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Pensions Bill

Volume 703: debated on Monday 14 July 2008

House again in Committee.

127: After Clause 88, insert the following new Clause—

“Minimum retirement income

(1) The amount of the minimum retirement income in respect of each tax year shall be set by the Chancellor of the Exchequer by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c. 16).

(2) Before making an order under subsection (1), the Chancellor of the Exchequer shall consult such persons as he considers appropriate.

(3) An order under this section (other than the order that applies to the first tax year during which this section is in force) must be made on or before 31st January of the tax year before the tax year to which the order applies.”

The noble Lord said: I shall speak to Amendments Nos. 128, 129 and 140 as well. I follow a number of my noble friends on this subject; the most persuasive speech was that made by my noble friend Lord Higgins on 15 November 2004, when he reminded us that this matter has a long history, stretching back over decades and many debates on various Bills. Indeed, he also reminded us that on several occasions this House has passed amendments to remove the compulsory age of 75. Therefore, it is with a sense of history that I seek to do exactly the same.

I recall that one of the most persuasive parts of my noble friend’s speech on 15 November 2004 was when he referred to the Watson Wyatt study, a very comprehensive and technically well executed study about people’s attitudes to annuities. Over a reasonable sample survey, it came to the view that something like 58.8 per cent of those surveyed never wanted to annuitise their pension pots and something like 12.1 per cent wanted to do so later than required to at the time. Therefore, something over 70 per cent of the people surveyed were against annuitising their assets as the present law requires them to do. I am very pleased to have the opportunity of giving the House a further chance to make its views absolutely clear.

We return to the question of whether the law should require pensioners to have converted all their pension saving into a lifetime annuity by the time they reach 75. The Finance Act 2004 outlines the law; namely, that pension income has to be taken before someone’s 75th birthday, either as an annuity—a secured pension—or as an alternatively secured pension.

I recall that the upper age of 70 was set in the Finance Act 1970. In 1976 this was increased to age 75 for retirement annuities. When personal pensions were introduced by my noble friend Lord Fowler, the age limit was retained. I look forward very much to any contribution he may make on this very important subject.

This is now important for three reasons: first, the growing acceptance of increases in longevity and the implications for pensions in the United Kingdom. I have been looking carefully at the tables, to which I referred in the previous debate. It is remarkable how 75 is viewed as relatively young. That is borne out by the figures. In 1981, life expectancy at the age of 65 for males was 14 and 18 for females. Life expectancy at the age of 75 was 8.1 for males and 10.7 for females. These figures have increased, so far as present tables are concerned, to life expectancy at age 65 of 19.5 for males and 22.2 for females. At age 75, it has increased for males to 11.4 and for females to 13.1. In 2050, it will increase at age 65 to 23.6 for males and 25.9 for females. It is foreseen that, at age 75, life expectancy will be 15.2 for males and 16.9 for females. One can well understand therefore why this is a key issue to consider.

The second reason is that future increases to state pension age have been agreed by legislation; namely, the Pensions Act 2007. Thirdly, there has been a rise in the minimum age at which someone can take pension benefits, from 50 to 55 by 2010.

There was a good debate on this matter some four years ago, when I recall the noble Lord, Lord Oakeshott of Seagrove Bay, being moved to say that,

“we would prefer no limit at all”.—[Official Report, 15/11/2004; col. 1229.]

It is obviously that the persuasiveness of my noble friend Lord Higgins had quite a dramatic effect, because we will hear later in this debate whether the noble Lord was overcome by the cogency of my noble friend’s arguments to make that clear statement and whether he still holds to it. My persuasive powers may not be as great as those of my noble friend, but we wait to see.

Amendment No. 128 would set up a retirement income fund, so that there would be enough money to ensure an annual income above a minimum set by the Chancellor in Amendment No. 127. That level of income would ensure that the individual would not have recourse to the state and not be eligible for benefits such as pension credit. Amendments Nos. 129 and 140 are consequential.

