HC Deb 02 July 1957 vol 572 cc892-906 It shall not be a ground for non-approval by the Commissioners of Inland Revenue of any superannuation fund or retirement benefits scheme for the purposes of Part XVII of the Income Tax Act, 1952, that such fund or scheme contains provision with regard to the change by a person of employment for his transfer to or from the ambit of another approved fund or scheme in such manner that his previous employment or employments are taken into account for all the purposes of the fund or scheme applying to his new employment.—[Mr. Wade.]

Brought up, and read the First time.

3.35 p.m.

Mr. Donald Wade (Huddersfield, West)

I beg to move, That the Clause be read a Second time.

This new Clause deals with one aspect of a very important problem, namely, the provision of adequate income for those who have retired. I do not think that anyone who is concerned about social welfare can be satisfied with the present state of affairs.

First, many old people are finding it very difficult to make ends meet. They are, in the main, those who are relying on retirement pensions and have not the benefit of voluntary superannuation schemes.

Secondly, it is fair to say that there are wide divergencies of income between these various people who have retired. I imagine that there are even greater divergences between retired persons than there are between those who are working.

Thirdly, it appears to me that the chances of benefiting in one's old age from some form of superannuation scheme is greater for those who do not move from one occupation to another or from one firm to another.

I do not consider the most satisfactory solution to be the creation of one vast State superannuation scheme to replace all voluntary schemes. I should prefer to see the maintenance of an adequate minimum for all, coupled with the encouragement of voluntary superannuation schemes extending wider and wider until all forms of employees are included, but I do not propose to discuss the comparative merits of a State scheme and a voluntary superannuation scheme because probably I should be out of order.

If we are to encourage voluntary superannuation schemes, more thought must be given to transferability of pension rights, the transfer of accrued rights when an employee moves from one firm to another or one type of employment to another. It is most important that these excellent voluntary superannuation schemes should not interfere with mobility of labour. I understand that in Canada it is an essential condition of Revenue approval that there should be provision for transferability, and I believe that there is much that we have to learn from other countries.

I am aware that some employers prefer a scheme which is non-contributory on the part of the employee and which provides no rights when an employee leaves. I can appreciate the point of view of those firms who are interested only in superannuation schemes which provide for no rights when those employed by the firm go elsewhere. However, there are many enlightened employers who are interested in schemes which will permit of the transfer of rights when their employees move, and the life insurance offices are anxious to be helpful in the development of those schemes.

As I understand, some firms have found difficulties in satisfying the Revenue when certain provisions are inserted in their schemes. This may be partly due to the extreme complexity of the law. One of the main difficulties arises front the fact that different schemes are approved under different Acts or under different sections of the Income Tax Act of 1952. When employees move from a firm with a scheme approved under one Section of one Act to a firm with a scheme approved under a different Section or a different Act, it is difficult to arrange the transfer of accrued rights.

This point was touched on in the Report of the Committee on the Taxation Treatment on Provisions for Retirement. Paragraph 184 reads as follows: Under our recommendations in this Chapter, all future schemes which obtained the Board's approval, whether funds or schemes, would be put on the same footing as regards the exemption of the build-up, the taxation at the benefit, subject to the right to receive one-quarter … in non-taxable form, and the taxation of withdrawals. There would then be no possibility of any loss of revenue if an employee's actuarial reserve (or the surrender value of a scheme policy relating to him) were transferred from one scheme to another. I recognise that sounds a little complex, but this is the gist of the paragraph: We therefore recommend that the existence of a rule permitting such a transfer should not be any obstacle to approval. It is only fair to read the concluding sentence of that paragraph: We would emphasise that this recommendation can facilitate changes of employment only to the extent that employers will themselves permit, by allowing the rules of their schemes to provide for transfers. I recognise that, but I believe there is force in the point made in that Millard Tucker Report, namely, that there should be no obstacles imposed by the Revenue on the approval of schemes, and the different schemes should be treated in the same way for taxation purposes.

