OCCUPATIONAL PENSION SCHEMES

HC Deb 15 July 1987 vol 119 cc1146-78

4.9 pm

Sir Brandon Rhys Williams (Kensington)

I beg to move amendment No. 77, in page 75, line 32, leave out paragraphs 1 and 2.

The First Deputy Chairman of Ways and Means (Sir Paul Dean)

With this, it will be convenient to take the following amendments: No. 69, in page 75, leave out lines 37 to 42 and insert— '(2B) In subsection (2A) above "the permitted maximum" means, unless Parliament otherwise determines, the aggregate of £100,000 and the sum produced by multiplying £100,000 by a figure expressed as a decimal and determined by the formula (RD-RI)÷RI where—

• RD is the retail prices index for the month in which the employee retires; and
• RI is the retail prices index for March 1987 and, if the result is not a multiple of £1,000, rounding it up to the nearest amount which is such a multiple.'.

No. 78, in page 75, line 38, leave out '£100,000' and insert '£104,000'.

Sir Brandon Rhys Williams

We discussed this point in some detail yesterday and I should like to spare the committee the necessity of considering it again. Therefore, I seek only to move amendment No. 77 formally because it is possible that other hon. Members may wish to contribute on this subject again today in the slightly different context of schedule 3. I have said all that I wish on the point and as I know that the Chair does not wish us to cover ground unnecessarily, I shall now resume my place. If another hon. Member has a contribution to make on either of the amendments that are grouped with this amendment, I shall naturally make room for them to do so because I have nothing further to add.

Sir William Clark (Croydon, South)

Will my right hon. Friend the Financial Secretary to the Treasury reconfirm that if the Treasury alters the occupational pensions limit of £100,000, it will not be altered downwards but only upwards?

Mr. Tony Blair (Sedgefield)

I wish to raise only one point. We have already been through the question whether the lump sum is correct in principle. As the House knows, my hon. Friends and I are basically sympathetic to the idea of a lump sum.

I should like to put two points to the Minister. First, I presume that the two paragraphs refer to all occupational pension schemes and that they cover all such potential occupational pension schemes or at least those that people join after 17 March or schemes that come into being after 17 March. My second point arises from that. Since the new lump sum provisions apply to schemes that come into being after 17 March or that people join after 17 March, I presume that the entitlement of those people who are already in schemes that were in being before 17 March—if those people were in the schemes before 17 March—will be unaffected. I should he grateful if the Financial Secretary would confirm that.

Mr. Robert McCrindle (Brentwood and Ongar)

I shall not detain the Committee for long but there is an interesting principle in amendment No. 69, which was tabled by my hon. Friend the Member for Slough (Mr. Watts). I make this minute contribution to see whether the Financial Secretary will establish the Government's approach to the index-linking of lump sums. I cannot recall having seen on record any reason why there should be any opposition to any such index-linking. Surely the alternative will be the necessity to return to this House in successive Finance Bills—even when inflation is as low as it has been during the past few years.

I wonder whether my right hon. Friend will be prepared to inform the House of the Government's view of the whole business of index-linking in relation to lump sums. I for one do not look forward to having to return perhaps every five years to update the figures that are embodied in a particular Finance Bill relating to a particular year.

Mr. John Watts (Slough)

I tabled amendment No. 69 precisely to make the point that my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) has just made. I note that the proposed new subsection (2)(b) contains the power to raise the limit. It would seem more sensible and for the greater convenience of the House if that were done automatically through a formula such as the one that I propose, except in those years when the Government bring forward a proposal, which is agreed by the House, that indexation should not apply in that year. Like my hon. Friend, I should be interested to hear my right hon. Friend's reasons for resisting—if he chooses to do so- the principle of indexation of lump sums.

The Financial Secretary to the Treasury (Mr. Norman Lamont)

First, in reply to the hon. Member for Sedgefield (Mr. Blair), yes, the clause covers all occupational pension schemes, although not statutory schemes, which have their own legislation and which may need to be amended. On existing members and the lump sum rules—not the accrual rules—the lump sum rules will not affect existing members at 17 March 1987, but would affect someone who became a member after that date.

Mr. Blair

I am grateful to the Financial Secretary for giving way. I want to sort out this matter now because some people are troubled by whether those who have been in schemes before 17 March will still be able to take the benefit of the lump sum provisions without any cap being put on them. I suppose such people would have an incentive not to move after 17 March into schemes in which such a cap will be placed on them. Has any consideration been given to that and to the effect that it might have on job mobility?

Mr. Lamont

Obviously that factor has been taken into account in some of the points that have been made on the various provisions. The mobility of labour argument has especially been used. After 17 March the lump sum cap applies. We made that decision taking all the arguments into account.

On the indexation of the lump sum limit, we debated that matter yesterday. However, I am happy to repeat, for the third time, that we do not intend that the limit should he eroded. We shall review and adjust it from time to time. I was asked the specific question whether we intend that it should be adjusted downwards. I made it clear that we did not intend that it should be eroded. Yesterday, my hon. Friend the Member for Croydon, South (Sir W. Clarke) seemed well satisfied with that reply. Therefore, I hope that other hon. Members who have posed that question for the third time in Committee will be satisfied also.

Sir Brandon Rhys Williams

I should like the Minister to clarify one point. I hope that in making that assurance to my hon. Friend the Member for Croydon South, (Sir W. Clarke) the Financial Secretary is not excluding further consideration of the recommendation that I have made on a number of occasions, that future accruals of lump sums, whether of £150,000, or more or less, should he liable to tax at the statutory rate. I put that forward as an extremely serious recommendation that I believe solves many of the problems that face the Inland Revenue at this time. I should not want my right hon. Friend to find himself caught by a remark that might he misinterpreted, so that he will be held not to be able to consider that recommendation any further. I trust that he will assure the house of that and of what he meant by the assurance that he gave to my hon. Friend.

Mr. Lamont

I do not wish to create a lot of uncertainty in the pensions world. My hon. Friend the Member for Kensington (Sir B. Rhys Williams) is dangling all sorts of words in front of me that he would like me to use. Of course, I always take my hon. Friend's comments seriously and it was in that sense that I said that I would consider the various points that he raised yesterday. However, he knows that at present we have no intention of introducing specific arrangements for what he has now suggested. If I were to respond otherwise, that would create considerable uncertainty in the pensions world. However, in response to what my two hon. Friends have said about the lump sum limit, I emphasise that we are not intending to erode that. I hope that that assurance will reassure them.

Mr. McCrindle

With great respect to my right hon. Friend, and with apologies for not having heard him on the first and second occasions when he made that point, he did not reassure me in quite the way that I had hoped, for the simple reason that if it is impossible to increase that figure to take account of the change in the retail price index for five years, during years one to four—on the assumption that inflation has not been nil—I remind my right hon. Friend that effectively there is an erosion. Is that not an argument in favour of linking into some index so that the lump sum never falls behind, and so that it cannot fall behind?

Mr. Lamont

I am sorry that I was rather brief, hut we went into this yesterday, when I made it clear that notwithstanding the arrangements that we had made, for example, for personal allowances, it is the Government's general view that we do not wish to build into fiscal legislation automatic escalators or index provisions. Although I recognise what my hon. Friend is saying, £100,000 and £150,000 are substantial lump sums. We intend to review the matter and to deal with the matter as I said. We do not think that it would be right to have a year-by-year automatic escalator, as my hon. Friend suggests, for reasons that I well understand.

Sir Brandon Rhys Williams

Since my right hon. Friend has given me an assurance on my proposal—I am sure that the Committee understands precisely what he said on that point, namely that he is not in the least committed in favour of what I am advocating—and since we have had a useful short debate, particularly following on what was said yesterday, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sir Brandon Rhys Williams

I beg to move amendment No. 79, in schedule 3, page 76, line 21, leave out 'the benefits provided by the scheme'.

The First Deputy Chairman

With this it will be convenient to take amendment No. 80, in Schedule 3, page 76, line 23, leave out 'whatever' and insert `which may be drawn to the notice of the Board by the Occupational Pensions Board.'

Sir Brandon Rhys Williams

This, once again, has a close relationship with the remarks that I made yesterday and I shall speak briefly.

I have made the point that it is wrong that the DHSS should seek to regulate schemes by the size of the contributions which are made at the start and that the Inland Revenue should seek to regulate schemes by the size of the benefits that are received at the end. This dual system of control is extremely confusing and hampering for pension schemes and people who contemplate making new arrangements for their retirement and it should be ended. If there must be a choice we should accentuate the positive and encourage people to make contributions rather than to discourage them in relation to the benefits that they receive.

As I have put my point again, I do not think that I need to labour it. It is germaine to this part of schedule 3 and I trust that my right hon. Friend can find a moment to give the House his further thoughts on dual control and the reform of the Inland Revenue.

The second point, which arises from amendment No. 80, is simply to draw attention to the enormous latitude conferred on the Inland Revenue by the use of the word "whatever" in line 23 of page 76 which seems so broad that the House should stumble on it. I think that it would be better if such an expression were not offered to the House because it is too broad. In order to improve this I am making the same suggestion that I made yesterday which is that consultation with the OPB would be the appropriate course. I hope that that will commend itself to the House. I do not think that I need to dilate further on these points and I should be glad if my right hon. Friend could let us have his observations.

Mr. Blair

We are grateful to the hon. Member for Kensington (Sir B. Rhys Williams) for raising these matters and I simply wish to make two short points arising from these amendments.

There has been some anxiety about the change in the system of discretionary approval and it is right that we ask the Financial Secretary to explain the Government's thinking on it. The National Association of Pension Funds is particularly worried that it will in some way result in a wide range of new restrictions on the types of occupational pension schemes that will be approved. I would be grateful if the Financial Secretary will confirm that the purpose of paragraph 3 of schedule 3 is to replace the practice notes which the Inland Revenue uses with a set of regulations.

If there are to be changes in substance, perhaps he could tell us what they are to be. But as I understand it the purpose is simply to swap the present system of discretionary approval by means of practice notes with a more formal structure in the form of regulations. If the Minister can assure us that that is the case, that will lay some fears to rest about the new paragraph 3.

