RESTRICTION ON INDEX-LINKING WHERE ANNUITY TIED TO INVESTMENTS

HC Deb 03 April 2000 vol 347 cc746-50

1. `.—(1) In section 51(2) of the Pensions Act 1995 (annual increases in rate of pension) for "Subject to section 52" there shall be substituted "Subject to sections 51A and 52".
2. (2) After section 51 of that Act there shall be inserted— "Restriction on increase where annuity tied to investments
   1. 51A.—(1) No increase under section 51 is required to be made, at any time on or after the relevant date, of so much of any pension under a money purchase scheme as—
      1. (a) is payable by way of an annuity the amount of which for any year after the first year of payment is determined (whether under the terms of the scheme or under the terms of the annuity contract in pursuance of which it is payable) by reference to fluctuations in the value of, or the return from, particular investments;
      2. (b) does not represent benefits payable in respect of the protected rights of any member of the scheme; and
      3. (c) satisfies such other conditions (if any) as may be prescribed.
   2. (2) For the purposes of this section it shall be immaterial whether the annuity in question is payable out of the funds of the scheme in question or under an annuity contract entered into for the purposes of the scheme.
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   3. (3) In this section 'the relevant date' means the date appointed for the coming into force of section (Restriction on index-linking where annuity tied to investments) of the Child Support, Pensions and Social Security Act 2000." '.—[Mr. Rooker.]

Brought up, and read the First time.

Mr. Rooker

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

New clause 25 provides members of money purchase occupational pension schemes with a choice. They will be able to use the non-protected rights element of their accumulated pension fund, in respect of rights accrued from April 1997, to buy instead either an investment-based annuity or an index-linked annuity. Occupational pensions must be increased annually as follows: rights that accrue from 5 April 1988 in respect of guaranteed minimum pension and protected rights must be indexed by the retail prices index, capped at 3 per cent.; and all rights accrued in salary-related and money purchase schemes from 6 April 1997 must be indexed by the RPI, capped at 5 per cent. Protected rights in appropriate personal pensions are subject to the same level of indexation.

We consulted the pensions industry, employers and the public on whether it would be right to relax the current rules for money purchase pension schemes in order to allow schemes to offer investment-linked annuities to any member who might wish to choose that option as an alternative to a traditional index-linked annuity. Of course, the advantage of an investment-linked annuity is that it enables the annuitant to benefit from growth in a range of underlying investments after retirement, although that goes hand in hand with a risk of possible falls in pension income if investment performance is poor.

The principle of introducing greater flexibility for occupational scheme members was widely welcomed. Indeed, a number of annuity providers pointed out that investment-linked annuities have delivered better results in recent years than the traditional index-linked annuity. The new flexibility will apply equally to members of money purchase schemes, whether they buy an annuity or are provided with a pension by their scheme.

Protected rights are not covered by the new clause. As I said when I announced the results of the consultation exercise on 22 March, we intend to give further detailed consideration to issues that arise for protected rights before we decide whether to make any changes to the indexation rules that apply to them. We shall also give careful consideration to the comments that many respondents made on the wider question of the application of indexation requirements to occupational money purchase schemes.

I emphasise that the proposed change provides a genuine option for members of money purchase schemes. The alternative of buying a traditional index-linked annuity will remain available for those members who prefer the certainty of a specified annual rate of increase each year.

The new clause is quite narrow. I hope that it has the support of the House.

Mrs. Lait

We certainly welcome this relaxation of the annuity rules for people who have to retire with a compulsory annuity, but it is worth pointing out that it has had to happen because annuities have been progressively less good value, and we are now dealing with a cohort of pensioners who are upset and angry about what a bad deal the current requirement of compulsory annuities is. I would like to encourage the Government to be slightly braver and to look at all the requirements about annuities for the sake of the aggrieved pensioners for whom they are tinkering around the edges, welcome though these changes are.

I would like the Government seriously to consider, first, whether annuities should be obligatory and, secondly, whether there is an argument for abolishing the 75-year rule for income drawdown. I should like to hear the Government's views on the proposal by the retirement income working party, in its document "Choices", that people should be obliged to take out a compulsory annuity that provides sufficient income merely to keep them off state benefits, and should then be allowed to manage the rest of their pension pot as they see fit. That seems to be the most sensible, logical and grown-up way of dealing with pensions.