I suppose that we could look at a number of alternatives. The first is the simplest: to remove the age limit of 75 all together, which is what the amendments propose. I suppose that we could go down more complicated routes. For example, we could agree to increase the age of 75 by a year every two years, which was argued with me by the president of the Institute of Actuaries at a recent dinner that I attended as an honorary fellow. That is an understandable suggestion that would lead in the right direction but would be an alternative method. I suppose that we could also increase the age of 75 by the same increases as the state pension age, or we could just increase the age of 75 in accordance with increasing longevity.

However, I am seeking in these amendments to apply the simplest approach; namely, to abolish the limit all together. I shall just indicate why I argue that case. First, I concede that annuitisation has its merits. Earlier in this debate, I made reference to my entries in the register of interests, where it is clear that I have for many years been involved in the insurance industry. I know that the industry regards annuitisation as a simple and secure way in which to maintain a certain level of income in retirement. Therefore, there is credence in having that as an option—but it should be a choice for the individual, who should be able to make up their mind whether they want to go down the road of annuitisation. However, we must safeguard the interests of the taxpayer by making sure that an individual cannot be reckless with regard to the pension pot.

There are already exemptions for the Christian Brethren. I referred in the debate last year—as did my noble friend in the debate four years ago—to the fact that the Christian Brethren, all 738 of them, had secured recognition of the fact that they objected to the pooling of mortality risk. We have asked on a number of occasions what the present situation was in that regard, and whether the Minister was minded to accept that others will have the same objection, on non-religious grounds. I know that on previous occasions he has said that it is a very dangerous road down which a Minister might travel, because of the problem of avoidance or, indeed, evasion—but primarily avoidance, which is perfectly acceptable but would not be accepted by the Government as an appropriate way in which to deal with this problem.

I would argue, too, that the ownership of the pension pot lies with the person who has saved throughout their lives, often at the expense of their living standards, in order to put aside a substantial sum of money for their retirement. I mentioned earlier that I am proud to be chairman of a body called the Life Trust Foundation, which is now looking at the effects of increasing longevity on the individual’s capacity to cater for those later years. Adding quality life to years of life is a theme that has to be considered. More people are now turning their minds to how on earth we are going to provide for the fact that we will all live very much longer.

The latest figures, some of which I referred to earlier, are quite remarkable. The Office for National Statistics and the Government Actuary’s Department’s figures predict that the cohort life expectancy for those aged 65 at present is projected to be 20.6 years for males and 23.1 years for females. That is an extensive period of time. Not only does it demonstrate that we are out of date in keeping to the limit of 75, but we should also be finding simpler and easier ways in which to enable people to save to cover their later years. That is a growing problem. The Life Trust Foundation has recently said that it is a bigger problem than climate change—the fact that so many people are living so much longer without really having had the opportunity to ensure that they have the necessary funds to maintain them in their old age.

My final point is that these amendments would re-establish individual control over a pension pot for the person who has done so much to save that sum. Of course, we are talking about a market which is expanding rapidly. The ABI estimates that the UK pension annuities market has tripled in size in the past 15 years.

Last year, premiums in the pension annuities market were over £11,000 million, and more than 400,000 contracts were sold, many to people who do not have very substantial sums and who need what I would give them in these amendments; namely, choice, freedom and the right to their property. I beg to move.

My name is coupled with that of my noble friend Lord Hunt of Wirral on these amendments. I congratulate him on putting down this series of amendments yet again. Compulsory annuities at age 75 is one of those subjects which has developed into a campaign in this House. I first observed it when, as my noble friend Lord Hunt reminded us, my noble friend Lord Higgins moved an amendment to the then Pensions Bill in 2004.

