§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Finlay.]
§ 10.48 p.m.
§ Sir Spencer Summers (Aylesbury)
Although the Treasury has been the subject of a whole day's debate today there is one aspect of its responsibilties which has not been touched on and which I want to take this opportunity of raising, namely, the responsibilities of the Inland Revenue for the approval of pension schemes whether from the point of view of contracting out from the graduated State scheme or the independent schemes. I am encouraged to do that because there appears to be a very marked contrast between the policy of the Government in this field as exemplified by the speeches of the Minister of Pensions and National Insurance, on the one hand, and the attitude of the Treasury, on the other.
There are a number of instances, and as I do not propose to detain the House with quotations, I hope that it will accept from me that it is the policy of the Government, as expressed by the Minister of Pensions and National Insurance, that occupational pensions to augment the State scheme are to be 366 welcomed. Indeed, he has gone so far as to say that the State graduated pension scheme ought not to be higher than it is in order that there shall be room left for occupational pension schemes arranged in the ordinary way under private enterprise. On the other hand, I hope to illustrate that the difficulties placed in the way of establishing such schemes by the Treasury itself, appear, on the face of it, to be contradictory to this policy.
I am not raising this matter because of any particular instance where I have been frustrated in the establishment of a scheme, either personally or in any company with which I am concerned. Therefore, there is no need for me to refer to any special interest. The opinions I am voicing are those of people who are steeped in this practice professionally and are constantly dealing with the Inland Revenue and with their clients wishing to establish pension schemes. It is upon their experiences that I draw for many of my remarks.
I want to make it plain that there is no criticism whatever of the officials in the Inland Revenue in the discharge of their duties. Within the limits imposed upon them, they are always helpful, courteous and as speedy as they can be. It is rather, I think, first, the restrictions placed upon them which constitute part of the trouble, and, secondly, the discretion they are allowed, which is another aspect I will refer to. It is not unreasonable to say that their approach to the conditions of a pension scheme which they are willing to allow is governed almost exclusively by fiscal considerations: how much revenue will they lose if they approve this scheme, and is it more than they should allow?
There are inherent in these schemes a number of social considerations which outweigh the fiscal considerations that the officials are concerned with, and I do not believe that enough weight is given to the social aspects in contrast to the fiscal arguments they no doubt advance. This matter would be very much easier if it could be said that all contributions to pension schemes were tax-free and all the benefits derived from a scheme, when paid out, were taxable.
The Tucker Report makes it clear that the Tucker Committee, if it were starting afresh, would have wished that to 367 have been the situation, but it felt that so much water had passed under the bridge, and that so many of these arrangements had prevailed for so long, notably in the Civil Service, that, however desirable in principle this distinction might be, it felt obliged to tolerate a mass of exceptions which had been going on for some time and, in particular, to permit them to continue benefits in the form of tax-free lump sum payments on retirement.
That, again, is part of the reason why the Treasury would appear to have to take such a keen interest in this matter. It is natural that it should wish to limit the contributions that are paid if they are to be tax-free, but if the Treasury could feel sure that ultimately the tax-free contributions would come out in the form of taxable benefits, then it is suggested that only patience would be required. I have here a List of the conditions which schemes are required to pass if they are to receive the approval of the Treasury.
Perhaps to express it like that is a little too precise, because the conditions are more accurately described as guidance to those who are concerned with these schemes. They insist upon limits being placed on the benefits payable, and since there will inevitably be an actuarial link between the contributions paid in and the benefits paid out, it is perhaps understandable that they should seek to place limits on the benefits. If, by so doing, they are indirectly placing a limit on the contributions which are tax free that, perhaps, is understandable.
There is another aspect of those limits which though understandable is, I suggest, carrying the matter a little too far. When actuaries advise those concerned with pension funds they are frequently at pains to encourage them to be generous in the contributions which they provide so as to make quite certain that, come good weather or bad, there will be enough in the "kitty", so to speak, to ensure that the benefits which they have undertaken to provide will be forthcoming.
In this instance, however, because of the operation of the tax-free element the Treasury is at great pains to make sure that there is not what it calls over 368 funding, a natural consideration perhaps, but one which I suggest can be carried a little too far. There are other considerations brought into the examination of schemes which are far less understandable than those which I have just mentioned. Restrictions are placed on the pension that may be drawn by a person who moves from one employment to another.
