§ (" . Part I of this Act shall not have effect until comprehensive legislation embodying the pensions proposals outlined in "A new contract for welfare: Partnership In Pensions" (Command 4179) has been introduced.").
§ The noble Baroness said: The purpose of the amendment is to ensure that Part I, which deals with the stakeholder pensions, shall not be proceeded with until we have the whole picture of the Government's pension provision in legislative form.
§ The Minister had great fun with me in Committee because I inadvertently quoted the wrong Green Paper. I have corrected that in this amendment, by referring to the December 1998 Green Paper Partnership in Pensions. The Minister rubbed my nose in it, saying that if only I had read that document, I would have understood and seen the whole picture of 34 government policy. She said that there was indeed a debate on the scheme in which I had taken part—so how could I claim that the Government had not presented the whole picture?
§ In the first place, there has never been a debate on that Green Paper in this House. A Statement made in another place was repeated in this House by the Minister, which is the custom. It is also the custom in this House to ask questions on a Statement, not to debate it. When I tried to put in my pennyworth, I was slapped over the knuckles by my noble friend Lord McIntosh of Haringey on the Front Bench, who pointed out that I had taken four minutes of the 20 minutes allowed to Back-Benchers to question Ministers on a Statement. I hope that the Minister will correct the misleading impression she gave that we all had plenty of opportunity to discuss the Green Paper and should therefore be familiar with it.
§ The concession that the Minister has just made to Lord Rix shows that she is today in a giving mood and that we shall get other concessions as we go along. Some of us laboured very hard in Committee to put forward reasoned arguments for important changes. We did not get much response. Amendment No. 2 is an example of a reasoned argument for important change.
§ The tenor of our complaint, as embodied in the amendment, is that it is disrespectful to Parliament to bring forward a Bill one section of which deals with the stakeholder pension, on which we are asked to vote and which will become law, whereas we are left in the dark about what the Government really intend over the pensions picture as a whole. I must in all gentleness point out to the Minister that the fact that certain proposals have been put forward in one of the Government's famous glossies called a "Green Paper"—although I believe it was actually yellow and blue—is not enough evidence for us to go on. Is it not true that until one gets to the stern moment of legislative decision, one does not get anything really clear-cut?
§ I remind the Minister that in another glossy—our manifesto in the last general election—we made a pledge to retain SERPS for those who wished to remain in it. The Minister queried me on that as well. I beg her to read that that manifesto most carefully, as I have done, in which it is indicated, although not in the Bill, that SERPS is to be abolished and replaced by a combination of the state second pension and the stakeholder pension. What is the Government's comprehensive aim on pensions? I urge the House to take this seriously. This is not just a would-be clever debating point.
§ We are told that the Government's aim with the sort of structure hinted at—but which is not before us in the Bill—will result in moving all pensioners out of dependence on means-testing, yet the Government have admitted that even with the combination of stakeholder pension and state second pension, by 2050 one in four pensioners in this country will still be dependent on means-tested aid. How could that possibly be accepted by the House? Ought we not to examine how that disastrous situation is reached?35
§ Poverty is not just about the lack of certain material things. It is also about being deprived of one's dignity and independence. If the Government envisage that in the middle of the next century one in four pensioners will still be dependent on the uncertain charity of the taxpayer, that is a confession that the Government's structure is inadequate—and should affect their policy on restoring the earnings link, for example.
§ There are other aspects of pensions policy that some of us have urged for so long. We shall go on urging them. We will not be silenced. I know that the Government must be feeling immensely pleased with the smoothness with which they are getting away with fragmenting pensions policy into salami slices and slipping them all through this House because most people cannot be expected to understand what is going on. We insist that the Government are honest with us and give a clear overall picture in a form that we can then vote upon before they ask us to vote on one of their salami slices.
§ I hope that the House will take Amendment No. 2 seriously and support my noble friend Lady Turner of Camden and me when we press it to a vote—unless of course the Minister plans to make another concession early this afternoon. I beg to move.
§ 4.45 p.m.
§ Lord Higgins
My Lords, in a previous debate on these matters the noble Baroness said that if she and I went on agreeing, people would start talking. I find myself, with some surprise, in agreement with a considerable number of the points she made both in Committee and today. The noble Baroness rightly quotes the Labour Party manifesto, which stated that Labour would retain SERPS for those who wished to remain in it. Perhaps the Minister will say whether or not that is still the Government's position. As I understand it, the Government do not propose to do that which was stated in their manifesto but instead say that people will be better off under the state second pension.
Perhaps I ought to repeat something that I said in Committee: there is some danger in these debates of getting into a semantic difficulty if we do not clearly distinguish between the state second pension—in capital letters, so to speak—and a second pension generally, which may refer to a whole range of different things. If the Government are, indeed, saying that the state second pension is a better substitute for SERPS, that needs to be carefully examined.
On closer inspection, there are three major catches. First, those higher levels of entitlement will only arrive on future earnings from a given implementation date. In other words, there will be no increase in entitlement on the basis of current or past contributions. I imagine that it will be almost a generation before one notices any difference. Secondly, although employees' rights to the new second pension on earnings up to £9,000 will, in the next century, accrue at double the rate of SERPS, nonetheless, that impressive rise will be substantially paid for and compensated by halving the 36 rate of accrual in the next band of income from £9,000 to £18,500. Perhaps the Minister could confirm that. I am seeking to get at what the second state pension is all about. Thirdly, a number of those in receipt of the state pension will inevitably find that they are receiving it instead of means-tested benefits. That point is not reflected properly in the tables and charts in the Green Paper to which the noble Baroness now rightly refers.
If I understand her correctly, the noble Baroness argues that it is difficult to take a firm view on the question of stakeholder pensions, and so on, if we do not have before us the Government's overall proposals and, as she rightly said, in legislative form. It is the case that one does not discover what is going on until one sees the proposals in the form of a Bill before your Lordships' House.
Much greater clarity is needed as to exactly how the state second pension and the stakeholder pension will fit together. The Green Paper to which the amendment of the noble Baroness refers is a lengthy document which will take some while to implement on a comprehensive basis. Nonetheless, paragraph 31 states:Once stakeholder pension schemes have become established (we expect in about five years time), the State Second Pension will become flat rate, paying all its members at a single rate which will be double [that] … under SERPS".However, how we move from one to the other is not at all clear. It will be extremely difficult to appraise the stakeholder pension unless we are much clearer than we are at present on the state second pension. I hope that the Minister, in the sympathetic mode in which she begun the afternoon, will be able to tell us rather more about the way the two fit together. My impression is that that is now quite difficult to ascertain, and the timing even more so. However, apparently, as the stakeholder pension proceeds, so the state second pension is to be transformed. It will help those at the very bottom end of the scale but will cease to help those further up the scale and do nothing for those in occupational schemes which, I believe everyone is now agreed, is the best way for pension provision to be made.
One of the regrettable aspects about this situation is that as I understand it—perhaps the Minister could confirm this—since the present Government came into office there has not been set up a single final salary-related pension scheme. That is perhaps not least because of the action taken by the Chancellor of the Exchequer in his first Budget with regard to changes in the tax system. There is a real danger that unless we are much clearer on the points made by the noble Baroness, people will defer taking decisions on pensions. That is of grave concern. We all know that it is important to contribute early on to a pension. The contributions in the early years produce far more than those made later. However, the uncertainty now being created is likely to lead people to delay in that way.
I fear also that unless we are clearer on such matters and unless this is carried out in a comprehensive way, as requested by the noble Baroness, a number of people will also hesitate to take up their company pensions. I have some experience of that from my own 37 knowledge. Some people are saying, "If there are stakeholder pensions, we will not yet take up a company pension because we do not know whether the stakeholder pension will be better."
There are now some products about which we are told, "These are, effectively, a pre-cursor to the stakeholder pension. Take out a new pension with this company and we will convert it into a stakeholder one". However, that does not solve the problem.
We have a great deal of business ahead of us. However, it seems to me, particularly with regard to the relationship between the stakeholder pension and the second pension, that considerably more clarity is needed than we have at present. Finally, perhaps the Minister can tell us when she expects legislation on the second state pension to come before the House.
§ Lord Goodhart
My Lords, nobody in this House can speak on the subject of pensions with authority equal to that of the noble Baroness, Lady Castle of Blackburn. She was the author of the 1975 legislation which has been the basis of our system of occupational and personal pensions ever since. Anything she says, therefore, has to be listened to with great attention.
We, on these Benches, have considerable sympathy for the amendment tabled by the noble Baroness, though for somewhat different reasons from those which she expressed. It would, perhaps, be unwise for her to assume that our sympathy would go as far as supporting her in the Division Lobby should she seek to divide the House.
The noble Baroness based her amendment on her objection to the abolition of SERPS and the failure of the Government to go back to the earnings-link for the basic state pension. On those issues, we support the Government rather than the noble Baroness. I do not think that it is appropriate for me to go into those reasons now. No doubt they will be raised when we reach Amendments Nos. 53 and 55 tabled in the names of the noble Baronesses, Lady Castle of Blackburn and Lady Turner of Camden. However, perhaps for reasons more similar to those raised by the noble Lord, Lord Higgins, we too regret that the opportunity was not taken up to introduce legislation to set out in more detail the Government's proposals for the second state pension.
It is clear that this is a three-legged stool. We already have a minimum income guarantee, which does not require primary legislation; the stakeholder pension and, in between the two is a second state pension. We have the first and third legs but we do not know what the legislation is to be regarding the second state pension. We believe that the interface between that and the stakeholder pension will be essential to the proper working of the new pension system which the Government propose to introduce, and with which we have a considerable measure of sympathy. We therefore regret that the Government did not feel able to introduce the legislation for the second state pension at the same time as that introduced for the stakeholder pension.
38 If the stakeholder pension is to go ahead before the second state pension is introduced, it will have some value. It will operate as what might be called a "cheap and cheerful" alternative to the more elaborate rules which now govern occupational and personal pensions. To that extent it is all to the good and we would not object to its introduction even before the second state pension is introduced.
However, I take the opportunity to say that we regret the failure to deal now with the second state pension. We shall listen with care to what the Minister says as to why it has been impossible to do that now.
§ 5 p.m.
§ Lord Clarke of Hampstead
My Lords, like the previous speaker, I have listened intently to the expertise of my noble friend Lady Castle, not only in this debate, but over many years. I therefore make my comments with some trepidation.
Amendment No. 2 is clear. It says that we should do nothing to improve the law on pensions until we can do everything. But in my view, to delay progress would be wrong. It is one thing to say that we must assess the Government's pensions proposals as a whole—that is what the Government asked us to do when they published their proposals last December in Partnership in Pensions. It is another thing entirely to say that we should not act on any of those proposals until we can act on them all.
It is surely right that we should make progress as and when we can. Some of the Government's proposals do not need primary legislation. In relation to the minimum income guarantee for pensioners, for example, it must be right that the Government act immediately to help those pensioners who depend on income support. Is it not right that the poorest pensioners should receive priority treatment'' What advantage could there be in delaying helping them until the whole of the Government's pensions programme can be implemented?
Similarly, I believe that the Government are right to press ahead with laying down the legal foundations for stakeholder pensions. We should remember that stakeholder pensions are aimed at the many people who do not at present receive a sufficient wage to enable them to save for their retirement. Occupational pensions are a good option for those whose employer provides one. Personal pensions are fine for those who earn enough to make them financially worth while. But what of those whose employer does not provide an occupational scheme or those on moderate earnings who find the cost of personal pensions prohibitively high? Surely we should be looking to help them as soon as we reasonably can.
Stakeholder pensions are a new idea and will require an innovative response from the pensions industry. The Government need to make it clear to the pensions industry that they are committed to the success of the 39 new scheme. If legislation were delayed, the industry would begin to doubt the Government's intentions, and that would benefit nobody.
§ Baroness Turner of Camden
My Lords, I support my noble friend's amendment. I attached my name to it. Partnership in Pensions, the document to which it makes reference, sets out an entirely new framework for pensions provision. It is a pensions framework quite different from anything that we have seen before. Chapter 6 covers reform of SERPS and refers to the second state pension. Chapter 7 introduces the framework for the stakeholder pensions.
Chapter 7 is extremely detailed and it is clear that a number of alternatives have been under consideration. We know also that the Government engaged on a comprehensive consultation exercise. I am in favour of that, but we still do not know what the results will be and how the proposed framework will be affected, particularly (as some previous speakers said) in relation to the whole question of the second state pension.
As was stated by the noble Lord, Lord Higgins, we must also consider the uncertainty created in the minds of those who might otherwise be involved with occupational pension provision. I recently visited a conference arranged by the National Association of Pension Funds. It is concerned about the possibility that stakeholder provision, as presently formulated, could have a deleterious effect on occupational pension schemes in the future. Of course, we do not know whether or not that will be the case; we have not seen the whole framework of pensions provision and do not know what the complete picture will be.
It makes sense, therefore, that we should have the opportunity of looking at pensions provision as a whole before segments of it are put into operation. On those grounds, I support my noble friend's amendment.
§ Baroness Hollis of Heigham
My Lords, Amendment No. 2 would insert a condition that Part I of the Bill shall not take effect until comprehensive legislation has been introduced on our wider proposals for pensions reform. We discussed a similar amendment in Committee.
The proposals we outlined in detail in the Green Paper, Partnership in Pensions, published in December 1998, set out a new insurance contract for pensions. As my noble friend said, it was brought forward in a Statement; a Green Paper—not a "glossy" as my noble friend described (there is nothing "glossy" about it, except the colour on the front)—consisting of over 105 pages, together with appendices. Questions were asked on that paper following the delivery of the Statement. Since then, as my noble friend will be aware, if there was any ambiguity in the House as to what the Government intended, there has been ample opportunity to table an Unstarred Question or to seek a Wednesday debate on the subject. No Peer has done so. We had the Statement on the Green Paper, and we have had the occasional Starred Question on the 40 matter. Until this late stage, noble Lords seemed to be well aware of the contours of the Government's proposals.
