PENSIONS

HC Deb 30 January 1995 vol 253 cc692-728 3.52 pm

Mr.Alistair Darling (Edinburgh, Central)

I beg to move amendment No. 13, in page 45, line 36, at end insert— '(2) Schedule 11 shall come into effect only if the Government has presented a report to Parliament before the passing of this Act on certain aspects of the Schedule specified in subsection (3) below. (3) The Government shall report to Parliament on—

1. (a) the likely effects of the provisions of Schedule 11 to this Act on the costs of administering personal pension schemes;
2. (b) an assessment of the risks to members of personal pension schemes of decisions taken as a result of the provisions of Schedule 11; and
3. (c) considerations raised by the extension of the provisions of Schedule 11 to retirement benefit schemes and retirement annuity contracts.'.

The subject of pensions may not often be the stuff of political cut and thrust—and, indeed, there is widespread agreement on the principle of this part of the Bill—but we have a number of questions and anxieties.

While welcoming the principle underlying clause 52—the introduction of more flexibility in the purchase of annuities—the amendment raises concerns that have been expressed inside and outside the House about both the cost of the scheme and who will meet it, and the whole question of risk. I refer to the risk of deferment, and also to that involved in any arrangements made by those wishing to secure greater flexibility than would be available in, for example, an occupational pension scheme. The amendment also deals with certain other considerations. Its purpose is to probe the Government on their intentions, mindful as we are that what Ministers say in the House can be relied on by those outside. I hope that I shall be able to persuade Ministers to make one or two helpful explanations.

As I have said, we welcome the flexibility introduced by clause 52, which will enable people to defer purchasing their annuities at any time between the ages of 50 and 75—a flexibility heralded by the White Paper that the Government published in June last year. We welcome that, but a number of problems remain.

While the flexibility for personal pension schemes is welcome in that it will enable people to defer purchasing an annuity if they think that circumstances justify such deferment, there are two particular concerns that need to be addressed. The first is obvious, and it is that people must be warned that there is no guarantee that rates will necessarily get better. Although there is flexibility and many people will be tempted to think that things can only get better, experience should tell them that that is not necessarily the case.

I shall return to that because, clearly, the warnings given to people who buy pensions or who transfer from occupational schemes to private schemes have exercised Parliament and people outside for some time. If the Government or the industry propose to publicise the provision, it is important for people to be warned that deferring purchase does not necessarily guarantee better returns.

The second matter concerning us is the cost of the scheme. I notice that the Government—as they do now with nearly all measures—published a compliance cost assessment which is available on request from the Treasury. It makes interesting reading, because it looks at the costs of introducing the measure and in particular at the businesses that might be affected and states that it would not affect small business. But that depends on how one defines costs, because many financial advisers, who for the most part constitute small businesses, will incur additional costs for the advice and the preparation of papers that need to be given to prospective purchasers of policies.

The Committee will be aware that, under the new disclosure regime it is necessary to give far more information to prospective purchasers of pensions and that will give rise to costs for small businesses. Therefore, I am surprised that the Government can assert in their compliance cost assessment that small businesses will not be affected.

Looking generally at the compliance costs, I note that the Revenue admits that the setting-up costs of the new scheme will be about £1.15 billion. That is a substantial cost and, of course, it will have to be met by the public. The Government do not propose to meet it, and I do not suggest for a minute that they should because, clearly, the industry must meet the costs itself. However, at the end of the day any cost incurred by the industry will be passed on to the public, and that is bound to affect people's decisions. I shall shortly return to the whole question of the regulatory regime that goes side by side with this in assessing risks and costs.

It is important at the outset to flag up the fact that there will be a significant cost. I understand that an annual recurring cost of more than £500,000 is expected to be incurred. I mention that because an article in today's edition of the Financial Times makes disturbing reading. It suggests that more than 20 per cent. of pension policies are halted within the first year and, plainly, cost will be one reason for that halting. After that period, termination rates are also high.

It is very much in the interests of individuals and in the interests of any Government to ensure that people make provision for themselves alongside public provision. If we are to encourage people to do that we must be mindful of the costs that will be imposed on them and of the warnings given to people who decide to buy certain policies.

As I have said, disclosure will clearly flag up to people what they are paying for, at least if disclosure works properly, but it could have a knock-on effect in terms of reduced sales, which have already taken a knock over the past year because of loss of confidence in the regulatory regime. I understand that some people in the industry think that sales may have gone down by about 10 per cent. over the past year because of that loss of confidence.

The main point on which I would like to draw Ministers is the thinking behind the decision apparently—I emphasise apparently—not to extend the flexibility to other pension schemes. The clause affects private pensions and we have no objection to that, but it would be helpful to get a clear statement of policy from Ministers about the Government's intentions. The Financial Secretary to the Treasury made a statement through a press release, but, of course, that has no legal force whatever. Many members of the public and people who work in the industry would like to know the Government's view on extending flexibility to occupational schemes and AVCs. In one view, they might be excluded because of Inland Revenue practice. I think that they might be excluded more because of practice than because of the law.

A number of categories are not included. Retirement annuity contracts were the forerunners of personal pensions and were largely superseded in 1988. They are apparently not affected. In a Treasury press release issued on 4 January, the Financial Secretary said that those people would benefit because they all had the option to transfer funds into a personal pension on the open market. Indeed they have that option, but, if one considers the recent history of pension transfers, one might have thought that Ministers would have thought long and hard about casually saying to people who have retirement annuity contracts, "Don't worry. Just transfer." Transfer incurs costs and may be inappropriate in a number of cases, depending on individual circumstances. To suggest, as the Financial Secretary apparently did, that no difficulty was involved, but that people should simply transfer to a private personal pension was not necessarily the appropriate advice to give. It would be helpful if either the Financial Secretary or the Minister of State, who appears to be poised to answer for the Government, would comment on that matter.

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Ministers should bear it in mind that it is only a year since the Securities and Investments Board discovered that up to 2 million pensions might have been inappropriately sold to people, who were wrongly persuaded to opt out of occupational schemes and to transfer to personal pension schemes. The Government should be wary of, as a matter of policy, encouraging people to opt out of an occupational scheme, or of any other scheme, and to transfer to a private pension, if they do not need to do so.

I am not saying that we should discourage people from taking out private pensions, which is appropriate for a number of people. The Government seem to accept that a need for flexibility exists in relation to occupational pensions, but the House should pass no measure that forces people to opt out and to transfer to a private pension, when they would not otherwise do so.

Mr. Nigel Forman (Carshalton and Wallington)

I am seeking to follow the hon. Gentleman's argument closely, and I have some sympathy with it. To refine his point further, will he clarify that he is talking about the unwisdom of persuading people to transfer to personal pensions from occupational pensions when they are, shall we say, aged over 45 or 50? Is not he making a blanket statement about people of all ages in their working career?

Mr. Darling

For many people, it is entirely appropriate to have a private pension—it depends on what they do, their age and their likely work pattern. Unlike in the past, many people will not reasonably expect to be in the same employment from the age of 20 to the age of 60 or 65, when the receive their gold watch. The Labour party has never said that the purchase of a private pension—never mind transfer—is a bad thing. That can be good and appropriate.

No doubt exists, however, that, in the past few years, a number of people have been wrongly advised to come out of occupational schemes and to go into private schemes, not because it was good for them, but because it was good for the salesman and insurance companies. That is the point that has exercised people in the past year.

I am making a general point. The Financial Secretary said that the way out of the difficulty, and the way to achieve flexibility, was for people in occupational schemes to transfer to private schemes. The Government should not force people to opt out to achieve flexibility if, through certain measures in the House or a change in Inland Revenue practice, they could achieve the same flexibility by staying where they are. Transfer should not be forced on people.

Mr. Dennis Skinner (Bolsover)

I agree with my hon. Friend. In the past few years, the Government and people acting on their behalf have obviously sent a signal to many workers, such as those in the mining industry, that it would be a splendid idea to opt out of the National Coal Board and British Coal pension, with the result that there are more than 100,000 casualties in the coalfields—people with redundancy money and the pensions entitlement. The net result is that there are people in every constituency in the coalfield areas who have been kidded on by salesmen acting on the signal sent by the Government. Many are now trying to fight in the courts to re-establish their entitlement to a pension although, of course, they are unable to get legal aid because the Government have chopped that, too.

Mr. Darling

My hon. Friend makes a good point. We all remember the television advertisements depicting a man in a straitjacket being freed by the change in the law in the late 1980s, a change for which the current Secretary of State for Social Security and another Minister—now the Prime Minister—had prime responsibility. We are all aware of the difficulties subsequently caused by the mis-selling of pensions. My point is that we should not bring about another situation in which people are forced to transfer to get the flexibility that we welcome in respect of private pensions. It is on that point in particular that I want Ministers to tell the House what the Government believe the law to be and what they believe to be the Inland Revenue's practice.

As I said, we should not as a matter of principle force people to opt out. It is bad enough that people are wrongly persuaded to do so for all sorts of extraneous reasons—because of the way in which the commission system works, or because salesmen are under pressure to sell policies in order to keep their jobs and earn enough to feed their families, which I regard as a fundamental structural defect in the industry—but the House should not do the same.

Mr. Forman

Once again I must ask the hon. Gentleman to clarify the point. I think that he is using language rather loosely. He talks about people being forced to transfer. Clearly, we all deplore the mis-selling of pensions that has happened, but nothing in the Bill requires such a transfer to be made; there are simply advantages held out for those who make such a move.

Mr. Darling

The hon. Gentleman is also guilty of being a bit vague. No one is suggesting that there is anything in the Bill to force someone to transfer, but clearly, if there is flexibility with a personal pension and inflexibility with an occupational pension, although people are not forced to transfer in the sense that no one is holding a gun to their heads, they may be "forced" to get the necessary flexibility. If the Government are committed to flexibility—a principle that we support—I should have thought that it should be universally applied to all pensions, unless there are good reasons why not. If there are good reasons why it should not be universally applied, we shall no doubt hear them, but, as things stand at the moment, the Bill provides flexibility for private pensions.

If he was quoted correctly—as the words appear in a Treasury press release, I have no reason to believe that they are incorrect—the Financial Secretary said that those who had retirement annuity contracts would benefit because they had the option to transfer. That means that they would have to transfer to get that option. Exactly the same thing applies to occupational pension schemes.

The press release also reports the Financial Secretary as saying: it is not clear that any legislative changes are needed. The purchase of an annuity is very often a part of the structure of these schemes, but the Inland Revenue are prepared to consider any ideas that scheme sponsors may have for introducing more flexibility in this area. It is my understanding that no legal change is necessary—I am sure that Ministers will tell me if my understanding is wrong—but the Financial Secretary concedes in the statement that, as a matter of practice rather than as a matter of law, the Inland Revenue can influence whether the flexibility that we are talking about can be transferred to an occupational scheme. He said that the Inland Revenue was now prepared to consider any ideas that scheme sponsors may have for introducing more flexibility". It would be helpful if the Minister of State could tell us what rules and principles the Inland Revenue is proposing to apply when sponsors of schemes come forward. It would be interesting for those in occupational schemes and those who sponsor such schemes. It is not clear from anything that Ministers have said, by way of press release or, indeed, by any other means, what the Government think will be changed in occupational schemes. Given that, judging from the reaction, there is general agreement that flexibility is good as a matter of principle, provided that people are warned that there is no guarantee of more money at the end of the day, it must apply to all schemes.

The Minister says that the Revenue is prepared to consider any ideas. It would be very helpful if we could find out the principles that Ministers are prepared to consider. Otherwise, we may be stuck with the current position, whereby the Inland Revenue practice, which for all practicable purposes has virtually the same effect as the law, may prevent flexibility from being extended to occupational schemes.