There is another way in which I think that the Revenue could be helpful. That is as regards the interval between employment in one firm and employment in another. I am aware that where an employee has contributed, he may on leaving a firm draw out the appropriate amount, which then suffers tax. He then may start on a new scheme, but that does not really provide very much inducement to employees to enter into such schemes. That point is covered by paragraph 178 of the Millard Tucker Report, the appropriate sentences of which are as follows: An employee who has obtained a refund of his contributions on leaving his employment may enter a new employment and may wish to pay in the whole amount of the refund to an approved scheme connected with his new employment. We recommend that, in such a case, any tax charged on the refund should be repaid if the interval between the employment does no exceed twelve months. Then the Committee proposes that certain conditions should apply.

3.45 p.m.

That is the second example of a case where the Revenue could be helpful. There is a third example. I believe that there are many others, but I am only taking three that occur to me. It relates to leaving one's rights in what is called cold storage. That is not quite in line with transferability, but it affects the decision of firms as to whether or not to introduce a superannuation scheme.

There are difficulties where an employee leaves his firm and wishes to allow his rights to remain in cold storage until he retires. I have had an interesting letter from a chartered accountant on this very point, who writes as follows: If this preservation is at the uncontrolled discretion of the employer, there appears to be no tax disadvantage when that discretion is exercised in an employee's favour. But if a scheme provides that employees shall have a right to such preservation a serious tax penalty is imposed not only upon employees who leave but upon all members of the scheme, including directors who may probably have no intention of leaving. This is the automatic withdrawal of the valued provision whereby one-quarter of the capital value of pension rights at retirement age may be taken in lump sum, cash down on retirement, and entirely free of tax. It is most unlikely that a company will sacrifice this benefit for the sake of a minority who leaves its service. On behalf of one large employer who has a genuine concern to allow transferability, I have pursued this matter in great detail and have had to confront him with the situation outlined above. The point I am trying to make is that the very least the Treasury should do is to remove any obstacles there may be in the way of the creation of voluntary superannuation schemes containing provisions whereby employees may have a right to carry accrued rights with them on change of employment. I recognise the fact that it is very complex, but I am satisfied that the Revenue could be more helpful. I urge the Chancellor either to accept this Clause, or to give an assurance that he will take steps to remove all existing obstacles.

Sir Keith Joseph (Leeds, North-East)

I am glad that the proposal of this new Clause has given the Committee a chance to air this important matter, but I think that in what the hon. Member for Huddersfield, West (Mr. Wade) described as a very complex matter we should consider some of the implications of making transferability obligatory.

Everyone has an interest in securing the maximum of transferability because it induces the maximum of mobility. Everyone, that is, except those young people who begin industrial life, because I understand from certain personnel officer friends that the last thing a young boy or girl tends to ask about, after luncheon vouchers and other things, is pension provisions; so we must take an interest on their behalf.

I have always got the impression that the Inland Revenue is very much in favour of transferability and, in fact, introduces all kinds of regulations and concessions to facilitate it. The fact is that, if superannuation is to be a reality, we must begin to accept pensions as being a form of deferred pay.

That raises the first question, and that is whether the right to deferred pay should start with the first day of employment or whether there should be a minimum period of service, as in Canada, before there is any accrued or vested right to be transferred.

If we treat superannuation as deferred pay, surely it would be better to refer to this matter not as the transferability but the preservation of pension rights, subject to the consideration of the matter of minimum service. There are various ways of preserving these rights, and I would draw attention to the article in Superannuation, of March this year, in which there was a rather scathing reference to the cold storage method. It is a fairly short quotation.

The article says: There are obvious advantages in having the whole of the retirement benefits paid from one Fund when the employee finally retires. It is administratively rather complicated to have large numbers of small paid up pensions in a fund, and where several years elapse between termination of service and the commencement of the pension, a great deal of trouble may be experienced in tracing the employee concerned when the pension finally becomes due. On the question of transfer values, to which the hon. Gentleman referred, it could be awkward in the case of funds which are only nominal funds, because they are not, in fact, funded. So there may well be no fund from which the transfer of the sum equivalent to the capitalised accrued value could be made.