My second point arises directly from the amendment. I have some sympathy with the hon. Member for Kensington about the inclusion of the word "whatever" in paragraph 3(5) because that seems to be extremely broad. The only difficulty with his amendment is that it does not simply mean that the OPB should be consulted; it confers some special statutory status on the board as opposed to any other body and that may be a little difficult to achieve. But his basic point is clear and deserves an answer from the Minister.

It would help enormously if the Minister could give us a clear answer on those points because they have caused enormous anxiety outside the House. If we can lay those fears to rest during the debate, it will have been well worth having.

Mr. McCrindle

I am somewhat fearful that this matter may also have been raised when I was absent yesterday, so I shall intervene even more briefly than before to dissent from my hon. Friend the Member for Kensington (Sir B. Rhys Williams).

I can see what my hon. Friend is trying to do and I would be prepared to leave out the word "whatever", but I am not sure that his replacement words would be of any major service to the advancement of occupational pensions. If my right hon. Friend the Financial Secretary is disinclined to accept the amendment, perhaps he would accept the point that to encourage the OPB to be able to take a rather broader view of a scheme, including the benefits, may not necessarily be bad, as my hon. Friend implied, and that possibly a middle course between the proposed deletion and the proposed new words may be considered before further legislation on occupational pensions is introduced.

Mr. Norman Lamont

Amendment No. 79 returns to a subject which we have debated on several occasions, the controls on benefits. My hon. Friend the Member for Kensington (Sir B. Rhys Williams) believes that the world would be a much better place if provision for retirement were essentially based on money purchase schemes rather than on final salary schemes. His amendment seeks to sweep away the present tax approval rules for occupational pensions which operate by references to the maximum benefits which the schemes can provide and he suggests a rule that the aggregate contributions to the occupational pension scheme, that is the amounts paid by the employer and employee combined, may not exceed 20 per cent. of the individual's salary. As I have already said to my hon. Friend, that would be a far-reaching change and would take us into Green Paper territory.

The issue has been aired considerably. My hon. Friend has discussed it with me and the Minister for Social Security and the Disabled. I am well aware that my hon. Friend is postulating a vastly different world and a different set of arrangements for pensions. I see that the hon. Member for Sedgefield (Mr. Blair) is looking worried about my reference to 20 per cent. I anticipated that we would take the next group of amendments with these amendments and I do not wish to be out of order, but there is a certain connection between the two. I was being extremely careful, if not a little vague, in my choice of words because I did not wish to stray out of order. The two groups are inextricably linked and it is difficult to discuss the first without the second and the 20 per cent. figure.

My hon. Friend seeks to sweep away the controls on benefits and instead place controls entirely on contributions. The hon. Member for Sedgefield and his colleagues may have reservations about that and certainly it would be a far-reaching change. I have discussed this matter with my hon. Friend on many occasions and I can assure him that it will continue to be aired and that we shall continue to listen to him. However, during the proceedings on the Finance Bill, I cannot suddenly introduce such a far-reaching change. I hope that my hon. Friend will not think me wholly unreasonable in resisting his revolution. He has deployed the argument on many occasions and I think that he has a lot of logic on his side. However. I do not wish to create havoc and uncertainty in the pensions world. My hon. Friend has been fighting this war for a long time and he very much wants to win it. He will have to fight for a little longer but he has advanced somewhat in his battle and has perhaps made some converts.

4.30 pm

On amendment No. 80, I was asked about the inclusion of the word "whatever". I emphasise that the intention is to preserve the maximum flexibility and, in answer to the hon. Member for Sedgefield that no substantial change is intended. Clearly it is not the intention to direct schemes to invest in a particular way. The purpose is to make it clear that controlling director schemes cannot invest in for example, holiday homes or yachts for use by directors. The provision makes no substantive change in present practice; it merely strengthens anti-abuse practice. In his wording my hon. Friend was perhaps reverting to one of the themes that we covered quite thoroughly yesterday—the liaison between the Inland Revenue and the Department of Health and Social Security and the Occupational Pensions Board. I made it clear to my hon. Friend that on many of these matters it would be absolutely natural for us to consult the occupational pensions board, and we shall do SO.

My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) suggested that we should think about giving the Occupational Pensions Board a somewhat wider remit, and I listened to his point. Yesterday, I defined narrowly and precisely the matters for which the Occupational Pensions Board was responsible and I shall draw my hon. Friend's remarks to the attention of my right hon. Friend the Secretary of State for Social Services.

Sir Brandon Rhys Williams

It has been useful for the Committee to go over the ground once again, because we have been going slightly further than we did yesterday. What my right hon. Friend has said has been constructive within the limits of the difficulty in which he obviously finds himself; in the Committee stage of the Finance Bill he is being dragged into very philosophical issues on the whole question of provision for retirement. Final salary schemes are based on the idea of collective funding. Money purchase schemes are based on the idea of an individual entitlement which can be put together in a fund with other individual entitlements; they are an aggregation of individual entitlements. In final salary schemes, it is difficult to determine who owns what. That cloudy and rather Socialistic approach to retirement pensions is wrong and is rather out of character with Conservative thinking.

I would not like it to be thought that I was totally opposed to final salary schemes and wished them to be destroyed. What is in line with the general tenor of the Government's thinking and what is absolutely right is that we should build up, even within a final salary fund, a core of personal identifiable individual entitlement which can be taken as a transfer value if the beneficiary decides to leave the scheme as an early leaver. It would he an identifiable amount and could be calculated actuarially. That is very important. I would not disagree that, if a final salary scheme, having covered what may be thought to be a suitable minimum personal entitlement for all the members of the scheme, then has sufficient funds to do more, it might be at the discretion of the trustees or the sponsoring employer to put those funds into additional benefits for members of the scheme and their dependants. I would not wish to destroy final salary schemes but I want to ensure that everybody knows where he stands rather than being in a scheme where he is not able to identify his rights. That is why I keep drawing attention to the constributions rather than the entitlements in legislation governing the schemes.

I note what my right hon. Friend had to say about the Occupational Pensions Board and the Inland Revenue. I floated the idea of removing "whatever" because I did not think that it should go through without comment. After this short debate I think that we have exhausted the subject.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sir Brandon Rhys Williams

I beg to move amendment No. 81, in page 76, line 34, leave out from 'exceed' to 'of' in line 36 and insert 'a figure which, when taken together with the contributions paid by his employer, is equal to 20 per cent. or such higher percentage as may, in a particular case, be prescribed by the Occupational Pensions Board.'.

The First Deputy Chairman

With this it will be convenient to take amendment No. 82, in page 77, line 8, leave out from 'exceed' to 'of' in line 9 and insert 'a figure which, taken together with the contributions paid by his employer, is equal to 20 per cent. or such higher percentage as may in a particular case be prescribed by the occupational pensions board.'.

Sir Brandon Rhys Williams

Here we have a reference to a point that I made, or sought to make, on Second Reading, and I have revived the figure of 20 per cent. partly because it corresponds to what I said on Second Reading. I mentioned that when I touched on the subject during the Committee stage of the Finance Bill in 1970. I brought up the concept that what one puts aside for one's retirement benefit might be related to the concept of 10 minutes in the hour, which, of course gives a figure of 20 per cent. That figure is not just a round figure which it is convenient to use for the sake of argument: it is approximately the figure that I think needs to be put aside for retirement so that the average person receives a pension which is approximately two thirds of his final salary when he comes to leave full-time work. It could be regarded as a target. I would not necessarily wish it to be regarded as a maximum, which is why I have said that in particular cases the Occupational Pensions Board might be willing to consider a higher figure. On other occasions, I have recommended a figure of 25 per cent. I am happy to see large sums flowing into pension schemes because that is for the good of the economy as well as for the good of the members.

The amendment would have the effect of putting contributory and non-contributory schemes on the same footing. When I was working in personnel management we took it for granted that there was not such a thing as a noncontributory pension scheme. In a particular employment it might well be expected that employees might put 5 per cent. into the occupational pension fund but if they were not called upon to do so by their employer we assumed that that would be taken into account in the general remuneration package and that the salary, on current account would tend to be adjusted in relation to the market for the particular type of employment because there was no requirement to contribute to a pension scheme in certain cases.

By putting the employer and employee contributions together, I am also making a recommendation that produces big administrative simplification when members belong to several different schemes. In some of those schemes the employer will make contributions jointly with employees, and in others the employee will possibly make voluntary pension contributions on his own. If we are to have a regulation whereby the maximum permitted access to the tax haven-type of pension provision is controlled with regard to contributions it might be reasonable to put employers' and employees' contributions together in a single lump.

I think that I am right in saying that the taxpayer has to pay 20 per cent. on top of current remuneration of employees in the public sector to provide the pension benefits required under the public sector unfunded schemes and yet we have much smaller contributions than that in the vast majority of private sector schemes.

I have looked at the minimum contributions required for employers and employees jointly in contracted-out schemes. That contribution is so small that it does not bear any relation to the figure of 20 per cent. Therefore, we could say that the private sector schemes are likely, on average, to be about half as good as what we think appropriate for the public sector. As the Committee is dealing with pension matters in such detail in the Finance Bill debate today I do not believe that we should pass by without comment upon the fact that, in the private sector we seem, at the present time, to be content with a very much lower standard of provision than we think is appropriate in the public sector. That is an observation that arises from the fact that I have put a figure of 20 per cent. in this amendment. I am not seeking to force this amendment on my right hon. Friend, but I believe that it would be valuable for the Committee to have his observations on it.

Mr. Blair

I congratulate the hon. Member for Kensington (Sir B. Rhys Williams) on raising an amendment that has a logical symmetry to it.

I have attempted to come to grips with the pension legislation and I believe that one of the curiosities of that legislation is that the limit on contributions refers simply to employees although the actual benefits that arise out of a scheme are the product of the contributions of employers and employees. There is a limitation on those benefits. As I understand it, the main thrust of the argument put forward by the hon. Member for Kensington is that the contributions of the employer should be lumped together with the contributions of the employee. The hon. Gentleman has chosen a figure of 20 per cent. as opposed to the limit of 15 per cent. to be placed on the employee. I suppose that, in some cases, that could mean a reduced amount of contribution since the employers' contributions are not, as I understand it, subject to any limitation. It is correct to ask why we treat the contributions in this way since both the contributions are going into a scheme and at the end of the day a limit will be placed on the benefits of that scheme.