It is true; I first observed it then. Since then the issue has arisen from time to time, not least in last year’s Pensions Bill. Make no mistake about it: your Lordships’ campaigns have a habit of getting on to the statute book. One, in particular, is graven on my heart. Over 12 years the late Lord Rugby campaigned vigorously to break the opticians’ monopoly on the sale of reading spectacles. It came to a head when I was a very junior health and social security Minister and was able to put my limited weight behind it. A suitable amendment, moved by the late Lord Winstanley, came to a vote and your Lordships agreed to it—just. The Government in another place confirmed it, and now reading glasses—cheap ones at that—can be bought anywhere. No doubt some noble Lords use them.

That simply would not have happened without the support of the Government of the day; so it is with my noble friend Lord Hunt’s amendments. The Official Opposition, here and in another place, stand four-square behind the abolition of compulsory annuities, which, incidentally, do not exist, so far as I can discover, in any G8 country. It should not be possible for anyone of any age to so run down their savings as to bring them into the benefits culture. In other areas, this is actually illegal. That is why my noble friend has coupled the abolition of compulsory annuities with a retirement income fund in Amendment No. 128, in which the thought I outlined is incorporated in proposed subsection (2)(4). It is noteworthy that the minimum retirement income which must remain in the fund is set by the Chancellor of the Exchequer. So the Government of the day remain in total control, as they do now with compulsory annuitisation.

The Bill means that almost anyone working consistently from the age of 20 to state retirement age could end up with a pension pot of, I believe, around £240,000. Thus the Minister’s complaint last time we discussed this—that these amendments will only benefit 3 per cent of the very rich—just does not stand up. Another of his complaints is that a retirement income fund will be left with money in it and will form part of the owner’s estate when he dies, and that, unlike the rest of his estate, it should not be capable of being shared between his survivors and anyone else to whom he wills his residuary estate.

We should not forget that pensions have two foundations: personal savings, which under this Bill are at least 3 per cent of the employee’s annual income, and the employer’s minimum 4 per cent, which is deferred wages. Both belong to the individual, just as much as his house or the value of his ISAs or other savings. Why should they not be passed on in his will to whomever he wishes? Is not this a basic human right? It is most certainly a basic human need.

Lastly, the Government claim that, while they welcome,

“innovative ideas for retirement income products for all”.—[Official Report, 6/6/07; col. 1162.]

as the Minister said last year, there is no appetite among the insurance industry for a retirement income fund. I find that very surprising. If any industry is open to new ideas, it is the insurance industry—if, that is, the Government allow it to be. Indeed, I noticed the other day a new scheme which, while just within the existing law, seemed extremely similar to my noble friend’s retirement income fund. So just what gives the Government such confidence that there is no appetite for this among the industry? Who have they consulted? I welcome the debate to follow.

I do not know whether the noble Lord will press the amendment to a vote, but I would not support him in the Lobbies. I do, however, support his argument. What is the state’s public interest in this? It is twofold, as has already been suggested by noble Lords: first, to ensure that pension savings are privileged in order to provide an adequate retirement income; secondly, that there be no recourse to public funds. Both those objectives are met in the subsection of Amendment No. 128 referred to by the noble Lord, Lord Skelmersdale, by an annuitisation that I calculate to be between £120,000 and £150,000 a year. After that, if an individual chooses not to annuitise but to accept the implications of adjustment of the fiscal privileges that went to build up that fund, why does the state have any public policy interest in what happens to the residual money? It is not good enough to say that that money was protected for pension savings and must therefore be used for pension provision. A mantra is a statement of faith, not an argument based on evidence.

As the noble Lord, Lord Skelmersdale, said, 10 or 20 years ago this may have been a relatively rich person’s issue. It is no longer so, as we see the movement from DB to DC schemes. The noble Lord’s figures are exactly right; I did the calculations as he spoke. A woman on average earnings—£21,000—over 40 years, even in a personal account without a threshold, would have a pot of £250,000. That is with contributions only going in at 8 per cent of the total. If, more realistically, one has a DC scheme with higher rates, she might well have a pot of around £450,000. Only once the two considerations of no recourse to public funds and any necessary adjustment to remove fiscal privilege are accounted for has the state any public policy interest in what then happens. Not only is there therefore a residual pot of money, not only would the taxpayers’ interest be safeguarded, but the Treasury could actually get a profit on the result.