Surely the key to this matter of obligation, which does not yet have to be considered seriously in respect of tranferability, is that there are now quite enough voluntary funds incorporating the discretion on the part of employers to transfer and preserve accrued rights to exercise an influence on new funds.

After all, even in 1951 the Economist reckoned that one-third of all the people covered by voluntary superannuation schemes were, in fact, the object of discretionary powers for the preservation of accrued rights, and that means that any individual or company which does not offer superannuation at all to those in its employment must, therefore, have to offer a higher salary, a car or some other attraction. If a company offers a pension fund, but does not offer any preservation of pension rights, it may well be that some countervailing advantage has to be offered. Anyway, the pressure of good employment practice has already spread very widely, and this is very properly something for which the trade unions could legitimately and we hope valuably press—the spread of transferability rights.

If there was ever to be legislation—and I hope that it may not be necessary—account will have to be taken of the solvency of these schemes. It is true that actuaries in setting up these voluntary schemes do have to take into account the fact that certain individuals are inevitably going to leave at an assumed average rate and that they will forfeit any contributions that have been made on their behalf.

Any windfalls falling into the hands of the fund in this way are discounted by the actuaries, and any obligation to preserve pensions rights would remove these windfalls which have already been taken into account in making the scheme solvent; while in some cases that might lead to upsetting the solvency of the scheme, I think it is only fair to say that such windfalls which are discounted by the actuary in setting up the scheme, do tend to reduce the contribution which the employer had made and would have given the employer an advantage.

All I am trying to put forward now is that, as the hon. Gentleman said, this is a very complex matter. It is a very complex problem in taxation equity to be solved without upsetting the solvency of the scheme, but also without overlooking the advantage to the employer who has taken account of the windfall.

Most employers who have set up such schemes have, quite properly, done so with mixed motives; to attract and keep good staff, and, secondly, because they feel it their duty as good employers. Even if all this were levelled out by an obligation to preserve they would still retain the advantages of being good employers—because it would have been their attitude to employment which caused them to set up the scheme originally. Nevertheless, such levelling out would be a shame, though it may be the destiny of pioneering.

I should like to make one small suggestion; if an employer has not only set up a scheme, but been able to achieve extra benefit by competent investing of the funds, I suggest that any obligation that may be imposed upon him to preserve pensions rights should only be subject to the payment of average pension rights, so that there would still be retained an attraction which a good employer could exercise to keep his staff: if they leave him they would take only the average pension and not the extra benefit which had accrued from his very good investment.

I have tried only to bring out the fact of the great complexity of this subject. The universal preservation of accrued pension rights will come about from the pressure of existing schemes and also from the practice of good employers, but perhaps, also, from the pressure of employees and trade unions—and I hope that the trend towards preservation will continue ever more rapidly with the blessing of the Treasury.

Mr, J. T. Price (Westhoughton)

I followed with considerable interest the arguments which the hon. Member for Huddersfield, West (Mr. Wade) presented to the Committee, in which he tried to explain a very difficult and technical subject in what I thought was a very lucid way.

Personally, I am very much in sympathy with the intention which lies behind the new Clause, but I do not think that the hon. Gentleman has estimated quite to the full extent the other technical difficulties that surround this question of the working out of a practical scheme of transferability of all these rights between the thousands of funds which exist.

I think I am right in saying that the original charter which gave the concession to privately managed superannuation schemes goes back to the Finance Act of 1921. I believe it was Section 32. The original concessions in taxation that were allowed on the funds that grew up from that date, largely under the impetus of the concessions granted by Parliament, have developed in many ways which were never anticipated.