I would be grateful if the Financial Secretary could explain the Government's thinking. In particular, I hope that the right hon. Gentleman can say whether he believes the hon. Member for Kensington is right in saying that if the amendment was accepted and the percentage was set by the Occupational Pensions Board or whoever and thus the contribution was set, that could give a more accurate reflection on the rules concerning the limitation of benefits when schemes finally come to fruition.

Mr. McCrindle

I support the amendment tabled by my hon. Friend the Member for Kensington (Sir B. Rhys Williams). I believe that to move in the direction of raising the limits is a perfectly good idea. Although I would be a little surprised if my right hon. Friend were prepared to accept the amendment in the specific form in which, inevitably, it has been tabled, I wonder whether he will take the opportunity to comment on why we still believe, in 1987, that it is desirable to have a percentage restriction.

I would like to put into a scheme a particularly large percentage of my earnings to achieve a particularly comfortable retirement pension. I believe that the Government should tell us why such a percentage should be restricted. Of course, I know all the historic reasons for that restriction, but I do not believe that there is any disadvantage in taking the opportunity of these Finance Bill debates to update our thinking and remind ourselves why we believe a percentage restriction should be placed on such schemes.

As I understand it we are talking about a 15 per cent. limitation in relation to additional voluntary contribution schemes. I believe that 17.5 per cent. is the limitation on personal pensions. Perhaps my right hon. Friend will take this opportunity, to remind us why, in an area in which, in all conscience, there is sufficient complication, we should eschew the possibility of uniformity. We seem to be approaching two different types of pensions with different percentage limitations.

Mr. Norman Lamont

I believe that my hon. Friend the Member for Kensington (Sir B. Rhys Williams) is putting forward the second part of his platform for the complete reform of pensions. The new controls that he wants to see on contributions are a substitute for the removal of the benefit controls that he wants to sweep away.

My hon. Friend the Member for Kensington explained in an earlier intervention that he believed that it would be much more in accordance with Conservative philosophy if we had a series of pensions where each person had his own accrued personal rights. That relates to his strong views on transferability. My hon. Friend has a specific amendment that incorporates that principle. We shall debate that amendment as it sums up in figures exactly what he has put down in this amendment.

4.45 pm

I am afraid that my reply to my hon. Friend is similar to the reply I gave to his last amendment. Amendment No. 81 encroaches on the territory of the Green Paper. If I were to accept the amendment it would go against the assurances that have been repeatedly given by my right hon. Friend the Secretary of State for Social Services and my right hon. Friend the Chancellor.

A number of my hon. Friends have queried various aspects of the limits on contribution. My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) asked about the 15 per cent. limit for AVCs and the 17.5 per cent. limit for personal pensions. There is a lower limit for the AVCs because of the benefit of employer contributions. I believe that there is an amendment about this and we shall be able to discuss the matter further. However, the employer's contribution is the reason why there is a difference between the personal pensions and the AVCs.

The hon. Member for Sedgefield (Mr. Blair) asked why there was no limit on employer contributions. He said that, in certain circumstances where there is a 20 per cent. limitation, that might result in a lower employer contribution because, presently, there is a limit on employees' contributions. There is a limit on benefit, but no limit on the employer's contribution. It is the employer's contribution that has been abused in certain instances. We discussed that abuse yesterday when we spoke about maximum accrual rates over a short period that resulted in large sums of money sometimes exceeding the payment of salary. Such employers' contributions have been channelled in a way to generate large sums in a relatively short period.

Benefits are based on final salaries. Employers' contributions follow the advice of the scheme actuary as to what is needed to keep that scheme solvent. I am afraid that I cannot give any explanation other than that to the hon. Member for Sedgefield.

My hon. Friend the Member for Brentwood and Ongar said that many of these limitations had grown up like Topsy and were rooted in history. My hon. Friend for Kensington is certainly trying to impose greater coherence on pension schemes.

Personal pensions, AVCs and occupational pensions serve slightly different purposes. The one thing they have in common is that they provide pensions, but they are subject to different circumstances. I do not believe that one could have the same controls on the benefits and contributions of personal pensions, largely for the self-employed, as on occupational pension schemes. However, as these new instruments develop, I have no doubt that the opportunity will arise when we can consider more possibilities for harmonising the arrangements and the framework within which the different schemes operate.

The campaign of my hon. Friend the member for Kensington continues. He wants to move to this money purchase scheme rather than a largely final salary scheme—or, as he made clear, if we have final salary schemes, he wants them to be much more on a basis similar to the personal pensions but within company pension schemes. I understand entirely what he is campaigning for. We will certainly continue to listen to him. My right hon. Friends intend to have discussions with him about this. I hope that he will understand that his radical sweeping reforms cannot simply be introduced through this one little clause in the Finance Bill.

Sir Brandon Rhys Williams

Once again, this has been a helpful short debate. I hope that our debates will be studied by people in the pensions movement because my right hon. Friend the Financial Secretary to the Treasury is making some very constructive suggestions that show that he has fully grasped the points that I am making. I know that we will be extremely grateful to him for that and I hope that we can carry him further along those roads in the future.

Employers who read the debate might take fright at the sight of a 20 per cent. contribution and think that that is now hanging over them. It would not be inappropriate that employers' contributions should be a minimum of 10 per cent. and that a further 10 per cent. should be at the option of the employee in the average scheme. However, even 10 per cent. is a lot for some employers on top of what they may be funding for other employee benefits.

I offer my right hon. Friend a self-denying ordinance—that the Treasury might possibly renounce its claim to employers' contributions to national insurance, which is already in excess of 10 per cent., and put that all into pension provisions. Before long, the Government would have much smaller bills for assistance to people in retirement with supplementary benefit. However, that takes us somewhat wide of the clause. Having had this useful debate, I beg to seek leave of the House to withdraw my amendment.

Amendment, by leave, withdrawn.

The First Deputy Chairman

We come now to amendment No. 51, with which we are to discuss No. 52.

Sir Brandon Rhys Williams

As I have given an undertaking to try to help the Chair to reduce the length of our debates, I recommend that with amendments Nos. 51 and 52 we take Nos. 53 and 56, which have a similar objective. If that is agreeable to the Chair, I think that will assist the Committee and help to shorten our debate.

The First Deputy Chairman

Does the Committee agree to that? So be it.

Sir Brandon Rhys Williams

I beg to move amendment No. 51, in schedule 3, page 70, line 4, at end insert— '15A. In paragraph 10 of that Schedule for the words "The Board" there shall be substituted the words "Subject to paragraph 11 below, the Board".'

The First Deputy Chairman

As the Committee has agreed, we will also discuss the following amendments: No. 52, in schedule 3, page 79, line 4, at end insert— `15B. After paragraph 10 of that Schedule, there shall be inserted 11(1) This paragraph applies where an employee who is a member of the scheme ('the main scheme') is also a member of an approved scheme ('the voluntary scheme') which provides additional benefits to supplement those provided by the main scheme and to which no contributions are made by any employer of his. (2) The Board shall not have power under paragraph 10 to make any regulations imposing any limits on the amount of a benefit provided for the employee—

1. (a) under the main scheme to the extent that it requires account to be taken of the amount of benefit under the voluntary scheme.
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2. (b) under the voluntary scheme to the extent that it requires account to be taken of the amount of a benefit under the main scheme.".'.

No. 53, in schedule 3, page 82, line 24, leave out paragraph 25.

No. 56, in schedule 3, page 82, line 32, at end insert— '(3) Sub-paragraph (2) above shall not operate so as to reduce the benefit provided for the employee by an approved scheme to the equivalent of a pension of less than one-sixtieth of his final annual remuneration for each year of service or such fraction if a lower fraction as is provided for in the rules of the scheme.'.

Sir Brandon Rhys Williams

Amendment No. 51 is introductory and simply paves the way for amendment No. 52, which is the central recommendation that I propose.

We come here to one of the aspects of the Budget that I think was regarded as a controversial feature when it was first announced by my right hon. Friend the Chancellor in March. It immediately caused consternation in the pensions movement. When it reappeared in the summer Finance Bill, the proposal that I am attacking at this point was regarded with widespread dismay. I am sure that I am not the only member of the Committee who has had earnest representations that the Government's proposals should be amended.

When I was discussing another issue yesterday I took the opportunity to read the observations of the Occupational Pensions Board in connection with the association that is intended at the moment of the AVCs with occupational pension schemes. The difficulty is that, in practice, the proposals that the Government are making in the schedule will prove unworkable because no one can tell employees precisely what maximum contribution they may pay to a free-standing AVC because it is impossible to know whether the aggregate benefits from the AVC and their occupational scheme will, on retirement, exceed the limits imposed by Inland Revenue.

If the aggregate benefits on retirement exceed the revenue limits, the Inland Revenue will expect them to be reduced. This would be unacceptable because, if an occupational scheme reduced its benefits, it would be profiting from the success of the employees' own investments. On the other hand, an AVC provider could not reasonably deny the employee the product of his investment. It would fall back on the trustees of the occupational pension scheme to break the rules of their scheme and to dishonour their trust to accommodate the fact that the thrifty employee had done a sensible thing and chosen a good AVC.

The employee would rule himself out of an entitlement that he would otherwise have enjoyed under his firm's occupational scheme. That must be wrong. It constitutes retrospective legislation, because it means that, where the AVC has proved to be a fruitful form of retirement provision, no benefits can accrue to the member because retrospectively what he might have hoped to get from his occupational pension scheme, is cut. I suppose that somebody else will get the money, in that either the employee will then get the benefit because he does not have to put such a large topping-up contribution into the scheme, or there is more money for the trustees for other purposes.

As the Committee has agreed to take amendment No. 56 together with this group, I would like to point out a side effect that is also important for it to bear in mind. If the occupational pension trust is frustrated from giving an annuity immediately because of the Inland Revenue limit that would apply according to the proposals that the Government are making across both schemes, it might decide that it will take that money away from the beneficiary and use it for something else or hold it back for a subsequent purpose. The implication is that one cannot finance future increases to protect the pension from inflation.