As I understand it, under the present practice, a scheme would be approved only if the rules of a money purchase occupational scheme require that an annuity is purchased on retirement. Consequently, there is something to be said for changing those rules so that the Revenue will allow flexibility of the sort that we are discussing with private pensions. The Government's intentions are not at all clear. Given that the industry is entitled to rely on ministerial statements, it would be very helpful if the Minister could tell us what the Government have in mind.

Our amendment refers to two particular points, which must be emphasised. The first is the question of cost, which, if I am successful in drawing the Government on allowing increased flexibility for occupational schemes, may be less of a problem. At the moment, when people transfer to private schemes they incur a cost. Everybody knows that, when one transfers a pension, not only are there administrative charges, but, very often, the act of transfer means that other optional benefits provided by the schemes could be forgone. That leads me directly to the point made by my hon. Friend the Member for Bolsover (Mr. Skinner). Many people who transferred inappropriately in the late 1980s not only gave up their entitlement in their contract of insurance, but the optional bonuses which they never get under private schemes.

Clearly, cost is incurred if one has to transfer, which is why I emphasise again and again that flexibility must be universally applied unless there are very good reasons for not doing so. We should not do anything in the House to force the substantial number of people in good occupational schemes out of those schemes. To please the hon. Member for Carshalton and Wallington (Mr. Forman), we should not so heavily influence people that they are driven to the conclusion that transfer is the only way out.

As I said, the new regime of disclosure, which we very much welcome, will help because people will be able to identify their costs. However, perversely, I suspect that sales may be initially depressed when people receive their print-outs from their independent financial adviser or their insurance company and see the cost of buying a policy. The Government should be aware that substantial costs are involved.

Secondly, and perhaps most importantly, there is the question of risk. I said at the outset that added flexibility does not necessarily mean that all is good news for those who choose to defer their purchase, because rates may not improve and people may make bad decisions. Individuals must decide that for themselves.

Mr. John Butterfill (Bournemouth, West)

Will the hon. Gentleman give way?

Mr. Darling

Yes, in one minute.

It is no part of a Government's function to try to substitute their judgment for that of individuals. However, individuals must know of all the pros and cons before they reach a decision and only an effective regulatory system can ensure that.

Mr. Butterfill

The hon. Gentleman will understand—indeed, it was explained to the all-party group on occupational pensions only last week—that quite a number of pension funds are now offering a phased arrangement, whereby people may change to gilts on a periodic basis. So each year they put a proportion in, depending on how far they are away from retirement. That will eliminate much of the risk about which the hon. Gentleman is talking. However, they would need pretty good professional advice to make those decisions.

Mr. Darling

The hon. Gentleman has made my case. He said that people will need pretty good professional advice. However, the ability to give pretty good professional advice has eluded many in the industry. I accept that if there is an ability to phase and to buy more gilts, that should benefit the individual.

We all accept that the difficulty is that only a handful of people in this country understand how pensions work. If we had a private, anonymous and confidential poll in the House, we would find that only a handful of hon. Members understand how the pensions regime works. That should worry all of us as the House passes pensions legislation. Indeed, the Pensions Bill is in the other place at the moment. Every year, hundreds of thousands of people will buy pensions or take out pensions through their employers, but they do not have a clue how those pensions work.

4.15 pm

No doubt the hon. Member for Bournemouth, West (Mr. Butterfill) will want to make a pitch for his other interests and perhaps come to our rescue. However, if we change the regime and give people greater flexibility, we should ensure that people know what they are letting themselves in for.

Mr. Michael Stern (Bristol, North-West)

Does the hon. Gentleman agree that there is a danger here? Some of the decisions that people will take in respect of this clause, or in related areas of pensions, cannot possibly be the subject of advice—except from Nostradamus—because they depend entirely on a view of the state of the market in 10 years' time. We should be wary of placing a huge reliance on advice when that advice can only be an informed guess.

Mr. Darling

I am not sure whether Nostradamus is registered under the Financial Services Act 1986 to provide such advice. Equally, I am not sure what point I am supposed to take from the hon. Gentleman's comments.

Mr. Stern

Will the hon. Gentleman give way?

Mr. Darling

No. I want to progress matters a little further.

Of course no one knows what will happen in 10 years' time. No one knows what is going to happen in five years. Unless the hon. Member for Bristol, North-West (Mr. Stern) had a different manifesto from that of his colleagues, he will recall that he made a gross error of judgment in 1992 when he told his electors that things were going to improve in 1992 and that growth would start the day after the general election. No one knows what the conditions are going to be and no one would suggest that the Government or a regulator should place themselves in the shoes of an individual and make such judgments for them.

However, a regulatory system can ensure that, when someone buys a pension or any other financial services product, that person should know what the risks are. People must form a judgment. The difficulty that we have had in this country for too long is that people do not know what the risks are because, as my hon. Friend the Member for Bolsover said, too many salesmen did not bother them about the risks. People were told to sign on the bottom line and to ignore the small print. They were assured that the money would be all right and that whatever they did would be better.

Happily, the regulatory system is beginning to bite on some of those people. However, there are still occasions when reputable companies, household names and companies which should know better allow inappropriate selling methods to continue. Companies with very good training regimes and very good and efficient regulatory regimes undermine those aspects by making their work forces depend on commission. If salesmen have to sell 10 policies a week, and only five have been sold by Friday afternoon, common sense tells us that a mistake is likely to be made.

I am not suggesting that we should attempt to substitute the judgment of Parliament or of the Government for the judgment of individuals. However, I am absolutely certain that we need a regulatory system that ensures that people are told the risks. That point has been raised many times in the House and I am afraid that it will be raised on many occasions in the future. Clause 52 and schedule 11 give a new opportunity for flexibility, and we welcome that. However, there is apparently an inflexibility with regard to occupational schemes. It would be reckless of us simply to nod the proposals through without having regard to the fact that the current regulatory regime is flawed in many respects.

That view is not held simply by Opposition Members. Many Conservative Members accept that there are problems with the regulatory regime which need to be addressed. That view is increasingly held outside the industry. I do not argue for a minute that there is unanimity about what should be done about the problem. We believe that self-regulation should be scrapped, but many Conservative Members do not hold that view. However, we are nearly at one in the belief that the system needs to be improved.

I mention that point because there are concerns. The Association of British Insurers, I think, has written to all members of the Finance Bill Standing Committee, stating: The risks to policyholders inherent in decisions of this nature must not be overlooked. There is no guarantee that a policyholder will benefit from a decision to defer purchase of his annuity"— this will be a costly system to provide— a factor overlooked in the compliance cost assessment to which I referred. Its present view is: Only those with funds at retirement in excess of £100,000 are likely to find this facility economic. If the ABI is right about that—it has a certain view because of what it is, but otherwise it is a respected and reputable organisation—surely the Committee needs to spend some time considering what we are doing.

If the costs are so great that people will benefit only if they have £100,000 or more, we must reflect upon that, but we must reflect even more on the difficulties and risks involved in such a transfer. As it is within his ministerial responsibility, perhaps the Minister of State will tell us whether the Government have at last accepted that the regulatory regime needs to be looked at in respect of not only its structure but the quality of regulation.

The Personal Investment Authority is now off the ground. It is still recruiting its members, but it is becoming more and more responsible for the retail end of the market. There is concern about the quality and degree of regulation. Although the PIA has a rule and regulation for just about every eventuality, there are doubts about how effective they are. That matter needs to be looked at, especially in the light of this measure.

The other matter of which Ministers must be aware is that the pension transfer problem, which was highlighted 13 or 14 months ago, has not yet been resolved. Indeed, although the Securities and Investments Board has now instructed the Personal Investment Authority to examine pension transfer cases, the Minister will be aware that many people in the industry are trying to block that review. Before the courts at present, which is why I cannot go into the matter in too much detail, is an action that I understand is funded by individual independent financial advisers' professional indemnity insurers.

If that review is blocked, we will be back at square one. The Minister will then be driven to accept that legislation is necessary to try to unscramble the mess that we are in, but we should not compound the problem with pension transfers until that matter is cleared up. Although the Minister will say that the review is under way, it will be at risk if the judicial review is successful, and we will not know that for a few weeks. If the Minister has more information, no doubt he will tell us.

I observe in passing that it is ironic that the insurance industry itself—professional indemnity insurers—is trying to block the regulators from trying to unscramble the mess and to sort out the problems of, possibly, 2 million people. Only under the Conservative Government could we have the absurd situation that self-regulation allows the interests of so many people to be in such a mess and threatened by litigation that is funded by another branch of the insurance industry. One would have thought that the Government might have accepted that they had some responsibility.

As I have said, more and more people will want to make provision for themselves, and more and more people are doing so. If we are to encourage them to do that, they are entitled to turn to Parliament and say, "You make sure that the regulatory system works." At present, the regulatory system does not work. There are fundamental problems with pension transfers which Ministers must address. Ministers have used self-regulation to turn their backs on the problem and walk away from it. It is high time that they faced up to their responsibilities and acted on behalf of the general public and not on behalf of those who continue to espouse self-regulation.

Mr. Butterfill

The hon. Gentleman will remember that my interest in the matter predates 1986, when I sat on the Committee which considered the Financial Services Bill, and that it also predates his sneering reference to the fact that I have advised the British Insurance and Investment Brokers Association on such issues for many years. Under the Labour party's proposals, which it put forward in 1986 and which accepted the principle of self-regulation—the only difference was that it wanted a statutory SIB—how would the presence of a statutory SIB rather than the present structure have altered the present position?

Mr. Darling

Direct regulation by the Securities and Investments Board, which is what we favour, would mean that the fiction of self-regulation by bodies such as the Financial Intermediaries, Managers and Brokers Regulatory Organisation, the Life Assurance and Unit Trust Regulatory Organisation and now the Personal Investment Authority would be done away with.

We would not have spent millions of pounds on setting up the PIA during the past three years. There would not have been the additional costs caused by the Treasury telling the SIB what to do, and then the SIB telling the self-regulatory bodies what they must do. We would abolish the difficulties caused by the fact that the PIA had to bid for members as well as bidding for recognition as a regulator. It is very difficult to serve two masters at once. That is the short answer.

Mr. Butterfill

rose—

Mr. Darling

No, I have not finished yet.

The hon. Member for Bournemouth, West was unkind to accuse me of sneering. I have not mentioned one of the hon. Gentleman's many interests in the Register of Members' Interests. I am saving that for the Committee. The hon. Gentleman's entry in the Register is almost as long as some of the schedules in the Bill. He should not worry—I shall return to that subject.

I am not sneering at the hon. Gentleman. He takes a great interest in these matters and, in between times, he makes occasional lucid remarks which have a great deal of force. That was the sneering bit. The subject is too important to indulge in the sort of exchange that the hon. Gentleman has in mind.

I return to a point that I do not want to labour. Self-regulation does not work, because it is very difficult to serve the trade interest and the public interest. We want regulation that acts in the public interest. Of course we must have the involvement of practitioners—that is very important—but it must serve the public interest first and foremost.

Mr. Butterfill

What the hon. Gentleman is saying is rather different from the position that the Labour party took in 1986, when it endorsed the principle of self-regulation and simply wanted a statutory SIB above it, rather than the present structure of the SIB. Is he not moving the goalposts as he speaks?

Mr. Darling

One would be hard pressed to find anyone in the country who believes that the Financial Services Act 1986 does not need revisiting. That applies to people of all shades of opinion, both political and industrial. That was not a terribly good point.