If that woman on average earnings with a pot of £450,000 had, after an annuity, some residual sum of £300,000—or £200,000 or thereabouts after tax privilege—it would perhaps go into a building society on which interest was paid. More likely, it would fall into her estate, on which inheritance tax after the basic rate would be 40 per cent. The state would recover for taxpayers what currently goes towards the profitability of private insurance companies. There is an additional argument that the taxpayer would not only not lose money, but returns would fall back to the country as a whole—and, therefore, to the improvement of benefits where appropriate.

I hope that my noble friend will not repeat the mantra that all Ministers, including me, have had to use on this subject at the Dispatch Box: “Pension savings are fiscally protected to provide income for retirement”. Provided that that need is met, and the fiscal protection has been adjusted, the state has no further legitimate public interest in what happens to the rest of the money. People should be free to make the dispositions they choose.

It may be that we are all eating our own words tonight. The noble Baroness gave an interesting speech, but, given that she seemed to support everything that the noble Lords, Lord Hunt and Lord Skelmersdale, said, I did not understand why she would not support them if they pressed the amendment. So be it. The noble Lord, Lord Hunt, kindly reminded me of my words four years ago. One of the problems of getting older is that one’s memory is not quite as good as it was. I will go and look at the context of what I said.

An imposed limit at age 75 is clearly out of date. It might have been right to impose such a limit in 1976, but it is clearly not right now. We want change. This is a slightly odd grouping because we will come to our amendments—for example, Amendment No. 132—on the same topic later. We prefer the much simpler option of increasing the limit, which was the fourth option mentioned by the noble Lord, Lord Hunt. I well remember standing shoulder to shoulder with the noble Lord, Lord Higgins, fighting for specific increases, but we thought that this time—we have all been round this track a few times—we would say to the Government, “You say how much life expectancy has increased since the limit was fixed, and that is the amount by which it should now increase”. Given how fast life expectancy is rising, the limit should be reviewed every few years to avoid this problem in the future.

Of course, things have changed a great deal since the 1970s. Being 75 in those days was probably characterised by the actors in “One Foot in the Grave”; for many people now “Strictly Come Dancing” would probably be a more accurate representation. However, I cannot agree with the noble Lord, Lord Hunt, that his is the simplest approach. His detailed amendments cover two pages of the Marshalled List, and, I believe, contain a few grey areas. We are strongly in favour of raising the limit, but we would not do it in this way.

As I understand it, the noble Lord is not in favour of the measure because he does not like the idea of money being inherited by family members. We part company with him there. Although he proposes that the age should be increased, that is not exactly the most fundamental reform of the system, if he does not mind my saying so. As for his argument that my noble friend’s amendments cover two pages of the Marshalled List, he has been involved in this area long enough to know that almost any reform involves at least two pages of text. Indeed, I am amazed at my noble friend’s modesty.

We differ from the Liberal Democrats on this rather important point. We believe that the family is the basis of society. We are probably not talking of spending vast sums to encourage people to save money for their children to inherit. Indeed, it is in the public interest that they are encouraged to do so. If that persuaded people to save money, it would be of vast public benefit. Therefore, I am not remotely persuaded by the argument of the noble Lord, Lord Oakeshott.

My noble friend Lord Hunt set out the case extraordinarily well. The matter has a long history and represents a longstanding injustice. There is absolutely no reason why people should be forced to take an annuity at 75. I agree with everyone who says that, if they wish to do so, they should have that opportunity. That is their choice, and some people will exercise it, as they do not want the trouble of looking after their money. That is fine. That is their choice and they should be allowed to exercise it. However, many people will not want to make that choice because they feel it is not in their interests to do so. On a number of occasions noble Lords have indicated that they would much prefer the citizen to exercise his own choice in this matter. Rather than getting weaker over the years that we have debated this issue, that case has become much stronger. As my noble friend Lord Skelmersdale said, pensions are changing rapidly. We are seeing the demise of the final salary scheme, apart from in the public sector, and the establishment of many more money purchase schemes. It is not an issue of marginal importance or interest any more; it is a case of fundamental importance. That is one argument for a change.