That is wrong. If there is more money than can be used to provide an annuity, sometimes the trustees of an occupational pension scheme can use it as time goes on to provide greater increases to a member's pension than it otherwise would have done. Rightly or wrongly, this is an area that is still open to the discretion of the trustees.

Under the new legislation there is a requirement on the trustees to reduce the benefits provided by the scheme so that maximum benefits are not exceeded. This seems to be a change in attitude. It is now implied that there is no residual amount that is in some sense the property of the member. Part of his voluntary contributions must be used to reduce the liabilities of the scheme. It seems most undesirable that this reduction should have no limit. A member could pay AVCs in good faith and, because of exceptional investment success or lack of proper advice, he could find that his money was entirely wasted. For that reason, the amendment attempts to provide that the pension paid by the scheme cannot be reduced below the basic entitlement provided for in the scheme's pensions formula. That is the very least that is fair.

I hope that the Government will extricate themselves from the dilemma by listening to what professional people and the pensions movement are pressing on them, which is that they should regard the AVC as a totally separate and free-standing undertaking for pension provision and that there should be no liability on the occupational scheme to adjust its benefits to correspond to the success or failure of the AVC. This is a matter where the Committee is seriously engaged and we look forward to what my right hon. Friend has to say.

Mr. Tony Blair

This amendment was urged on me by several outside bodies. In the end, I did not put my name to it because I was not sure exactly where the balance of the argument came down, but it raises some points to which the Financial Secretary should respond.

I understand that there is a limit on the contributions, which are aggregated for both the additional voluntary contributions and the occupational pension scheme. In other words, the 15 per cent. limit applies to the total amount paid either in the occupational pension scheme or in additional voluntary contributions. If, under the occupational pension scheme, an employee is contributing 4 per cent. of relevant earnings, with an additional voluntary contribution he can top that up another 11 per cent., which gives an aggregate of 15 per cent. The regulations will also provide limits on the benefits that can be paid out under the schemes on the basis of aggregation. The limit on benefits will be two thirds of final salary, or whatever.

The National Association of Pension Funds Ltd. and other bodies say that if there is a limit on contributions to the scheme, one will not need to aggregate the benefits; that simply depends on how well the additional voluntary contribution scheme or the occupational pension scheme have gone. They say that, if benefits are limited on an aggregated basis, one will presumably not enjoy the proper fruits of one's investment. They also say that if one invests a certain amount of money well, the returns will be more than the limit on benefits that the regulations impose, that such money will be lost, and that, because of the limits, one will not be entitled to the fruit of one's investment.

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There is also the worry that it will be extremely difficult to see how to limit the benefits paid for what the additional voluntary contributions buy. Limits will occur in the occupational pension scheme. Some pension funds worry that it will mean that occupational pension schemes will become less attractive to people because they will have a limit on the fruits of their investment.

I saw another difficulty in the legislation. Perhaps there is an answer to it, in which case I shall be happy to support the hon. Gentleman's amendment. I assume that, when an employee purchases additional voluntary contributions, the body through which he purchases his investment will judge what the likely benefits will be. It will not be an entirely random event. Some attempt will be made by an employee, when he engages in additional voluntary contributions, to work out exactly what the likely benefit will be at the end of the scheme. It is not as though an employee will go into it with his eyes completely closed.

The main difficulty—this is why I said that there was a symmetry in the hon. Gentleman's earlier amendments—is that there is no limit on employers' contributions. I suppose that it will be possible to obtain two thirds of a salary—the maximum benefit—under the occupational pension scheme and then have additional voluntary contributions making a further top-up. The hon. Gentleman may say that there is nothing wrong with that. The hon. Member for Brentwood and Ongar (Mr. McCrindle) asked why there should by any limit on the amount of contributions.

We are talking about tax relief. Therefore, we must balance the interests of the Exchequer, acting on behalf of the whole body of taxpayers, against the interests of any type of investment, such as pensions, that we want to encourage. I should be unhappy if there were to be a widespread opportunity for higher earners to make additional voluntary contributions, if such benefits are not aggregated with the benefits under the occupational pensions scheme and, therefore, purchase for themselves a much greater pension than will be available to others. If that were to be the case, it would involve a change in the balance between the interests of the Exchequer and individual taxpayers. We must think carefully about that matter. I should he grateful if the Financial Secretary will respond to the points that I have made. They are worth raising.

Mr. McCrindle

I agree with the remarks of the hon. Member for Sedgefield (Mr. Blair) about why there should be limitations on contributions. He will understand that, for the purpose of the debate that I was trying to generate, it would not have been appropriate if I had conceded the point then, but I readily concede it now. It will be recalled that, during my contribution to the earlier debate. I raised the contrasting treatment of tax relief on contributions between AVCs and personal pensions. I received an explanation from my right hon. Friend of why it should be 15 per cent. on one and 17.5 per cent. on the other. To some exent—we may return to the matter another day—I accept the Financial Secretary's explanation of why such differences should apply.

The amendments to which we now turn our attention are aimed at bringing equivalence. So far as I can read them, they are designed to ensure that AVCs are, in effect, as freestanding as personal pensions already are under the legislation that has been introduced. Therefore, it seems to follow, as the amendment implies, that benefits should not be aggregated with those of the occupational pensions scheme. When, in retirement. total benefits exceed Inland Revenue limits, the benefits will not need to be reduced if the amendments are passed.

I now raise the central point to which I draw my right hon. Friend's attention and to which it would be helpful if I could have a response. If we now agree, as we did during earlier debates on other amendments, that for the reasons that we conceded, there must be a limit on contributions, why must we have, in effect, a limitation on contributions and a limitation on benefits? One of the ways in which we could most effectively move forward would be to accept that if there must be one, it does not necessarily follow that there must be another. To that extent, I commend the amendments that were moved by my hon. Friend the Member for Kensington (Sir B. Rhys Williams). I look forward to hearing what my hon. Friend the Financial Secretary to the Treasury has to say.

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I echo some of the arguments and worries that halve been expressed. I, too, have received representations from the National Association of Pension Funds Ltd. and similar organisations. There is a good deal of consternation, even at this stage. I am aware that we are running short of time within which the Government are seeking to introduce new, important and generally helpful innovations. It is almost a revolution in the provision of pensions in this country. I support the Government's main thrust, but I have two worries about voluntary contributions as presently proposed. First, the scheme as presently proposed by the Government is unmarketable for the reasons that have been stated by the—

Mr. Norman Lamont

indicated dissent—

Mr. Kirkwood

The Financial Secretary shakes his head. It is difficult to see how AVCs can be sold in the context in which the Government propose them. I wait to hear what he says, and so will the industry. I cannot see how a salesman, an insurance company, or whoever will purvey the schemes, can put together a prospectus that will convince me that a scheme is sensible, if it were appropriate to my personal circumstances to adopt a scheme.

Secondly, I agree with what was said earlier. The scheme is unmanageable. I do not see how the people who are responsible for AVCs—presumably they will be trustees—can possibly work out exactly what will happen at the end of the day and prevent the possibility of benefits exceeding the limits that have been set down. I am worried about what happens to the benefits. Will they fall into the hands of trustees or employers? I am not entirely sure. I am certain that the trustees of any such scheme, when they try to determine what future benefits will be, may run foul of the Securities and Investments Board plc in terms of the monitoring of the scheme.

Trustees may say to prospective purchasers, "We think that the projection will be this, that and the other." Of course, we have had debates in the House on other legislation about the need to counsel caution in respect of projections and scheme sales. If the trustees of the new AVCs adopt such an approach, as they should, and they find that they have been over-cautious and that the benefits will exceed the limits, what will happen to the money that accrues from investment? There are difficulties and, although I am not an expert, I can foresee problems on the horizon for trustees in the monitoring of the scheme.

I understand that the Government are issuing consultative documents to trustees to try to meet that point. The proper and obvious way of solving the matter, as has been suggested, is to ensure that free standing AVCs are as free standing as personal pensions so that their benefits are not aggregated with those of an occupational scheme. How much would that cost the Government? What difference would it make? Would it disrupt some of the schemes, benefits, guidelines or the rules and regulations that abound in this sector? If so, I should be pleased to hear about them. With the information that is presently available to me I do not think that it will cost a lot or be difficult to administer. It would enable the scheme to progress in the way that industry was expecting, which would be to the benefit of all concerned.

Mr. Norman Lamont

We shall study carefully all the points that have been made, but I should like to distinguish sharply between personal pensions and AVCs. AVCs are not personal pensions, which was the main reason for their introduction. I shall rest my case on the strong distinction between them.

My hon. Friend the Member for Kensington (Sir B. Rhys Williams) seeks to disapply the benefit limits for members of schemes who are paying free standing AVCs. If the benefit limits did not apply it would be possible for someone in a non-contributory occupational scheme to invest up to 15 per cent. of salary in a free standing AVC scheme and increase his total pension benefits way beyond the two-thirds final salary maximum that applies under the existing rules.

The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) asked about costs. I cannot possibly answer that, but I can envisage circumstances in which the cost could be substantial. I understand why the industry should want this change. I was shaking my head because it is not surprising that the industry wants it. It says that free standing AVCs should be like personal pensions, but we have introduced personal pensions for that purpose. If people want personal pensions they can take them out. We have introduced AVCs to help people who wish to make up part of their occupational pension scheme; we already have in-house AVCs. We are introducing free standing AVCs to give people choice in investment management. Given that we have these rules for free standing AVCs—they are part of occuptional pension schemes—it is logical that they should be constrained in the same way as occuptional pension schemes.

I understand that my hon. Friend the Member for Kensington wants nothing to do with limits on occupational pension schemes. In this instance we are not having a wide ranging debate, we are on a narrower point as to whether AVCs should be constrained on benefits. In my view they should be because they are part of occuptional pension schemes. They are not personal pension schemes under another name; if they were we would have introduced one new instrument and not two; they are for different purposes.

A number of hon. Members, particularly the hon. Member for Roxburgh and Berwickshire, have suggested that the benefits may be impossible to police. We shall consider that point and review it in the future, but I do not think that the problems with which one is faced will be inherently different from those of in-house AVCs.