Having looked at what my colleagues said in 1986 and before that, I think that what I am saying—with regard to our experiences over the past eight or nine years—is a logical development of that. There needs to be a change, and one day—perhaps even in this Parliament—we may have the Second Reading debate for a new Financial Services Act, if the Government face up to the fact that changes are needed.

Perhaps the new regime—there are a number of new faces on the Treasury Front Bench—might even see that change is needed. Perhaps the Government will continue their policy of clearing the decks in advance of a general election, in the hope that nobody notices those things between now and 1996, or whenever the election is.

It is important that we reflect that the pension transfer problem which was highlighted 14 to 16 months ago has not yet been resolved. The House is being invited today to approve something that could add to the problems, unless the regulatory regime is put on a proper footing. That is the point that I am making, and I shall continue to make it until the Government face the fact that reform is needed.

It will be helpful to the House and to the country if the Minister tells us whether the Government accept that changes have to come to the regulatory regime, and whether the Government will contemplate even consulting on the matter or having further legislation because the present situation cannot possibly be allowed to continue. Given that it will probably take two or three years between the change being announced and anything being put in place, the sooner the Government take action, the better.

I shall revert to the subject that has dominated our thinking this afternoon—whether people will be forced to transfer. I draw to the House's attention a letter that I received from a firm which advises nurses and others in occupational schemes. The firm makes the point that those people may be forced into a position where, in order to get flexibility, they will have to transfer their pensions. That cannot possibly be right, and I hope that Ministers will make absolutely clear what the Government believe needs to be done to provide greater flexibility.

If there is no need to change the law, and it is simply a question of changing the Inland Revenue's practice, it would be helpful if Ministers could first announce that the Revenue is to change its practice and allow flexibility in occupational schemes. It would be helpful if the Government were to announce what their thinking is and what the goalposts are, if I might use that term. Many people outside the House want to know the position.

Paragraph 4(4) of schedule 11, headed "Income withdrawals", deals with a technical matter—I describe it thus as it is rather obscure. It requires that the withdrawals must be not less than 70 per cent. or more than 100 per cent. of the annual amount of the annuity which would have been purchasable by him"— the policyholder— on the relevant reference date. I understand that the Government will publish tables of annuity rates to which people can refer to calculate whether 70 per cent. is being withdrawn. I have been told that the problem with the table rates is that they will be arrived at on the basis of a level annuity—in other words with no indexation on the basis that there will be no pension for a surviving spouse.

I do not know whether that is true. Can the Minister tell me whether my understanding is correct? If it is, is not the 70 per cent. tariff high, as it might lead to far more disbursement than would be wise? Perhaps a 50 per cent. rate might be appropriate. I am seeking information and it would be helpful if the Minister could let us know the Government's thinking on that matter.

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In conclusion—you will be pleased to hear, Mr. Morris—we welcome the flexibility that the measure offers. It is a good thing, provided that people know that there is a cost, what the risks are and that we can never guarantee that deferral will mean more, or even the same amount, in the end.

Secondly, we need a clear statement on flexibility and the extension of that principle to all pension schemes. What is the Government's position, what are the rules and regulations and, if flexibility is to be allowed, what relaxation or changes do the Inland Revenue propose?

Our amendment highlights not merely the costs, but the need for the industry to be properly regulated. I shall emphasise time and again that self-regulation does not work in the conduct of the affairs of the House, or in the regulation of the financial services industry, and the sooner the Government face up to that fact the better. In that spirit, I hope that the Government will be able to explain their thinking.

Mr. Stern

First, I must make it clear that I have a personal interest in this matter. I was self-employed for most of my working life before I came to the House, I am still self-employed as regards my outside interests, and I inevitably took out some of the old retirement annuity policies and retained them. That fact will inform some of my later comments.

The comments of the hon. Member for Edinburgh, Central (Mr. Darling) on flexibility were a little rich. In 1984–85, before the hon. Gentleman came to the House, I served on the Standing Committees considering two social security measures that paved the way for the introduction of personal pensions. I remember the vitriol that the hon. Gentleman's colleagues—the hon. Member for Oldham, West (Mr. Meacher) and the right hon. Member for Derby, South (Mrs. Beckett)—threw at the concept of personal pensions, purely because they thought that ordinary people could not be trusted with flexibility in pensions. They were not prepared to consider the idea of people being able to choose between a good, honest, upstanding occupational scheme and a personal scheme that might accidentally be more appropriate in certain circumstances.

I welcome the change in outlook in the Opposition Front-Bench team, and the fact that they accept that ordinary people, as opposed to the organised masses for whom they were formerly speaking, welcome that flexibility. I urge the hon. Gentlemen to encourage some of his colleagues who have been here for longer to look at many of their entrenched attitudes towards other areas where ordinary people could benefit from the flexibility that he now lauds.

In introducing his amendment, the hon. Gentleman rightly distinguished between personal pensions that are being given the extra flexibility of taking an annuity on a range of dates; occupational pensions; and section 226 policies. But he failed to make one crucial distinction: such flexibility already exists in many good occupational pension schemes, and can be introduced in others. In any case, flexibility is available to employers to increase a pension in payment, which many large occupational pension schemes already do.

Such flexibility is not available to a person who has purchased either a personal pension or a retirement annuity. Many retirement annuity policies currently exist, and premiums are still paid into them. I am indebted Scottish Equitable for supplying me rapidly with information on this matter and telling me that some 5 million section 226 policies are still in force, and many of those continue to grow.

Those policyholders do not have the flexibility that is being offered to personal pension holders under the clause, nor is it suggested that they should be entitled to it, despite the fact that current thinking in pensions is towards greater flexibility in retirement. For example, many people may now leave invested a large part of their pension provision to pay for care costs when they are very elderly, need much more care than can be provided through the state system, or need care that differs from that provided through the state system, for which they must pay. Such flexibility is built into the personal pension regime now proposed by the Government, but 'is on offer to no one else.

I hope that, both in replying to this debate and when we return to the subject later during the passage of the Bill, as I suspect we will, my hon. Friend the Minister will give better reasons for excluding retirement annuity policyholders and, to a large extent, many occupational pension scheme members, from the flexibility that is now proposed. It is not sufficient to say that it is open to a retirement annuity pensioner to transfer.

First, as the hon. Member for Edinburgh, Central rightly said, a suitable policy may not be on offer. Secondly, costs are incurred whether those are borne by the individual or other pension holders. The estimated cost for each retirement annuity policy transferred into a personal pension policy is some £50 per policy. Why should those costs be incurred when it is of no apparent benefit to the Exchequer to exclude section 226 policyholders from the benefits in the clause?

I hope that my hon. Friend the Minister will give a detailed explanation of why we are reintroducing a class system into pensions.

Mr. Forman

I agree with much of what my hon. Friend the Member for Bristol, North-West (Mr. Stern) said. I, too, look forward to a clear explanation from my hon. Friend the Minister, which I am sure we shall have, about the thinking behind how the lines have been drawn in the schedule. I say "schedule" because, even though we are talking about clause 52, the thrust of the debate so far has been about the terms and the implications of schedule 11.

In opening the debate, it is interesting that the hon. Member for Edinburgh, Central (Mr. Darling) made it clear to the House—and, through Hansard, to the country—that any future Labour Government would see a further upheaval of the financial services industry through the introduction of direct statutory regulation by the Securities and Investments Board in place of the existing measures and structure, which have taken the best part of seven years to put in place. I think that the industry must be warned about that.

The main point I wish to make in this afternoon's fairly narrow but necessary debate is that, as I understand it, clause 52 and schedule 11 constitute a permissive and not a mandatory measure. That goes to the heart of what I said to the hon. Gentleman by way of intervention. The arrangements do not force any transfer upon pension holders, and nothing is required to be transferred by law. If the Bill becomes law, certain advantageous arrangements will be offered to categories of pension holders, and they may or may not take advantage of them, depending on the quality of advice they receive and their own decisions about their plans between the age of 50 and 75 years.

I want to ask the Minister of State some relevant questions. First, if the Bill goes ahead unamended, can he confirm that the costs of making a transfer will be of the order mentioned by my hon. Friend the Member for Bristol, North-West, or will they be more or less than that? Have some estimated categories of cost been overlooked at this stage?

Secondly, are there any persuasive arguments against the idea of extending the principle of flexibility to the other instruments mentioned by my hon. Friend? Thirdly, can we feel confident that, when best advice is given, particularly by independent financial advisers, that best advice will include not only the advantages of transferring—all hon. Members know of cases where those advantages have proved illusory and damaging to the people concerned—but the advantages of staying with the existing arrangements?

The hon. Member for Edinburgh, Central said, quite correctly, that most people in the country, and indeed in this House, do not fully understand their own pension arrangements, let alone those of other people. Obviously it is important that independent financial advisers argue clearly the advantages of maintaining the present position rather than making a change.

I welcome the option of flexibility which the clause opens up for people between the age of 50 and 75. I do not think that it will clinch the decision for all people: they would be wise to look carefully at the implications of the measure for their individual circumstances.

I urge my hon. Friend to think carefully, and preferably inform the House as fully as possible, about the assumptions which lie behind the present policy. Perhaps he could include some up-to-date figures about the size and scope of the personal pensions market today. My hon. Friend the Member for Bristol, North-West has already cited figures in relation to section 226 contracts, and it would be useful to compare them with the personal pensions market.

I welcome this element of the Finance Bill, and wish it well. However, I think that we need to address some of the detailed points which have been raised on both sides of the Chamber.

Mr. John Denham (Southampton, Itchen)

The debate so far has hinged on the question not whether flexibility is desirable, but whether the regulatory system which is in place is sufficient to ensure that those who choose to exercise flexibility take the right decisions. That is where the real question marks arise, and there is little sign that the Government are addressing the weaknesses in the regulatory system.

Obviously, anyone who considers exercising the new flexibility afforded by clause 52 will be making a critical and very difficult decision. As has already been said, that decision requires the ability to project into the future in a way that few people, including professional advisers, are able to do. Recent evidence shows that those who have sought to project into the future have fairly consistently overstated the benefits of taking a particular investment decision, which has left people very vulnerable.

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An obvious example which comes to mind is the sale of home income bonds in the late 1980s. The pitch behind that sale—"Here is a way of making far more out of your capital than you previously thought possible"—could apply also to the holder of a personal pension. That exercise ended in disaster for many households.

Although the costs have not yet proven to be as high, it is clear that the sale of endowment mortgages—essentially a gamble on the performance of the stock market—in the 1980s took place on the basis of results which have not been achieved. The projections for the performance of endowment mortgages which were approved at that time by the regulatory organisations have subsequently been scaled down.

In looking at using personal pensions in a flexible manner, we must say that the regulatory system failed to ensure that people received the best advice in those circumstances. My worry about clause 52—not the principle of it, but its practical consequences—is that good advice is again not likely to be forthcoming.

We do not know whether someone who has bought a personal pension will have much money to invest in an annuity. People who have invested two or three years' savings with a firm such as Guardian may find that they have nothing left when their policy matures after 20 or 30 years, because, according to the projections of Money Management magazine, the effects of fees and charges will exhaust their savings altogether. Many people who have entered the personal pensions market believing that money is accruing safely to provide for their future pensions will find that they have very little or no money left at the end of the day.

Even more important than the flexibility with which people can invest in a pension fund is the return they receive on that investment. The survey by Money Management showed that some firms produce twice the rate of return on policies as others. At the moment, the regulatory system contains little to enable a personal pension purchaser to distinguish between the best and the worst performers in the industry.