There appears to be a kind of theme running through the thinking on this subject which says that each employer should be made responsible for the pensionable obligations of the person concerned whilst in his employment and should have no share in the benefits which the person concerned may derive while in someone else's employment. For instance, if a man over 45 years of age moves from one type of employment to another, particularly where in the former case he has been a partner in a professional undertaking, he cannot draw more than one-sixtieth of his final salary under his new employment, which means that with only twenty years to go he may have only twenty-sixtieths of his salary. That is as much as schemes authorised by the Treasury will permit even though he has no pension whilst a partner for the first twenty or more years of his career and even though his second employer would be willing to provide contributions sufficient to make his final pension a more generous one.
When one seeks for the explanation one is forced back on the idea that each career is in a watertight compartment for the purpose of deciding how much pension one should ultimatetely be permitted to draw. The same applies to the transference of pension rights to widows which, again, is a very social consideration as opposed to a fiscal one with which the Treasury seems to have to contend. Where pension schemes are directly related to contracting out of the State graduated pension scheme the Registrar has to give his approval from the point of view of eligibility to contract out.
Some of these social considerations seem to be much more appropriately dealt with by the Registrar than by the Treasury itself. But, of course, it is only where the question of contracting out arises that pension schemes are, as it were, dealt with in two places. I suggest 369 that if the notion of more social considerations having greater emphasis is accepted a greater use could, perhaps, be made of the Registrar in dealing with that aspect of the matter.
The present situation which I have endeavoured to outline is unsatisfactory for reasons other than those which I have mentioned. If restrictions are placed upon the amounts of pension which may be paid—and I am told that it is almost inevitable that certain individual cases in a pension scheme will go over the limit—consultation with the Revenue is called for. Indeed, by the undertakings which they sign, trustees undertake to consult the Treasury before payments above a certain limit are made.
That means that it is not possible for a binding undertaking to be given to a beneficiary by the trustees, because they know that in certain circumstances they will be obliged, after consultation with the Treasury, to obtain its approval to the payments that the scheme would otherwise permit. A degree of discretion, therefore, comes into the fulfilment of the obligations of trustees to their work-people, and that element of uncertainty is not at all satisfactory.
Moreover, if the trustees have undertaken to see that even though the scheme provides for it, payment over certain limits shall not be made without consultation, they have to establish considerable administrative methods to ensure that the individual cases where consultation is called for are thrown up in order to be able to fulfil the undertaking given in the first place.
I am advised that even if one accepted the common sense of this consultation provision—which I question—the extent to which the whole business is growing is beginning to place a serious burden on the officials of the Inland Revenue and on the professional advisers who deal with these matters and may before long break down under its own weight if proper consideration is not given to this matter.
Of course, it is becoming increasingly complex with every form of guidance issued by the Inland Revenue. It has now reached a state when no one dares to embark on the establishment of such a scheme without going to highly qualified professional people who have 370 access to the Inland Revenue and who are almost able to make discretionary arrangements, sometimes of a temporary nature, which is not a very happy arrangement in dealing with things such as this. Moreover, it takes considerably longer to get these things established than would otherwise be the case.
There is another point to be mentioned in this connection. Those professionally concerned automatically get from the Inland Revenue a certain amount of information in the form of guidance, but, so far as I know, there is no place to which an individual can go to obtain the current practice of the Inland Revenue in this matter. It is only a courteous provision of information to the profession which is available, whereas, even at the risk of these forms of guidance having to be qualified as not committing the Revenue in a particular case, it would be very helpful to those concerned with these matters if guidance could be regularly made available about the kind of conditions on which the Revenue will insist.
I do not suppose that my hon. Friend the Economic Secretary will be able tonight to deal as fully with this matter as I hope that my remarks will prompt him to do on some other occasion, because these matters are complex. But I hope that I have said enough to illustrate that it would be very much better for the administration of pension schemes generally if more weight were given to the social aspect of the matter, as hoped and, I think, implied by my right hon. Friend the Minister of Pensions and National Insurance in his speeches on this subject. I do not know whether I ought to disclaim it, but I should make it clear that he has not prompted me to say that.
The social aspect is important, and the genuine worry which is to be found amongst those who deal with this subject ought not to be ignored. The more complex it becomes, the more essential it will be to bring in the professionals, so it is not really in their interests so much as the beneficiaries that these points should be ventilated.