As the noble Lord, Lord Goodhart, said, it is a three-step approach. The first step is for those, mostly elderly, people who have not had the opportunity to build up a pension and who want to make sure that they receive adequate protection in their old age; the second is the state second pension for low earners. The scheme will reform SERPS. It will be a "pay-as-you-go" scheme for those who would otherwise have little access to a decent pension in their old age. Thirdly, there will be the stakeholder pension, which is what we are discussing today.
Those contours have been clear for almost 12 months. If any noble Lords were uncertain about the Government's proposals, it was open to them at any stage to table an Unstarred Question or to seek a debate. They have not chosen to do so. That is why it is puzzling that this matter should arise at this late stage.
Our approach in the Green Paper was to build a modern and affordable pensions system which ensures that everyone has the opportunity to achieve a decent income in retirement. The pensions system we inherited does not do that. We recognise the strengths of the current system, but it leaves several gaps. First, it does nothing to encourage those who could, but do not, save for their retirement, to begin making provision. Secondly, it does nothing to help those who cannot afford to save to achieve security when they retire. Thirdly, those on low earnings or outside the labour market, those most in need of help, particularly women in part-time and low paid jobs, do not benefit from SERPS. Finally, many people do not have access to high quality, second-tier pensions.
Occupational pension schemes are one of the great welfare success stories, but they are not available to everyone. Personal pensions can be a useful substitute where people change jobs frequently, but again are not suitable for everyone, particularly those with moderate or low earnings. My noble friend Lady Turner has been in the forefront—rightly so—of criticising some of the misselling activity that has lain behind their growth.
Our integrated strategy for the future of pensions aims to meet the needs of those different groups. First, we are committed to ensuring security in retirement—that is, security for current pensioners. We have moved quickly to put policies into place. As the noble Lord, Lord Goodhart, acknowledged, we introduced the new minimum income guarantee in April to provide immediate help to today's poorest pensioners, increasing their income support by three times the rate of inflation. Single pensioners now receive £75, couples receive £116.
So that all pensioners can share in rising national prosperity, our long-term aim, as resources permit, is for the minimum income guarantee to be increased in line with earnings, not prices. As a first step towards that, the increase next April will be based on earnings. That will ensure that the value of the extra help is maintained next year.
41 The minimum income guarantee—pensioners can have access to that through home visits, the post or the telephone; they do not need to step inside a benefit office—is an entitlement which will make a real difference to the poorest pensioners as quickly as possible. It is the most effective way to help those most in need.
But we are doing much more than that. In our first Budget we allocated £200 million, introducing winter fuel payments for pensioners. The last Budget increased winter fuel payments to £100 each, which will benefit around 10 million pensioners and over 7 million households. We also gave a guarantee on tax—a package worth £1 billion overall. As well as that, we reduced VAT on fuel and scrapped eye-test charges for the over-60s. But that is only the first step in a strategy designed to extend the benefits of secure retirement to all our pensioners.
My noble friend Lady Castle asked about the Government's proposals. Our plans are to reform both state and private pensions so that all those who spend a lifetime in work or in caring will build up rights to a pension sufficient to take them above the minimum income guarantee. If they are low earners, they will probably go into the reformed SERPS, but because the state second pension is SERPS without the "ER"—the earnings related aspect—it will redistribute to the poorest, as SERPS never did.
Secondly, with the state second pension, those earning under £9,000 a year and those who cannot work because they are caring, ill or disabled will see a dramatic improvement in their state pension provision. For example, someone on £6,000 a year in 20/50 terms will be getting £45 on SERPS but on the state second pension he or she would be getting nearly double that sum with £80. So the state second pension will reform SERPS for the better as regards those who are the least well-off.
In this Bill we are introducing reforms to make it easier for those future pensioners who can save in a funded scheme to do so. Our new low-cost and flexible stakeholder pension schemes will provide a better return for the hard-earned savings of moderate earners. We want to give these people the opportunity to boost their retirement income by providing access to a good value pension scheme—stakeholder pensions—to which they can contribute extra when their earnings and other circumstances allow.
As I said before, personal pensions can provide a reasonable option for many. This Bill sets out the legislative framework for stakeholder pension schemes to provide the value for money and flexibility which is missing from so many existing arrangements. We think that it is vital that stakeholder pension schemes are available for people to join as soon as possible. Even a short delay in starting a pension arrangement can have a considerable impact on the level of pension which is available at retirement; for example, someone aged 25 who delays starting a pension for five years could lose 16 per cent of his potential pension, while someone aged 45 could lose one quarter of his pension if he waited for five years.
42 That is why we have brought forward this legislation at the earliest opportunity, following the publication of the Green Paper. Potential scheme providers need time to plan and make preparations, so they need to know what we will be asking them to do. The industry needs to know where it stands and not have the detailed proposals, in terms of the regulations upon which we have been consulting with it over the summer, thrown up into the air by an amendment moved at the Report stage of this Bill. That would be unfair to the industry and unfair to those who will benefit from the new arrangements that will be put into place.
The Government need to ensure that the necessary administrative and regulatory arrangements are put in place so that we can ensure that schemes are efficient and secure. We need to act with some urgency, but we are also conscious of the need to get the details right.
I believe that the noble Lord, Lord Higgins, asked me two specific questions. First, he asked me about the state second pension and the accrual rates. He asked me to explain what we intend to achieve by introducing a 40 per cent accrual rate up to £9,000. The noble Lord thought that that would be paid for by a 10 per cent accrual rate for the band £9,000 to £20,000. Perhaps I may correct that misunderstanding. All contributors will get a 40 per cent accrual rate on the band of earnings from the LEL to £9,000. In addition, there will be 10 per cent on earnings of £9,000 to £20,000. Therefore, moderate earners will gain, although not by as much as low earners. We are unapologetic about this because we think that the pension policy of previous governments of all colours has not done enough for those low-paid earners. There are no losers at any level of earnings above LEL.
Secondly, if I understood him correctly, the noble Lord, Lord Higgins, raised the point that no new occupational pension schemes have been set up under the present Government. We understand that 30,000 new schemes were set up in 1997–98; 24,000 schemes have been set up so far this financial year—
§ Baroness Hollis of Heigham
My Lords, I do not have the breakdown for that. However, the important point is that something like well over 90 per cent of all occupational schemes are final salary schemes at present. In today's labour market where people move from job to job and are in and out of work, especially if they are women, it is not always clear that final salary schemes based on traditional models of middle-class professional male work, which show an income level for 40 years at a time, are the most appropriate way forward. Where people are in careers which are insecure, there is much to be said for having the benefit of a portable, funded money purchase scheme rather than a final salary scheme.
We set out many of the detailed proposals in an extensive programme of consultation over this summer, as my noble friend Lady Turner acknowledged. These will have given those in the industry important information about our thinking on many of the detailed issues that will affect the 43 establishment and operation of stakeholder schemes. We have received many hundreds of extremely helpful and well-considered responses on these papers and are currently refining our proposals with the aim of announcing decisions around the turn of the year.
The amendment seeks to provide that the stakeholder clauses should not come into effect until the Government's other pension proposals are set out in legislation. I accept that pension reforms need to be judged as a whole: that is why we published the Green Paper. However, my noble friend Lord Clarke is absolutely right, I do not believe that this means that we should not do anything until we can do everything. What my noble friend Lady Castle calls "salami" I would call an incremental approach to delivering the policies and philosophies outlined in the Green Paper that noble Lords discussed at the time and, had they so wished, have had ample opportunity to discuss further.
As I said, it is important that we do this as quickly as possible. If this Bill is improved, we expect stakeholder pension schemes to be able to operate from April 2001. However, changes involving the new state second pension are not expected to come into force until April 2002 at the earliest. We do not see that this need cause problems; indeed, why should there be any? They are different forms of pensions for different groups of our citizens: one is a pay-as-you-go scheme, while the other is a funded scheme. I give way.
§ Lord Higgins
My Lords, none the less, one needs to look at the two side by side. If indeed the second state pension will not come into effect until 2002, is there any reason why the Government could not publish draft clauses, as has been done most successfully with a number of other pieces of legislation? In that way we could see the detail, which is the concern of the noble Baroness, Lady Castle.
§ 5.15 p.m.
§ Baroness Hollis of Heigham
My Lords, if that is the concern of my noble friend Lady Castle—I am not sure that it is—I should emphasise that these are two separate and different pensions: one is funded, one is a pay-as-you-go scheme. The funded scheme is the one that we are introducing in this Bill; that is the innovation. The pay-as-you-go scheme is a reform and an adaptation of what we already have—SERPS. Subject to approval being given for it to be included in the next Queen's Speech, we will then have the opportunity to discuss it in three or four months' time.
We have a perfectly reasonable timetable. The big, important and new innovatory changes fall under the stakeholder pension which we are discussing now. They were based on six consultation documents issued through the summer. The industry is expecting this timetable and I think that it would be appalled if we were now to turn that upside down. The proposals regarding the state second pension, which I hope will be included in the Queen's Speech next autumn, will be a reform, an adaptation and a development of SERPS. However, unlike SERPS, it will help the lower paid. In my view, therefore, it will be a much better scheme.
44 These are different types of scheme for different groups of the population: one is a pay-as-you-go scheme and the other is funded. One will be delivered by the private sector and the other by the state. Therefore, they do not need to be read alongside one another. They do not interact in some important way in that sense over and beyond the philosophy outlined in the Green Paper. I do not believe that my noble friend is right to say that it is reasonable not to go forward with the state second pension, which is the complicated, new funded scheme, until she has the details of the reform steps in her hands. She knows the broad philosophy. I shall certainly take up the point about the clauses because I think that it would be perfectly reasonable to try to get that in the public domain as quickly as we can. However, to hold up the entire stakeholder pension, which industry is counting on us to deliver in time, for the sake of not being able to discuss a totally different pay-as-you-go pension—a development of SERPS—seems to me to be deeply unreasonable.
I hope that I have provided your Lordships with some reassurance. We intend to bring forward legislation to implement the state second pension as soon as the parliamentary timetable allows. While I cannot give a guarantee about that, it is certainly our aim, as I said, that the new state second pension will have been introduced into Parliament by the time that the stakeholder pensions legislation comes into effect.
I hope that in the light of those remarks my noble friends Lady Castle and Lady Turner will feel able to withdraw their amendment. They are asking me for what they term a "concession". However, it is not a concession. It would effectively constitute a wrecking amendment as regards this part of the Bill. Stakeholder pensions would be put into suspense for a year or more until the state second pension had been fully discussed. What does that mean?
If this House cares about providing a funded, portable, cheap, transparent and secure pension for those who most need it—that is, low earners, the self-employed, those moving from job to job and those who have fallen out of the labour market, perhaps to have a child—it will not support this amendment. If Members of your Lordships' House are concerned about the good will and the detailed consultation that has taken place with the private pension providers, they will not support this amendment. It would effectively delay the implementation of this Bill and an important move on the part of the Government to ensure that there is pension provision for those in need.
My noble friend seeks to delay the introduction of that measure. I do not believe that that is because she does not know what we are proposing. I think that it is because she does not like what we are proposing. That is a very different and, in my view, unacceptable reason. I hope that if my noble friend is minded to press the amendment to a Division your Lordships will not support her because the price of supporting her will not be paid by your Lordships but by the low paid, the self-employed and women who will be denied the 45 earliest possible opportunity to get the pension provision to which they are entitled and which they have been led to believe they will obtain.
§ Baroness Castle of Blackburn
The Minister has given us one of her eloquent and rather long-winded justifications of government policy. But the more I listened, the more I thought she was proving the case that. Lady Turner and I had made. To serious parliamentarians, ministerial eulogies are no substitute for hard legislative facts. She has not, for instance, explained why, although the Government set up a pensions review body way back in 1996 to examine pensions policy as a whole and only later produced a document on the stakeholder pension, the only thing we have is the stakeholder pension.
I am sorry, but we really are being asked to take too much on trust. I give one example. We know that the Government are trying to divide pensioners into two halves: those on means-tested benefits and those who privately finance themselves because they are able to. We are given a wonderful picture of the minimum income guarantee of £75. However, even then I would point out that that is less generous than the £90-odd that the basic state pension as of right would be today if Lady Thatcher's government had not cancelled the earnings link for its uprating. However, the minimum income guarantee ceases to be a guarantee and the term becomes a mockery unless the Government commit themselves by law to an annual uprating in line with earnings. "Oh" says the Minister, "in the longer term we are hoping that we might do that"; in other words, we are right, but we must wait and trust the Government. What does she mean by "in the longer term"? Why should Parliament be fobbed off with language such as that?
I could go on, through all her long speech, pointing out items such as that. However, I shall not abuse the time of the House, as I am afraid she sometimes does in trying to lay low her adversaries. I am far from convinced and utterly dissatisfied by her reply. However, it is extraordinarily difficult in this complex field to get over to people who are not as "soaked" in the matter as Lady Turner and I, far example, just what is happening. I shall discontentedly withdraw my amendment in the hope that perhaps we might rally our troops for Third Reading. One never knows! I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 1 [Meaning of "stakeholder pension scheme"]:
Lord Higgins moved Amendment No. 3:
Page 1, line 12, leave out subsection (2)1.
§ The noble Lord said: My Lords, we tabled a somewhat similar amendment in Committee in the sense of this being a probing amendment. We now have rather more information than we did at that stage. I am sure this is totally out of order, but I hope that I may make two remarks. First, I think that the noble Baroness will have discovered from our previous discussion that there has not been any final salary scheme created since the Government came into power. Secondly, I welcome what she said about 46 considering the detailed clauses on the state second pension because I believe that will be a tremendous help. That worked well as regards the subject of VAT and saved much time.