The case put by the noble Lord, Lord Oakeshott, about age was also true. Even if you believe in compulsory annuities, no one in their right mind would put the limit at age 75 because age expectation has increased. You are now talking about 80 or 85 if you are a believer in the system, which I am not.

Let us face it: only the Treasury stands against this proposal, as in all things good in this world. The only reason it has for doing so is that people could fall back on to social security. In my noble friend’s two-page amendment, he has gone to enormous trouble to prevent that taking place. After that, like the noble Baroness, Lady Hollis, I cannot think of any sensible arguments that can be put in its place.

My noble friend and others have talked about the pension pot of money that you hope to have at 75 or whatever age. If you are coming up to 75 now, you may well find that your pension pot is under more pressure than for many years. Your investment values will have gone down, probably at a worse rate than for 10 or 20 years; the noble Lord, Lord Oakeshott, is a greater expert on the investments than I am. At that point, you are saying to individuals, “We don’t mind that, but we insist that you annuitise at that inflexible age”. That is totally unjust.

For all those reasons, the time has come to reform the rule, whatever the past has been. The situation as everyone has recognised it has changed. There is a question of fundamental justice here, and I hope that the Minister will at long last recognise that.

I have been listening to the debate with great interest, and of course support everything said about compulsory purchase of annuities at 75. I also understand from the description that the noble Lord, Lord Hunt of Wirral, gave of his amendments that there is a case for them in the light of the changing situation, with the disappearance of final salary schemes and the introduction of money purchase and so on, so that people are left with a lump sum that they have to deal with when they reach the right age.

What bothers me about all this is that I am a supporter of final salary schemes; I hate to see them disappearing. Where the workers are strong enough and have enough collective pressure, in certain circumstances they have been able to retain their final salary scheme. I would hate to see anything introduced that could further encourage their disappearance. That is one reason why I have some dubiety in my mind about the amendments. Would they make the alternative to final salary schemes more attractive than it otherwise might be? I am in favour of retention—doing everything possible to retain final salary schemes in the private sector as well as the public sector.

I understand that the issue has a long history in your Lordships’ House, certainly longer than I have been here, but just from the debates on last year’s Pensions Act I get a sense of déjà vu, or as the sports commentator said, “It’s déjà vu all over again”.

It falls to me to set out the Government’s position—maybe the Government’s mantra—on this. The purpose of pension saving is to provide individuals with an income in retirement. In order to encourage and assist people in saving for their retirement, generous tax incentives are given to pension savers. In 2007-08 this tax relief was estimated to be worth £17.5 billion.

In addition to the tax relief given when a person makes a pension contribution and the tax-efficient environment in which their funds grow, you can take up to 25 per cent of your pension fund as a tax-free lump sum. In return for these generous incentives, the remainder of the pension fund must be, by the age of 75, converted into a secure retirement income for life, thereby achieving the purpose for which it was intended. In defined contribution schemes this secure income is usually in the form of an annuity. Annuities provide the peace of mind of a regular income for life, regardless of how long that may be. They provide simplicity, security and a guaranteed income and are low risk; in other words, they provide a pension. Between the ages of 50—rising to 55 from 2010—and 75, people are able to choose when to convert their funds into an annuity to suit their circumstances. There is a period of 20 years in which people can choose when to annuitise.

The Pensions Commission has endorsed this policy. It stated:

“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time”.

An alternative is available for those who have a principled objection to the way that annuities work by pooling mortality risk. The alternatively secured pension offers a product with similar restrictions to an annuity and achieves broadly the same aim without the mortality pooling aspect. Both these options, as well as the scheme pension, more typically used for defined benefit pension schemes, offer a secure income guaranteed for life. They use the pension fund built up to provide an income in retirement.