Mr. Butterfill

Does the hon. Gentleman agree, therefore, that it is even more important that independent financial advisers retain their place in the market, and that we do not move to a system where most schemes are marketed directly by financial institutions which do not offer a range of independent advice? Does he agree that the report conducted into the matter for the Securities and Investments Board showed that those who took independent financial advice fared much better than those who bought directly from financial institutions?

Mr. Denham

I am not aware of the report which made that distinction. Some independent financial advisers offer a good service; equally, there are those who do not. The record books are full of both examples, and one could argue either way in order to prove one's case. However, I think that it is to the consumers' advantage that they can turn to independent financial advisers for advice as well as to the major companies.

The Government's failure to regulate in that area is costing the taxpayer a great deal of money. It appears that, up to 1992, £3.5 billion was paid to private insurance companies on behalf of personal pensions by people whose incomes were so low that they would have been better off remaining in state earnings-related pension schemes. That is an enormous sum of public money to pay the private insurance industry to put people in a worse situation than they would be in otherwise.

Assuming that such people retain their pensions until they mature, they may find that the annuity in which they wish to invest under this clause will buy them a pension less than the one they would have received under SERPS—whether they purchase the annuity on the date that the policy matures, or whether they buy it some time later. There are no signs yet that the Government are using the regulatory system to clamp down on that sort of mis-selling. Pension fund opt-outs affect perhaps half a million people, but opt-outs from SERPS by people on low incomes affect perhaps 2.5 million. Numerically, it is a much greater problem than that with which the board is wrestling.

One in five people abandon their personal pensions within the first year of sale. Almost every one will lose practically all the money that they paid, and the money paid by the taxpayer in the form of national insurance contributions and additional rebates will be entirely wasted. Although this debate naturally concentrates on policy maturity, far too little is done by the Government to make sure that someone who buys a personal pension is in a position to maintain it until its maturity.

Mr. Forman

The hon. Gentleman makes an important point about the start of long-term schemes. Does he have further evidence that, in the majority of cases, people terminate their pensions because of a force majeure—a downturn in their personal circumstances? Is it not more usually the case that the advice that they were initially given was defective?

Mr. Denham

There is no satisfactory answer to that question, because studies of individual cases in sufficient detail have not been completed. The question arises, what is force majeure in such circumstances? If someone discovers that they cannot continue a policy less than one year after it was sold to them, that is arguably something that a competent salesperson, properly managed, should have predicted. That will not always be so, but in many cases where policy payments lapse after a relatively short time, the reasons will include bad advice because the salesperson did not look sufficiently into the future in determining the best policy.

That is often the case when individuals are encouraged to sign up for regular premium policies, when they would have been better advised to enter into a single premium policy. Such a policy would largely protect them from the whole of the first three years' premiums being absorbed by commissions and fees, and would provide the security of knowing that the amount invested will stay invested for a reasonable time.

I am not against the principle of flexibility but a major investment decision by someone in their fifties, sixties or seventies requires a level of advice and expertise that the financial services industry and its regulators have not yet demonstrated. Hand-in-hand with the Government's proposed measures should be a reassurance that they will continue to drive the regulatory structure, so that consumers will be better protected from bad advice than in recent years.

Mr. Butterfill

I am the first to agree with the hon. Member for Edinburgh, Central (Mr. Darling) that the existing regulatory structure contains defects, and did so ab initio. The problem is that, following implementation of the Financial Services Act 1986, the Securities and Investments Board did not require a single retail regulator. That, above all else, caused the majority of the subsequent problems.

Regrettably, Sir Kenneth Berrill, the board's first chairman, concentrated more on writing detailed rule books—as one might have anticipated of a former civil servant—than considering the big picture of what was to happen in the marketplace. Had he done that, and insisted on a single retail regulator, today's position would be considerably different.

However, we have a single retail regulator now in the Personal Investment Authority. I agree with the hon. Member for Edinburgh, Central that it took a lot of cajoling to secure one. I would have preferred a modest amendment to the 1986 Act, to give the SIB power to direct the way in which practitioners were regulated and by whom. That would have made the PIA's birth much less painful. Having said that, it is up and running and likely to work satisfactorily. We ought to give it a good try before embarking on wholesale reform of the 1986 Act.

I agree with my hon. Friend the Member for Bristol, North-West (Mr. Stern) about section 226 policyholders. Again, I must declare an interest as such a policyholder myself. Distinguishing between one group of pension holders and another is unjustifiable. I am particularly concerned about people in occupational schemes that are money purchase schemes, who will be disadvantaged relative to those in other schemes under the Government's proposals.

I see no justification for disadvantaging some policyholders, and agree with the hon. Member for Edinburgh, Central that we ought to remedy that situation in the Bill. There is a grave danger that many people in good occupational schemes that are money-purchased will be tempted out of them and into personal pensions that may be inappropriate. Contrary to the suggestion of the hon. Member for Edinburgh, Central, the respectable part of the independent adviser profession agrees with him. He may have seen the briefing that the IFA Association sent to hon. Members.

Mr. Darling

At no time did I suggest that independent advisers in general or particular were at fault. The hon. Gentleman must be thinking of another speaker.

Mr. Butterfill

I will read Hansard carefully, but my clear recollection is that the hon. Gentleman said that it was likely to lead to such further mis-selling, by anybody. The IFA Association agrees with the hon. Gentleman. Its chairman wrote to me: Why should the personal pension have an advantage over all other schemes? Has the Government not yet learnt the lesson from pension transfers and opt outs? … I see restriction of deferred purchase to personal pensions as yet again opening the floodgates for the unscrupulous salesman. The hon. Gentleman's views are endorsed by the profession itself. It is right to allow deferral, because it is wrong that someone reaching retirement at an unpropitious time in the market should be forced to make an investment decision that nobody with the freedom would make at that time.

I urge my hon. Friend the Minister to consider reducing from 70 per cent. to 50 per cent. the minimum amount taken, because although people reaching retirement age are likely to be suffering a substantial diminution in income, and they will probably need more money, if they retire at a time in the market when the yield on their annuity is unusually low, it is unreasonable to expect them to take a substantially increased risk as a result.

I am concerned also about the taxation provisions, and seek my hon. Friend's advice. If, following a member's death, where there is deferral, his widow chooses to take the lump sum, she will be liable at that time to tax at 35 per cent. That seems to breach the general rule that transfers on death between husbands and wives will be free of taxation, and seems unnecessarily harsh.

Of course, the wife might die shortly after her husband. For example, if the husband died immediately in a car crash in which they were both victims, but his wife died some weeks later, there could be double taxation. The estate would pay not only 35 per cent. tax but inheritance tax. I hope that my hon. Friend will consider those points when he responds.

Mr. Geoffrey Hoon (Ashfield)

Clause 25 and schedule 11 are clearly designed to alleviate a problem that arises in relation to personal pension schemes—the obligation placed on members to use accumulated funds in pension schemes to purchase an annuity as soon as any benefit is taken from the pension fund. That means that people may be obliged to buy their annuity at a time when market rates are less favourable than they might be. The advantage to everybody of such a rule is that it results in clarity. Everyone knows that, at the point at which a fund matures, the purchase of the annuity has to be made.

This inflexibility, however, can cause problems for someone who has contributed large amounts of income to the fund for many years, at a time when rates may have been significantly higher than they are at the point when the fund is used for annuity purchase. In those circumstances, the Government have sensibly sought ways of avoiding the problems. Their plans were set out clearly in the DSS White Paper, "Security, Equality, Choice: The Future for Pensions".

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Published in June 1994, the White Paper states in paragraph 3.9: The Government is aware of the effect that annuity rates at the time of retirement can have on the size of the pension bought with the contents of a money purchase pension fund. The Government favours greater flexibility in this area. Certainly, the proposals in the Finance Bill will achieve that flexibility.

The basic proposition will allow personal pension scheme members to purchase an annuity at any stage between the ages of 50 and 75. Secondly, it will allow retired people who have deferred annuity purchase to withdraw income broadly equivalent to the annuity that the fund would have purchased. These proposals for flexibility at least address the basic problem which I have described.

The issue for the Opposition concerns whether the proposals will work in practice and whether they will remedy the harm that we are worried about. Of course I accept that the Government's proposals will give members of personal pension schemes a greater range of choice; but in so doing, certain difficulties are likely to arise for members. It is those difficulties that amendment No. 13 is designed to deal with.

First comes the risk problem. Although rates may have been falling for some time, there is clearly no guarantee that a policyholder will gain from any decision to defer the purchase of an annuity. There is a risk that, if rates have been falling while contributions have been paid into a fund, they may continue to fall. So deferral will merely serve to achieve the purchase of an annuity at still lower rates. That is a judgment which any holder will have to make.

The difficulty with exercising this judgment is that it requires a fairly sophisticated understanding of markets and how they are going to operate. Thus flexibility does not necessarily bring benefits for the individual concerned.

We should also bear in mind the more substantial consideration at stake—the costs that policyholders may have to bear in the exercise of this choice. The Inland Revenue has calculated that the one-off cost to personal pension providers of setting up the new system will be about £1.15 billion, together with annual recurring costs of as much as £600.000 a year by the third year of operation. Those figures are contained in the compliance cost assessment of 29 November 1994. The Revenue goes on to state: It is expected that personal pension providers will pass on all compliance costs to their members in the form of an administration charge. That will significantly reduce the money available for the ultimate purchase of the annuity. The cost will fall to the pension holder, in the form of reduced benefits on retirement.

Policyholders who are contemplating making use of the new flexibility and choice will need to understand all the risks involved. I have already mentioned one: the fact that rates may continue to fall, so the fund will purchase still less in the form on an annuity. Hence anyone taking advantage of the new flexibility will need professional advice—which tends to be rather expensive. That is necessarily so, because the advice needs to be as sophisticated as circumstances dictate.

Mr. Butterfill

Surely the advice does not need to be terribly sophisticated? One has only to look at the long-term money rate trend in the market. If the market is discounting a higher rate for the future, it clearly expects interest rates to rise. That is about as far as anyone can predict.

Mr. Hoon

That is right, but the problem is that many people depend on expert advice. When people have paid substantial contributions into their pension funds so as to buy an annuity, we want them to have the best possible advice. The hon. Gentleman makes light of these judgments, but they are of grave concern to people embarking on their retirements. I repeat that this sort of professional advice, especially if it is of the highest quality, can be expensive.

All this tends to suggest that the proposals in this years's Finance Bill are likely to benefit only the wealthier members of society. As my hon. Friend the Member for Edinburgh, Central (Mr. Darling) has already said, and as the Association of British Insurers reiterates, Our present view is that only those with funds at retirement in excess of £100,000 are likely to find this facility economic. That is quite a large fund. Although flexibility obviously benefits people with that much to invest, we would like to ensure that the disadvantages are not so great as to render the exercise uneconomic for other people. There is also a clear risk of poor decisions and judgments about how the new rules should operate being reached.

Our amendment seeks at least to provide further information about how the rules would operate. It suggests that the Government report to Parliament on the likely costs of administering personal pension schemes, and provide an assessment of the risks to members of such schemes. We believe that that would provide a context in which to reach a judgment on the operation of the proposals; and on whether, in practice, they benefit not just the wealthy but also the greater number of people who might expect to take advantage of them because they have a fund into which they have paid throughout their working lives. Such people will want to purchase annuities at the most favourable rates.

Generally speaking, while we can see the benefits of the flexibility that these proposals allow for personal pension schemes, we are worried that the flexibility involved may be achieved only at some risk. Amendment No. 13 at least eliminates some of those risks.