§ Baroness Hollis of Heigham
My Lords, I said that I would reflect on the matter and decide whether it made sense. I gave absolutely no commitment on the matter. In the spirit of trying to be helpful, I shall see what we can do.
§ Lord Higgins
My Lords, I thank the noble Baroness for those comments. This amendment concerns whether the stakeholder pension scheme should be set up under a trust arrangement or under some other arrangement. The Government seem to have vacillated quite a bit on that. I refer to the not particularly glossy consultation brief No. 5 which concerns the Government's proposals for governance of stakeholder pensions. We now have a lot more detail than we had previously. Therefore, it would be wrong of me to take up your Lordships' time by going through it as if it were a consultation paper and I were one of the consultees.
However, I shall make a few remarks. On page six of the consultation paper, the Government say that they,are not convinced that finding individuals to take on the role of trustees in schemes will be an insuperable difficulty".I think that they are being over-optimistic in that regard. One has only to consider the extraordinary obligations that one takes on if one becomes a trustee of a pension scheme, and the risks which are involved in doing that, to realise that if we are to have a multiplicity of stakeholder schemes it will be difficult to find trustees who are able to do a proper job and, in particular, to make sure that they are independent.
I am not particularly keen on the paragraph which states that the,onus will be on the financial service company to identify individuals willing to act as trustees".The next question is whether they will be paid. If they are to be paid, that will increase the cost considerably. Professional trustees do not come cheap, as opposed to voluntary trustees. What particularly worries me is paragraph 27 which concerns liability and states:Trustees will ultimately be financially liable for the operation of the scheme".Of course, trustees are always liable in terms of carrying out their duties properly. However, that is rather different from what is stated here. The paper further states:In the event that a scheme was unable to operate within the charge limit, the trustees would be liable for any costs in excess of the charging limit".I find that a strange statement. We have trustees 'who will presumably operate in the same way as a company pension scheme trustee. But trustees are, of course, responsible for exercising their trust. Action may be taken against them—indeed, severe action, such as imprisonment and so on—if they do not act properly. However, if a scheme does not meet its 47 charges in the way which is suggested simply because it goes over the 1 per cent limit set by the Government, to say that the trustees are personally liable for that—I refer to paragraph 27 of the paper—seems to me rather extraordinary. The paper makes a number of other points about independence and so on. Of course, the trustees must be independent and if they fail in that respect, they will find themselves liable for penalties in the way that I described a moment or two ago.
I do not wish to weary the House by going through the consultation paper in general; it is helpful to have it before us in order that we may consider it. I am interested to know what kind of representations the Government have received as a result of its publication.
§ 5.30 p.m.
§ Baroness Turner of Camden
My Lords, I rise to oppose to some degree what the noble Lord, Lord Higgins, said and to oppose Amendment No. 3. My Amendment No. 4 is grouped with it and puts a rather contrary point of view.
It is stated in subsection (2):The first condition is that the scheme is established under a trust or in such other way as may be prescribed".My amendment seeks to delete the words:or in such other way as may be prescribed".In other words, I want all such schemes to be written under trust law.
When stakeholder pensions were first mooted I got the clear impression that this was the Government's intention. That seems to be borne out to some degree by the consultation paper. Since that time I believe that sections of the pensions industry have mounted a small campaign against that. In its consultation brief on the governance of stakeholder pension schemes the DSS includes a suggested alternative to the trust-based arrangements, and yet I think the DSS clearly favours the trust-based concept. It has said that a board of trustees will provide an effective counterweight to the financial services companies which will be involved in stakeholder pension schemes. I could not agree more.
§ Lord Higgins
My Lords, I apologise for interrupting. I am also entirely content with the trust arrangement. It was simply in the form of a probing amendment that I raised the point. I do not dissent from what the noble Baroness said.
§ Baroness Turner of Camden
My Lords, if I may, I shall continue to speak to my amendment because it is grouped with that of the noble Lord.
Almost all the surveys of pension provision which have taken place over the years have emphasised the importance of trustees—in the case of occupational pension schemes, trustees representative of the employees concerned. It is accepted that such trustees provide a vital sense of security and reassurance for the scheme members. Furthermore, as has already been indicated, trustees have quite significant 48 responsibilities, for which training is required. That is provided by unions in particular and by many companies operating such schemes. The stakeholder concept does not involve any lesser need for membership security and accountability. Indeed, as I said in Committee, many friendly societies and unions may wish to set up such schemes for the benefit of members who may not have access to occupational schemes. It is certain that such schemes would need member trustees.
I believe that one objection has been made on the grounds of excessive cost, although there is a DSS view that if a stakeholder scheme recruits a large enough number of members the trustee costs could work out at only a fraction of the capped 1 per cent fund charge.
Another objection is whether trustees can realistically be found. This has been mentioned already by the noble Lord, Lord Higgins. I do not think this is so much of a problem, as in some cases trustees could be drawn from the stakeholder scheme sponsors, such as a union, employers' organisations or others, while in other cases financial services companies could arrange experienced trustees.
Under the suggested secure stakeholder management governance the proposal is that an FSA-authorised stakeholder manager would run the scheme as a regulated investment business and adhere to a contract made with the members. The manager would be required to register the scheme with OPRA and provide limited information. There could possibly be an advisory committee to represent members' interests. I do not think that is an adequate alternative to trust-based governance.
Through choice, many financial services companies would obviously not introduce a trustee body to be responsible for any of their products. Trustee bodies will increase costs—another point which has already been made—as they see it, although I have indicated that the increase could well be marginal spread over a large membership.
Trustees may also change the service provider in the future if they felt that it did not provide adequate value, leaving poor providers with low volumes of business. I should have thought that this was all to the good and to the benefit ultimately of the pensioner population. Moreover, nowhere in the proposed alternative model is there a requirement for the scheme to be run in members' interests, as was originally envisaged in the Green Paper. The advisory committee representing the interests of scheme members is only optional. I understand that OPRA has already said that the alternative proposal lacks an intermediary who is independent. I refer to trustees.
Trustees are needed to act on behalf of a largely unsophisticated and economically vulnerable group of contributors. The use of the term "secure stakeholder management" may give an impression of greater financial security than exists. As I said in Committee when the issue was raised by the Opposition, I am firmly committed to the idea of governance based on trust law, with trustees whose duty it is to ensure that the scheme is run in the interests of members. I was 49 under the firm impression that this was the Government's view as well. The amendment I put before your Lordships this afternoon seeks to delete,or in such other way as may be prescribed".That means that in future such schemes will have to be written under trust law and with trustees, which I thought was the original concept.
§ Baroness Hollis of Heigham
My Lords, these amendments cover our proposals for the governance of stakeholder pension schemes. Amendment No. 3, which was moved by the noble Lord, Lord Higgins, seeks to remove the requirement for stakeholder pension schemes to be established under a trust. I am slightly surprised that he said it is a probing amendment. I do not know why this matter was not regarded as having been appropriately dealt with in Committee or why we should have probing amendments on Report. Perhaps we have different understandings of the conventions of the House.
Amendment No. 4 was spoken to by my noble friend Lady Turner of Camden with her impeccable courtesy. The amendment seeks to ensure that schemes can be set up only with a trust; that is, that there should be no alternative forms of governance. I wish to explain why we think that both forms of governance are likely to be necessary and appropriate.
An identical amendment to Amendment No. 3 was tabled at Committee stage. We explained then that we believe trusts are an integral part of our proposals for stakeholder pension schemes. The noble Lord in his aside to my noble friend Lady Turner accepted that this was the desirable form of governance and had no objections to it. We have always made it clear that we want stakeholder pension schemes to have a structure which ensures that they are run in their members' best interests. Trust law is a proven and effective means of ensuring that schemes look after their members' interests—rather than those of the pension provider—and of providing valuable security and protection.
We accept that supporting a trustee structure will have costs for schemes, particularly smaller schemes where these costs are borne by relatively few members. We do not expect that for the majority of schemes these costs will be excessive. Over time, trustees should be able to deliver reductions in overall scheme costs by negotiating on behalf of scheme members, which should offset the direct costs of trustees. We remain convinced of the value of trustees in ensuring that contributions are used to secure value for money from scheme providers and that schemes comply with the minimum standards we will set for them. They should help to obtain good quality of information and high standards of service for their members. We are therefore legislating for stakeholder pension schemes to be set up under trust law. Our consultation paper on governance set out our specific proposals for the operation of trust-based schemes.
The noble Lord, Lord Higgins, pressed me on what was the implication of, I believe, paragraph 27 of what I call the yellow document on governance. The noble Lord thought it was perhaps unreasonable to expect 50 trustees to bear the additional costs of charges. However, someone must be liable for ensuring that schemes meet the charging limit and for covering any overrun in costs. The precise issue of who will be liable will be a matter for schemes. The noble Lord will know that the consultation paper continues in the following paragraph that trustees could, for example, reach a contractual arrangement with the source provider of the scheme under which the provider would take on this liability or arrange suitable insurance. But the buck has to stop somewhere, and that is one of the proposals.
§ Lord Higgins
My Lords, will the noble Baroness allow me to intervene? Yes, of course, it is possible for the trustees to get an indemnity in the way the noble Baroness has suggested. However, I do not think it will be possible to secure insurance against the kind o f risk stated here, as against a breach of trust.
§ Baroness Hollis of Heigham
My Lords, our response to the consultation document should certainly not raise the fears suggested by the noble Lord. However, I will be happy to take away the points that he has made and look further into them. The last thing that we want to do is to put such a responsibility on trustees that we deter appropriate people from coming forward to take on the posts and responsibilities of trustees. In so far as there may be difficulties, I am happy to look at it again.
The noble Lord asked from where trustees might be drawn and who would want to be a trustee. I thought that that point had been well answered by my noble friend Lady Turner. We expect trustees to be drawn from a number of sources including representatives of organisations setting up the schemes, trades unions, employers' associations, employers, scheme members and independent individuals who have worked in the pensions industry. Trustees may also be individuals who have a particular interest in the industry on which the scheme is based, or they may simply want to be of service to the community.
The noble Lord, Lord Higgins, also raised the broader issue of the question of trustee liability in more general terms. We have received a number of consultation responses, including those from OPRA concerning trustee liability generally. We are considering carefully what has been said on this subject. The secure stakeholder management model provides an alternative governance structure which may be suitable in situations where for a number of reasons a trustee model may not be appropriate. However, if the noble Lord has any further worries about the appropriateness of this structure or alternatively the degree of risk that he feels trustees may be exposed to, then I repeat that I shall be happy to exchange correspondence or have further discussions on this before Third Reading. I am sure we have the same objectives here; namely, that of ensuring that we have a good range of trustees from which we can draw.
We have always accepted that in some types of stakeholder pension scheme it might be difficult to put in place the trust-based model, for example where 51 schemes are set up directly by financial service companies. In this type of scheme, where there is no affinity group link—perhaps they are all hairdressers—it may be harder to establish a properly representative board of trustees. As I have said before in our discussions, we are prepared to consider alternatives to the trust-based model, where they produce a comparable degree of protection for members.
In the pensions Green Paper we sought views from the industry on suitable alternative structures and a similar invitation was included in the consultation paper issued jointly by the Treasury and DSS on new flexibility in pension investment. We have now considered carefully what the industry has had to say on alternative governance structures.
Since our debate in Committee, we have taken account of those views in a more detailed consultation paper on stakeholder pension governance. This included proposals for "secure stakeholder management" as an alternative to trust-based schemes. Under the suggested model, schemes would be run by a stakeholder manager authorised by the Financial Services Authority. We envisage that the manager would have a number of functions similar to those of trustees, including ensuring that schemes met the minimum standards. Members' rights in schemes would be set out in a contract and the manager would be required to report to members on the value of their fund and on how schemes have performed in comparison with a number of appropriate benchmarks.
We have sought views on this proposal and will be developing it further in the light of the responses received. If it, or any other alternative, does provide appropriate security and protection for members, the Bill provides the flexibility to incorporate it in the framework for stakeholder schemes.
As I have said, we want to ensure that stakeholder pension schemes can cater for all those on modest earnings who do not have the chance to join an occupational scheme. We expect that schemes will be established both by affinity groups and, on a more general basis, by individual providers or groups of providers. Allowing schemes to be set up under either a trust or a suitable alternative which meets those same quality conditions will offer schemes the flexibility to choose the most suitable governance structure.
Our primary concern has always been the protection of members' interests. I believe that the Government's proposals will offer that protection and I therefore urge your Lordships to withdraw the amendments.
§ Baroness Turner of Camden
My Lords, before the noble Baroness sits down, I wonder whether she could answer a question? I believe that the DSS has established a working group on this issue. Does that 52 working group include members who have had experience of being trustees or who are at present trustees of pension schemes?
§ Baroness Hollis of Heigham
My Lords, if my noble friend is referring to the group under the chairmanship of Tom Ross, then certainly that group does have considerable experience. However, I cannot tell her whether the individual members of that group have had personal experience of serving as trustees. However, what they do have—including Tom Ross himself, as my noble friend will know—is very extensive experience of the pensions industry.
§ Baroness Hollis of Heigham
My Lords, I shall write to my noble friend about the qualifications of those members, if that is the group to which she is referring.
§ Lord Higgins
My Lords, this has been a helpful discussion. As I understand it, a probing amendment has no official recognition in this House. I am not aware that there is any reason why such an amendment should not be tabled at Report stage as well as in Committee. Be that as it may, it has been very helpful indeed to have had some clarification of the issues which have been raised, and I welcome the kind offer of the noble Baroness to exchange correspondence before Third Reading on the technical points that I have raised. Subject to that, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendment No. 4 not moved.]
§ 5.45 p.m.
Baroness Castle of Blackburn moved Amendment No. 5:
Page 1, line 17, leave out subsection (4).