For example, it was the general practice in 1921, and in the years which immediately followed the great development of these schemes, for schemes to be privately managed by trustees set up by companies and employees who were the parties to these schemes, but later developments placed a new emphasis on the underwriting of pension rights by insurance companies, which is a perfectly legitimate commercial practice and one widely adopted for various reasons.

As I see it, while the Treasury has the right to make regulations under the original Act of 1921, to which I am referring, the power to make regulations is a very wide power, under which approval shall be granted by the Treasury, including the terms under which tax should be repaid when an employee leaves the service of a scheme of which he is a member.

It is all right to say, as the hon. Member for Huddersfield, West suggested, that is desirable that there should be equality of treatment for taxation purposes between the different types of schemes. It is much easier to postulate that desirable thing than it is to find a practical way of doing it. For example, nobody who has studied this problem would try to avoid the difficulty presented by the payment of lump sums in addition to the annuities which are the basis of many schemes. Earlier in our debates on the Finance Bill this year, reference was made to an Amendment which sought to extend the principle of lump sum tax-free bonuses in addition to the annuities which are the main purpose of superannuation schemes. The Treasury, as I think, rightly, has to discriminate in all sorts of ways between the different types of schemes which have different types of benefit.

In my view, for what it is worth, I cannot see any automatic remedy under which we can get equality of treatment for taxation purposes between schemes which are managed by privately appointed trustees, managed by the members of the fund themselves as equal partners in the undertaking of these funds, and schemes which are under- written by insurance companies and pay all kinds of supporting and ancillary benefits, in addition to those which are the main purpose of the funds—the payment of pensions.

4.0 p.m.

It is desirable, on wide social grounds, that we should find a practical method of making pensionable rights more easily transferable than they are at present. I should have thought that far from it being the Treasury and its power to make regulations, the main stumbling block was rather the wide variation in the different benefits in the shape of accrued rights when these transactions have to be settled between the respective actuaries of the funds who are responsible for their management.

For example, I have often heard professional actuaries discuss these questions and one of the obstacles that is seen from a professional point of view is the situation of a man who may begin his working life in the fortunate possession of pension rights granted to him under his contract of service, who stays on with a firm for a number of years and then passes on to another firm which has some kind of transferable rights because it is a similar type of organisation—for instance, within a trade association. The flour milling industry is a good example of this and there is wide transferability between the respective firms.

Having gravitated through various employments over a substantial part of his working life, the man eventually takes another appointment which puts him outside pensionable employment. There may have been a build-up of transfers of capital sums representing the actuarial reserve over the various periods in particular jobs and at the end his last firm with pensionable employment has the accrued value of all his previous rights and will be left in possession of the total accrued capital value of all his pension rights when he goes to his non-pensionable employment, and the reserve which has been created is not called upon.

Actuaries, like all other human beings, are sensitive about matters of this kind, which may represent the application of moneys which were originally intended for pensions for a certain individual through a fund which no longer has any liability towards the man. These appear to be some of the practical difficulties.

At the same time, I should like to take the opportunity of querying the way in which the powers are administered by the Treasury under its existing right to make regulations. I do not want to weary the Committee by quoting many detailed examples, but I sometimes think that the power under which, for example, the Treasury is entitled to recover Income Tax concessions at one-quarter of the standard rate—the fraction was originally one-third, but is now one-quarter—when a person leaves pensionable employment and has a cash refund made to him, is hedged around by all kinds of other conditions also. The Treasury sometimes makes wide and amorphous regulations which on many occasions are difficult to appreciate fully by those who are called upon to administer funds.

Having said that in, perhaps, a modified critical way, I support the plea made by the hon. Member for Huddersfield, West in asking the Committee to consider whether it would not be in the wide general interests of this movement to provide pension rights which have a greater flexibility as between one employment and another, not only in the interests of the persons enjoying those rights but in the general economic interests of the country.