Members of occupational schemes have a right, under social security legislation, to know the value of their pension rights, and therefore what the scope is within the overall benefit limits to pay AVCs. That is a calculation which AVC managers should carry out under present rules on in-house AVCs to guard against excessive contributions. For free standing AVCs they will have to make a calculation and that information will be conveyed by the scheme member to the AVC provider. I do not think that that will be inherently impossible. I do not wish to minimise the point, but I am not surprised that the industry wanted a different regime.

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We must pay attention, as the hon. Member for Roxburgh and Berwickshire reminded me, to any practical problems. I am not convinced by what has been said thus far about possible problems, but we shall keep the practical aspect of the matter under review and we shall do what we can to make it workable if there are genuine difficulties. On the point of principle with benefits, there is a strong case for a limitation on benefits.

Sir Brandon Rhys Williams

I should like to raise the point that was made by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) as to the cost of allowing a bigger flow of savings into AVC pension schemes by removing the restriction that is intended by the Government's provisions. The result, insofar as the AVC results in the payment of a higher annuity, would be that the taxpayer loses nothing because the principle is, as I have often said in slogan form, "save now, pay tax later." The taxpayer recovers much more money because if it is put into a fund to fructify, which is then able to grow and is well invested, when it emerges as an annuity more tax is paid than if tax were deducted and the money went straight out in the pay packet in the first instance and was not saved. The taxpayer must gain if an annuity is ultimately larger; the economy gains, because by encouraging thrift and savings instincts and by getting money put into these schemes, which then go out into investment—we hope into productive manufacturing industry or worthwhile projects—the economy is healthier and there is a better yield to the taxpayer.

In insisting that the provisions must stand as they are my right hon. Friend is not only creating almost impossible dilemmas for administrators he is also doing something which is not in the public interests or in the interests of the economy. Therefore, before we close on this point, will he say whether he is prepared to consider further suggestions which we might be able to work out between now and Report, which I think will be next week? I should like to feel that we had not left this point, if I withdraw my amendment, because there is much concern about the administrative difficulties, quite apart from the wider implications, and the Government would be wrong to steamroller the House into accepting the provisions. I therefore hope that my right hon. Friend will be prepared to say to the Committee that this is a matter which he thinks appropriate to come back to on report.

Mr. Norman Lamont

I have tried to respond to the points that my hon. Friend the Member for Kensington (Sir Brandon Rhys Williams) has made during this lengthy consideration of the pension provisions. I have tried to respond as constructively as I can. I hope that my hon. Friend will agree, despite the radical proposals that he has put forward, that I have responded in a positive manner.

As to the principle of the benefits on AVCs, I cannot give an undertaking to come back on report because I feel that the principle is correct. I listened carefully to what my hon. Friend the Member for Kensington said about administration and the practicality of it. I have noted what was said and I shall seriously consider that point. However, I do not think that I can come back on report with a new way of looking at the administration of it.

I cannot agree with my hon. Friend on the central point about benefit limits. I listened to my hon. Friend. He says that there may be no cost because the benefits are subsequently taxed. That is in the long run. The immediate cost will he substantially higher. The benefits may not be paid for up to 40 years. Of course, I have no idea what the cost of having no benefit limits would be. However, it would simply allow free standing AVCs to be used as a tax shelter for investment generally.

Sir Brandon Rhys Williams

Why not?

Mr. Lamont

I do not think that my hon. Friend has carried all Members of the Committee with him in that comment. I am afraid, he has certainly failed to persuade me that in the present regime, with the limits on benefits in occupational pension schemes, AVCs, which are not personal pensions, ought to be subject to a regime that is analogous to that of personal pensions schemes rather than that of occupational pensions.

Sir Brandon Rhys Williams

On the matter of recommendations to allow large contributions to tax haven schemes, I am not trying to suggest that outrageous proposals should be permitted that have no real relationship to orthodox provision for retirement but arc simply an exploitation of the tax haven element. I do not want to be associated with the idea that there should be no upper limit whatever on contributions. However, I think that contributions should be encouraged to rise from what they are now. It is a pity to talk about limitation to the extent that we do. I think that contributions of 20 per cent. or 30 per cent. of current remuneration would be perfectly appropriate and that higher figures, in many cases, might even be appropriate.

On this question, I have been reflecting lately on what I might like my friends to write on my tombstone after my death. I think that I would like them to write, "God knows I tried." I hope that anyone who reads the debate in the pension movement will see that I have tried to persuade the Government on this point. If I have not succeeded on this occasion, no doubt the House will have need to come back to it at another time. My right hon. Friend the Financial Secretary has been so clear. The House is grateful to him for the extremely appreciative way in which he is approaching the debates. I have no criticism of him whatever. I think that he happens to be mistaken on this particular point, but a man who never made a mistake, never made anything. However, having made those observations I beg to ask the leave of the Committee to withdraw my amendment.

Amendment, by leave, withdrawn.

Mr. Watts

I beg to move amendment No. 71, in page 80, leave out lines 7 to 50.

The First Deputy Chairman

With this it will be convenient to consider the following amendments: No. 8, in page 80, line 8, leave out paragraph 19.

No. 55, in page 80, line 9, at end insert— '(1A) In this paragraph, and in paragraphs 20 and 21 of this Schedule, the words "each year of service" wherever they occur shall have effect so as to include those years of service in a previous employment to which any transfer value accepted by the scheme relates.'. No. 36, in page 80, line 13, after 'service', insert ', including any previous periods of service as a member of any other retirement benefits scheme of the same or an), other employer and any other periods of service which the Board may prescribe by regulations under paragraph 18(2) above,'. No. 54, in page 80, line 13, after 'service', insert ',including any previous periods of service as a member of any other approved retirement benefits scheme of the same or any other employer.'. No. 75, in page 81, leave out lines 1 to 26.

Mr. Watts

The effect of amendments Nos. 71 and 75 is to delete paragraphs 19, 20 and 21 of schedule 3 which introduce a new and much less favourable regime for accelerated accrual of pension rights. At present, late entrants to an occupational pension scheme can accrue maximum benefits over a period of 10 years. The new regime proposed in the Bill extends that period to 20 years. It seems inevitable that that change will discourage labour mobility, particularly among older employees. No one over the age of 45 will be able to change jobs and still accrue a maximum pension.

The change seems to run counter to some of the legislation we enacted in the previous Parliament to improve the position of early leavers in respect of their pension rights. For example an early leaver at the age of 50, who is entitled to transferable benefits guaranteed by the Social Security Act 1985 may find that he is not able to realise the benefits of those transferred funds on retirement because of the changes now before us.

I have struggled in vain to identify any rationale or logic in the proposals contained in the paragraphs. In my view, they are ill-thought-out and should be taken away by my right hon. Friend the Financial Secretary for further consideration. All they show me is the rather deplorable Inland Revenue Prejudice that pension provisions, and much else that people do, are solely means of tax avoidance and little else. I am sorry to see so much of that prejudice reflected in the drafting of legislation. Of course, I hope that I am wrong and that my right hon. Friend may be able to lead me down the road to Damascus and to greater enlightenment. However, I doubt whether that will be the case.

Mr. Blair

The amendments of the hon. Member for Slough (Mr. Watts) take a fairly drastic blue pencil to much of page 80 of the schedule. My amendment, which is included in this group, is more modest but I hope that it has a constructive effect. I simply want to probe the Government's intentions in relation to the new rules. The present rules allow the accrual of the maximum pension over a minimum period of 10 years. The new rules will substitute 20 years. The effect of amendment No. 36—there are others that have a similar effect—is that if the employee leaves one firm and joins another and both firms have occupational pension schemes, one simply aggregates the service. In other words, there must be at least 20 years' service to obtain the maximum benefit but that service can be with different employers.

As I understand it, the Government wanted to change the rules from 10 years to 20 years because they thought that the 10-year rule was allowing some over-hasty accrual of the maximum pension and that, therefore, the provision was being used for tax avoidance.

I confess, that at first I found it difficult to see how there could be avoidance on that basis unless the particular employee was joining a scheme and had no previous pension. In that way an employee, over the 10-year period was effectively allowing a huge and rapid accrual of benefit. I may have got that entirely wrong. As I understand it, the Government want to change the rules because they thought that 10 years was too short a time to accrue the maximum benefit and that the system was open to avoidance if the employer started to make large contributions to the scheme.

If the new rule of 20 years is permitted and the earlier service is included, which is the effect of the amendment we have tabled, the long period of 20 years would still have to be taken into account but it simply would not have to be with the same employer. My concern about the Government's requirement is that it places an obstacle in the way of job mobility. People would have to remain with the same employer in order to obtain the rapid accrual of benefits. I cannot see any reason why they should not move from one occupational pension scheme to another and simply take the benfit of their service with them. Indeed, I would have thought that that would fit in neatly with the Government's scheme of pension provision.

There is the further point that the personal pension scheme has no such restriction in the sense that it is simply taken with the employee wherever he goes. Therefore, the personal pension scheme will have an advantage over occupational pension schemes and will put them at a disadvantage.

If the test of the Government's provision is that it should prevent avoidance and they think that 10 years is too short a time to prevent that avoidance, they have to justify not so much the 20 years but why the 20 years has to be with the same employer. If we were able to have those provisions with different employers, it would meet the Government's objective in relation to avoidance and it would allow full flexibility of pensions.

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Mr. Kirkwood

On balance I am in favour of the approach adopted by the hon. Member for Sedgefield (Mr. Blair) as opposed to the rather sledgehammer approach adopted by the hon. Member for Slough (Mr. Watts), although I entirely agree with everything that he said and support the way in which he introduced the amendment. Like the hon. Member for Sedgefield, I should like to probe the Government about the thinking behind this scheme. Like the hon. Gentleman I cannot see easy ways of adopting avoidance tactics against the background of the maximum-period rules that formerly applied.

This is a substantial change and as the hon. Member for Slough said, it will have the effect of decreasing potential job mobility and portability of pensions. Some serious consequences could accrue from this change. The solution to the problem as we see it, and as the amendments see it, is simply to aggregate the service in the way that the hon. Member for Sedgefield suggested. What would that cost? I know that such questions are difficult to answer, but is there any way of knowing the effect of adopting the approach suggested by the hon. Member for Sedgefield of aggregating years of service? That seems to be an effective compromise that would give a balance against potential avoidance and avoid some of the worst effects that the hon. Member for Slough mentioned. To make the argument all-party, I certainly subscribe to the arguments advanced by the hon. Members for Slough and for Sedgefield.