§ The noble Baroness said: I beg to move Amendment No. 5 standing in my name and that of Lady Turner. This amendment is a variant of one that we put down for Committee stage. Being such a variant, I hope it establishes the complete reasonableness of our approach. The purpose of this amendment is to remove that section of the Bill on the stakeholder pension which says that it must be a money purchase scheme. At Committee stage we moved to insert the word "not" to be a money purchase scheme. On second thoughts, at this Report stage we have accepted the text tabled by Lord Higgins; that is to say, to leave the matter open. Therefore, we only want to take away that part of the Bill—and it is not much, by the way—which is quite specific about what the stakeholder pension must and must not be.
§ We are therefore suggesting that the words "money purchase" be removed from the Bill. That matter, along with many other aspects of the stakeholder pension, will fall to be decided later. It makes for greater flexibility to put it in that way. I say to the Minister in all seriousness: is it not fairer to leave the 53 issue open? Why be specific on this one particular point? Other conditions under which people contribute or do not contribute and so on are to be prescribed later. But one thing is not to be prescribed later; it is to be decided now, and that is that they must be money purchase schemes. Why be specific in that rather arbitrary way? What is so wonderful about a money purchase scheme that we must insist on it in the text of the Bill?
§ Of course, a money purchase scheme means that someone will not get a defined pension. When you contribute, you dc not know exactly what you will get when you retire. It depends on the play of the market, and how much your contribution may yield when it has been invested. Many people much prefer the security of a defined pension even if it is a bit more modest. I put it to the House: why should we say that it must be one thing under this heading and not under any other?
§ I am greatly at a loss to understand the mind of the Government on this. What has inspired it? Of course a money purchase scheme takes away the risk from the employer and puts it on the employee. Therefore, it gives uncertainty to the planning of anyone seeking to provide for his or her pension in retirement.
§ I hopefully ask the Minister to consider our amendment very carefully. I also hope that Lord Higgins will see it in himself, on this point at any rate, to support our amendment.
§ Lord Higgins
My Lords, I am not sure I can possibly resist that invitation but I fear that there is a real problem. I should like very much to see schemes which are final salary schemes, but I have some difficulty in seeing how that might be the case as far as concerns stakeholder pensions. Indeed, if the Minister can explain that to us, I shall be delighted, and then the noble Baroness, Lady Castle, the noble Baroness, Lady Hollis, and I will be equally content.
§ Baroness Hollis of Heigham
My Lords, Amendment No. 5 would remove the requirement that stakeholder pension schemes should, with exceptions to be prescribed, be provided on a money purchase basis. We discussed a somewhat similar amendment in Committee. I shall recap on why we think that money purchase arrangements are the most suitable for stakeholder pension schemes.
Stakeholder pensions are designed to fill a significant gap in the pensions market. They will provide affordable, funded pension provision for a large number of people, for the first time. These people will be able to see their own "pot" of money grow and to look forward to a secure income in retirement. We believe that the most effective way to promote financial security in retirement for most people is to encourage provision of funded pensions and personal savings. Stakeholder pension schemes are central to those plans.
Salary-related schemes are excellent value for many people. Personal pensions are suitable for many high earners who do not have access to an occupational 54 scheme. The state second pension will help those who cannot afford to save towards their retirement. There are a number of reasons why we believe that money purchase schemes are the most suitable arrangements for stakeholder pensions. Salary-related schemes are excellent value for many people who stay in the same job for a long time with ascending salaries, but they require a sponsor—usually an employer—to stand behind the pension promise. In other words, if there is any shortfall, the employer has to make good that shortfall. That is his responsibility under defined benefit schemes.
It is unlikely that there will be such a sponsor for stakeholder pension schemes, so providing benefits on a salary-related basis is not a feasible option. If it were, the employer would already be offering an occupational pension with a defined benefit scheme. It would also provide real problems for someone who went into such a scheme and then came out of the labour market and wanted to continue paying in. Would we expect the former employer to stand as the deliverer of the promise for someone who was no longer a member of his workforce but was paying into a scheme? Money purchase schemes are also simpler and more flexible arrangements than salary-related schemes. They enable each individual to have a readily identifiable "pot" of money, into which they can put different sums each month during the course of the year or irregularly, according to their resources. They can pay in when they are not actually in work.
This has clear advantages. The concept will be familiar to almost everyone. Schemes will be able to issue members with regular statements of how much their "pot" is currently worth, scheme charges will be easier to understand and compare, and transfers of funds will be much more straightforward. The complexity of the existing arrangements often discourages people from starting a pension. We believe that providing benefits on any basis other than money purchase will inevitably be hugely complex and therefore less attractive to people who are thinking about providing for their retirement for the first time. Those who are already sophisticated in pension arrangements—either employees or employers—are likely already to have occupational pension schemes or good alternatives. These are for those people who are working for employers who do not offer such a scheme. We want to provide a alternative for them to a decent occupational pension.
However, the Government recognise that there are rapid developments in pensions and it is possible that in the future suitable arrangements may be developed. The power to prescribe exceptions gives us the flexibility to allow other forms of arrangements provided, of course, that they still satisfy the other conditions for stakeholder pension scheme status. We would want to ensure that such schemes would remain secure, flexible and value-for-money arrangements. I hope that in the light of that explanation, the noble Baroness will withdraw her amendment.
§ Baroness Castle of Blackburn
I see a glimmer of light in the Minister's final remarks. She does see 55 situations in which the provision for exemptions might lead to the kind of flexibility that we are seeking to achieve in the amendment. Well, it is only a small ray of comfort. The emphasis still remains on the money purchase scheme, which is fine and dandy if world markets are booming and everyone is getting something for nothing. In this battle with the Government we have to be thankful for small rays of light. In view of what the Minister said, I withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ The noble Baroness said: My Lords, in moving this amendment, I should like to speak also to Amendments Nos. 12, 15, 29, 30, 32 to 38, 40, 277 and 281. These technical amendments clarify the application of occupational pensions legislation to stakeholder pension schemes and set out the position in relation to Northern Ireland.
§ First, I shall deal with the Northern Ireland amendments. These clarify the territorial application of the stakeholder pension provisions and the relationship between this legislation and the corresponding provisions we expect to be made in Northern Ireland. As your Lordships will be aware, Northern Ireland generally takes responsibility for its own legislative requirements in respect of pensions, and that will continue under the Northern Ireland Assembly. Full details of how the Assembly will discharge its duties have not yet been decided and we have been in discussion with Northern Ireland colleagues and legal advisers on the most sensible approach for stakeholder pension scheme legislation.
§ The amendments ensure that this Bill is compatible with the corresponding Northern Ireland legislation that is to be drawn up. Employers in Great Britain will be required to offer access to a scheme registered under this Bill, and employers in Northern Ireland to a scheme registered under corresponding Northern Ireland legislation. I do not propose to talk about each amendment in great detail, but I should like to take the opportunity to explain, in broad terms, how the arrangements will work.
§ Part I of the Bill—that is, the stakeholder clauses—will extend to England, Scotland and Wales. The corresponding provisions for Northern Ireland will then be made in Northern Ireland legislation. We expect the two sets of legislation to be similar; for example, the conditions a Northern Ireland stakeholder pension scheme will have to meet are likely to be the same, and these schemes will need to register with the Occupational Pensions Regulatory Authority. This authority will have the power to investigate breaches of the Northern Ireland stakeholder legislation, including the employer access requirement.56
§ We are also making sure that all appropriate relevant employees are properly covered by the legislation. The employer access requirement in this Bill will cover all employers with relevant employees in Great Britain, and employers based in Great Britain who employ people outside the United Kingdom. We expect that the equivalent Northern Ireland employer access requirement will cover employers with relevant employees in Northern Ireland, and Northern Ireland employers who employ people outside the United Kingdom.
§ Clearly, while the stakeholder pension conditions remain the same in both sets of legislation, it will be a simple matter for schemes to register with the Occupational Pensions Regulatory Authority under both provisions. Those schemes will then be able to be designated by employers in both Great Britain and Northern Ireland.
§ I should also like to mention briefly the second set of amendments in this group. Amendments Nos. 34 to 37 are minor and technical amendments to ensure that the appropriate provisions of existing legislation are applied to stakeholder pension schemes. In particular, they will ensure that occupational pension scheme legislation will apply to stakeholder pension schemes only where appropriate.
§ Paragraph 2 of Schedule 1 applies certain sections of the Pensions Schemes Act 1993 and the Pensions Act 1995 to trust-based stakeholder pension schemes which are personal pension schemes. This set of amendments makes minor changes to these applications. I could develop that point, but it may be that your Lordships will not need further information. In the light of my explanation, I hope that your Lordships will support the amendments. I beg to move.
§ 6 p.m.
§ Lord Higgins
My Lords, here is a whole batch of amendments. Indeed, a large number of government amendments have been tabled throughout the Bill for this Report stage. With her customary courtesy, the noble Baroness wrote to me explaining—or, more accurately, apologising for—that fact. After all, the Bill has been through its Committee stages. Some of the amendments relate to matters that we raised in Committee. I am not clear whether all the amendments relating to Northern Ireland are the result of any change in the situation there since the Bill completed its passage in the other place. At all events, it is unsatisfactory that there should be so many. I presume that it is either the result of a lack of ministerial guidance or of the draftsman simply waking up rather late in the day. If the latter is true, I hope that some suitable reprimand will be delivered. As the Minister said, the amendments are largely technical. Only now have we received an explanation of the Northern Ireland amendments. I shall consult my noble friends 57 who are more aware of the situation in Northern Ireland than I am to see whether any particular points need to be introduced at Third Reading.
§ Baroness Hollis of Heigham
My Lords, I take the reproof. I do not like bringing amendments on Report either. I accept that charge. All I would say is that it is not peculiar to this Bill or this Government. I remember the passage of the Pensions Act 1995 when I spoke from the Opposition Benches without support, save of course the huge support of my noble friends on the Front Bench. I have checked on the number of amendments introduced by the government then. It was 260—rather more than we are introducing to this Bill. I accept that it is a perennial problem of government. Many of the amendments are technical. I understand that in regard to the Northern Ireland amendments parliamentary counsel waited until the last possible moment because they were trying to see the shape of developments, if any, progressed in the Northern Ireland Assembly. They used the period of the Summer Recess in the hope that the situation might be fully resolved. It has not been, and that is why we are having to approach the matter in this way.
Some of the other amendments coming through at this stage are in response to requests by the Delegated Powers and Deregulation Committee. I believe it is right to say that we have accepted every proposal that the committee has made to us. The rest are in response to issues raised in this House, including, for example, changes to the national insurance contribution, with which we shall deal in our debates on Wednesday. So there is good reason for each batch of amendments. However, I accept that it is not the most desirable way to proceed. In the light of that, I hope that the House will accept my proposals.
§ Earl Russell
My Lords, before the Minister sits down, if, as the noble Lord, Lord Higgins, put it, the draftsman woke up rather late in the day, should we not say, "Better late than never"?
§ Baroness Hollis of Heigham
My Lords, that is right. It is my understanding that parliamentary draftsmen take a long time to train. In anticipation of the Labour Government wanting a whole series of legislative measures pushed through quickly because they had a huge commitment in their manifesto, the previous administration might have been kind enough to start training and employing those parliamentary counsel five years ago in readiness for us!
§ On Question, amendment agreed to.
Lord Higgins moved Amendment No. 7:
Page 1, line 21, at end insert ("but there shall be no requirement to take out a stakeholder pension in the form of an annuity by a specified age").
§ The noble Lord said: My Lords, this is an important amendment, standing also in the names of my noble friends. It relates to the question of annuities. It suggests that, so far as the stakeholder pension is concerned, there should be no requirement to take an 58 annuity at a specified date. Amendment No. 50 is related to this one and refers to annuities more generally.
§ The noble Baroness said that it is important for people to be able to look forward to a secure income in retirement. That will have a hollow ring for those who retired about 18 months ago on money purchase schemes. Their retirement coincided with a fall in the Stock Market which reduced the value of their fund. On top of that, they saw a huge fall in annuity rates compared with a couple of years or so previously. Indeed, some found themselves obliged to take their pension at a level that was only some 60 per cent of what they had originally expected or had expected 24 months or so in advance of their actual retirement date.
§ Against that background, I find it extraordinary that in regard to the stakeholder pension the Government have committed themselves to stating what pension people may expect on retirement. If the amount varies by that much over a period of two years, it is certainly likely to vary a great deal more over a longer period.
§ There are several different aspects to the amendment. The first relates to whether people need to take the pension at a particular time—for example, when they retire. The fact that they are presently obliged to do so can have severe consequences. When people come to draw the stakeholder pension, they may feel that they would like to defer it and not be forced to take the annuity at that particular time.
§ There is a second aspect to the question of timing; namely, whether people are obliged to take an annuity at the age of 75. There has been growing pressure against the change in demographic background since the time of Beveridge—that that limit is not appropriate. I believe I am correct in saying that at the time of Beveridge people were expected to survive only two years after retirement age. Now, the period is vastly longer. It is likely that a number of people at the age of 75—not looking at the actuarial tables but at their general state of health and given their other financial circumstances—may feel that they would prefer to delay drawing their pension because they do not desperately need it and may feel that they would like to do so if their life expectancy is quite a bit longer than the average. The fact that they have to take the pension as the clock ticks at 75 may mean that they do so at a disadvantageous moment.
§ Annuity rates have plummeted. That is to some extent a reflection of the fall in the rate of inflation. That being so, one may say that it does not matter that the annuity rate is lower because the rate of inflation is lower. But there is no guarantee that the inflation rate will be at the same level at the moment when one wishes to draw the annuity.