Although there are no absolutely reliable figures, I understand from the best estimates that about 8 million of our working population of 24 million people are enjoying pension rights of one kind or another. Certainly, the existence of pension rights should not represent a bar to any man who is capable of transferring his abilities elsewhere, perhaps to employment where he would be more usefully occupied. The existence of accrued pension rights ought not to hinder the flexibility of that man's labour and his ability to transfer to wherever it is most useful. Anything that the House of Commons can do to facilitate that process would be entirely justified, and from that point of view I support the new Clause.

The Financial Secretary to the Treasury (Mr. J. Enoch Powell)

The new Clause is drawn—and, I am sure, was intended to be drawn—in the widest possible terms to embrace all circumstances of transfer from one pensionable employment to another. The hon. Member for Huddersfield, West (Mr. Wade), who introduced it, distinguished, however, three separate cases of transfer.

The last one to which the hon. Member referred was what he described as the cold storage method, whereby the employee leaves behind his rights in the employment which he leaves and gets the benefit of them only when he eventually reaches retirement age. I am, however, advised that the Inland Revenue does not place any bar on provisions whereby, when an employee changes his job, his part of the pension fund—instead of being transferred to the new employer—is put into cold storage. Then, on ultimate retirement at the prescribed age, the employee becomes entitled to a pension from his old employer as well as to any pension earned by his subsequent service with the new employer. So far as I am aware, therefore, the cold storage case, so defined, is not barred by the regulations under which this Part of the Income Tax Act is at present administered.

Mr. Wade

In obtaining approval for a scheme, is any difference caused by the fact that discretion is given to the firm or a right is given to the employee? I understand that a distinction is made in obtaining approval from the Inland Revenue.

Mr. Powell

I was going to offer, in any case, to look at particular variants and special cases of the main classes which might be thrown up in this debate. That would be the most useful method of dealing with the matter. Generally speaking, however, the method by which Part XVII of the Bill is administered does not prevent the cold storage treatment of pension rights.

The hon. Member then mentioned the case where an employee who changes his job brings with him his share in the pension fund of the employment which he has left. There again, I am advised that the Inland Revenue does not object to provisions whereby the part of a pension fund relating to an employee who changes his job may be transferred to the new superannuation fund—with this important qualification: so long as it does not result in money that was originally intended to provide pensions, and was treated accordingly for tax purposes, being applied under the scheme to which the employee transferred to provide lump sums or other benefits which would attract a different tax treatment. Subject, however, to that obviously necessary qualification, there is no bar from an Inland Revenue point of view to the employee on change of job taking with him his share in the pension fund of the employment from which he is moving.

But the main part of the hon. Member's case related to the transfers where an employee brings nothing whatever with him from his former employment and where there arises the question of whether his new employer should be allowed to give him pension benefits related not to his length of service with that new employer, but to a longer period—that is to say, to the whole or part of his employment with one or more previous employers.

That, of course, would be covered by the new Clause which the Committee is considering. The effect of that would be that the new employer would be making payments on behalf of the employee which would rank for the specially favourable tax treatment and which might be out of all relation to his current remuneration and length of service with the new employer. It might, in fact, be a means of tax free remuneration being paid by the employer to the new employee.

While, therefore, the Inland Revenue does not insist strictly that the pension rights in the new employment should be restricted to the actual length of that employment, it naturally requires that there should not be a serious disproportion between the amount of actual service and the amount of additional service which is counted in the calculation of the pension. That seems reasonable and inevitable, given the favourable tax treatment which these payments attract.

I therefore agree with the hon. Member for Westhoughton (Mr. J. T. Price) that there is no automatic remedy for the difficulties of transfer to be found by making an automatic concession of the sort which is proposed in the Clause. I agree with him, too, that the main barrier to transferability and free movement between one pensionable employment and another is not of a revenue character. I must advise the Committee that it would be contrary to the policy which underlies the favourable tax treatment of these superannuation arrangements if a Clause in terms as wide as that before the Committee were to be added to the Bill.

Having said that, however, I will not assert that there may not be cases which could legitimately be covered and which it may be desirable to consider, and I will certainly look into any type of case where there appears to be a revenue difficulty which is brought to my attention by any hon. Member.