Sir Brandon Rhys Williams

The hon. Member for Sedgefield (Mr. Blair) admirably moved amendment No. 36 standing in his name. I should like to draw to the attention of the Committee the fact that my amendment No. 54 is in identical terms but does not go quite as far as his. However, it seeks to make the same point. It worries me very much that transferability would be restricted by what the Government propose here. Obviously, the whole object of securing a transfer by an early leaver when he leaves one firm and enters another—if it is a final salary scheme that he joins—is to achieve the negotiation of added years. It appears to me, although I may be wrong, that what the Bill is proposing will make it more difficult if not impossible to secure added years in the second employer's scheme.

It has been strongly urged on me that in personnel management, particularly when negotiations about movements of very senior people are concerned, this provision that the Government intend is likely to be extremely damaging. I find that very disheartening not only because it is bad for the workings of the economy but because it is hard on individuals if they are impeded from making the best of their opportunities at the peak of their career by pension scheme provisions which may have a very substantial value by the time a man is in his late forties or fifties.

It is disheartening when I and other hon. Members who have worked for so long to try to improve the conditions for the early leaver find that the Inland Revenue is moving in precisely the opposite direction by introducing rules that will actually make it harder for the early leaver to get a fair deal. This is an indication of the fact that the Inland Revenue has lost sight of the public interest and is simply concerned to find ways of stopping the exploitation of the tax haven provisions that are allowed in retirement benefit schemes.

I am afraid that once again we are detecting at the back of the Revenue's thinking its terror that someone will exploit the tax-free lump sum opportunity. What it is doing here is once again aimed at blotting out exaggerated tax-free lump sum arrangements, but once again in the wrong way. I do not need to emphasise to my right hon. Friend what I think would be a better arrangement, that future accruals of lump sum entitlement, should be taxed at the standard rate. That would not be a retrospective action. It would be 40 years before it fully took effect, but where the stopping of eccentric or unacceptable plans for exploitation of lump sums is concerned it would have an immediate effect. That is the right way and what the Government are doing is the wrong way. I trust that the Committee is about to hear from my right hon. Friend that the Government have thought again about these proposals.

Sir William Clark

I support the amendment tabled by my hon. Friend the Member for Slough (Mr. Watts). My amendment No. 8 is precisely the same as his, except that he cut two lines and removed the title. Presumably, that is why my hon. Friend's amendment was taken first. Perhaps I was upstaged. I do not want to reiterate the arguments that my hon. Friends have advanced. In many cases high flyers or middle management in the private sector have to move from one employer to another. That does not apply to civil servants. I shall not go into indexation of Civil Service pensions, but if a civil servant moves from one Department to another, whether from the Department of Transport to the Treasury or to the Home Office or elsewhere, he has the same employer and, consequantly, his pension is not affected. However, pensions in the private sector are affected by job movement.

Let us look at the employee who does not want to move and is made redundant. Is he to be penalised? I agree with my hon. Friend the Member for Kensington (Sir B. Rhys Williams) who said that on many occasions the Inland Revenue gives the impression that it is absolutely scared stiff that one person may find a loophole in some piece of legislation. Consequently, the Inland Revenue wants the legislation complicated and it is hedged around with so many restrictions and regulations that the ordinary man in the street and, indeed, the informed man in the street, can seldom make head or tail of it. It is time that we stopped this sort of restrictive practice. We ought to propagate Conservative philosophy by encouraging more and more people into private pension schemes.

Without amendment, this clause will have an inhibiting effect upon such movement into private schemes. I urge my right hon. Friend to have another look at this. We should stop this nonsense of trying to block loopholes that probably do not exist. The only effect is upon the employee, and I reiterate that it will invariably affect only the private sector employee.

Mr. Norman Lamont

We have had two different cases deployed. My hon. Friend the Member for Slough (Mr. Watts) backed by my hon. Friend the Member for Croydon, South (Sir W. Clark) simply wants us to drop the restriction on accelerated accrual. My hon. Friend the Member for Sedgefield—sorry, not my hon. Friend although he has been most helpful in the course of this debate. The hon. Member for Sedgefield (Mr. Blair) had an ally in my hon. Friend the Member for Kensington (Sir B. Rhys Williams) in suggesting that accrual should be based on service with previous employers. Although I understand the logic and the reason behind the suggestion by the hon. Gentleman and my hon. Friend, I shall spell out in some detail why that would not be the way to go.

First, I shall address my hon. Friend the Member for Slough and tell him and the Committee why we felt it necessary to make this change. I emphasise that, of course, job mobility, and especially job mobility for senior executives, is extremely important. Pension expectation is one factor, but only one among others that influence the decision. Even with pensions, many of the things that we have done are precisely designed to encourage mobility. I recognise that we have not got, under the present regime, a complete answer or transferability, nor everything that we need on mobility. Costs and other factors restrict mobility, and that is why we have been introducing schemes such as personal pensions and why there has been the revaluation of deferred pension benefits under the social security legislation. That is extremely important. It does not go as far as my hon. Friend the Member for Kensington wants, but it is a step forward and has made it easier, in certain circumstances, for people to move around.

We have attempted to tackle that problem through these various routes. None the less, although we recognise the importance of not placing obstacles in the way of people moving around, we have felt that there was a case for acting against the accelerated accrual. The maximum rate of accrual for occupational pensions under a final salary scheme is normally one sixtieth of final salary for each year of service up to 40—hence the "two-thirds final salary" rule, although many schemes offer less generous pensions, which accrue at one eightieth or even one hundredth final salary for each year of service. For a variety of reasons, most employees will not serve 40 years in one scheme to retirement. Consequently very few—perhaps only 10 per cent. of all occupational scheme members—will qualify for anything approaching a pension of two thirds final salary on the normal basis.

In recognition of this, it has always been possible under the present tax rules for schemes to provide benefits based on the accelerated accrual, which has enabled maximum benefits to be obtained after as little as 10 years' service to retirement. The maximum rate of accrual for lump sums is normally three eightieths of final salary for each year of service up to 40—hence the "one and a half times final salary" rule. In the past it has been possible to take the maximum lump sum after 20 years' service—even where the total benefit was based on normal rates of accrual. In this way, people could maximise their tax-free lump sum at the expense of their taxable pension.

These are particularly generous concessions. It is very costly for employers to fund pensions on this basis, sometimes requiring annual contributions in excess of 150 per cent. of the individual's salary. As such contributions attract tax relief, this concession is also very costly for the Exchequer—particularly at the sort of salary levels which some employees currently enjoy.

5.45 pm

On Second Reading, I said that we have had interaction between the accelerated accrual and the lump sum, which has led to some large tax-free sums being handed out to people. I know that my hon. Friend the Member for Kensington feels that we should tackle the lump sum anomaly in an entirely different way, but we have not gone along that road. We believe, as the hon. Member for Sedgefield said, that there have been situations in which large contributions, through the employer—the employee contribution is limited—have been paid in, such as 150 per cent. of the salary per annum, to arrive at a two thirds salary.

For that reason, we propose a cut in these concessions, with effect from 17 March, when my right hon. Friend the Chancellor first announced these proposals. The maximum pension benefits will be possible only after 20 years' service to retirement—the same period that has always applied under the present regime for the lump sum. The lump sum can be boosted above the normal rate of accrual only if, and to the extent that, total benefits are boosted. This latter measure is a relaxation, in response to representations made after the original Budget day proposals. I stress that we have made changes under the social security legislation on the revaluation of deferred pension benefits and transfer values. All these things are designed to ease this problem, but through the employer's contribution some large sums have been paid in, sums that we regarded as difficult to justify.

The hon. Member for Sedgefield has tabled amendment No. 36 to which I shall address my remarks. My hon. Friend the Member for Kensington has tabled a similar amendment. Amendment No. 36 would mean that one employer would be providing an employee with a pension partly in respect of service with another, completely different, employer. This would entail substantial cross-subsidisation, particularly where schemes did not offer similar benefits.

It is not clear that employers could obtain tax deduction, under general tax principles, for their higher contributions, although I do not want to make much of that point. Only a handful of privileged employees would benefit from this amendment—the same handful who, under the old rules, could obtain maximum benefits after as little as 10 years.

Mr. Blair

With respect, that surely cannot be right. The purpose of our amendment is to keep the 20-year change but simply allow service with other employers to be counted. That cannot mean that the same people who benefit from the 10 years will now benefit from the 20 years.

Mr. Lamont

It does. The hon. Gentleman is missing a point of which my hon. Friend the Member for Kensington is aware, and of which he is prepared to pay the cost. What is being proposed would be a significant initial cost to industry, because when an employee moves from firm A to firm B what he takes with him is merely the pension that he has earned so far. That sum of money does not make up the difference between the two pensions and what he would have earned if he had stayed with one employer throughout his whole period. That is a substantial cost to add to British industry.

The hon. Member for Sedgefield has asked how much the proposal would cost. I am not sure what the cost to the Exchequer would be, but that is not the point. The point is that it would cost British industry if one said that in the funding of occupational pension schemes one should take account in the accrual of the years that would have been spent with other employers as well. This subject has been reviewed before. It was reviewed by the Occupational Pensions Board, which made recommendations on transfer values, and measures were included in the social security legislation. That also took account of the views of employers about the cost that would be imposed on them if they were always having to add back full liability for previous years with previous employers. I can give the hon. Gentleman a detailed arithmetical example if he thinks that that would be helpful.

I am in no doubt that this is a serious matter for industry. I know that my hon. Friend the Member for Kensington recognises this although he strongly believes that this is a price that should be paid, and that this is part of the price that we have to pay to move to a world of properly funded schemes more equivalent to money purchase ones.

Mr. Quentin Davies (Stamford and Spalding)

Does my right hon. Friend concede that at this moment, when many companies have found that they have overfunded their pension liabilities and are therefore writing back sums to profit, it is the right time to look positively at reforms which would be desirable on general grounds and which would involve an additional cost to industry to which my right hon. Friend the Minister referred?

Mr. Lamont

That may be so. We have debated surpluses and the proper way in which to use them. We have debated that in Committee and certainly the Committee would find that such a proposal would be strongly resisted by industry in general.