§ It should also be stressed that the reason annuity rates have plummeted has to a large extent been that the Government have issued very little long-term date debt of the duration required to meet the needs of pension funds and others who feel that they have to hold annuities in order to meet their liabilities. It is a 59 point that the Chancellor may wish to consider. If the Government expect to move into long-term surplus, the dangers are even greater that the annuity rate will fall further. So the timing aspect relates to the moment at which people have to take their pension, whether when they retire or whether at 75. Somewhat different considerations apply in each case. Our amendment suggests that the stakeholder pension ought not to force people into these particular circumstances.
§ The other aspect is not one of timing. It relates to whether an annuity is anyway the most appropriate form in which to take one's pension. Given the increase in life expectancy, people may well feel that, if they are to survive only two years, an annuity is not wholly inappropriate. But if people have a considerable life expectancy, they may do better to invest their pension in some other form of financial asset.
§ Recently, the Government have to some extent relaxed the rules on annuities, particularly with regard to so-called "draw-down policies". They are a highly sophisticated instrument and are not to be undertaken by the unwary. Reports by actuaries such as William Mercer do not suggest that, welcome though the changes may be in some ways, they are likely to meet the main problem I seek to address this afternoon.
§ If one is forced to take the pension as an annuity, it gives one no scope for making possibly preferable other investments. It locks one into a situation in regard to when one dies and the annuity comes to an end.
§ Another important point which may commend itself to the House is that the fact that at present the pension has to be taken as an annuity discriminates considerably against women. Women have a greater life expectancy than men and annuities for them are lower than for men. So, the fact that the present arrangements force people to take an annuity as their pension means that women are worse off than men. If they were able to use some other form of financial instrument, it would be to their advantage.
When the matter came up at Committee stage, the noble Baroness referred to a point which I had not seen spelt out in black and white before. At col. 1122 of Hansard for 24th June, she said:
Under Inland Revenue legislation the funds built up in money purchase schemes—
which is what we are talking about—
must be used to purchase an annuity. Perhaps I could remind your Lordships why this annuity rule exists. It reflects the fact that the tax privileges accorded to pension contributions are given in order to ensure that the beneficiaries have an income throughout retirement".
Of course, it is quite possible for people to use an alternative form of financial instrument which would give them an income throughout retirement. It depends very much on the level of pension.
The noble Baroness continued (still at col. 1122):
This avoids the risk of an individual having to rely on a low pension income and perhaps income related benefits because they have spent the proceeds of their fund in the early years of retirement".
There's the rub. There is no reason why one should not have a less restrictive rule if, in the light of the amendment, that was the Government's view. That rule would say that people must at least take as much in the form of a secure income—namely, an annuity, albeit unfavourable—on the basis of having enough money to keep them off means-tested benefits. The Government could do that, although it depends on the level. In relation to the stakeholder pensions, that may not be unimportant.
§ Another provision which I ought to mention and of which I was not previously aware is that, apparently, if a person dies before taking the pension, proceeds may be obtained from it but there is a tax charge of 35 per cent. I was not aware of that. Presumably, one could introduce some flexibility into the scheme by saying, "If you want to give away or give back the tax advantage and retire, you could get the money on that basis". However, that is taking us rather wide of the amendment.
§ It seems to me that these arguments have now "ripened" to the point where, in relation to both timing and the financial efforts involved, because the market has developed considerably, and against a background of a demographic change and people living much longer, we ought not to continue with the kind of restrictions which have previously been imposed. It ought to be possible to meet the objections from the Inland Revenue and others. Such changes would be helpful in avoiding discrimination against women. I beg to move.
§ 6.15 p.m.
§ Lord Goodhart
My Lords, I regret that I am unable to support the noble Lord, Lord Higgins, on this amendment. We agree that problems may be faced by people who retire at certain times. As the noble Lord pointed out, 18 months ago a particular combination of circumstances made it difficult for those who retired at that time and who wished to take out a pension immediately. Since then, the considerable rise in the stock market has made things look rather different.
That is dealt with to a considerable extent by the fact that prospective pensioners are now allowed to defer taking their pension until they reach the age of 75. A few people go on working and are therefore in a position to defer taking a pension until they reach that age. Those who retire at some point between 60 and 70—the normal retirement ages—can defer taking their pension for a considerable time until the economic situation becomes more favourable.
However, it seems to me that the whole basis of pension schemes is that the pension builds up a fund which at some point has to be "annuitised". Pension funds are not simply a tax-favoured savings scheme which can be drawn on by someone at any time after they reach retirement age and in any manner that they wish. Other kinds of tax-favoured savings schemes, such as ISAs, give a facility to draw them down with much more flexibility.
The purpose of an annuity is to provide a regular income in retirement. On the one hand, it prevents pension-holders from spending the contents of their 61 fund early and therefore having to rely on state benefits as they reach a greater age and have used up their fund. On the other hand, it prevents pension-holders from saving up their pension funds in order to pass them on to their children. Once again, that is clearly not the purpose for which the tax relief is given.
Therefore, we on these Benches are unconvinced that there is any need to depart from the principle, which has existed ever since the beginning of tax relief for occupational pension schemes, that sooner or later, unless someone dies before reaching the age of 75, the fund will have to be "annuitised".
§ Lord Williams of Elvel
My Lords, I wonder whether the noble Lord, Lord Higgins, has understood the present state of the market. First, as regards age, to advance the age would imply a significant difference in the present way that pension providers in the private sector manage their portfolios. I can say that from personal experience. Secondly, if there is a guaranteed annuity, the problem is when the guarantee starts. However, a number of products are coming onto the market, which I researched this morning, which provide for with-profits annuities and other kinds of annuities which do not necessarily fix the annuity in a particular frame so that they are not, for example, disadvantageous to women, or whatever. They are being developed by the major pension providers. I hope that the noble Lord, Lord Higgins, will do his research and understand that these possibilities are available and that the market is coping with them.
§ Lord McIntosh of Haringey
My Lords, we debated this issue at Committee stage and considered the whole issue of the merits o f annuities, as we have heard from the quotation of my noble friend Lady Hollis by the noble Lord, Lord Higgins. Amendment No. 7 seeks to remove the requirement to purchase an annuity with the stakeholder pension fund, while Amendment No. 50 prohibits a pension scheme from requiring a member to take an annuity by a specified age. Since we have debated it before, I must go over the same ground again.
The fundamental point is that a deal has been done. In return for tax privileges related to contributions to pensions, the Government have taken the view that it is right for the proceeds of those funds to provide a stream of income on retirement. This reflects the fact that the Government want people to save for their old age. The key feature of an annuity is that it provides a guaranteed income for the remainder of the pensioner's life. That applies whether a traditional type of annuity is chosen or the pensioner opts for one which is in some way investment-linked, such as a with-profits annuity of the kind to which my noble friend Lord Williams referred.
As was made clear from the quotation of my noble friend Lady Hollis at Committee stage, in return for providing this tax privilege the state seeks to ensure that those who take advantage of it do not run the risk of looking to the state for their income in retirement. But the annuity rule includes flexibilities, and we propose that they should be extended to members of 62 stakeholder pensions. Income drawdown—I believe that the noble Lord, Lord Higgins, attributed it to this Government but it was introduced by the previous government in 1995—has been available between the ages of 50 and 75 and allows a person to draw an income from the fund while deferring the purchase of an annuity.
The upside of the income drawdown is that in allowing him or her to choose the timing of an annuity purchase the person in the meantime is able to benefit from any investment growth. As the small print at the bottom and the gabbled words read out at the end of television advertisements always say, investments, annuities and even inflation can go up and down. Despite the observation of the noble Lord, Lord Higgins, Gordon Brown does not walk on water nearly all the time. However, there is a risk that investment performance may be inadequate to maintain the value of the fund and the person ultimately suffers a substantial reduction in income compared with what would have been achieved by the purchase of a secure annuity on retirement.
The noble Lord, Lord Higgins, referred to security. One cannot have all kinds of security all the time, but most people prefer to opt for peace of mind when they retire by taking their annuity at that time, because even though it may not be entirely what they expected in the full flush of high inflation or a different investment market, what they take at the time of retirement is what they will get until they die. There are exceptions. Those with large funds and a willingness to accept the attendant risks may be justified in taking the drawdown option, but there is a danger of fund depletion in such a plan which increases with age. A balance needs to be struck between allowing flexibility to the individual in the timing of annuity purchase and ensuring the achievement of the underlying objective: the provision of a secure income for the remainder of the pensioner's life. In our view, to require annuitisation by the age of 75—in other words, taking advantage of the changes introduced in 1995—strikes the right balance.
We continue to monitor the position. The Inland Revenue is now conducting a special exercise to assess how the current arrangements on income drawdown and annuity purchase are working in practice. We shall take account of the information obtained in this research in assessing whether any changes to the current rules are needed. Annuity rates are set by the market and reflect a number of factors, such as life expectancy and long-term interest rates. The noble Lord, Lord Higgins, said that they discriminated against women. Annuities bought with protected rights—that is, the part of pension savings derived from contracting out of the state scheme—are by definition unisex; in other words, they are at the same rate for men and women. If women get a smaller amount per year it is because of the expectation that they will receive that smaller amount for more years. I believe that there is a certain logic in that.
We accept that annuity rates have fallen in recent years, but that should not be considered in isolation. Inflation which ran at 6.6 per cent. during the previous 63 government's stewardship is now under tight control; in other words, Gordon Brown does walk on water. That will benefit everyone, especially pensioners because their pensions will maintain their purchasing power into old age better in a low inflation economy which we are determined to maintain.
I stress that the current economic environment does not mean that to buy an annuity is a bad deal. The stable economy which the Government are delivering provides scope for sustained growth in pension funds which means bigger annuities. Lower inflation means that an annuity will buy more. That is a far better prescription than a boom and bust economy which would have a far more serious effect on someone's real income in retirement.
The noble Lord, Lord Higgins, went so far as to cast doubt on whether an annuity was the best alternative. He was answered to a considerable extent by my noble friend Lord Williams. I ask the noble Lord to bear in mind the point made so effectively by the Minister in Committee that this is a deal which has been made in return for tax privileges. We cannot afford to provide those tax privileges and at the same time allow people to fall into dependence on the state in retirement. That is the reason for these provisions, and I hope that the noble Lord will withdraw his amendment.
§ Lord Higgins
My Lords, I deal first with the point just made by the noble Lord. It may well be that in considering the position with regard to stakeholder pensions, if the amendment is accepted some further sophistication should be introduced to provide that a certain amount must be drawn in the form of an annuity, but there is no reason why the whole amount should be included in that.
I turn to the points made by the noble Lord, Lord Williams. I am aware that in this respect the market is developing considerably, for example in the field of profits-related annuities. None the less, the terms vary considerably and it may be that some other type of investment is preferable to an annuity in either form. The situation depends to a great extent on inflation. At Committee stage the noble Baroness stressed that an individual could obtain an index-linked annuity, but she went on to say that she believed that that could be done on very favourable terms at the moment. I have received a large number of letters from individuals who do not believe that to be the case.
As to a guaranteed income in retirement, whatever be the good intentions of any government rates of inflation fluctuate considerably. Unless one has taken what is, on the whole, a rather tough deal on an index-linked annuity—even then not on very favourable terms—one will have to consider the effect of inflation on that annuity. As people live longer, so inflation is likely to erode the annuity considerably. Certainly, in terms of real income some of my former constituents in Worthing did not find themselves on a very secure basis as inflation affected their fixed income rather than some other financial instrument which might have given them a greater degree of protection.
64 It is true that last year there was an unfortunate conjuncture of the stock market and annuity rates. None the less, some of those people who retired may find that they are a burden on the state. In that respect also I have already suggested it is possible to provide a floor but for the overall change to be made. That would meet the point of the noble Lord, Lord McIntosh, about there being some kind of deal in this respect.
The noble Lord, Lord Williams, did not cover the point about the 75-year situation. That is one of our major concerns which we think is covered by the amendment.
Women have a lower annuity rate because they tend to live longer and therefore draw the income for a longer period of time. But in those circumstances it may be better for them not to be as restricted as at present on timing or the annuity itself. We believe that the present system is too inflexible. Accordingly, I should like to test the opinion of the House on this matter.
§ 6.31 p.m.
§ On Question, Whether the said amendment (No. 7) shall be agreed to?