I hope that this matter will be looked at, and I look forward to hearing how far my hon. Friend can encourage me to hope that the establishment of pension funds will be easier as time goes 371 on and as the Treasury is able to give a little more latitude than it is able to do at present.
§ 11.6 p.m.
§ The Economic Secretary to the Treasury (Mr. Anthony Barber)
I am grateful to my hon. Friend the Member for Aylesbury (Sir S. Summers) for raising this matter which is not only an important one but, as he said, complex. I agree with my hon. Friend when he says that there are important social aspects of which we should not lose sight. On the other hand, I think that he will agree that, in essence, the matter with which we are concerned is the effect on pension arrangements of the Inland Revenue requirements which have to be met to obtain approval of the arrangements for tax purposes.
I am grateful to my hon. Friend for what he said about the work of the officials in the Inland Revenue who deal with this matter, because, as I shall show, the work has increased considerably over the last few years. I know that those who are working particularly hard to try to ensure that there is no backlog of applications for approval will be grateful for my hon. Friend's comments.
Before I deal with one or two individual points raised by my hon. Friend, I think that it would be helpful to say a word about the background to this subject, and also the scope of the Inland Revenue interest in it.
As my hon. Friend—and, I think, other hon. Members—knows, there are really two types of private occupational pension arrangement. They are often referred to by those who deal with these matters as "funds" and "schemes", and they are treated differently for tax purposes. They have one fiscal aspect in common, and that is that in both cases the employer's ordinary annual contributions are, under the general tax law, treated as a trading expense and consequently deductible in arriving at his taxable profits, but in other respects the treatment of these two different types of arrangement, "funds" and "schemes", is different.
As regards the funds, legislation was introduced as long ago as 1921 to exempt the income of approved privately invested superannuation funds and to allow 372 relief to the employees for their contributions to such funds. This relief takes the form of a deduction from the employee's earnings of the amount of the contribution.
My hon. Friend referred to both fiscal and social considerations, and here I think that both are relevant. The justification for this special relief in respect of superannuation funds is partly the avoidance of what may be called double taxation because, as my hon. Friend pointed out, pensions paid by the fund are fully taxed as earned income, and there would obviously be a form of double taxation if the employee obtained no relief for his contribution and the income of the fund were taxed.
There are also, as my hon. Friend rightly pointed out, considerations of social policy which are very important. I would have thought that everyone would agree that it is obviously desirable that an employed person should provide for his own old age and for the care of his dependants. But I hope that my hon. Friend will agree that tax relief for superannuation must be controlled in some way if we are to ensure that it does not extend beyond its purpose. It is because of this that the law requires that a fund must satisfy a number of conditions to qualify for approval.
In particular, it must provide benefits only in the form of annuities. That is a basic pre-requisite of approval. If these annuities—with some trivial exceptions with which I will not bother the House—are commutable for tax-free lump sums, approval is restricted to that part of the fund which relates to the provision of pensions. Again, that is a principle which will, I think, command general acceptance.
So much for pension funds. The other type of arrangement is the policy-operated scheme where there is no fund. Under this system no special tax relief is provided. The employee receives the ordinary life assurance relief for his premiums, and there is no tax exemption for the underlying investment income of the scheme. In view of the time available I cannot go into detail, but I will say, in passing, that although that might seem, on the face of it, to be a little strange, the fact is that there are people 373 who find the scheme, despite its apparent disadvantages, a better type of arrangement to go for than the fund.
The tax legislation which governs schemes, as opposed to funds, was introduced in 1947, and it was introduced for the purpose of checking tax avoidance. It simply provides that unless a scheme meets the conditions for approval, the employee is assessed to tax on the employer's contribution to the retirement benefits scheme. One of the conditions for approval which is laid down by law in the 1947 Act—and most hon. Members would say that it is the main condition—is that the aggregate value of the benefits which it affords is reasonably comparable with the value of the benefits usually afforded by statutory superannuation schemes in like circumstances.
My hon. Friend referred to a feature which is common to both private and public superannuation schemes, and that is the provision of a tax-free lump sum. This is a most important aspect. In the case of schemes, the Income Tax Acts provide that the commutable proportion of the aggregate benefits shall be the same as in the public service, and in practice that means one-quarter. A fund cannot by law be wholly approved unless it pays only annuities, and the Revenue will not approve it partially if the benefits paid in lump sum form exceed one-quarter of the total benefits. In times of high taxation the lump sum has acquired an importance which I think we all recognise—and certainly an importance which it did not possess on its first introduction in the public service early in this century.