Sir Brandon Rhys Williams

indicated dissent.

Mr. Lamont

My hon. Friend is shaking his head. I shall be interested to hear what he has to say. However, the matter has been discussed with industry and I understand that industry has made it clear that this is not a cost that it would easily assume. I am speaking of matters that are largely the concern of the DHSS and we must take the views of industry into account. We would be imposing substantial costs on industry.

Mr. Blair

I want to ask for information. The Minister is being extremely lucid in his explanation. However, surely the question of the costs to industry is a matter that industry would have to agree in the terms of the pension scheme. There is no obligation on industry to contribute any particular amount or to hasten the process of accrual.

Mr. Lamont

That is absolutely right. Occupational pension schemes are voluntary arrangements. We want companies to develop occupational pension schemes. If we impose requirements on them that are too onerous, the development of occupational pension schemes will be hampered. The hon. Member for Sedgefield is quite right. Those matters are part of the remuneration package in the long run. We want to develop occupational pension schemes and I am informed that the proposal put forward by the hon. Member for Sedgefield which is supported by my hon. Friend the Member for Kensington has been fiercely resisted by industry. However, I shall listen to my hon. Friend the Member for Kensington.

Sir Brandon Rhys Williams

My right hon. Friend is misinformed about this. Of course there is a cost to the employer who is seeking to attract the services of a top person in the last and possibly the most productive years of that person's life. I do not think that that cost is one which the Inland Revenue ought to step in to prevent employers from incurring if employers know their own business and who they need to run that business in their last years.

The biggest cost to industry is the lack of mobility of top people, imposed by the Inland Revenue rules which restrict transferability. Transferability, particularly at the top end of the management scale, is being restricted by the Treasury in the name of saving industry from itself and saving employers from incurring too much expense in the way of "golden hellos". If industry needs a particular man, it should not be inhibited from negotiating the change of job of that person. I really think that my right hon. Friend the Minister must look at this again. I am quite certain that he will receive the very strongest representations from personnel directors and managing directors of large firms who need mobility of labour to carry forward their plans.

My right hon. Friend has drawn attention, as he did on Second Reading, to the fact that there are really outrageous schemes being contemplated which are intended to exploit the tax-free lump sum option. There are other ways besides what the Inland Revenue proposes to the Committee today to tackle these extreme and outrageous exploitations of schemes. There could be an upper limit on contributions insofar as they qualify for lump sums which would restrict plainly outrageous and unacceptable projects without doing the damage which will be done if the Government are not prepared to accept an amendment on the lines of the amendment tabled by the hon. Member for Sedgefield (Mr. Blair) or myself.

I trust that my right hon. Friend will be willing to listen to this point. Certainly I, and I am sure that other hon. Members, have had the very strongest representations. Industry does not wish to be saved from itself in the negotiation of final salaries and conditions for top people. Employers know what they are doing when they are trying to get first-class people to help them in their work and the movement of people between jobs ought not deliberately to be impeded by the Inland Revenue.

Mr. Norman Lamont

My hon. Friend has made his case strongly, as he always does. However, he knows very well that requiring schemes to provide transfer values on this improved basis would impose substantial cost on industry. My hon. Friend has said that I should not save employers from themselves as employers do not want that. I assure him that substantial costs would be imposed on industry.

I am sure that my hon. Friend the Member for Kensington is aware that the report from the Occupational Pensions Board in 1981 made limited recommendations, about which I know that my hon. Friend is extremely critical. Even those limited recommendations caused some worry to the industry and to the OPB. The board was concerned about what it was adding in terms of additional costs to industry.

I should make it clear that this whole area is primarily a matter for the DHSS, not the Revenue. My hon. Friend the Member for Kensington wishes to use tax approval and the tax rules in a rather different way from the way they are used at the moment. I am not in any way criticising that. However, he expects me to reply in a rather different way on a subject that is a matter for the DHSS. I shall certainly talk to my right hon. Friend the Secretary of State for Social Services about this. However, I do not want to mislead my hon. Friend the member for Kensington or the Committee in any way. I will not come back on Report with an amendment accepting this.

I have a lot of sympathy with the amendments tabled by my hon. Friend the Member for Kensington. I have total sympathy with what my hon. Friend is trying to achieve. I know that I have to say that on many occasions in respect of the amendments tabled by my hon. Friend the Member for Kensington, but I mean that genuinely and sincerely. However, he is trying to reform the whole pensions world, which has had many upheavals in recent years. Indeed, it has a lot to digest as a result of the Budget. My hon. Friend is trying to totally reform and bring to a culmination his long-standing campaign and I cannot at this stage in the Finance Bill reform the whole pensions world immediately as he would wish.

My hon. Friend the Member for Kensington knows that I and my right hon. Friend the Secretary of State for Social Services have willingly offered to go into these matters with him. We want to see improvements. My hon. Friend is right. We have not solved or dealt with the problem of transferability. Although preserved benefit changes, transfer values and other things introduced in the Budget have improved the situation, it is not right yet. My hon. Friend the Member for Kensington is 100 per cent. right. We need further improvements in that area.

The amendment tabled by my hon. Friend the Member for Kensington is the same as that tabled by the hon. Member for Sedgefield. I cannot accept that for the reasons that I have given. With respect to the first set of amendments, although I know that this will disappoint my hon. Friends, I think that through the mechanism of the employers' contributions and the inter-action with the lump sum there have been some very large contributions made. The revised accrual rates when combined with some of the other things that we have done to encourage mobility will not noticeably worsen the position. However, we are very concerned about the mobility problem as is my hon. Friend the Member for Kensington.

Sir Brandon Rhys Williams

As usual, my right hon. Friend the Minister has been speaking in a very accommodating and perceptive way. I think that I have made some progress in opening up this subject together with other hon. Members who have spoken on both sides of the House.

If there is a defect in the drafting of my proposal which has made it obligatory on the receiving employer to take on board an overwhelming obligation which perhaps would not be covered by the amount of the transfer fund that the employee was able to bring with him, that is a fault of mine. I hope that my right hon. Friend would be willing to consider on Report an amendment which did not carry this obligatory character which he seems to read into what I have proposed.

I should like to see something which is at any rate permissive so that the possibility of negotiated transfers at the top level in industry is not damaged by the Inland Revenue's provisions. With that thought, I do not wish to press the matter further. I leave it to those who have proposed other related amendments to decide whether they wish to take the matter further.

6 pm

Mr. Watts

Having listened to my right hon. Friend the Financial Secretary, I am even more convinced now that the approach that has been adopted is misconceived. My hon. Friend the Member for Kensington (Sir B. Rhys Williams) has dealt with the misconception that there will be an imposition of costs on industry. I cannot see that the existing regime, or the modified proposals advanced by the hon. Member for Sedgefield (Mr. Blair) and supported by my hon. Friend, impose a cost on industry. That is because there is discretion. The changes that my right hon. Friend proposes will deny companies the opportunity of having a scheme that allows for a faster accrual than 20 years and will not allow account to be taken of service with any other employer.

I accept that there may be a problem with excessive contributions by employers—my right hon. Friend cited contribution rates of up to 150 per cent. of salary, which must be an abuse—but it seems that my right hon. Friend has chosen to tackle the problem in an inappropriate way. As my hon. Friend the Member for Kensington has said, the way to tackle excessive levels of contribution is to have some control over employers' contributions into schemes. I am still convinced that the Government's approach will prove to be a major disincentive to labour mobility, and I consider it to be entirely misconceived.

I might be more willing to be persuaded by the arguments advanced by my right hon. Friend if I believed that an Inland Revenue official who moved to another Government Department at the age of 45 or 50 would face the prospect of not being able to accrue a maximum pension over the remaining 10 or 15 years of service. However, we know that that is not the position. We are discussing rules that have been drafted by those who will not be subject to them, and rules that will operate to the disadvantage of the majority of those working in the private sector.

I recognise that my right hon. Friend is not prepared to concede now or on Report, but I shall not seek to press my amendment to a Division because I do not think that that would be a constructive course. I am convinced that we shall have to return to this matter when we discuss a future Finance Bill. The regime which the provisions before us will introduce will be so chaotic and disruptive to the interests of industry that that will be necessary.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Watts

I beg to move amendment No. 72, in page 82, line 15, leave out paragraph 24 and insert— '24.—(1) This paragraph applies where—

1. (a) an employee who is a member of a retirement benefits scheme approved by the Board before 17th March 1987 retires on or after that date, and
2. (b) the rules of the scheme make provision for the payment by employees of voluntary contributions.

(2) Any rules of the scheme imposing a limit on the amount of a benefit provided for the employee shall have effect without regard to the amount of any additional benefits provided for the employee by any such voluntary contributions.'.

The First Deputy Chairman

With this it will be convenient to discuss the following amendments: No. 9, in page 82, line 15, leave out paragraph 24.

No. 73, in page 82, line 30, leave out from effect' to third 'the' in line 31 and insert 'without regard to'.

Mr. Watts

The effect of amendments Nos. 72 and 73 is to delete paragraph 24, which prevents additional voluntary contributions from being commuted. As we have an overall limitation on the amount of lump sums, it seems unnecessary to prevent part of the benefits that accrue from an AVC scheme from being commuted, provided that the lump sum comes within the overall limitation to which we have already addressed ourselves.

Secondly, the amendment ensures that members of existing schemes who retire on or after 17 March 1987 will not be subject to any limitations on the benefits which they derive from their voluntary contributions. My right hon. Friend will be aware from correspondence that has passed between us of a problem faced by a major company in my constituency that has arisen because its AVC scheme has performed too well. It is accumulating surpluses that cannot be paid out to the pensioners who made contributions initially because of the two thirds limitation on total benefit that can be withdrawn. There is no way in which the contributions can be refunded. It seems almost morally wrong that, having paid contributions over many years, members of an AVC scheme should not be allowed to draw part of the benefits to which they have contributed.