On that note, I would welcome—

Mr. Quentin Davies

My hon. Friend has just said that the Government made this proposal only as a sop against the enormous, quite justified outcry from those people who are being cheated—being forced to take annuities at a yield scarcely above the gilt rate, although their capital is being extinguished thereby. Does she agree that this is a thoroughly inadequate, characteristically new Labour, sop? It is a thoroughly fraudulent public relations response.

Mr. Deputy Speaker

Order. Now that the hon. Gentleman has made his speech, perhaps I can say to the hon. Lady that we are going wide of the amendment before us.

Mrs. Lait

I completely agree with you, Mr. Deputy Speaker, which is why I was trying to bring the debate back to the small improvement that the Government have offered. Although I might thoroughly agree with my hon. Friend, I was trying to encourage the Government to help, rather than to beat them round the head, because sometimes it helps if you stroke them. Therefore, I hope very much that they will be stroked, and are prepared to consider much wider provision of better retirement income for pensioners.

Mr. John Butterfill (Bournemouth, West)

I want to support what my hon. Friend has said and to welcome the measure as far as it goes, but the sheer complexity of the measure that the Minister has just outlined shows how impossible it has become for those who are buying annuities and pensions even to understand what they are contracting for.

We are now in a position where any independent financial adviser who advised a prospective pensioner to buy a personal pension would be guilty of mis-selling. That is partly because the Government, and successive Governments, have laid on alternative forms of tax-advantageous investment. Recently, individual savings accounts were introduced. Before that, there were personal equity plans and tax-exempt special savings accounts. There are still venture capital trusts and enterprise investment schemes, all of which, from an investor's viewpoint, are better investments than personal pensions.

The situation for personal pensions will get worse. Because of the operation of the minimum funding requirement, the funds are not allowed to invest in such advantageous forms of investment. They are forced into gilts, so the value of pension funds will be diminished, which means that the yield on the annuities will be diminished. That is why the Government tabled the new clause, but it is a wholly inadequate response. We must put pension provision and pension saving on the same footing as the other forms of saving that the Government seek to encourage. As they do that, however, they are undermining the basis on which pension provision has been made in the past.

11.15 pm

Mr. Flight

I welcome the new clause, but I wish to point out that there are two problems with investment-linked annuities. First, it is normally impossible to change manager. If someone is locked into what he considers to be a poor fund, he can do nothing about the manager of the equity-linked annuity.

Secondly, the tax rules are such that if the annuity performs extremely well, the investor cannot take the full gains. The smoothing rules require that the income taken from the equity-linked annuity makes provision for potentially bad years in the future. There have been many cases in which people have died and left behind undrawn income, which simply accrues to the benefit of the insurance company.

As far as I am aware, neither problem has been addressed by the Government's proposals. Therefore, I exhort them to get a move on and to consider the retirement income working party's report. It has addressed all the key concerns that the Treasury and the Inland Revenue have had about abolishing the obligation to buy an annuity. The debate has been going on for three years, and the Minister might even agree that the argument has been conclusively won by those who support the abolition of the requirement to buy an annuity and who want to move to something like the Canadian scheme. The requirement is particularly unjust for those approaching 75 and who find themselves locked into an annuity.

Mr. Field

I very much welcome the change that the Government are making, but I hope that they will listen to the comments that have been made from both sides of the House and that we can move to a position in which the taxpayer's interest is protected. Provided that people meet the requirement of not being on welfare when they already receive tax concessions to build up their pension entitlement, they should be free to manage their own funds over and above the level stipulated.

Mr. Rooker

I could get quite angry. However, given the time of night, I shall not do so. I do not think that we have received a big enough thank you for what we have done.

Mr. Field

I say a big thank you to my right hon. Friend.

Mr. Rooker

I expect that from Labour Members.

When I moved the new clause, I tried to hint at a serious issue that has not been addressed by it. The new clause is quite narrow and the issues that have been raised are important. In due course, the Government will respond to the "Choices" report and I am very keen to get a positive response. The report raises some important issues. I do not think that it provides all the answers, but I doubt whether we shall ever find all the answers. However, we must find a way through the impasse.

The problem is partly a consequence of the very low rates of inflation that we currently enjoy. Some people are aggrieved, and we shall try to find a solution, perhaps based on the "Choices" report, which may provide a foundation for the answer. My Department is concerned to ensure that any proposed scheme guarantees that people do not fall back on the state and means-tested benefits, and the Revenue has its views. The Government can make a collective response and we will come forward with that as quickly as possible.

Question put and agreed to.

Clause read a Second time, and added to the Bill.