I think that it will be apparent to the House from what I have said that the Inland Revenue's interest in superannuation schemes is the control of the taxation reliefs and immunities laid down in the Income Tax Acts. I think that it will be generally agreed that we must ensure that the encouragement which the tax relief affords to the provision of occupational pensions does not go outside the prescribed statutory limits. The reliefs which exist today, as they stand, are a substantial inducement to employers to make provision for their employees' retirement. The formation of new arrangements and the revision of old ones goes on steadily in 374 increasing numbers from year to year. I think it significant that the number of new pension funds—this is not the total in any year, but simply the new pension funds—increased from 1,760 in 1958 to 5,300 last year, and the number of new pension schemes increased from 6,300 in 1958 to 9,700 last year.
My hon. Friend referred to some delay in giving approval and consideration to these schemes. I should like to go into greater detail, but I will only say that there have been some inevitable delays as a result of this considerable increase in the numbers of new funds and schemes which have been established. On behalf of the Inland Revenue, I can only say that they regret very much that these delays have taken place, and they will certainly do their best to reduce them in the future.
I want to turn to a very important point which my hon. Friend mentioned—the treatment of the older recruit. As I have explained the Revenue is required by law to have regard in approving schemes to the benefits usually afforded by statutory schemes in similar circumstances. Similar standards are applied to funds.
In the public service, the standard pattern is an aggregate benefit of one-sixtieth of final salary for each year of service, amounting to two-thirds of final salary after forty years' service. There is provision, in the case of an established civil servant recruited above the age of 35, under which retirement benefits somewhat in excess of one-sixtieth of final salary for each year of service may be given in special circumstances. In the commercial field which my hon. Friend mentioned, the Revenue will similarly approve retirement benefits for late entrants somewhat in excess of the normal sixtieths.
I am not sure whether I entirely agree with my hon. Friend's example, but I may have misunderstood him and perhaps I can best answer him by giving a simple instance. The Revenue will approve a pension of two-thirds of final salary after only twenty years' service. If the normal retirement age is taken as 65, that means that a man can take a new job up to the age of 45 and draw a pension of two-thirds of his final salary, less, of course, any retirement 375 benefits to which he may be entitled in respect of his previous employments—but, at any rate, he would be able to get two-thirds of his final salary—
§ Sir S. Summers
As that is completely contradicted by the guidance issued by the Inland Revenue, will my hon. Friend see that revised guidance is issued that complies with what he has just said?
§ Mr. Barber
I will look into that. I can only say that when I saw the notice of this Adjournment debate on the Order Paper I made inquiries about just this sort of case, because I have heard it raised before. I understand that this is the present practice.
If a man changes his job at, say, 55, so that he can serve only ten years before retiring, the Revenue would normally approve a pension of more than ten-sixtieths, but less than two-thirds of final salary, less any previous retirement benefits. All I can say about this particular matter, which is of great importance, is that in view of the legal obligation to follow the pattern set by the statutory schemes, the Revenue's view has been that this practice is as liberal as the law allows. I do, however, appreciate the special importance of facilitating the free movement of highly-qualified staff, and I will certainly give 376 the fullest consideration to what my hon. Friend has said on the subject.
On the question of the transfer of widows' pension rights I would say very briefly that this, again, is a matter of social importance, as my hon. Friend rightly said. But I am told that until very recently this practice was a rarity. Now, apparently, the idea has taken root. It seems that, in the past, employers who made provision for widows' pensions usually did so only for the widows of people who were either pensioners at the time when the widow became entitled, or who died in harness while working for the company concerned. Provision is now sometimes made for the case of a person who moves from one job to another and this is a matter that is being looked into at present, not only sympathetically but, I can assure my hon. Friend, urgently.
I fear that there is not time to deal with some of the other points made by my hon. Friend, and I would only like to repeat that they are, in the Government's view, matters—
§ The Question having been proposed after Ten o'clock and the debate having continued for half an hour, Mr. SPEAKER adjourned the House, without Question put, pursuant to the Standing Order.
§ Adjourned at nineteen minutes past Eleven o'clock.