The Minister of State, Treasury (Mr. Anthony Nelson)

There is one matter on which hon. Members on both sides of the Committee can agree—pensions are a complicated business. Most people rarely understand the full details of their own pension let alone the range of those offered on the market, the benefits that derive from them and the tax treatment of them. That is a matter for regret. In the search for equity and greater self-provision, it is probably inevitable that there will be complexities in the provision of choice and equity, but at the same time—the complexity of such schemes has been raised by a number of hon. Members—it raises the whole issue of education about financial provision. It is an issue to which I have referred on numerous occasions in the House and I do so again today.

One does not want in any way to be too patronising, because, of course, the Government are obliged to frame the law properly and regulators are obliged to supervise the law properly, but at the end of the day there must be an obligation on the individual to look carefully at investment products—particularly long-term investment products such as pensions—before they enter into them, to seek advice from those who have expert abilities and to ensure as far as possible that the contract that they are entering into meets their needs.

We can do the best that we can, and we can seek to refine the legislation, as I will endeavour to show later, and the regulatory system, to give as much support and backing as possible, but we must address a wider issue, perhaps through the education system, perhaps in a variety of publicity ways, by regulators and product providers, to ensure that people understand much better the nature of the products that they are offered, their obligations and the benefits that they are likely to receive.

Mr. Gerry Sutcliffe (Bradford, South)

I have listened intently to the debate as one of those persons ill-informed on pension provision. I take the point about education, but, practically, how can one provide that with changes being made to the pension provision almost daily, notwithstanding the clause before us? How will the Government be forced to do that?

Mr. Nelson

The principal means of improving awareness about the nature of products, the obligations and benefits that arise under them, is through disclosure, the transparency and the understanding of the nature of the product itself. The disclosure regime, which came into effect from the beginning of this year—not just with regard to life insurance products but the wider application—goes to the heart of the issue and goes a long way towards answering the hon. Gentleman's question.

I suggest that there is a wider obligation, because one can disclose; one can tell people; one can write to people; but unless one is pretty certain that people understand, they can still be mis-sold, or they can enter inadvertently into a disadvantageous contract. I have no wish to use this important debate to give a polemic on the wider issue, but it is relevant and is a matter to which the Committee may wish to return.

A number of reasonable points were made by hon. Members and I shall do my best to comment on them and provide answers where possible.

Clause 52 and schedule 11 will give personal pension scheme members greater choice over the timing of the annuity purchase and will enable them to continue to benefit from the further investment growth of their funds while drawing an income in retirement. The amendment proposes that the provisions of schedule 11 should come into effect only after the Government have reported on three issues: the costs to personal pension schemes of administering the new provisions; the risks to personal pension scheme members who take advantage of the provisions; and the extension of the provisions to occupational pension schemes and to retirement annuity contracts.

I sympathise with the concerns raised by a number of hon. Members on those matters. The Government have already taken action to meet those concerns as far as they can. I must say, therefore, that I do not think that the proposed amendment to clause 52 will serve any useful purpose. I shall explain why by providing reassurance, I hope, on each of the issues covered by the amendment.

I deal first with the likely effects of the provisions of schedule 11 on the costs of administering personal pension schemes—a point raised by the hon. Member for Edinburgh, Central (Mr. Darling). As a matter of general Government policy, all Departments are required to prepare a structured appraisal of the likely cost to businesses of complying with new or amended regulations. In that way, compliance costs can be assessed and unnecessary burdens to business identified. In the case of annuity deferral, a full compliance cost assessment—CCA—has been made and has been available, as announced in an Inland Revenue press review from its deregulation unit, since Budget day.

The CCA broadly examines the likely administrative costs to personal pension providers over and above the costs of administering the present regime, which requires immediate annuity purchase once benefits are taken from a personal pension scheme. Costs are divided into those that are non-recurring, such as the cost of amending computer systems, and recurring ones, such as arranging income withdrawals for people who defer annuity purchase.

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Of course, the costs are likely to rise in future years as more people retire and take advantage of the new flexibility, but we would expect all pension providers to recover those costs by means of an administration charge, such as that already levied in respect of personal pension arrangements.

Mr. Hoon

Does the Minister expect that that administration charge will be spread evenly throughout all personal pension holders, or will it simply be paid by those who are deferring their annuity purchase?

Mr. Nelson

That will be a matter for the individual schemes to determine. It is not a matter for regulation. The costs, in general terms, while inevitably as much a guesstimate as an estimate, are clearly set out. It will be for the industry to determine how to recover those costs. In the case of smaller businesses—a number of hon. Members, including the hon. Member for Edinburgh, Central, raised this point—independent financial advisers already have to give the best advice possible, and we do not see that that necessarily will involve additional net costs, but there will obviously be particular compliance costs for the product providers, as such, rather than the intermediaries. It will be a matter for them broadly to determine how the costs are spread.

The second point covered in the amendment concerns the risks that people will run in deferring annuity purchase. It is an important issue. It must be apparent to all hon. Members that flexibility involves choice, and choice involves risk. It is an interesting paradox that risk can be present both with flexibility and with inflexibility. If any regime is too inflexible, and tethers people down to only one recourse, that can be highly risky and can prejudice them.

Equally, if one introduces flexibility into any regime, as we seek further to do with the amendment and schedule, it opens up a choice, but it opens up the prospect of some risk, or relatively better performance by one who behaves in one way as opposed to another. So although there might not—I hope—be a fundamental risk in terms of the whole stream of income or the value of the security of a fund, there will be a differential result, obviously, for people who behave in different ways.

It is inevitable in providing flexibility or choice that there will be some risk for people that they take a decision, the outcome of which will be less preferential to them than had they chosen otherwise. What I am saying is obviously a truism in one sense, but it raises the point made by hon. Members—that such risk can best be avoided by getting the best possible advice from professionals on how people should proceed, and how they should or should not take advantage of the flexibilities provided under the clause and schedule.

Mr. Butterfill

Does my hon. Friend agree, however, that although there is undoubtedly some risk inherent in the choice, the overall risk is reduced by giving that choice? Although some people will make bad choices, overall the element of risk must be reduced by giving that choice.

Mr. Nelson

I hope and believe so. The Government would not have brought the measure forward unless we believed that to be so. Of course, without straying too much from the narrow provision of the clause and schedule, the Government's overall macro-economic policy is there to try to bring about a sustained period of low inflation and interest rates as low as can be sustained to continue to bear down on that level of inflation.

If it were possible—an objective seriously to be desired by all hon. Members—for the country to enjoy a very long period of low inflation and low interest rates, it follows that it might not necessarily be right for people to defer for a long period the purchase of an annuity. Indeed, as the hon. Member for Ashfield (Mr. Hoon) and others pointed out, they might be disadvantaged: the market can move in both directions, and interest rates may fall. People must make their own decisions.

Understandably, over the past couple of years—particularly a year or so ago—there was apprehension about the requirement for the removal of any money from a personal pension immediately to trigger the need to buy an annuity at what were historically low interest rates: no option was available. We hope that the introduction of further flexibility will meet people's needs, although it does not necessarily follow that it is right for them to defer without expert advice.

Mr. Derek Enright (Hemsworth)

What advice would the Minister give people today, with the prospect of a rise in interest rates?

Mr. Nelson

The hon. Gentleman tempts me, but I cannot advise people on such matters.

Let me return to the risk involved in the deferral of annuity purchase. I am well aware of the concerns that have been expressed, and assure the House that the Government take them very seriously in the light of past mis-selling of personal pensions. The Securities and Investments Board has already made its recommendations for redress following cases of mis-selling, and the House will recall the statement that I made about the matter on 25 October last year.

We should remember that the annuity deferral proposals were made in response to a flaw in the present personal pensions regime. We want above all to free people from the obligation to buy an annuity as soon as they take benefits from their pension scheme, possibly at a time when annuity rates are low. The new flexibility that we are offering has been widely welcomed, but—as my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) pointed out—it is only an option: no one will be forced to defer buying an annuity if they are unhappy about the risks involved. Indeed, we do not expect that many people will wish to do so for more than a few years.

So what are the risks that people may run if they opt for income withdrawals? The main risk is that their income may decrease at some point in the future, either because of falling interest rates which have a direct effect on annuity rates or because of an unexpectedly low investment performance by their fund in the deferral period. There is also the risk, for people with a small fund, that administration charges will erode the value of the fund before the annuity is bought—a point raised by more than one hon. Member.

Regulatory bodies such as the Personal Investment Authority will therefore have a duty to ensure that personal pension scheme members are made aware of the risks, and the disclosure regime on life products that came into effect on 1 January this year provides an excellent basis for that. Pension providers will be obliged to disclose the potential risks in deferring annuity purchase, and individual scheme members will normally consider seeking expert financial advice before reaching a decision.

The proposed legislation itself provides a further safeguard against the too-rapid depletion of the pension fund: personal pension providers will have to review members' funds every three years to ensure that income withdrawals are in line with the value of the fund. Members will, of course, be able to convert their pension fund to an annuity at any time they choose up to the age of 75.

Let me now deal with the third issue covered by the amendment—the possible extension of the proposals to money-purchase occupational pension schemes and retirement annuity contracts. The Government considered that very carefully when formulating the present clause and schedule. In the light of press comments following the Budget day announcement, we examined the matter yet again; and, as has been mentioned, my right hon. Friend the Financial Secretary made a statement that was reported in an Inland Revenue press release issued on 4 January.

That statement pointed out that the present tax approval rules for occupational pension schemes did not prevent flexibility in the timing of annuity purchase, although a pension must be taken. The provision of annuities is often part of the structure of the schemes, for reasons unconnected with the tax rules. Following the Budget day announcement about the proposal to amend the personal pension schemes tax rules, we made it clear that we would be happy to discuss the issue with the promoters of occupational pension schemes. As a result, some insurance companies have approached the Inland Revenue to see what changes would be needed in the rules governing tax-approved occupational pension schemes.

At this stage, it is not at all clear that any legislative changes are needed in relation to occupational pension schemes, but if it proves—as a result of discussion with the promoters of the schemes—that some changes are desirable, we shall consider introducing appropriate measures.

Mr. Darling

Does that mean that the Government are agreeable to the principle of extending flexibility to occupational schemes? Have any difficulties been highlighted so far by the approaches made to them?

Mr. Nelson

Yes and no. Yes, we are in favour of the principle of extending flexibility: that is, we believe that flexibility already reasonably exists, but if we were persuaded otherwise we would want to examine the matter carefully. No, our discussions and consultations have not flagged up any problems. Unless compelling reasons are given for us to introduce appropriate measures, we see no need to assert in legislation what is already the case.

The statement also pointed out that the retirement annuity legislation had been obsolescent and had remained unchanged since 1988, when personal pensions superseded retirement annuity contracts. In any case, it was not necessary to amend the retirement annuity rules, because holders of RACs can already transfer their funds to a personal pension scheme if they want to benefit from the new provisions. Inland Revenue officials have spoken to nine insurance companies, all of which said that they would make no charge for internal transfers—that is, transfers from a retirement annuity contract to a personal pension scheme with the same company. That option therefore need not involve any additional cost.

The hon. Member for Edinburgh, Central raised the question of the principles that should be applied to administrative savings for schemes, and to any annuity changes and transfers that are made. Broadly, amendments to occupational pension schemes should ensure that changes are consistent with the purpose of pension schemes. It is a tax approval condition that the schemes should provide a pension for life. Any proposals should be consistent with that principle, based on actuarial considerations relating to life expectancy and periodic reviews of funds.

My hon. Friend the Member for Bristol, North-West (Mr. Stern) asked whether we were reintroducing a class system into pensions. That is far from being the case; we intend to ensure, by providing greater flexibility and choice, that people are better able to take the course that they consider best for them. The provision of an opportunity that does not currently exist should only break down any class system that may be in the pensions regime.

