Clause 60 - Index-linked gilt-edged securities

Finance (No. 3) Bill – in a Public Bill Committee at 4:45 pm on 7th June 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I look forward to working with you in the Chair, Mr Hood.

I have a couple of quick questions for the Minister. The explanatory notes helpfully supplied by Her Majesty’s Treasury to all members of the Committee state in paragraph 7 of the section on clause 60:

“At present, there is not a reliable government estimate of the number, or size of pension schemes that are affected.”

The clause amends the corporation tax definition of an index-linked gilt-edged security. The Committee will know that the current definition provides that an index-linked gilt-edged security is one in which payments are wholly or partly determined by reference to the retail prices index. This is to be changed, and such securities will be ones where the payments are determined wholly or partly by reference to the index of prices published by the Statistics Board.

Paragraph 5 of the explanatory note states:

“In July 2010 the Minister for Pensions announced that, from 2011, the ‘general level of prices’ for determining the statutory minimum percentage increase for revaluation and indexation of private sector occupational pensions, Pension Protection Fund compensation and Financial Assistance Scheme payments is the consumer prices index (CPI).”

Paragraph 6 states:

“As a result, for those pension funds whose trust deeds refer to the ‘general level of prices’ for the revaluation of deferred pensions and the indexation of pensions in payment, the CPI applies as the statutory minimum increase rather than the retail prices index”.

However, as paragraph 7 states, no reliable estimate has been made of the number or size of pension pots to be affected.

My question is simple. It is becoming rather a habit, but how can the Minister bring a proposal to the Committee—clause 60 is yet another example—when, as he admits in the explanatory notes, he does not know the number or size of pensions schemes that will be affected? As a starter, I ask the Minister for his assessment of the impact of the changes. How many pension schemes will be affected? What is the size of those pension schemes? How many individuals are there? Is there a costing in the Treasury for an up or a down in the overall value of the schemes? Putting, “We’re very sorry, guv. We don’t know,” in an explanatory note is not satisfactory, so will he give some indication of that?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

While the right hon. Gentleman is right to highlight the issues raised in the background note, and while it is right to say that there is no reliable Government estimate of the number or size of the pension schemes affected by the increased use of the consumer prices index, the purpose of the clause is actually to create certainty for pension schemes that use index-linked, gilt-edged securities. Let me set out what that change is. In clause 60, we are looking to make changes to ensure that the corporation tax treatment for all index-linked, gilt-edged securities issued by the Government is consistent, regardless of the index of prices used to determine payments.

By way of background, it is right to say that, in July 2010, the Minister with responsibility for pensions announced that, effective from 2011, CPI would be used for the revaluation and indexation of private sector occupational pensions, Pension Protection Fund compensation and financial assistance scheme payments. As a result, for those pension funds, the trust deeds of which refer to the general level of prices for the revaluation of deferred pensions and the indexation of pensions in payment, the CPI would henceforth apply as a statutory minimum increase, rather than the RPI. Those changes may affect the value of many pension schemes’ liabilities and the preferred mix and type of hedging instrument schemes used to manage liabilities.

In the past, Governments have only ever issued RPI-linked gilts. The availability of a CPI-linked gilt will afford some pension funds an instrument with which to better hedge some liabilities. Under the current corporation tax rules, an index-linked, gilt-edged security is defined using the RPI to calculate payments, so if a gilt-edged security linked to a different index of prices is issued, the corporation tax treatment would be unclear and a different tax treatment would be applied. The clause changes the definition of an index-linked, gilt-edged security to remove any doubt surrounding their taxation. The legislation governing the taxation of index-linked, gilt-edged securities uses the index of prices by which payments on that gilt are calculated to identify the gains arising from the inflationary uplift and removes them  from the charge to tax. The clause will ensure that that continues regardless of whether RPI or CPI is used to calculate the inflationary uplift.

The changes made by clause 60 will ensure that the current corporation tax treatment of index-linked, gilt-edged securities will be applied to any future issuance by the Government. That should be welcomed by gilt market participants and should reassure them. UK pension funds are the largest single investor group in that index-linked market. I say to the right hon. Gentleman that the main focus of the clause is actually to provide greater flexibility for pension funds, to enable them to use CPI-linked gilts to hedge their future liabilities and to ensure that the tax treatment of those index-linked gilts is clear and beyond any doubt. It is creating certainty for pension funds, and it is up to them to decide whether to use the powers.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful, and, in passing, can I congratulate the Minister on his 10th anniversary of becoming a Member of the House? It was a great day, with 413 Labour MPs elected on 7 June 2001. My majority was 9,000 on that day, and it has dropped considerably since then, but let us not touch on that one.

I accept what the Minister has said, but the point is that paragraph 7 of the explanatory notes for clause 60 still says that

“there is not a reliable government estimate of the number, or size, of pension schemes that are affected.”

I understand the reasoning behind it, but I am simply asking whether the Treasury has done any modelling whatever or estimated the number of pension schemes that are likely to be affected? At what stage will he monitor the impact of clause 60 in the future? I feel that, in terms of the Minister’s objectives, it would be helpful to know his assessment of the likely impact of the clause.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I do not want to create a long-running saga out of what is a relatively small but helpful clause. The point is to facilitate CPI-linked gilt-edged issuance. Should the Government decide to proceed down that route in the future, pension funds will have to decide how they approach this matter and whether there is any appetite for CPI-linked gilt-edged issuance. It is only when the pension funds themselves have reached a decision that we will know what appetite there is and what the impact will be. Rather than waiting for a problem to emerge or for a clamour for action once a problem has been identified, the Government are now making it possible for pension funds to make those changes. The funds know that the opportunity may be there for the Government to issue CPI-linked gilts in the future. It is only once they have decided what they are going to do that we can respond to that demand.

Question put and agreed to.

Clause 60 accordingly ordered to stand part of the Bill.

Clauses 61 and 62 ordered to stand part of the Bill.