As the noble Lord, Lord Hunt, explained, his amendments would establish an alternative to annuities, scheme pensions or alternatively secured pensions: the so-called RIF. The intention is that the RIF product would remain invested and would permit withdrawals between an individual’s minimum and maximum level. An annual maximum withdrawal allowance would be set by the provider for each individual member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in any year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider. In setting this the provider would have to ensure the member’s total income was at least equivalent to a minimum retirement income set by the Chancellor of the Exchequer.

There appears to be nothing in the noble Lord’s proposal to prevent the minimum allowance being set at zero if the member’s income from other sources was greater than the MRI. In those circumstances it is unclear how the maximum withdrawal allowance would work. As it is impossible to accurately assess an individual’s life expectancy—one of the requirements of the proposal—and there is no express requirement that the RIF be spread over the whole of the individual’s expected lifetime, it would be possible for a provider to set a high maximum withdrawal allowance. The member could then withdraw large lump sums of tax-advantaged pension savings. Alternatively the member might choose not to draw any pension income at all from the RIF in order to pass the fund on to heirs.

The noble Lord is worried about drawdown of tax relief savings. Do not ISAs, for example, have incredibly generous tax relief?

Indeed, ISAs have tax relief, but not the same as provided through pension saving. That is an absolutely fundamental point. The total taxation relief on pension savings is very substantial, which is why, as I explained, the deal is that you convert it to a stream of income. There is tax relief on the way in for the individual; for the employer, there is a tax-free build-up of funds and there is the ability to take a 25 per cent tax-free lump sum. That collection of tax relief provides a significant part of a retired person’s pension pot. The noble Lord, Lord Hunt, pointed out that these are a person’s assets; they own them and they should have the choice.

The Minister is moving into rather technical issues that demonstrate what I said previously: he and his colleagues are particularly concerned about avoidance. Although I cannot see what is wrong with someone pursuing the path that he is outlining, surely the answer lies in the amendment. The Chancellor, in bringing forward the order under subsection (1), could well cover the sort of situation that the noble Lord is most concerned about. I am happy to discuss with his officials ways in which we can ensure that when the order comes forward, provided that the House agrees to these amendments, there is no level of avoidance that would cause the sort of problems that he is talking about. I am also waiting to hear what the noble Lord has to say about Christian Brethren.

In answer to the first point, I do not believe that the amendment will do what the noble Lord describes. Perhaps I may expand on the issue of the tax risk to the scheme. I noted that no noble Lord who spoke in favour of the proposition—with the exception of my noble friend Lady Hollis, who talked about withdrawal of the scheme’s tax benefits—indicated in any way what tax regime he or she thought should apply to it. That was not part of the proposition advanced by the noble Lord, Lord Hunt, and adhered to by others who spoke in favour of the amendment. It can make a fundamental difference to the operation of the proposal.

I reiterate that, under this proposal, if someone has income from other sources, the minimum retirement income could be set at zero. If it is set at zero, so that the provider does not have to preserve amounts in the scheme for subsequent periods, there could effectively be no limit on the withdrawal. You could take a lump sum from the scheme in one go. It would be tax-advantaged savings with some real risks as to how the tax on it might be withdrawn. The noble Baroness, Lady Noakes, is shaking her head, but that is how this proposition would operate. A member would be able to withdraw large lump sums of tax-disadvantaged pension savings. Alternatively, as I said, a member might choose not to draw down any pension income at all from the RIF in order to pass the funds on to heirs.

I say to the noble Lord, Lord Fowler, that we have no objection to—we would support—people providing for subsequent generations, but enhancing that provision for heirs by means of the benefits of a very significant tax-advantage regime is not what that regime is for.