I hope that I have made it clear that it is easy for people with retirement annuity contracts to transfer to personal pension schemes; certainly, that was suggested by nine insurance companies that we consulted.

Mr. Stern

rose—

Mr. Nelson

I will give way in a moment. First, let me make a further point which I think was implicit in what a number of hon. Members said. They asked why we have not in this or in other legislation referred specifically to retirement annuity contracts. I have said that that is essentially obsolescent legislation. A complicated corpus of further clauses in the Bill would be required to address what we believe is not in practice a problem.

There would be no great advantage. It would not offer to those with retirement annuity contracts a choice or an option that is not already there. It could not be done at no or low cost, and in any case we have assurances that it can already be done. It is open to people to change to a personal pension, thereby taking full advantage of the flexibility provided by the clause and the schedule. For the reasons that I have given with regard to occupational pensions and retirement annuity contracts, we do not think that the problem arises.

5.30 pm

Mr. Stern

I am sorry that my hon. Friend the Minister has so clearly misunderstood, failed to comprehend, the genuine fears of people who hold retirement annuities. First, he said that retirement annuities were obsolescent but they cannot be obsolescent because many hundreds of thousands of people continue to pay premiums and will go on doing so for the next 20 to 30 years. They are not obsolescent: they are very much alive.

Secondly, my hon. Friend said that some insurance companies have agreed not to charge people who wish to transfer and take advantage of the flexibility which retirement annuity holders, and they alone according to the Minister, will be debarred from taking under the existing legislation. He is wrong. First, those costs exist, and if they are not borne by a charge on the policy holder making the change they will be borne by the general fund of policy holders. Secondly, what happens if the personal pension offered by the insurance company with which someone has a retirement annuity is not suitable for that person and he wishes to transfer? Costs will be transferred automatically.

Mr. Nelson

rose—

The Second Deputy Chairman of Ways and Means (Dame Janet Fookes)

Order. That intervention verged on a speech and I have strong views on that.

Mr. Nelson

With that stricture in mind, I hasten to assure my hon. Friend that I do not wish my remarks about retirement annuity contracts to be taken as derogatory. Far from it. They exist, and people took them out and continue to subscribe to them. For many people they have distinct advantages and they wish to retain those contracts. However, my hon. Friend and I both know that personal pensions legislation superseded them and offers a different set of opportunities and benefits.

In some ways RACs have certain benefits that are not provided under the personal pensions regime. I acknowledge all that and, as I say, I am not in any way being derogatory. We are discussing the issue of taking advantage of deferment flexibility. I am saying only that that can be done without necessarily introducing a whole corpus of law to provide freedom and flexibility for RACs in particular. It can be done easily by filling in a form and transferring from the RAC to a personal pension.

As I have said, there are no direct costs to the prospective pensioner. Of course costs are involved, but how they are absorbed is a matter for the companies. I assume that the Committee is principally concerned about whether there is a cost to those people who exercise their rights for deferment and take advantage of the flexibility. All the evidence, as far as we can assess it, is that there is not.

Mr. Butterfill

I agree with my hon. Friend the Member for Bristol, North-West (Mr. Stern). The reply by my hon. Friend the Minister will not do. He admits that it may not be appropriate for some people to transfer from RACs to personal pensions. How do we relieve their predicament if they are not offered the proposed flexibility? Secondly, the Minister may be surprised to know that what he says may not be widely disseminated outside the confines of the Chamber. I suspect that thousands, if not hundreds of thousands, of personal pension holders will be unaware that they can transfer in this way. They will continue to hold RACs and will suffer as a result. It is incumbent on the Government to amend the legislation, if not in this Finance Bill in the next one.

Mr. Nelson

I hear what my hon. Friend says and take it seriously. I shall reflect upon any shortcomings that he feels are in the current legislation or proposals. I was simply trying to respond to concerns raised at the beginning of the debate which seemed to show that those with retirement annuity contracts did not have this option or, if the deferment option did apply, it would involve them in costs. I have tried to show that the opportunity is there.

RACs are different from personal pensions, and to provide the deferment regime on top of RACs would be going beyond what is currently proposed. People can exercise their right to defer and can choose to implement at a later date the purchase of their annuity through transfer. That is not unreasonable.

My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) asked about size and scope of personal pensions. The latest figures show that there are about 8 million personal pension holders. That is a considerable number and shows the choice that people have exercised since 1988 to make provision for themselves. Despite the undoubted serious problems relating to the mis-selling of personal pensions, the figures demonstrate that for many people such pensions are popular and will continue to be so for the many who wish to make flexible provision for themselves for retirement.

My hon. Friend said that the arguments for staying put in an occupational pension scheme should be presented as clearly as the arguments for transferring to another one. I entirely agree. That is exactly the purpose of the disclosure regime and the product and advice regimes which we have tried to implement through Securities and Investments Boards rules and the Personal Investment Authority.

It is necessary to point out to prospective investors the advantages of the status quo as well as the option for change. It would certainly be inadequate and a serious shortcoming of that advice if a comparison were not made. It is implicit in giving best advice that it is compared with the current range of available benefits. In its executive function the regulatory regime has sought seriously to improve the quality and efficiency with which such information and advice is rendered.

The hon. Member for Southampton, Itchen (Mr. Denham) said that the flexibility in the clause requires good advice. That echoes what he said several times in the past, and I whole-heartedly agree with him. We must constantly support measures to improve the quality of advice and to crack down on bad advice. That means costs for the industry and, of course, at the end of the day for the product buyer, the investor. But if markets are to be free they must also be fair, and if people are to have more confidence in investor protection they must have impartial and good quality investment advice.

The changes which Andrew Large, the chairman of the Securities and Investments Board has instituted, and the shake-up and changes in the self-regulatory organisations will deliver very much better standards of investment advice. Of course, that will always stop short of a guarantee that people will get perfect advice, and even the best advice may not match how events eventually turn out, but there must be a constant quest to improve the quality of advice and in that regard substantial progress has been made.

Mr. Hoon

The Minister spoke about the benefits of extra advice and no one challenges his suggestion. But there will clearly be a cost involved. Perhaps I may use the illustration used earlier in the debate. A company providing a personal pension scheme will have to employ someone for the time that it takes to provide advice on whether it is sensible to defer the purchase of an annuity. In those circumstances, and given the extra costs for the company, would it not be sensible to accept at least the spirit of the amendment tabled in the name of my hon. Friend the Member for Oxford, East (Mr. Smith)? There should be some consideration of the extra costs involved in administering personal pension schemes.

Mr. Nelson

I have, of course, read the amendment and I understand its purpose. I am endeavouring to explain to the hon. Gentleman and to the House that the Government have considered these matters carefully, and that we have reported on some of them—I referred to the cost compliance assessment. Eventually, people reach the point where they must make up their minds and decide what to do. One cannot make all policies a matter of constant review. I know of the popularity of that with the Opposition. All policies seem to be put on hold while someone else decides what the outcome should be.

With matters as important for people's provisions as pensions, however, people must not make judgments on the basis of the fact that the regime will be revised and reviewed, and that it may be imperfect. They must make long-term personal decisions on the basis of the regime that operates, and of the Government's best judgment of how it should do so. That is the purpose of law in the matter. It is important that it should be certain, even if it is not wholly inflexible. Of course, we revise and consider things with the experience of time, but we have already spent a good deal of time on considering how flexibility can be better extended.

My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) gave a broad welcome to the Personal Investment Authority. He said that it was important to give the PIA a chance, before we engaged in radical reform of the regulatory system. I agree with him. The establishment of the PIA marks a step change in the quality of investment, advice, supervision and regulation in the retail sector.

Although, through shortcomings and inadequacies, well-advertised problems and serious consequences have arisen for many individuals in recent years, the changes that have been put into place, if only because of the controversy that has sometimes been aroused by the constituent members of the PIA, demonstrate that they are taking their responsibilities seriously. I reiterate that I give Mr. Palmer and all members of the PIA my full support in seeing through the important changes that they are bringing about and which are improving significantly the quality of the provision of investment services in the retail sector.

My hon. Friend said that it was right to allow deferral. I am grateful for the broad support that, I take it, he was giving to the clause and schedule. He asked, as the hon. Member for Edinburgh, Central did, about the amount of income that would have to be withdrawn during the deferral period, and my hon. Friend asked whether it might be appropriate for the minimum level to be lowered even further.

Perhaps it would be helpful if I explained that the intention is to ensure that, where someone exercises deferral, some income is taken out of the fund that has been built up. The aim is to ensure, in part, that that income, which is then taxed, goes to help refund the reliefs that have been available for contributions to the fund during its lifetime. Otherwise, a danger would exist that such funds would become just a money-box that people could dip into from time to time.

5.45 pm

The essence of our personal pension policy and, indeed, our pensions law and provision is that people receive tax relief on their contributions during their working lifetimes to build up or to fund an amount, which can then provide a decent income for them in retirement, which will be subject to tax, and which will equate with the contributions made and the reliefs during the lifetime of contributions. If it were possible for no income to be withdrawn for a long period of time, it would offer a savings opportunity and a non-pensions opportunity, which was not the intention. If a case exists for providing reliefs for long-term savings, we should do that, as the Government have done through schemes such as the personal equity plan. We should consider that sector.

On pensions, the intention broadly should not necessarily be to assist especially high-worth savers to build up a very large sum at the expense of the Inland Revenue, when they have had relief on contributions during the lifetime; it should be to ensure that a relationship exists between the taxation that is recouped and the relief that is given during the period of contributions.

On the amount of withdrawal during the deferment period, the Government considered carefully the single annuity to ensure that some flexibility was built in for people who might have purchased different sorts of annuity—one providing benefits for a spouse and one providing for staged increases in benefit entitlement. That is why there was a difference between the minimum and maximum. However, partly as a result of some of the comments made outside the House as well as within it, we accept that a case may exist for reconsidering the matter.

I listened carefully to what my hon. Friend the Member for Bournemouth, West said. In particular, he made a case for a reduction from 70 per cent. to 50 per cent. The Government might want to consider that further. The hon. Member for Edinburgh, Central raised that point at the end of his remarks.

The Government's proposals for enabling annuity purchase to be deferred have been widely welcomed, but some people have said that a minimum deferral of 70 per cent. is too high. The Government now accept that, and we are discussing the right figure with interested parties. When that consultation has been completed, we will propose an appropriate amendment on Report. I hope that the House will accept that that is a sensible way to proceed.

My hon. Friend the Member for Bournemouth, West. raised a point about taxation on death. There might be taxation on a spouse receiving the cash sum from a pension fund, and were she or he to die subsequently, they might also be liable to further tax, such as inheritance tax, if it formed part of the estate. That has always been the case.

It is also the case with other savings funds that are built up. If the widow or spouse decided to continue with the deferment and to purchase the annuity, they would be able to do that; there would be no tax charged, other than on the income that subsequently arose under the annuity. I know, however, that comments have been made about the tax level, were the surviving spouse to take the whole of the lump sum, instead of continuing with the deferment. I hope that that has explained the position to my hon. Friend.

The hon. Member for Ashfield (Mr. Hoon) asked about flexibility. He said that it could work against a person if market rates declined. I understand the point, which I think I have dealt with adequately.

The issues about the regulatory system, while perhaps going somewhat wider than the clause and schedule allow, are nevertheless relevant. The House is right to seek assurances that our legislative system, both in the statute book and in practice, delivers the sort of public confidence that people are entitled to receive. Any system or structure that one devises and implements by law does not necessarily deliver the human judgments that result in high-quality investor protection.