Mr. Douglas Jay (Battersea, North)

I support at least the general purpose of the new Clause. The hon. Member for Huddersfield, West (Mr. Wade), by way of preface, said that he was not in favour of any vast State scheme to replace private schemes. I do not know whether he was referring to the Labour Party's policies in this respect, but I assure him, also by way of preface, that it is not part of the Labour Party's national superannuation scheme to replace private schemes in the sense of driving them out of existence.

It is certainly our intention and our expectation that if there were such a State scheme a very large number of private schemes should continue to give increased, alternative or improved benefits in certain cases. Our purpose is to ensure that the advantages of these schemes are available to those who, at present, have little or no chance of enjoying them.

Indeed, it is our intention to go further than that and to accept many of the private schemes as alternatives to the State scheme when it comes into existence. I am sure that the hon. Member will be gratified to know that one of the conditions provisionally suggested for such approval is that there should be transferability in the sort of sense he has been proposing. The hon. Member for Leeds, North-East (Sir K. Joseph) appeared to argue as if the hon. Member for Huddersfield, West wanted to make provision for transferability obligatory on employers. I did not think that that was his intention. I thought that what he was seeking to do was to remove an obstacle at present placed in their way by the Inland Revenue.

Mr. Wade

The purpose of the Clause is to remove obstacles. That is all I am seeking at the moment. I am not discussing whether there should be an obligation on all employers, if they are introducing schemes, to have this condition of transferability.

4.15 p.m.

Mr. Jay

I understood that the purpose at the moment was that obstacles placed in the way by the Inland Revenue should be removed, or at least modified.

Subject to what the Financial Secretary said about the present law, it is contrary to general public policy that by their tax reliefs the Government should be making it positively more difficult for employers to grant transferability and for employees to carry their accrued rights with them, to use the phrase of the hon. Member for Huddersfield, West. In all sorts of ways that is undesirable. First, it is a hardship for an employee, who has contributed and who has acquired accrued rights, to find that it is impracticable for him to carry those rights with him to some alternative employment.

Secondly, there is no doubt that it is an obstacle to changes of employment which in other respects might be desirable for the economy generally. Thirdly, to mention one other disadvantage, it may act as a deterrent to the employment of older workers if an employee cannot carry rights with him. The engagement of an older worker may, therefore, present special pension difficulties for the employer. I am sure that none of us wishes to add to the difficulties of older workers finding employment at present.

Both the Financial Secretary and my hon. Friend the Member for Westhoughton (Mr. J. T. Price) made it clear that there are extreme complexities and obscurities in this matter. The Financial Secretary argued that the Inland Revenue is not placing obstacles in the way of transferability to any substantial extent in the way the hon. Member for Huddersfield, West seemed to think. I hope that that is so, but the fact remains that the Millard Tucker Committee, a highly expert Committee which went into these matters at great length and in great detail, recommended that something fairly substantial should be done on the lines proposed in the new Clause.

In paragraph 184 of its Report, the Committee said: We therefore recommend that the existence of a rule permitting such a transfer should not be any obstacle to approval. The Committee was referring to an Inland Revenue rule and for it to have made that recommendation shows that there must be some difficulty to be overcome. It cannot be wholly true to say that the whole matter is satisfactory and that the Inland Revenue does not place difficulties in the way of an employer.

I understood the Financial Secretary to undertake to examine the Clause and, where evidence is placed before him, to see what he can do to act in accordance with the spirit of the whole Committee this afternoon. I hope that he will do that and that we may, as far as possible, use the tax instrument to encourage rather than discourage transferability in these pension schemes.

Mr. Wade

I am obliged to the Financial Secretary for promising to look into these matters. I hope that he will keep in mind the fact that there may be difficulties which do not necessarily come to the notice of the Inland Revenue, because firms may be advised by their experts that proposals which they have in mind would not be approved. As the hon. Member has been good enough to give that undertaking, I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.