§ Their Lordships divided: Contents, 145; Not-Contents, 137.66
|Division No. 1|
|Addison, V.||Cross, V.|
|Alexander of Tunis, E.||De L'Isle, V.|
|Alexander of Weedon, L.||Dean of Harptree, L.|
|Anelay of St. Johns, B.||Denbigh, E.|
|Astor, V.||Denman, L.|
|Astor of Hever, L.||Derwent, L.|
|Attlee, E.||Dixon-Smith, L.|
|Belstead, L.||Downshire, M.|
|Berners, B.||Dundonald, E.|
|Bethell, L.||Eames, L.|
|Biddulph, L.||Eccles of Moulton, B.|
|Birdwood, L.||Eden of Winton, L.|
|Blaker. L.||Elibank, L.|
|Blatch, B.||Elles, B.|
|Boardman, L.||Elton, L.|
|Bowness, L.||Fookes, B.|
|Brabazon of Tara, L.||Geddes, L.|
|Brentford, V.||Glenarthur, L.|
|Bridgeman, V.||Glentoran, L.|
|Brougham and Vaux, L.||Gray, L.|
|Buccleuch and Queensberry, D.||Greenway, L.|
|Buckinghamshire, E.||Haddington, E.|
|Buscombe, B.||Harding of Petherton, L.|
|Byford, B.||Harmsworth, L.|
|Cadman, L.||Henley, L.[Teller.]|
|Campbell of Alloway, L.||Higgins, L.|
|Carnock, L.||Holderness, L.|
|Carr of Hadley, L.||HolmPatrick, L.|
|Chadlington, L.||Hothfield, L.|
|Chesham, L.||Ironside, L.|
|Clanwilliam, E.||James of Holland Park, B.|
|Clark of Kempston, L.||Jenkin of Roding, L.|
|Coleridge, L.||Jopling, L.|
|Colwyn, L.||Kelvedon, L.|
|Cope of Berkeley, L.||Kenilworth, L.|
|Courtown, E.[Teller.]||Kintore, E.|
|Cranborne, V.||Knight of Collingtree, B.|
|Laing of Dunphail, L.||Onslow, E.|
|Lane of Horsell, L,||Onslow of Woking, L.|
|Leigh, L.||Oppenheim Barnes, B.|
|Liverpool, E.||Park of Monmouth, B.|
|Lucas, L.||Pender, L.|
|Lucas of Chilworth, L.||Perry of Southwark, B.|
|Luke, L.||Pilkington of Oxenford, L.|
|Lyell, L.||Radnor, E.|
|McColl of Dulwich, L.||Rawlings, B.|
|Mackay of Ardbrecknish, L.||Reay, L.|
|Mancroft, L.||Renton, L.|
|Marsh, L.||Roberts of Conwy, L.|
|Mayhew of Twysden, L.||Romney, E.|
|Merrivale, L.||Rotherwick. L.|
|Mersey, V.||Rowallan, L.|
|Miller of Hendon, B.||Ryder of Wensum, L.|
|Monk Bretton, L.||St. Davids, V.|
|Monro of Langholm, L.||Saltoun of Abernethy, Ly.|
|Monson, L.||Seccombe, B.|
|Monteagle of Brandon, L.||Sharpies, B.|
|Montgomery of Alamein, V.||Shaw of Northstead, L.|
|Morris, L.||Soulsby of Swaffham Prior, L.|
|Mowbray and Stourton, L.||Stewartby, L.|
|Moynihan, L.||Strathclyde, L.|
|Munster, E.||Swansea, L.|
|Murton of Lindisfarne, L.||Swinfen, L.|
|Napier and Ettrick, L.||Tebbit, L.|
|Naseby, L.||Teviot, L.|
|Newall, L.||Torrington, V.|
|Norfolk, D.||Trefgame, L.|
|Norrie, L.||Trumpington, B.|
|Northbrook, L.||Vivian, L.|
|Northesk, E.||Windlesham, L.|
|Norton, L.||Wise, L.|
|Nunburnholme, L.||Young, B.|
|Acton, L.||Elder, L.|
|Addington, L.||Evans of Parkside, L.|
|Ahmed, L.||Evans of Watford, L.|
|Alli, L||Falconer of Thoroton, L.|
|Amos, B.||Faulkner of Worcester, L.|
|Archer of Sandwell, L.||Farrington of Ribbleton, B.|
|Bach, L.||Gilbert, L.|
|Barker, B.||Gladwin of Clee, L.|
|Barnett, L.||Goodhart, L.|
|Bassam of Brighton, L.||Gordon of Strathblane, L.|
|Berkeley, L.||Gould of Potternewton, B.|
|Blackstone, B.||Graham of Edmonton, L.|
|Blease. L.||Grantchester, L.|
|Brett, L.||Grey, E.|
|Brooke of Alverthorpe, L.||Hacking, L.|
|Brookman, L.||Hampton, L|
|Brooks of Tremorfa, L.||Harris of Greenwich, L.|
|Bruce of Donington, L.||Harris of Haringey, L.|
|Burlison, L.||Haskel, L.|
|Carlisle, E.||Hayman, B.|
|Carter. L.[Telter.]||Hilton of Eggardon, B.|
|Castle of Black burn, B.||Hogg of Cumbernauld, L.|
|Chandos, V.||Hollis of Heigham, B.|
|Christopher, L.||Howie of Troon, L.|
|Clarke of Hampstead, L.||Hoyle, L.|
|Clinton-Davis, L.||Hughes of Woodside, L.|
|Crawley, B.||Hunt of Kings Heath, L.|
|Currie of Marylebone, L.||Irvine of Lairg, L. (Lord|
|Davies of Coity, L.||Islwyn, L.|
|Dean of Thornton-le-Fylde, B.||Janner of Braunstone, L.|
|Desai, L.||Jay of Paddington, B. (Lord|
|Dholakia, L.||Privy Seal)|
|Donoughue, L.||Jenkins of Putney, L.|
|Dormand of Easington, L.||Kennedy of The Shaws, B.|
|Dubs, L.||Kennet, L.|
|Dunleath, L.||Kilbracken, L.|
|King of West Bromwich, L.||Renwick of Clifton, L.|
|Kirkhill, L.||Rodgers of Quarry Bank. L.|
|Lea of Crondall, L.||Russell, E.|
|Lockwood, B.||Sainsbury of Turville, L.|
|Lofthouse of Pontefract, L.||Sawyer, L.|
|Longford, E.||Scotland of Asthal, B.|
|Lovell-Davis, L.||Serota, B.|
|Macdonald of Tradeston, L.||Sewel, L.|
|McIntosh of Haringey, L.||Shepherd, L.|
|[Teller.]||Shore of Stepney, L.|
|Mackenzie of Framwellgate, L.||Simon, V.|
|McNair, L.||Simon of Highbury, L.|
|Mallalieu, B.||Smith of Clifton, L.|
|Mason of Barnsley, L.||Smith of Gilmorehill, B.|
|Merlyn-Rees, L.||Stoddart of Swindon, L.|
|Milner of Leeds, L.||Strabolgi, L.|
|Mishcon, L.||Strange, B.|
|Molloy, L.||Symons of Vernham Dean, B.|
|Monkswell, L.||Taylor of Blackburn, L.|
|Morris of Manchester, L.||Taylor of Gryfe, L.|
|Murray of Epping Forest, L.||Thomas of Walliswood, B.|
|Palmer, L.||Thornton, B.|
|Peston, L.||Turner of Camden, B.|
|Pitkeathley, B.||Varley, L.|
|Plant of Highfield, L.||Walker of Doncaster, L.|
|Ponsonby of Shulbrede, L.||Wallace of Saltaire, L.|
|Prys-Davies, L.||Warwick of Undercliffe, B.|
|Puttnam, L.||Weatherill, L.|
|Ramsay of Cartvale, B.||Wedderburn of Charlton, L.|
|Rea, L.||Williams of Crosby, B.|
|Redesdale, L.||Williams of Elvel, L.|
|Rendell of Babergh, B.||Williams of Mostyn, L.|
On Question, amendments agreed to.
§ Resolved in the affirmative, and amendment agreed to accordingly.
§ 6.41 p.m.
Lord Higgins moved Amendment No. 8:
Page 1, line 22, leave out subsection (5).
§ The noble Lord said: My Lords, I hope that the Minister will excuse me if I say that this is also a probing amendment. It is related to administrative expenses.
§ There has been a great deal of discussion about administrative expenses, in particular the 1 per cent limit which the Government suggest should be imposed on those who administer stakeholder pensions. We have been told that some in the industry have been prepared to accept that limit and we can understand that progress has been made. It would be fair to say that the effect of the introduction of the proposals for stakeholder pensions has led to some increase in the competitive pressures in the market. As a result of that, some charges on existing schemes have been reduced.
However, a number of press reports, one as late as 16th September, stated that,
Darling may lift the I per cent charge cap".
It would be helpful to know whether that is the Government's position. Furthermore, a number of subsequent amendments relate to commission; for example, that tabled by the noble Earl, Lord Russell. The noble Baroness has tabled an amendment relating to the costs of administration being borne by members and another relating to advice. At this first stage of the
discussion on these points, perhaps we may know whether it is the Government's intention to impose the limit and whether they think it is appropriate.
My Lords, I must confess that I find Clause 1, which defines stakeholder pension schemes, one of the most incomprehensible pieces of legislation I have come across in 54 years in one House or another of Parliament. Within that clause, it is difficult to envisage how subsection (5) will work. The strange thing is that the various issues which must be worked out under paragraphs (a), (b) and (c) will be difficult to calculate. Indeed, it will mean going into people's personal finances in a subtle, perhaps sometimes complex, way. I believe that what my noble friend Lord Higgins said requires careful attention and I hope that the Government will consider simplifying this subsection.
§ 6.45 p.m.
§ Lord McIntosh of Haringey
My Lords, the pensions Green Paper outlined our proposals for minimum standards for stakeholder pension schemes and, as the noble Lord will recognise, on 2nd June we published detailed proposals for the minimum standards in a consultation document. They include setting restrictions on the way in which charges may be made and an overall limit on the charges.
Amendment No. 8 would mean that schemes could charge their members in any way and at any level they wished. The noble Lord said that this is a probing amendment about the 1 per cent limit on charges. However, I must take the amendment as it stands and it gives complete freedom to schemes to charge as they wish. I shall do my best to respond to the probe, but in the end I shall have to ask the noble Lord to withdraw his amendment on the basis of what it states rather than on the basis of what he states.
I want to explain why we consider that a simple and transparent charging structure should be one of the fundamental features of stakeholder pension schemes. Before leaving that point, perhaps I may say to the noble Lord, Lord Renton, that there is no question of any investigation into anyone's personal finances. We are concerned here only with the charges that may be made; with the level of the charges, which should not be more than 1 per cent; and with the basis on which the charges are made, which is the total value of the fund.
For many people, the only option of saving for retirement is a personal pension, but the charging nature of some personal pensions bears heavily on smaller investors or penalises those who have to stop contributing to their scheme. Many personal pensions charge in a complicated way, making it difficult for scheme members to understand how the overall charge has been worked out. Terms and conditions vary widely making it hard for potential members to compare the products available.
That is why the consultation paper issued in June proposed that stakeholder pension schemes may charge only in a certain way; that is, a single charge on the value of the fund. No additional charges will be allowed for transferring in or out of a stakeholder scheme or for 68 stopping or changing contributions. We have sought views on these proposals and we are currently evaluating them in the light of the responses we have received, but the majority of those who responded favoured a single charge on the value of the fund.
I understand the concern of the noble Lord, Lord Higgins, in proposing the amendment. We accept that we are setting a challenge for schemes. Of course, it is a challenge that has already been met by some schemes. There is the printing industry scheme, the engineering and electrical workers' scheme and the Virgin scheme. We intend to make it a challenge, but we want to make sure that those who join stakeholder schemes get a good deal.
Some people argue—I did not hear the noble Lord, Lord Higgins, do so—that market forces alone will drive down costs. Some providers have developed plans for lower costs and flexible personal pensions. That is excellent. We are pleased that they have encouraged the development of better value personal pensions for those seeking to make retirement provision, but we do not believe that this should be left to chance.
We have also proposed that there should be a 1 per cent limit on total charges. Every fraction on the charge makes a lower final pension for pension scheme members. The limit on charges provides them with important reassurance. We are determined to strike a hard bargain on behalf of the consumer. It is with that in mind that we propose the challenging but realistic limit of 1 per cent. In proposing that figure, we have taken into account responses to the Green Paper.
We have considered available information on the range of charges in personal pensions. We have already seen schemes being offered at that level and lower. I acknowledge straightaway that most of those responding to the consultation exercise have argued for a higher limit. We are evaluating the responses carefully and we shall announce our decision in due course. The final level will be set out in regulations using the power in subsection (5) which the amendment seeks to remove.
Therefore, I can only say to the noble Lord, Lord Higgins, that he should not believe everything that he reads in the press and that he should not expect me to anticipate the final result of the consultations or to announce from this Dispatch Box what the figure is going to be when the regulations come out. The regulations will be subject to parliamentary scrutiny. I shall not allow the noble Lord to probe me any further. He can probe me as much as he likes, but he will not get any more answers. I hope that on that basis he will see fit to withdraw the amendment.
§ Lord Higgins
My Lords, I agree with the noble Lord that one should not believe everything that one sees in the press, although his response seems to suggest that one does not know whether to believe it or not. At all events, I understand from his answer that the question of the 1 per cent charge cap is still under consideration and that the Government have not yet made up their mind. As I said earlier, a number of subsequent amendments relate to that question and to the particular question of charges for advice and so forth. It is probably better to defer further discussion until the matter is dealt with at an appropriate place in the Marshalled List. I beg leave to withdraw the amendment.
§ Amendment, by leave. withdrawn.
Baroness Turner of Camden moved Amendment No. 9:
Page 1, line 22, leave out from ("that") to ("or") on page 2, line 2, and insert ("no part of—
The noble Baroness said: My Lords, I beg leave to move Amendment No. 9 standing in my name and that of my noble friend Lady Castle of Blackburn. The subsection would then read that:
no part of—
§ The effect of the amendment would he that the whole of the schemes; expenses, commission and so forth, would be borne by the employer or the provider of the scheme. The employee's contributions and funds and the funds' investment income would be used solely for the provision of benefits. That would have two advantages. First, the employer would have to contribute at least the amount needed to meet those expenses. That would have the advantage that the employer would have an interest in endeavouring to keep down the charges. Secondly, there would then be no need to lay down a minimum level of charges.
§ I believe that the House is aware that my noble friend and I are supporters of the concept of occupational pensions. This amendment is in a way an attempt to ensure that members who participate in a stakeholder scheme have some of the advantages which accrue to members of an occupational scheme, in that employers in an occupational scheme obviously have to bear an amount of the cost and have also to make a contribution themselves. The amendment does not demand, as later amendments do, that the employer should make a contribution, but it suggests that the employer should contribute at least a minimum amount to meet expenses, or the provider if it is not a case of an employment situation.
§ I believe that that measure would be of benefit to employee members and would perhaps encourage the growth of stakeholder pensions in situations where there was no occupational scheme but where employees needed to have the benefit of coverage. I beg to move.
§ Baroness Hollis of Heigham
My Lords, I rather imagined that the noble Lord, Lord Higgins, would not be rising to support the amendment, and I was not disappointed.