Sometimes, there is a quest for reform. I make no complaint about people testing arguments, especially if they can come up with better systems, but massive and costly uncertainty and change do not necessarily result in cowboys being put out of business, or in the prevention of fraudsters. I believe that the course that we have adopted, which is to make the system work significantly better, is the right course to deliver greater confidence to investors and depositors.

Many of the problems that have been uncovered in recent years and which are being redressed demonstrate that the system is working. We may not like some of the consequences in that some firms have gone bust or some people lose out but the fact that problems are being detected and redressed, and the fact that there is an investors' compensation scheme that provides relatively high recompense to those who have lost out and that it has worked out in practice, is an endorsement of a good success record. The fact that we have built in the many changes that Andrew Large and others have instituted means that we are not complacent—far from it—but that we are determined to ensure that the system works better.

However, revolution in the structure of regulation of the City is no answer for those who seek more certainty. It is an answer for those who want ever more centralist control of the financial resources in our economic system but we will have no part in that. It is not our intention to embark on a blighted period of cost and uncertainty for the financial services industry. That would merely deliver more opportunity for, rather than detection of, the worst sort of practices.

Mr. Butterfill

May I press the Minister on one other point? Talking about the position of those in occupational schemes which are money-purchase schemes, he said that he did not think that there would be any difficulty in the trustees of such schemes allowing deferral and that there was no legislative barrier to that taking place. What could he do to overcome the difficulty that might arise if individual employees wished to choose deferral but the trustees said no because it was an extra cost that they were not prepared to load on to the scheme? In the case of personal pensions, the initiative or option rests with the policy holder himself but, in the case that he has described, the decision lies with the pension trustees. Does he regard that as satisfactory?

Mr. Nelson

I acknowledge immediately that this does not deal entirely with my hon. Friend's point, but one answer is that people can opt out of an occupational pension into a personal pension scheme. When an individual decides to be a member of an occupational scheme, it is implicit that he understands—or at least, one hopes that he does—the implications of being part of a collective scheme, which has benefits as well as obligations. It also has risks and involves exercising a choice.

About 90 per cent. of people in occupational pension schemes have defined benefit schemes rather than money-purchase schemes. Only a small proportion of those in occupational pension schemes decide to translate into annuity the benefits that they receive and very often do so because it is more certain and easier for them to do so. It may be only a minority but it does not make it any less important that individuals should have as much flexibility as possible. However, I repeat that we are not aware that there is a problem or that anything inhibits deferral, provided that the scheme decides to take that line and offer deferral to its beneficiaries.

Mr. Butterfill

I accept that there are at present more defined benefit schemes than money-purchase schemes but the Minister will be aware that the trend is going the other way. There are virtually no new defined benefit schemes being set up and major companies such as BP are suggesting that they may move from defined benefit schemes to money-purchase schemes.

Mr. Nelson

My hon. Friend, who is well informed on this and related matters, is absolutely right, and I take his point seriously. If there proves to be a problem in practice, we shall certainly reconsider the matter but we think that the flexibility for retirement annuity contracts and for occupational pensions is adequate. Therefore, though worthy, the amendment is unnecessary. For that reason, I hope that the hon. Member for Edinburgh, Central will withdraw it.

Mr. Darling

I would not be too confident about that. I thank the Minister for his remarks about schedule 11. I accept entirely that if tax reliefs are given we should ensure that we are not subsidising saving in a way that does not apply to other savings products. However, the Government will have to explain why 70 per cent., as opposed to 65 per cent. or any other figure, is the appropriate one.

Having said that, it is fascinating that the Minister and a number of Conservative Members—although not all of them—take as their touchstone for whether a scheme is good or bad what the industry—the product providers—have to say about it. The hon. Member for Carshalton and Wallington (Mr. Forman) and the Minister were at pains to point out that no one was forced to transfer. Indeed, no one is forced to buy a pension; it is always possible to go through life without one and then wait and see what happens when one retires. People may not be forced, but the Minister should reflect on the point made by Labour Members and one or two Conservative Members. Although people are not physically forced to transfer, many may feel that they have to because there is no flexibility in the scheme that they have, whether that is an occupational scheme or any other sort.

It is not good enough for the Minister to say that he has spoken to nine companies which have said that people can transfer as long as they move to one of their schemes. That is precisely what we do not want; we do not want employees to be able to transfer only to one of the schemes that a company happens to have on offer. The alternative scheme which has the flexibility may not be the best—another company may have a better one.

The Government must sometimes ask not only what is good for business but what is good for the general public. The Government say that they have a compliance test and seek to check business costs and red tape. That is a good thing and perhaps they will apply the same principles to the rest of the evening's debate.

Yes, let us ask the industry and the product providers but let us consider, too, the effect of such policies on people in general. Parliament is supposed to be representing the people at large, not only those in business. We must not take what the industry says as the last word on the matter. We must consider the wider interests, something that the Minister and the hon. Member for Carshalton and Wallington failed to do. However, I shall look to my new ally, the hon. Member for Bristol, North-West (Mr. Stern), for support.

Mr. Stern

The hon. Gentleman is wise to do so. I was going to take his point a little further. Does he agree that the Government are not only looking purely to business but are going further and saying that two classes of policy holders will be entitled to a say, whereas a third class of policyholder will have the option either of not accepting the flexibility being offered or transferring willy-nilly? We are offering freedom to some but not to all.

Mr. Darling

The hon. Gentleman makes a good point and, in so far as he is allowed to, I hope that he will return to it in Standing Committee. For the Government to say that no one is forced to transfer is not adequate.

The fundamental issue that has been touched on repeatedly is regulation. Again, it is interesting that the Minister and one or two other Conservative Members take as their touchstone the increasingly minority view that there is nothing wrong with the Financial Services Act 1986 and that no change is needed. The Minister said that any change would mean a revolution and central control of resources but no regulatory system on this earth seeks to control resources in that way. The fact is that a growing number of people recognise that the 1986 Act will have to be amended and the sooner the Government face that, the better.

We believe that we should build on what we have but it is nonsense to try to continue with the fiction of self-regulation. The Minister cannot say that the system is working because many problems have been identified. Indeed, many of the problems that arose with pension transfers were due to the fact that the system was not working and was driven by the industry, which knew that bad practices existed but too many of those involved chose to do nothing about it.

Mr. Forman

The hon. Gentleman is referring to a point that I made in an earlier intervention. I was trying to tell the hon. Gentleman that it has taken the best part of nine years to perfect and improve the system of self-regulation within a statutory framework. It would be very unwise, in the interests of this country and the financial services sector, to tear that up by the roots again, as I understand that his party would seek to do were it to come into office.

Mr. Darling

We are not proposing to tear it up by the roots but to reform and to strengthen it. I agree with the hon. Gentleman that the regulatory system has improved dramatically, especially since Mr. Andrew Large became chairman of the Securities and Investments Board. The Minister cited Mr. Large's review as a major step change. Indeed it was, but the Minister might be candid enough to admit that poor Mr. Large had to conduct his review in the straitjacket of knowing that the Government would not introduce any new legislation.

The Government have always made clear to anyone who cared to ask that they would not legislate. That is because they are not confident of getting a Bill that is committed to self-regulation through the House. Not only Opposition Members, but Conservative Members have doubts about the whole philosophy of self-regulation. It is expensive, it is cumbersome and it does not work.

The debate has been extremely useful, in that I think that the Minister is now in no doubt that we are looking for flexibility to be extended universally across pension provision. The sooner that the Government do that the better. I very much welcome the fact that the Government have admitted, perhaps not in clear terms, that they would make the necessary changes if it turned out that there was some fundamental problem in allowing that flexibility. I hope that the Minister will report to the House further as and when discussions continue.

6 pm

The Government have nothing new to say about regulation. Yet again, they seem to be in the pockets of a minority of providers in the industry. They are not prepared to face up to the fact that the public and, increasingly, a large section of the industry, have lost confidence in our regulatory system. Until that is put right, sales will continue to fall and people will continue to lack the confidence to make provision for themselves—the sort of confidence that they ought to have—because they will have doubts about the integrity and the efficiency of the regulatory system. That must be put right. For that reason, if for no other, we shall certainly press our amendment to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 215, Noes 275.

Division No. 53]	[6.00 pm
AYES
Abbott, Ms Diane	Boateng, Paul
Adams, Mrs Irene	Boyes, Roland
Ainger, Nick	Bradley, Keith
Ainsworth, Robert (Cov'try NE)	Brown, Gordon (Dunfermline E)
Allen, Graham	Brown, N (N'c'tle upon Tyne E)
Alton, David	Bruce, Malcolm (Gordon)
Anderson, Donald (Swansea E)	Burden, Richard
Anderson, Ms Janet (Ros'dale)	Byers, Stephen
Ashdown, Rt Hon Paddy	Caborn, Richard
Ashton, Joe	Callaghan, Jim
Austin-Walker, John	Campbell, Mrs Anne (C'bridge)
Banks, Tony (Newham NW)	Campbell, Menzies (Fife NE)
Barnes, Harry	Campbell, Ronnie (Blyth V)
Battle, John	Campbell-Savours, D N
Bayley, Hugh	Canavan, Dennis
Beckett, Rt Hon Margaret	Cann, Jamie
Benn, Rt Hon Tony	Chidgey, David
Benton, Joe	Chisholm, Malcolm
Bermingham, Gerald	Church, Judith
Berry, Roger	Clapham, Michael
Blair, Rt Hon Tony	Clark, Dr David (South Shields)

Clarke, Eric (Midlothian)	Kilfoyle, Peter
Clarke, Tom (Monklands W)	Lestor, Joan (Eccles)
Clelland, David	Lewis, Terry
Cohen, Harry	Liddell, Mrs Helen
Connarty, Michael	Livingstone, Ken
Cook, Robin (Livingston)	Lloyd, Tony (Stretford)
Corbett, Robin	Lynne, Ms Liz
Corbyn, Jeremy	McAvoy, Thomas
Cousins, Jim	McCartney, Ian
Cunningham, Jim (Covy SE)	Macdonald, Calum
Cunningham, Rt Hon Dr John	McKelvey, William
Dalyell, Tam	Mackinlay, Andrew
Darling, Alistair	MacShane, Denis
Davidson, Ian	Madden, Max
Davies, Bryan (Oldham C'tral)	Mahon, Alice
Denham, John	Mandelson, Peter
Dixon, Don	Marshall, David (Shettleston)
Dobson, Frank	Martlew, Eric
Donohoe, Brian H	Maxton, John
Dowd, Jim	Meacher, Michael
Dunwoody, Mrs Gwyneth	Meale, Alan
Eagle, Ms Angela	Michael, Alun
Eastham, Ken	Michie, Bill (Sheffield Heeley)
Enright, Derek	Michie, Mrs Ray (Argyll & Bute)
Etherington, Bill	Milburn, Alan
Evans, John (St Helens N)	Miller, Andrew
Ewing, Mrs Margaret	Mitchell, Austin (Gt Grimsby)
Field, Frank (Brikenhead)	Moonie, Dr Lewis
Fisher, Mark	Morris, Rt Hon Alfred (Wy'nshawe)
Foster, Rt Hon Derek	Mudie, George
Foster, Don (Bath)	Mullin, Chris
Fyfe, Maria	Oakes, Rt Hon Gordon
Galbraith, Sam	O'Brien, Mike (N W'kshire)
Galloway, George	O'Brien, William (Normanton)
Gapes, Mike	O'Hara, Edward
George, Bruce	Olner, Bill
Gerrard, Neil	O'Neill, Martin
Gilbert, Rt Hon Dr John	Orme, Rt Hon Stanley
Godman, Dr Norman A	Parry, Robert
Golding, Mrs Llin	Patchett, Terry
Gordon, Mildred	Pearson, Ian
Graham, Thomas	Pendry, Tom
Grant, Bernie (Tottenham)	Pickthall, Colin
Griffiths, Nigel (Edinburgh S)	Pike, Peter L
Grocott, Bruce	Pope, Greg
Gunnell, John	Powell, Ray (Ogmore)
Hall, Mike	Prentice, Bridget (Lew'm E)
Hanson, David	Prentice, Gordon (Pendle)
Harman, Ms Harriet	Prescott, Rt Hon John
Harvey, Nick	Primarolo, Dawn
Heppell, John	Purchase, Ken
Hill, Keith (Streatham)	Quin, Ms Joyce
Hinchliffe, David	Radice, Giles
Hodge, Margaret	Randall, Stuart
Hoey, Kate	Raynsford, Nick
Home Robertson, John	Reid, Dr John
Hoon, Geoffrey	Rendel, David
Howarth, George (Knowsley North)	Robertson, George (Hamilton)
Howells, Dr. Kim (Pontypridd)	Robinson, Geoffrey (Co'try NW)
Hoyle, Doug	Roche, Mrs Barbara
Hughes, Kevin (Doncaster N)	Rooker, Jeff
Hughes, Robert (Aberdeen N)	Rooney, Terry
Hutton, John	Ross, Ernie (Dundee W)
Illsley, Eric	Ruddock, Joan
Ingram, Adam	Sedgemore, Brian
Jackson, Glenda (H'stead)	Sheldon, Rt Hon Robert
Jackson, Helen (Shef'ld, H)	Shore, Rt Hon Peter
Jamieson, David	Short Clare
Janner, Greville	Skinner, Dennis
Jones, Lynne (B'ham S O)	Smith, Andrew (Oxford E)
Jones, Martyn (Clwyd, SW)	Smith, Chris (Isl'ton S & F'sbury)
Jones, Nigel (Cheltenham)	Smith, Llew (Blaenau Gwent)
Kaufman, Rt Hon Gerald	Soley, Clive
Keen, Alan	Spearing, Nigel
Kennedy, Jane (Lpool Brdgn)	Spellar, John
Khabra, Piara S	Squire, Rachel (Dunfermline W)

