensure that retirees are given that information. Perhaps the Minister will consider including that in the regulations to be made under clause 8(2).
The hon. Gentleman is right. He knows a lot more about this than I do. We want to ensure that retirees get that information and go down that route. However, we tabled the new clause because we want that information to be required to be made available under the Bill, rather than saying that it should be made available. That is a matter of semantics, but it is important. For example, it is estimated that in 2007 those buying an annuity lost £1.25 billion of pension and benefit by not accessing enhanced annuity rates. At the moment there is insufficient information available for people purchasing annuities and some relevant issues are not being addressed. In due course, an additional 6 million to 10 million people will have a personal account and will want to cash it in for an annuity, and it is important that they go for the open market option.
I will be interested to hear how the Minister intends to ensure that that option is made available. As the hon. Member for Ryedale knows, we have laboured the point about information and advice quite a lot, because the success of the personal accounts is predicated on the quality of the advice that is available. By including the new clause in the Bill, we would be requiring the open market option to be used, because it has the benefit of forcing people to go down that route, otherwise they may take the easy option. We know what happens when people are visited in their homes by people trying to get them to change their electricity or gas supplier: they use the information that they are given because that is all they have in front of them. The benefit of the new clause is that it says that the open market option, with all the options available, is the route that has to be chosen. I would be very interested to hear how the Minister intends to ensure that that sort of benefit is taken advantage of, if not by that route.
I am grateful to the hon. Member for Rochdale for tabling the new clause. I am tempted to reply by referring him to the hon. Member for Ryedale, who has almost dealt with the matter already. Nevertheless, I have a few other things to add and some reassurances to give, which I hope will address the thrust of the argument made by the hon. Member for Rochdale and encourage him to withdraw the new clause, which, as I will try to explain, is unnecessary.
New clause 22, as the hon. Gentleman said, would require all qualifying pension schemes, including personal accounts, not only to offer, but to require, their members to exercise the open market option. As he rightly said, choosing annuities is one of the most important financial decisions that a pension scheme member makes. It is a one-off decision that can have a big effect on the value of income in retirement. For this reason, the Government fully support the open market option, which allows individuals to shop around to get the best annuity deals that they can under the circumstances, rather than simply taking the annuity offered by the provider. By shopping around, people can certainly make a very big difference to the value of their pot—as much as 30 per cent, we believe.
However, new clause 22 is not required to ensure that members of personal accounts, or any other qualifying scheme, can benefit from the open market option. Under the Finance Act 2004, all tax-registered money purchase pension schemes that provide benefits through the purchase of an annuity must offer the open market option, or they would face tax charges. As clause 14 requires all qualifying schemes to be tax registered, that requirement, in effect, already applies to all money purchase schemes into which employees can be automatically enrolled, including personal accounts.
As hon. Members will be aware, the Government, working with stakeholders, have recently conducted a review of the operation of the open market option. That review reported in 2007 and set out a number of measures to help and encourage more individuals to use it. We do not believe that it would be right at this stage to go beyond that and to force members of money purchase schemes to use the open market. Apart from anything else, such an approach could add to costs and complexity, for example if schemes had to check that the member had shopped around to avoid tax charges.
We do not believe that the Bill should create a separate set of rules just for personal accounts. Additionally, we have said that within the existing framework, the detailed design of the process will be a matter for the delivery authority, based on the conclusions of the review of the open market.
Regarding the point of information that was raised by the hon. Member for Ryedale, existing legislation already requires occupational pension schemes to provide a wide range of information to members. The relevant parts of the legislation will apply to personal accounts in the same way as to any other pension scheme.
I must confess that I had not thought about this point before. Could the Minister clarify how he thinks the personal accounts scheme will be structured? If someone is in a group personal pension scheme operated by a major insurance company pension provider, and the default position is that that pension provider will convert the cash in the fund to an annuity at their rates unless the person exercises the option to purchase an annuity somewhere else on the open market, is it the intention that the scheme will itself provide a default pension, or will people simply take the money and buy the best priced pension they can find? I think that the Minister takes my point that there is quite a subtle difference between the two.
The hon. Gentleman is right to stress that. The important thing is to ensure that individuals reaching this point are aware of the need to shop around for their annuities and that they have the right information to do so. As I said in response to the hon. Member for Rochdale, we are making changes, which were reported in 2007, to the way the OMO works.
The Pensions Advisory Service is setting up a web-based, structured choice tool to guide people. We are working with stakeholders to facilitate the development of better focused information for customers about their annuity options. The issue will also be for the Personal Accounts Delivery Authority, which will be responsible for the detailed design of how members can access their pension savings. That will include consideration of the information that members will need when making that important choice.
I hope that I have reassured the Committee about the Government’s commitment to the open market option and that the personal accounts scheme, along with other qualifying money purchase schemes, will be required to offer that to their members. The appropriate support for information will be in place, and I hope that the hon. Member for Rochdale will withdraw the motion.
I advise the Committee that we have a revised selection list. Although new clause 28 is starred, the hon. Member for Stoke-on-Trent, South has spoken to me about it and I think that the issue merits a brief debate. Bearing in mind that we are not under pressure from the programme order, I am happy for the hon. Gentleman to move his new clause.