Amendment No. 9 would mean that stakeholder pension schemes could make no charges on their members. Effectively, under the amendment, schemes could not operate unless costs could be recovered from an employer or other sponsoring organisation—perhaps the Government. If the costs were met by the scheme provider, they would have to be recovered by them in some other way; perhaps in terms of the effectiveness of either the 70 investment policy or the gap between buying and selling of funds held in the scheme. They would certainly not be carrying that out on a non-profit basis.
Amendment No. 9 would mean that charges could not be taken from members and therefore would have to go somewhere else. Of course we want schemes to offer value for money. That is one of the reasons we have proposed that charges should be made only in a certain way and should be below a limit of 1 per cent of the value of the fund. To go further and prevent charges entirely would undermine the schemes altogether. Many of the people whom we are seeking to help work for employers who have elected not to fund an occupational scheme. To expect such employers then voluntarily to meet those charges is not realistic; nor, as I have explained, do we see this as the area on which it is appropriate to concentrate state help.
The net effect of the amendment, were it to be pursued by my noble friend, would be to prevent the operation of stakeholder schemes. That would leave around five million people without the opportunity to join a stakeholder pension scheme. We think that the new schemes are a vital part of pension choice. We want them to be readily available. Therefore I hope that my noble friend will not pursue her amendment.
§ Baroness Turner of Camden
My Lords, I thank my noble friend for her response to the amendment. I do not share her view that the amendment, if passed, would mean that stakeholder pension schemes would cease to operate. If a similar amendment—perhaps not with this wording—were to be passed, such schemes would be very attractive to employees and would perhaps result in greater pressure for a scheme to be introduced. However, in view of what has been said this evening, it is certainly not my intention to call a vote on the issue. I shall look carefully at what my noble friend has said in Hansard tomorrow morning. beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
Lord Goodhart moved Amendment No. 10:
Page 2, line 4, leave out (", to pay commission").
§ The noble Lord said: My Lords, in moving the amendment I shall speak also to Amendment No. 11 which is tabled in my name and grouped with it.
§ I say frankly that the point is something of a hobby-horse of mine and indeed has been for some years past. Insurance brokers and advisers act in law as agents of their clients—the people who go to them to receive recommendations on what kind of insurance policy they should buy. The brokers are paid for their services not by their clients, but by the insurance companies whose policies they recommend their clients to buy. There is therefore an obvious and straightforward conflict of interest on the part of the insurance brokers between their own personal interests and those of their clients.
§ The law in general requires an agent to account to his client for any benefit received from a third party in connection with the agency. However, there are some Victorian cases which held that that principle does not apply to the case of insurance. I believe that that is wrong. I believe that the general law should apply to insurance brokers and advisers in the same way as it applies to agents 71 generally. The duty of an agent is to act solely in the interests of his or her client. If one insurer is offering the agent a bigger commission than other insurers, there is a strong and obvious inducement for the broker to recommend the policy with the bigger commission. No doubt many insurance brokers and advisers resist that temptation, but it is one which should not be there.
The loophole also encourages insurers to compete in offering larger commissions rather than larger benefits for a given premium. Commission in those circumstances is frankly no less than legalised bribery. The buyers accept it because the real cost is hidden by the front-end loading of policies which absorbs the cost of the commission paid to the insurance broker. What we should do is say to the buyers of policies, "If you want honest and disinterested advice, you are more likely to receive it if you pay for it yourself'. As the Social Security Committee in the other place quoted from a witness in its report on pensions and divorce,
if advice has got a value then it also has a cost
If you pay for advice yourself, you get more insurance for the same premium. Therefore, I should like to ban those who hold themselves out as independent brokers or advisers from taking commission at all. Such a ban might be in practice—perhaps not technically—outside the scope of the Bill were that to be applied across the board to all kinds of pension policies. But surely at least we can start with stakeholder pensions, particularly as advice is less likely to be needed in the case of such pensions which are relatively simple and straightforward and where the great majority of people are in any case likely to go for what is a designated scheme in their individual case. Therefore, I propose that commission should not be a permitted expense of providers of stakeholder pensions. I beg to move.
§ 7 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to the noble Lord for admitting that this is what he describes as a "hobbyhorse". In Committee he described commissions as "institutionalised bribery" and I can see how strongly he feels on the issue. However, I hope to persuade him that, given that we have now agreed that there will be a limit both on the total charges to be made by providers of a scheme and a single method of calculation of how that limit shall be arrived at, his amendment would be an intrusion into matters which are not properly the concern of government.
Traditionally, of course, the noble Lord is right. Those involved in the sale of personal pensions have been remunerated at least in part by the payment of commission. The payment of commission upfront can often lead to charges which bear heavily in the early years. That is why personal pensions can be poor value, particularly for those who find that they have to stop paying after a short period in the scheme. That was one of the major issues in the mis-selling of personal pensions in the 1980s and early 1990s. It is also one of the reasons why there is a complex structure of charges which bear heavily on small investors and make it difficult for scheme members to understand how the overall charge is worked out. As far as that goes, I am entirely in sympathy with what the noble Lord says.
72 However, I am not convinced that it is necessary to go so far as to ban the payment of commission for stakeholder pension schemes. We are confident that our proposals for minimum standards, which we set out in the consultation paper in June, will ensure that schemes cannot charge in ways which would impact disproportionately on those with moderate earnings or penalise those who need to take contributions breaks. As I explained when we were debating Amendment No. 8, stakeholder pensions could charge only in a certain way; that is, through a single charge on the value of the fund. We propose also that there should be a 1 per cent limit on total charges; low additional charges for transferring in or out of the stakeholder scheme; or for stopping or changing contributions. We believe that that will provide the simple and transparent charging structure that is essential if stakeholder pensions are to provide members with good value for money and make it easy for them to make comparisons between different schemes.
As I said in Committee, I do not believe that whether or not commission is paid is an issue for government at all. Perhaps I may be so bold as to quote myself. I said,it seems to me that commission is a way of incurring marketing costs—and marketing costs are part of the costs of running a pension scheme".—[Official Report, 24/6/99; col. 1128]It is not for us to decide how a pension scheme provider should allocate this cost. So far as concerns the customer, commission is the same as any other back-office cost or any other cost. It reduces the value of the individual fund.
Given the protection which is provided for in the way in which a charge can be made and which will be provided for in regulation on the amount of the charge, I hope that I have persuaded the noble Lord, Lord Goodhart, that his amendment is an unnecessary restriction on the commercial judgment of pension scheme providers and that he will feel able to withdraw it.
§ Lord Goodhart
My Lords, the noble Lord, Lord McIntosh, will not be altogether surprised to hear that he has not persuaded me of that. He will perhaps also not be altogether surprised to hear that I take the view that this is not an appropriate amendment on which to divide the House. Therefore, having raised the issue and having had my say, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendment No. 11 not moved.]
Lord Higgins moved Amendment No. 13:
Page 2, line 11, leave out from ("to") and ("and") in line 12 and insert ("a minimum contribution level of £20 per month").
§ The noble Lord said: My Lords, this amendment relates to two issues which we have already discussed: the question of charges and whether adequate income will be provided by a stakeholder pension. I raised the issue of charges in Committee on a rather more modest amendment. I believe that it related to £10 a month. I pointed out that if the Government adhere to their policy of saying that there is a cap of 1 per cent on the annual charge, there is a real 73 problem with people taking out a stakeholder pension if the amount which they put in is very low. Therefore, I suggested that there should be some minimum level; otherwise, clearly, the return which the provider receives is likely to be negligible in relation to the charge which he is allowed to make. That is likely to deter people.
§ I believe that in any case whether or not there needs to be some minimum level of contribution is a difficult issue because we shall find that although a person contributes throughout his working life, the pension which he receives at the end of the day is less than the minimum income guarantee now proposed by the Government. As we understand it, that will be related to earnings. However, in her earlier remarks, the noble Baroness left out the small print which normally occurs in government documents; namely, "if resources allow".
§ At all events, it is obviously wrong to encourage people to invest in a stakeholder scheme if one finds that at the end of the day they receive nothing in return because the income it produces is less than the minimum income guarantee. Therefore, on both these points I believe it would be helpful to have the Government's view. It is, of course, the case that people's incomes may vary substantially over their working life. Even so, given the whole emphasis placed earlier by the Government on people providing an income which does rise above the minimum income guarantee, there would seem to be some case for this particular amendment.
§ At this stage, I do not propose to move Amendment No. 14. I beg to move.
§ Baroness Hollis of Heigham
My Lords, these amendments relate to the level of contributions to stakeholder pension schemes. Amendment No. 13 would put on the face of the Bill a level of £20 for the minimum contributions that stakeholder pension schemes can require their members to make. Amendment No. 14 seeks to specify a maximum limit for contributions to stakeholder pension schemes. We debated amendments almost identical to these in Committee, and I am intrigued as to why the minimum suggested has increased from £10 to £20 since then.
Clause 1(7) is intended to give stakeholder pension scheme members the flexibility to contribute either on a regular basis or as and when they can—something that is not possible with many existing personal pensions. It also provides the power to make regulations specifying minimum contribution levels and other restrictions on contributions. We made it clear in the Green Paper that any scheme that requires a minimum contribution should not be able to set it above a specified amount. To ensure that people who can afford only modest contributions are not excluded, our consultation document on minimum standards, issued in June, proposed that amount should be £10. I agree that at the time it was sort of a tickover sum, but that is what it was intended to be.
Our consultation document proposed that there should be no requirement for contributions to be made on a regular basis, such as once a month as suggested by Amendment No. 13. One of our key aims is that stakeholder pension schemes are flexible enough to adapt to people's changing circumstances. We want people to be able to make contributions as often as they wish, by either 74 regular payments or one-off payments—which might suit someone who is self-employed, for example, rather better. For those in employment, regular monthly contributions make sense, but unemployed people may wish to make small contributions (as and when they can afford to do so), while they look for work, and we want them to be able to do that. Similarly, we want to allow those who take breaks from work—to raise a family, for example—to make one-off contributions from time to time. We want to ensure that stakeholder schemes cater for people who want to make irregular lump-sum payments; for example, self-employed people who may receive a large one-off payment for a specific contract.
In the consultation document we sought views on the compatibility of that proposal with the variety of ways in which schemes may collect contributions. We expect that most stakeholder pension schemes will receive contributions either through individual direct debit arrangements or through the employer's payroll system. Our proposal to allow one-off payments means that they may have to accept other methods of payment.
We are evaluating our proposals in light of the responses we have received to the consultation paper. In particular, we are mindful that many people have said that the £10 minimum contribution is too low and that it will place an excessive burden on schemes. We shall consider those views carefully before coming to a final decision. We want to ensure that our proposals achieve the right balance between flexibility for members and the costs to schemes of handling very small contributions.
Our final proposals for the minimum standards will be set out in regulations, which will give us the flexibility to amend the levels of contributions in future if it becomes appropriate to do so. We think that it is reasonable to go down that route, rather than specify a figure in primary legislation.
The main aim of Amendment No. 14 is to allow stakeholder scheme member`, to contribute up to a flat-rate amount of £5,000 or a figure calculated as a percentage of earnings using the existing Inland Revenue limits, where that is higher than £5,000. I hope that your Lordships recognise that things have moved on considerably since Committee. I indicated then that the Government were considering carefully the points that had been made on the operation of the proposed tax regime for stakeholder pensions. In particular, there were concerns about the integration of the simplified tax regime for stakeholder pensions with the existing tax limits for personal pensions.
On 16th September, we issued a consultation paper—the claret-coloured one—that set out our revised proposals on tax. We have accepted the weight of the arguments that prompted the amendment, but we have gone much further in radically simplifying the tax rules for stakeholder and personal pensions. For the first time, we are offering people who cannot work—including disabled people and carers—the opportunity to build up their own pension and to benefit from the tax reliefs available to earners. The proposals have been widely welcomed by the pensions industry, which has recognised the radical thinking that has gone into them. It has welcomed also the reduction in red tape for pension providers.
75 The new arrangements will allow members to contribute up to either £3,600 a year or to the age and earnings-related limits for personal pension schemes where those are higher. Precisely the same rules will apply to stakeholder and personal pensions, avoiding any tax complications for people who are thinking of joining a scheme.
We have not gone as far as the amendment in setting the tax limit at £5,000. Your Lordships will recognise that some limit is needed to put a cap on the cost to the Exchequer from pension tax relief. We think that £3,600 is a sensible figure. In practice, 95 per cent of existing pension scheme members pay in less than £3,600 each year. To go any higher would have a cost, but would provide little benefit for the moderate earners who are the main target for stakeholder pensions. To put in a figure of £5,000 when one is talking about a stakeholder target figure of between £9,000 and £20,000 seems extremely high.
We have listened and revised our proposals in the light of views expressed in this House and elsewhere. It is not our intention to set out the tax arrangements in the Bill. The Inland Revenue and the DSS are continuing to consult on the proposals for a new integrated tax regime. Those proposals will be brought forward in a forthcoming Finance Bill—which will of course be debated in another place in due course. In the light of the revised proposals and the explanations that I have given, I hope that the noble Lord feels able to withdraw the amendment.
§ 7.15 p.m.
§ Lord Higgins
My Lords, we are grateful to the Minister for her reply. We still have some concerns about the minimum payment level. It may be that people will find—despite fluctuations in income and the ability to make lump-sum payments—that they are gaining nothing from all their contributions because the proceeds fall below the minimum income guarantee. The Government should give that point further consideration, whether by way of a refund or contributions or whatever; otherwise, that will serve as a considerable deterrent to people trying to do the arithmetic involved, when working out whether or not joining a scheme would be worth while.
