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.