If the noble Lord, Lord Hunt, tabled a subsequent set of amendments to cover the point about tax privilege, and if that created no more and no less privilege in aggregate than, say, ISAs—which might seem an equitable way forward—would my noble friend change his mind?

I do not think so. The nature of the regime that would have to be established, particularly given the opportunity for withdrawing significant one-off lump sums in circumstances where someone might plan to be non-resident for a period, would require a raft of anti-avoidance provisions that would fetter the fundamentals of our current pension saving schemes.

None of these options is compatible with the basic and fundamental purposes of pension savings—to provide the member with an income in retirement. As I said, I would also like to consider the tax consequences of the amendments. These amendments do not indicate how withdrawals would be taxed. The expectation would be that a form of taxation would apply, but in most cases it would seem likely that the tax charge on RIF withdrawals would be less than the amount of tax relief enjoyed on these funds. RIF savings would clearly be tax advantaged compared with other forms of savings. Given the apparent ability of those with sufficient other income to extract RIF savings at will, there is a danger that it would become a vehicle into which other savings are recycled for tax advantage, rather than encouraging new retirement savings. It would be unfair to expect taxpayers to foot the bill for people who take the tax relief for pension savings but do not use the accumulated funds to provide an income in retirement.

It is unclear what would happen to the RIF on a member’s death but, given what is proposed by Amendment No. 140, which I shall move on to shortly, it seems that these clauses would allow a small group of wealthy individuals to pass their pension funds on to their heirs on death. There is no rationale for taxpayers to support bequests in this generous way.

One of the primary considerations of current pension provision products is that they provide an income that is guaranteed for at least the rest of the person’s life. With the proposed RIF, there is a risk of the individual running out of money in retirement. This is because it is impossible to accurately assess an individual’s life expectancy. How on earth would that be done? Insurance companies can protect the average life expectancy of particular cohorts. The noble Lord, with his expertise, does not need me to tell him that. The RIF requires an individual assessment to be made that enables a guaranteed income for life to be provided, regardless of how long the life is, by pooling the risk.

Annuities achieve exactly the same outcome for defined contribution pension schemes as exist for defined benefit schemes or, for that matter, state pensions; namely, that pensions are paid as a regular stream of income until death and, barring dependants’ pensions, that they end on the member’s death. No refund of contributions is given to the estate but everyone has the peace of mind of knowing that the pension will continue to be paid regardless of how long they live.

In essence, these amendments would benefit those who are able to take advantage of the tax relief given for pension savings to build up substantial pension pots, but who then want to use the accumulated fund for a purpose other than providing an income in retirement. In other words, the proposed RIF would provide significant tax benefits to the wealthiest in society at the expense of the taxpayer.

I will pick up on a number of points about the current range of pension pots. I take the point that, over time, more people will build up a significant retirement pot. However, the current figures show that, for 2007, a total of 445,871 annuities were sold, only 3.2 per cent of which—14,000—were for pension pots of more than £100,000. We also have figures for the first quarter of 2008, which show that 3.7 per cent of those sold were for pots of more than £100,000. I accept that that may change over time, as more people save in pensions and as personal accounts get under way. The Government have said that they will keep under review the age at which someone should annuitise in future.

What matters is not 3 per cent of the total but what the percentage is of those who have to annuitise compulsorily at the age of 75.

While I am on my feet, the Minister was good enough to say that he wanted to investigate the tax arrangements more fully than he has been able to do so far. I am sure that my noble friend Lord Hunt will welcome that. The Minister referred to tax savings of £17.5 billion; that is spread among a large number of pension savers. When he does his investigation, could he ask the Treasury for figures on the number of people who hold ISAs? We would then get a better sort of comparison, especially if he also looked at the tax advantages, which do exist—he admitted that they do—for saving through ISAs. Could he also look at the alternatively secured pensions? They have tax arrangements that are somewhat different from what is currently envisaged elsewhere in the system.