Steinberg, Gerry	Wallace, James
Stevenson, George	Wareing, Robert N
Stott, Roger	Watson, Mike
Strang, Dr. Gavin	Wicks, Malcolm
Sutcliffe, Gerry	Williams, Rt Hon Alan (Sw'n W)
Taylor, Matthew (Truro)	Wilson, Brian
Timms, Stephen	Wise, Audrey
Tipping, Paddy	Worthington, Tony
Turner, Dennis	Wright, Dr Tony
Tyler, Paul	Tellers for the Ayes:
Vaz, Keith	Ms Tessa Jowell and
Walker, Rt Hon Sir Harold	Ms Estelle Morris
NOES
Ainsworth, Peter (East Surrey)	Cran, James
Aitken, Rt Hon Jonathan	Currie, Mrs Edwina (S D'by'ire)
Alison, Rt Hon Michael (Selby)	Curry, David (Skipton & Ripon)
Allason, Rupert (Torbay)	Davies, Quentin (Stamford)
Amess, David	Day, Stephen
Ancram, Michael	Deva, Nirj Joseph
Arbuthnot James	Delvin, Tim
Arnold, Jacques (Gravesham)	Dicks, Terry
Arnold, Sir Thomas (Hazel Grv)	Dorrell, Rt Hon Stephen
Ashby, David	Douglas-Hamilton, Lord James
Atkins, Robert	Dover, Den
Atkinson, Peter (Hexham)	Duncan, Alan
Baker, Rt Hon Kenneth (Mole V)	Duncan Smith, Iain
Baker, Nicholas (North Dorset)	Dunn, Bob
Baldry, Tony	Dykes, Hugh
Banks, Matthew (Southport)	Elletson, Harold
Banks, Robert (Harrogate)	Emery, Rt Hon Sir Peter
Bates, Michael	Evans, David (Welwyn Hatfield)
Batiste, Spencer	Evans, Jonathan (Brecon)
Bellingham, Henry	Evans, Nigel (Ribble Valley)
Bendall, Vivian	Evans, Roger (Monmouth)
Beresford, Sir Paul	Faber, David
Biffen, Rt Hon John	Fabricant, Michael
Booth, Hartley	Field, Barry (Isle of Wight)
Boswell, Tim	Fishburn, Dudley
Bottomley, Peter (Eltham)	Forman, Nigel
Bottomley, Rt Hon Virginia	Forsyth, Rt Hon Michael (Stirling)
Bowden, Sir Andrew	Forth, Eric
Bowis, John	Fox, Dr Liam (Woodspring)
Boyson, Rt Hon Sir Rhodes	Fox, Sir Marcus (Shipley)
Brandreth, Gyles	Freeman, Rt Hon Roger
Brazier, Julian	French, Douglas
Bright, Sir Graham	Gale, Roger
Brooke, Rt Hon Peter	Gallie, Phil
Brown, M (Brigg & Cl'thorpes)	Gardiner, Sir George
Browning, Mrs Angela	Garnier, Edward
Budgen, Nicholas	Gill, Christopher
Burns, Simon	Gillan, Cheryl
Burt, Alistair	Goodlad, Rt Hon Alastair
Butcher, John	Goodson-Wickes, Dr Charles
Butler, Peter	Gorst, Sir John
Butterfill, John	Grant, Sir A (SW Cambs)
Carlisle, John (Luton North)	Greenway, Harry (Ealing N)
Carlisle, Sir Kenneth (Lincoln)	Greenway, John (Ryedale)
Carrington, Matthew	Griffiths, Peter (Portsmouth, N)
Cash, William	Grylls, Sir Michael
Channon, Rt Hon Paul	Hague, William
Churchill, Mr	Hamilton, Neil (Tatton)
Clappison, James	Hampson, Dr Keith
Clark, Dr Michael (Rochford)	Hanley, Rt Hon Jeremy
Clarke, Rt Hon Kenneth (Ru'clif)	Hannam, Sir John
Clifton-Brown, Geoffrey	Hargreaves, Andrew
Congdon, David	Harris, David
Conway, Derek	Haselhurst, Alan
Coombs, Anthony (Wyre For'st)	Hawkins, Nick
Coombs, Simon (Swindon)	Hawksley, Warren
Cope, Rt Hon Sir John	Hayes, Jerry
Cormack, Sir Patrick	Heald, Oliver
Couchman, James	Heath, Rt Hon Sir Edward

Heathcoat-Arnory, David	Paice, James
Hendry, Charles	Patten, Rt Hon John
Hicks, Robert	Pattie, Rt Hon Sir Geoffrey
Higgins, Rt Hon Sir Terence	Pawsey, James
Hill, James (Southampton Test)	Peacock, Mrs Elizabeth
Hogg, Rt Hon Douglas (G'tham)	Pickles, Eric
Horam, John	Porter, Barry (Wirral S)
Hordern, Rt Hon Sir Peter	Porter, David (Waveney)
Howard, Rt Hon Michael	Portillo, Rt Hon Michael
Howarth, Alan (Start'rd-on-A)	Powell, William (Corby)
Hughes, Robert G (Harrow W)	Renton, Rt Hon Tim
Hunt, Rt Hon David (Wirral W)	Riddick, Graham
Hunter, Andrew	Robathan, Andrew
Hurd, Rt Hon Douglas	Robertson, Raymond (Ab'd'n S)
Jack, Michael	Robinson, Mark (Somerton)
Jackson, Robert (Wantage)
Jenkin, Bernard	Roe, Mrs Marion (Broxbourne)
Jessel, Toby	Rowe, Andrew (Mid Kent)
Jones, Robert B (W Hertfdshr)	Rumbold, Rt Hon Dame Angela
Kellett-Bowman, Dame Elaine
Key, Robert	Ryder, Rt Hon Richard
Kilfedder, Sir James	Sackville, Tom
King, Rt Hon Tom	Sainsbury, Rt Hon Sir Timothy
Knapman, Roger	Scott, Rt Hon Sir Nicholas
Knight, Mrs Angela (Erewash)	Shaw, David (Dover)
Knight, Greg (Derby N)	Shaw, Sir Giles (Pudsey)
Knight, Dame Jill (Bir'm E'st'n)	Shepherd, Rt Hon Gillian
Knox, Sir David	Shepherd, Colin (Hereford)
Kynoch, George (Kincardine)	Shepherd, Richard (Aldridge)
Lait, Mrs Jacqui	Shersby, Michael
Lamont, Rt Hon Norman	Sims, Roger
Lang, Rt Hon Ian	Skeet, Sir Trevor
Lawrence, Sir Ivan	Smith, Tim (Beaconsfield)
Legg, Barry	Soames, Nicholas
Leigh, Edward	Spencer, Sir Derek
Lennox-Boyd, Sir Mark	Spicer, Sir James (W Dorset)
Lester, Jim (Broxtowe)	Spicer, Michael (S Worcs)
Lidington, David	Spink, Dr Robert
Lilley, Rt Hon Peter	Spring, Richard
Lloyd, Rt Hon Sir Peter (Fareham)	Sproat, Iain
Lord, Michael	Squire, Robin (Hornchurch)
Luff, Peter	Stanley, Rt Hon Sir John
Lyell, Rt Hon Sir Nicholas	Steen, Anthony
MacGregor, Rt Hon John	Stephen, Michael
MacKay, Andrew	Stern, Michael
Maclean, David	Stewart, Alan
McLoughlin, Patrick	Streeter, Gary
McNair-Wilson, Sir Patrick	Sumberg, David
Madel, Sir David	Sykes, John
Maitland, Lady Olga	Tapsell, Sir Peter
Malone, Gerald	Taylor, Ian (Esher)
Mans, Keith	Taylor, John M (Solihull)
Marland, Paul	Temple-Morris, Peter
Marlow, Tony	Thomason, Roy
Marshall, John (Hendon S)	Thompson, Patrick (Norwich N)
Marshal, Sir Michael (Arundel)	Thornton, Sir Malcolm
Martin, David (Portsmouth S)	Thurnham, Peter
Mellor, Rt Hon David	Townsend, Cyril D (Bexl'yh'th)
Merchant Piers	Tracey, Richard
Mills Iain	Tredinnick, David
Mitchell, Andrew (Gedling)	Trend, Michael
Mitchell, Sir David (NW Hants)	Twinn, Dr Ian
Moate, Sir Roger	Vaughan, Sir Gerard
Monro, Sir Hector	Viggers, Peter
Montgomery, Sir Fergus	Waldegrave, Rt Hon William
Needham, Rt Hon Richard	Walden, George
Nelson, Anthony	Walker, Bill (N Tayside)
Neubert, Sir Michael	Waller, Gary
Newton, Rt Hon Tony	Ward, John
Nicholls, Patrick	Wardle, Charles (Bexhill)
Nicholson, David (Taunton)	Waterson, Nigel
Nicholson, Emma (Devon West)	Watts, John
Norris, Steve	Wells, Bowen
Onslow, Rt Hon Sir Cranley	Whitney, Ray
Oppenheim, Phillip	Whittingdale, John
Page, Richard	Widdecombe, Ann

Wiggin, Sir Jerry	Yeo, Tim
Willets, David	Young, Rt Hon Sir George
Wilshire, David	Tellers for the Noes:
Wolfson, Mark	Mr. Sydney Chapman and
Wood, Timothy	Mr. Timothy Kirkhope

Amendment accordingly negatived.

Clause 52 ordered to stand part of the Bill.

Schedule 11 agreed to.