As my right hon. Friend said during an earlier debate, there must be some calculation of the likely benefits from the main scheme and the extent to which there is scope for them to be topped up by additional voluntary contributions, but those calculations can never be precise when one is looking forward 10, 15, 20 or 30 years to retirement. We already have a formidable array of controls that restrict the level of contributions into schemes—I understand that my right hon. Friend is not prepared to accept during our consideration of the Bill that that should be the only restriction on pension schemes in general—and it seems that it would be a modest step to accept that no such limitation should apply to AVC schemes, so the benefits that derive from contributions go to those who made the contributions when they become pensioners.

As my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) has said, such limitations cannot apply to money purchase schemes because of their different nature. It seems unfortunate that there should be discrimination and that we can have funds locked into a scheme that cannot be used for the benefit of anyone.

Sir William Clark (Croydon, South)

I support the argument of my hon. Friend the Member for Slough (Mr. Watts). I tabled an amendment similar to that which he has moved.

We all welcome the fact that an employee who is a member of an occupational pension scheme can top up his pension with additional voluntary contributions, and I cannot see why AVCs should not be included in computations. I shall be interested to hear what my right hon. Friend the Minister has to say about that. There should not be two or three different types of pensioner.

The restriction that we are discussing applies to AVCs but not to occupational pension schemes or public sector schemes. If it is the Government's policy to increase the number of private pension schemes and to encourage their growth—that is a policy with which I go along—one way of pursuing it is through AVC schemes.

Mr. Archie Kirkwood (Roxburgh and Berwickshire)

I support the argument that has been advanced by the hon. Member for Slough (Mr. Watts). The principle behind it is well worth supporting. I await with interest the Minister's justification for resisting the amendment, if that it be. Is there any way in which the Government can quantify the consequences of accepting the amendment? I think that its acceptance would lead to a considerable enhancement of the value of additional voluntary contributions. I can see no reason of principle for resisting the amendment. As I have said, the effect of the amendment would be to enhance the potential of AVC schemes in future. I add my voice to this cross-party appeal.

Mr. Norman Lamont

My hon. Friends the Members for Kensington (Sir B. Rhys Williams) and for Slough (Mr. Watts) have advocated both that the benefit limits should not apply on the free-standing AVCs as regards members of occupational pension schemes. Earlier, when my hon. Friends the Member for Kensington and for Brentwood and Ongar (Mr. McCrindle) spoke, I made the distinction between personal pensions and AVCs. I do not think that I need repeat all that again. The Committee has heard my views and has at least understood them, even if they were not entirely welcomed.

The purpose of AVCs is to increase pension provision, and that is why we have brought about the free-standing AVC. In fact, that is the purpose of both in-scheme and free-standing AVCs. The schemes attract very generous tax relief, and we feel that their purpose should be to make up for deficiencies, perhaps the sort of problems that we discussed in relation to the amendment tabled by my hon. Friend the Member for Kensington. We do not consider it right that the additional voluntary contribution, with its generous tax reliefs, should be used simply for the lump-sum benefit.

This is essentially the same argument that we had before. I detect that many of my hon. Friends are very attached to the notion of the lump sum; we view it with some reservation. As we have said, we intend no changes, but when we introduced the concept of the free-standing AVC and the additional tax reliefs, we did not consider that that should be commuted to a lump sum. That was the simple reason for the restriction.

Having made the change on the free-standing AVC, we felt that it was logical to make the same change in respect of the in-scheme AVC, if the free-standing AVC was to be marketed and if people were to use the choice of investment managers outside. The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) said earlier that he did not think anyone would take up the freestanding AVCs, and we thought that it was extremely important that they should be established on the same basis.

Mr. Watts

I understand my right hon. Friend's desire to achieve parity of treatment between free-standing and in-company AVC schemes, but, in doing so, he creates another disparity. Let us consider two different company schemes. In one the employee is able to contribute 10 per cent. to his pension, and to commute part of the pension into a lump sum. Another employee with a less good company scheme in which he makes a payment of 5 or 6 per cent. might want to achieve parity with his neighbour by paying 4 per cent. into an AVC scheme, but he will be able to commute only from a much worse pension provision. In trying to create parity in one area, my right hon. Friend seems to be creating an injustice in another.

My right hon. Friend would be wrong to think that I have any particular attachment to lump sums. I have long recognised that they are the probably biggest anomaly left in pension provisions in that they have tax relief when money is contributed to the scheme, but no tax is paid when money comes out. I should understand if the suggestion by my hon. Friend the Member for Kensington—that lump sums should be subject to tax or abolished—were taken up. But, if they are to exist, I can see no logical reason for imposing a restriction on AVC schemes that does not apply to other schemes.

Mr. Lamont

We have enlarged pensions provision and have allowed a new instrument to come into being. We think that that ought to be for the purpose of providing pensions, not cash-free lump sums. If any hon. Member is implying that there will be a tremendous restriction on the lump sum benefit—which, of course, has been at the centre of considerable controversy in regard to pensions—my hon. Friend has, in a sense, answered that. The person with an AVC and membership of an occupational pension scheme will be able to take more of his pension out of the AVC, and commute more of the pension into the lump sum within the occupational pension scheme. I do not think that that will have a disastrous effect on the lump sum availability. We simply did not consider it right to allow money to be commuted into the lump sum which is taken out tax free.

6.15 pm

I stress the tax deduction into the fund and the tax-free status when the benefit is paid out. That is a generous concession. We see the free-standing AVC as designed primarily to remedy the deficiency of people's earnings in retirement. The purpose is to provide pensions, not to be yet another addition to the lump sum provision. That is the rationale behind the measure.

I take my hon. Friend's point that I may have created a level playing field here and a bump elsewhere, but I think I have explained our decision adequately.

Mr. Watts

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Sir William Clark

I beg to move amendment No 10, in page 82, line 39, at end add— '(3) An employee shall be treated for the purposes of this part of this Schedule above as a member of the scheme therein referred to before 17th March 1987 if—

1. (a) he was before that date a member of a scheme approved by the Inland Revenue;
2. (b) the company which employed him, or the group of companies of which his employing company was a member, was acquired by another company which operates a scheme approved by the Inland Revenue.; and
3. (c) as a consequence of that acquisition the employee's membership of the scheme referred to in (a) above was terminated and he became, after 16th March 1987, a member of the scheme referred to in (b).'.

I do not think that I need detain the Committee for long, as this is merely a probing amendment. I hope that my right hon. Friend will tell me that I am wrong, but, as I read the schedule, it does not allow the employee to preserve his pre-1987 rights. I should like an assurance that, in the event of a takeover, when the pension. arrangements may change, the employee will retain his pre-1987 rights.

Mr. Norman Lamont

I entirely sympathise with what my hon. Friend has said, and I am happy to assure him that his amendment is unnecessary. I can spell it out for him if he likes. I fully accept that it would be unfair to regard people joining a pension scheme on or after 17 March as new members for the purpose of the legislation. which is what is bothering my hon. Friend. The amendment deals with one such circumstance, in which the pension scheme is reconstructed following a takeover or merger. Of course, there are many other circumstances which the amendment does not cover—for example, when an employee moves from one scheme to another, perhaps on promotion, or to a scheme established by another employer in the same group.

There has been concern over these issues, and the Inland Revenue has published a draft memorandum that set out the proposed transitional arrangements in some detail. The document was warmly welcomed by the pensions industry, and has now been revised in the light of comments that have been received. Copies have been placed in the Library. In due course, these transitional provisions will be contained in regulations made by virtue of paragraph 18(2) of this schedule. I am advised that my hon. Friend's amendment is unnecessary and that its effect would be narrower than the regulations that we intend to make. Therefore, I hope that my hon. Friend will feel able to withdraw his amendment.

Sir William Clark

After such a categoric assurance that my amendment is unnecessary and that its purpose is already provided for in the Bill and in the regulations, I beg to ask leave to withdraw the amendment.

Amendment, by leave withdrawn.

Question proposed, That this schedule be the Third Schedule to the Bill.

Sir Brandon Rhys Williams (Kensington)

I am concerned about the fact that paragraph 22 of this schedule appears to have a retrospective character. That point has not yet been raised. The Inland Revenue is seeking to take powers over a scheme with different rules and to use those powers in such a way that the expectations of a member of the scheme who is nearing retirement will prove to have been ill founded because of the proposed change in the law. I do not know to what extent that is significant, but we should never contemplate retrospective legislation without very careful consideration and examination if the result would be that individuals would suffer unexpectedly. That appears to be a blot on the schedule.

My right hon. Friend has done his best to persuade the Committee that it is in the general interest that the Bill should contain this schedule, but in my view it contains undesirable provisions and the Committee ought not to allow it to remain part of the Bill.

Mr. Norman Lamont

On the point made by my hon. Friend the Member for Kensington (Sir B. Rhys Williams) about retrospection, new members of occupational schemes will be subject to the new rules for final remuneration, but existing contractual arrangements are not affected. The proposed changes are intended to curb misuse of the present definition of "final remuneration" by high earners in order to inflate artificially the pensions figure—in particular, the tax free lump sum. In paragraph 4 there are special transitional provisions for non-controlling directors with salaries over £100,000 who retire between now and 6 April 1991. Changes in final remuneration apply only to relatively high earners. The vast majority of pension scheme members who have no opportunity to use the scheme will not be affected.

I shall look at my hon. Friend's point and see whether there is anything that I should add to it on Report. I think that my hon. Friend's concern is misplaced, but if it is not, I shall so report to the House.

As for my hon. Friend's other points on schedule 3, I cannot add to the many debates that we have held on the subject. My hon. Friend has a very clear view of what he wants for pensioners.

Sir Brandon Rhys Williams

As the Member of Parliament for Kensington, part of my work in the House is to speak for the relatively high earners in my constituency. My right hon. Friend points out that paragraph 22 is aimed at the relatively high earners, so I have done my best to speak for those of my constituents who are relatively high earners. There are also very low earners and people in Kensington who have no income, and when it is appropriate to do so I speak for them, too.

I am reassured by my right hon. Friend's undertaking to consider whether the paragraph has a retrospective effect. If it does, I rely on him to make the necessary changes. He has confirmed once again that what we are hunting is the tax free lump sum. There is no need again to go over my remedy for that. I am reassured about the possible significance of paragraph 22, but I am still unhappy about the schedule's major provisions. I hope that the Committee feels that it would be better if the schedule were omitted.

Schedule 3 agreed to.

Clause 59 ordered to stand part of the Bill.