§ Baroness Hollis of Heigham
My Lords, I intended to present this information when we debate income support levels but for the noble Lord's information, somebody who contributes over a full working life—there are certain assumptions about earnings increasing 4 per cent a year and so on—will only have to pay in £3.50 a week or £13 a month, of which perhaps half could come from recycled rebates, to float them above the level for a stakeholder pension. If they were to put in something like £50 a month or £12.50 a week—half of which or more, according to the person's age, could be recycled rebates, so that is a gross figure and not a net figure because a net figure could be half that or less—they would acquire a pension over a working life of the order of £75 a week on top of their state pension. Even quite small sums—£10, for example—would produce a worthwhile figure if that were net of the recycled rebates. If one added that £10 into the recycled rebates, one could have (on certain assumptions about earnings and inflation over a lifetime) a pension of perhaps £50 a week. We should 76 not underestimate the power of compounding over a lifetime and the addition of both the employee's net contribution and the recycled rebate.
§ Lord Higgins
My Lords, I am grateful to the noble Baroness for her intervention. With a number of amendments, the arguments have gone back and forth, and replies relevant to one can be used for another. I shall study carefully the illuminating figures that the Minister has just given.
As to the tax limit and so on, we have referred to a number of consultation documents. Consultation brief No. 6, which has a red cover in this case—
§ Lord Higgins
My Lords, burgundy perhaps. Someone has to be the straight man in this act.
A number of the proposals have been widely welcomed, with surprise in some cases. As I understand the tax proposals, if someone who has no income makes a contribution to their pension, they will get a handout from the Inland Revenue. I cannot recall that happening on any previous occasion. Perhaps it is regrettable that will appear in the Finance Bill in another place rather than be debated here. In the light of the Minister's helpful remarks, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendment No. 14 not moved.]
Lord Higgins moved Amendment No. 16:
Page 2, line 18, at end insert ("or other insurance contracts, annuity contracts or pension arrangements which satisfy the prescribed arrangements").
§ The noble Lord said: My Lords, Amendment No. 16 concerns an important issue on the question of transferability of assets from one particular form of contract into the stakeholder pension scheme. It is linked with Amendment No. 17. I am not sure whether or not that amendment accepts my proposal. If that is so, we can make rapid progress. However, there are one or two points which should be made.
§ Incidentally, I believe that perhaps the noble Baroness was not accurate with regard to final salary schemes in saying that there are difficulties on transferring. One can always leave the final salary amount in the existing scheme, as indeed I did. The noble Lord, Lord McIntosh, shakes his head.
§ Lord McIntosh of Haringey
My Lords, you can always have a frozen pension, but if you change jobs three or four times in your 20s and 30s, you will land up with three or four "piddling" little frozen pensions which will not add up to a proper final salary scheme.
§ Lord Higgins
My Lords, speaking from personal experience, I served roughly the same length of time with a 77 well-known multinational as I did as a Minister. The frozen pension did a great deal better than the ministerial one. Be that as it may, as we understand it the stakeholder scheme must accept transfers from other schemes but there are some risks as far as concerns the trustees. I refer, for example, to schemes which do not have fully equalised benefits for men and women. I am not sure whether that point has been taken into account.
The issue of transfer values is difficult and much involved in discussions with actuaries, and so on. We will need to ensure that trustees who transfer, for example, from a defined contribution scheme (like that of a company) to a stakeholder scheme do not suddenly find that there are problems. If the amendment tabled by the noble Baroness embraces my amendment—no doubt it is far better drafted—I look forward with interest to what she has to say. I beg to move.
§ Lord McIntosh of Haringey
My Lords, the noble Lord is quite right. He moved the same amendment in Committee and I said that we were prepared to consider it further; indeed I quite welcomed it.
The reason for extending the provision is that occupational and personal pensions are not the only type of recognised pension arrangements. Other types include retirement annuity contracts and certain other types of annuity or insurance policies. Insurance and annuity contracts can, for example, be used to give effect to an ex-employee's rights in the former employer's occupational pension scheme. Once our proposals for pension sharing on divorce are introduced, a spouse who becomes entitled to a share of the former spouse's pension and is not at that time a member of a pens: on scheme will be able to buy a deferred annuity. It is possible that those people may, in future, want to transfer such rights into a stakeholder pension scheme.
There is nothing in our original proposal which would have prevented a stakeholder scheme from accepting transfer from such arrangements. However, since we last discussed the issue, I have had an opportunity to consider it further. I am pleased to say that on reflection we can see no reason why this provision should not be amended to ensure consistency of treatment between different types of arrangements. We have tabled Amendment No. 17 to include transfers of rights in the types of pension arrangements that we have been discussing. It meets what I believe to be the purpose of Amendment No. 16 but has simply been expressed somewhat differently, on legal advice, to achieve the intended effect.
§ Lord Higgins
My Lords, I am not a lawyer and therefore I fully accept that this is no doubt better drafted than my own amendment. I am glad that the Government have been prepared to accept the principle of what we argued in Committee. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
Lord McIntosh of Haringey moved Amendment No. 17:
Page 2, line 18, at end insert—
Lord Higgins moved Amendment No. 18:
Page 2, line 20, at end insert—
("(10) The ninth condition is that the scheme shall provide full and accurate advice to any person who applies to join the scheme as to how a stakeholder pension would benefit the applicant compared to other types of pension and shall tell the applicant that they have up to twenty-five days to cancel the application without cost or penalty; and an applicant to a stakeholder pension scheme shall have up to twenty-five days from receiving the said advice to cancelling the said application without cost or penalty.").
§ The noble Lord said: My Lords, Amendment No. 18, which stands in my name, suggests that it should be a condition of the stakeholder scheme that it shall provide full and accurate advice to any person who applies to join the scheme as to how their pension would benefit the applicant compared with other types of pension, and tells the applicant that they have 25 days to cancel if they think it is wrong.
§ This clearly relates to the question of advice and concerns one of the problems which arose with regard to the so-called "1 per cent cap" on the charge which the stakeholder scheme can make for provision of the pension. As I understand it, the Government are changing their view somewhat as regards that matter. They are tending to say that there may be some additional charge for advice. That is an important shift. One of the reasons why charges are as they are in existing schemes is that the amount which is charged "up front" includes a charge for providing advice. However, as the noble Lord, Lord Goodhart, stated earlier, that commission may indeed be paid in a way which is not justified.
§ Essentially, we are suggesting that there should be a sensible system for advice. The noble Lord, Lord Williams, suggested earlier that I was not taking into account the increase in the number of products available—"products" is the right word. The more one looks at such products, the more difficult advice becomes. Despite the fact that the noble Baroness argued earlier that the state second pension is somehow totally separated from the stakeholder pension, there are considerations there which individuals may wish to take into account when deciding whether or not to join a stakeholder scheme. Indeed, that is so more generally.
§ In particular, there are other difficulties. Dare I mention the provision by the Treasury of the so-called LISA? We have heard nothing at all about LISA. It appears to have sunk without trace. Clearly people will need advice as to whether they should go in for a stakeholder scheme or what appears to be a competitive product offered by the Treasury. It looks like a complete alternative to the stakeholder pension scheme. Will the advice given by the stakeholder promoter take that into account? Referring back to the comments made by the noble Baroness, Lady Castle, an area to be considered is whether people have the whole picture so far as concerns the present situation. None the less, I do not wish to detain your Lordships longer. I hope that we can have some reassurance from the Government with regard to the question of adequate advice 79 and, in particular, whether it is now considered appropriate for a charge to be made for it by the provider of the stakeholder pension. I beg to move.
My Lords, before my noble friend sits down, I wonder whether it would be in order for him to reply to the short point that I wish to put. Amendment No. 20 is tabled with Amendment No. 18. His explanation referred mainly to Amendment No. 18. In the first line of Amendment No. 20 we see the expression, "a decision tree". I have never before seen such an expression. It sounds like an attractive possibility. I wonder whether my noble friend could explain how the Treasury is expected to interpret that expression. The noble Lord, Lord McIntosh, is holding up a piece of paper which I have not yet seen. He may care to interrupt me in order to shorten the proceedings.
§ Lord Higgins
My Lords, I am grateful to my noble friend, in particular for drawing my attention to the grouping which for a moment I had overlooked. In Committee I argued strongly for the use of a decision tree as a helpful means of obtaining advice. The document being waved by the noble Lord, Lord McIntosh, is in fact consultation paper No. 4, unless I am mistaken.
§ 7.30 p.m.
§ Lord Higgins
My Lords, it all seems to be related to drink, though I am not clear why. It looks more like "Tizer", to me, but "Tizer" is a product which died out some years ago—certainly my investment in the company producing it was a mistake.
At the back of the document my noble friend will find a decision tree. The tree begins with the question, "Are you self-employed?". If the answer is "yes", a series of questions follow, and if the answer is "no", an alternative series of question is asked. It should enable people to decide whether or not they should invest in a stakeholder pension. Not only is there a decision tree number one, but also a decision tree number two which begins with the question, "How many years do you have to go before state retirement age?" It does not say what we do if we are over state retirement age, but it operates in the same way.
There is a case for that form of simplified advice. Of course, there are considerable dangers in that, but I understand that the Government are proposing to produce official decision trees of this kind which will help people to decide whether or not to take out a stakeholder pension. The problem is that it will not take one through the woods in a way which takes into account all the possible forms of pension which might be taken out instead of a stakeholder pension and, for example—I come back to the point I was making earlier—whether or not one should invest in the Treasury's competitive product LISA, rather than a stakeholder pension.
80 I welcome the fact that the document contains this idea and will be happy to discuss it with my noble friend Lord Renton if he cares to do so.
My Lords, I believe it is in order for me to speak now. I asked my noble friend a question and he answered it at length. Perhaps I may now venture to express an opinion on Amendment No. 20.
My noble friend knows well that I support him on every possible occasion, but the words in Amendment No. 20,and other forms of saving",are of extremely wide application. It would be unusual for the Treasury to consider the vast range of savings vehicles that could be considered applicable. Some people may say that the best form of saving is to buy an antique picture, or something even more incredible, a picture by Van Gogh. They hope that it will increase in value over the years and that is where they will devote their savings. I find that difficult to follow.
I am not trying to introduce a difficulty for my noble friend. I greatly admire the constructive attitude he has adopted in interpreting this complex piece of legislation. However, I find that proposition slightly problematical.
§ Lord McIntosh of Haringey
My Lords, I do not feel that a third speech would be appropriate at this stage.
Amendments Nos. 18 and 20 concern the provision of information and advice to prospective members of stakeholder pension schemes. We debated identical amendments in Committee.
I said then that joining a pension scheme is one of the most important financial decisions that most people will ever make. It requires a long-term commitment. In order to encourage people to make that commitment, they need to be aware of the benefit of saving for their retirement and be properly informed about any scheme that they are considering joining. Individuals must also be confident that their proposed arrangement is suitable for them and that it is secure, flexible enough to cope with changing circumstances, and will deliver good value for money. It is vital that people make decisions which take full and proper account of their circumstances.
As the noble Lord, Lord Higgins, said, we made proposals for the provision of information and advice on stakeholder pensions in a document we call the "tangerine" document, published on 2nd August. They reflect our commitment to good, accurate financial information and advice being available to all potential members.
We are proposing that all prospective members of a stakeholder pension scheme will receive good quality, understandable information to help them to make a reasoned choice about joining the scheme. As part of that, the consultation document makes clear that we are developing decision trees, which the noble Lord, Lord Higgins, has been kind enough to explain to the House, which will help to guide people by setting out their options and prompting them to work through a number of key questions about their circumstances. We did a similar thing earlier this year in the Employment Relations Bill which contained a number of decision diagrams. I am glad that in 81 neither case have we put forward the horrible algebraic formulas which were a feature of the legislation of the previous government; notably, their unsuccessful local government legislation. We believe that, for some people, that information will be sufficient to enable them to make an informed decision about the most suitable arrangement for them.
Decision trees will have a useful role to play as part of a package of information about stakeholder schemes and for some they will be sufficient. But we are not saying that they will be a substitute for advice in all cases. We recognise that many potential members will want or need additional help in considering their pension options and that for some it will involve individual, personal financial advice. For many of those, the advice will be straightforward, focusing, for example, on whether they should join a specific scheme, but others, such as those who have already taken out a personal pension, are likely to need more detailed and complex advice.
The noble Lord, Lord Higgins, suggested that we have already accepted that there should be an extra charge for advice. That is a matter still awaiting consultation. One option considered was that more detailed advice may be made available at an additional charge. We are considering responses to that which will feed into a decision on any appropriate charge limit.
We must strike a balance between the protection for consumers and the costs imposed on schemes and their members. We want stakeholder schemes to offer an appropriate level of advice within the overall charge and are now consulting on the best way to ensure that. It will be a challenge for scheme providers who may need to find new and low-cost ways of delivering advice, but we are determined that stakeholder pensions will be a good deal for those who join them. We shall be carrying out further work on the content and lay-out of the decision trees, but we think that it should be part of the FSA's guidance—the scheme providers—rather than something which comes from the Government.
As I hope I have made clear, although we are very sympathetic to the thrust of the amendments—I trust that that is confirmed by our consultation document—the wording of these particular amendments cannot be accepted at this time.
§ Lord Higgins
My Lords, I am grateful to the Minister for that response. I believe that he has taken up some of the points made by my noble friend. However, as far as concerns the provision of advice, it clearly needs to take into account the point which he made; namely, that there are various forms of saving, and so on. The decision tree really needs to take that into account. In those circumstances, I should have thought that there was at least some case for a degree of official guidance in the matter. In particular, some guidance as to what choice should be made in given circumstances as regards certain government products.
I had hoped that we might have some further elucidation with regard to the mysterious question of LISAs and whet her they are an alternative to stakeholder pensions, but answer came there none. Perhaps we may get something after the dinner break. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Baroness Amos
My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion, perhaps I may suggest that the Report stage begin again not before 8.40 p.m.
Moved accordingly, and, on Question, Motion agreed to.