Finally, all this talk of taxes reminds me that we are not debating a Finance Bill; we are tying to look at pensions as pensions. When the Minister has conducted his investigations on tax, will he be good enough to write to my noble friend Lord Hunt and me and put a copy in the Library for the general education of noble Lords?

It is not my job to investigate the tax effects of these propositions. The noble Lord said that we are debating pensions and that it is not for us to debate tax. You cannot decouple tax and pensions—they are inextricably linked.

So why did the Government invoke the issue of privilege last year when we won the vote in this House?

Precisely for that reason—taxation, as noble Lords know, is an issue not for this House but for the other place. The proposition was not acceptable to the other place; that is why it claimed financial privilege. We cannot debate sensibly a pensions issue of this nature without understanding the full range of taxation implications. My noble friend would not support one proposition at all if it did not involve full withdrawal; alternatively secured pensions—the money left in the pot when someone dies—involve a 70 per cent tax charge and the rest flows through for inheritance tax. Is that in the minds of noble Lords who support the proposition?

The noble Lord asked about ISAs. You do not get a tax deduction on the way into an ISA; you may get tax-free income.

And growth. I hang on to the point that the range of tax benefits going into pension savings—deduction for the employer, deduction for the employee, tax-free build-up and the opportunity to get 25 per cent tax free—means that this is a much more tax-supported regime than that involving ISAs; that is why there is a requirement to take an income flow from it.

With all this talk of tax, I cannot resist getting up to the Dispatch Box.

Does the Minister accept the proposition of the noble Baroness, Lady Hollis, which seemed to me to be perfectly reasonable? She said that if a scheme could be designed that neutralised the tax advantages that accrued to not taking the retirement fund in the originally envisaged form—that is, retirement income—the amendments in the name of my noble friend Lord Hunt would be acceptable. If so, there is a model involving alternatively secured pensions, which my noble friend Lord Skelmersdale has just raised, although many do not find the model particularly attractive. Would the Government accept the amendments if those tax arrangements were embedded into my noble friend’s amendments?

There is a big “if” about whether you could effectively describe the sort of regime that would cover the RIF. The proposition would facilitate the opportunity for someone to take a significant lump sum in one go as income or capital from the RIF. The noble Lord, Lord Fowler, looks askance at that but the RIF, as so defined, would provide it. If someone has enough income from the RIF, the minimum level that they must take, or which has to be set on an ongoing basis, would be zero, and the maximum amount that could be drawn could be very significant indeed. That would provide the opportunity for people to plan to take that in a tax-effective way. You could structure all sorts of anti-avoidance provisions that would greatly add to the tax legislation, for which the Government would doubtless be challenged. You would need that if you are going to make this fair. That is why we do not think that it is the right use of the pensions regime.

I was looking askance because I was wondering, while I listened to the Minister’s defence, whether there are any amendments or safeguards—however guaranteed—that would ever persuade the Minister. He is simply fundamentally opposed to any change in this area whatever, regardless of what is put forward.

Because of its tax impact, I do not see the merits of building on this proposal. With the exception of my noble friend, everyone who has spoken has been silent in advancing reasons for accepting it and, unless we know those reasons, it cannot be properly evaluated.

Perhaps I may help my noble friend. When I was in the department, I argued for changes in this area but I could not persuade HMRC. The figures may well have altered now and I would not wish to go to the stake on them, but the work that I had done suggested that the tax gain on pensions represented between 45 and 55 per cent of the total value of the final pot. That was the range that we dealt with and it included the tax gain from the 25 per cent lump sum.

It depends on which taxpayer is involved and whether he is getting tax relief on contributions at the higher rate or the basic rate.

At that time, they were almost entirely higher-rate taxpayers because they were the only ones who possessed such sums. Obviously the tax privilege would be considerably less. My estimate is that it would now be between 35 and 50 per cent on average if we included basic-rate taxpayers—for example, the woman on average earnings who will over the course of a few years find herself with a pot which is much larger than necessary to float her off income-related benefits.

Perhaps I may say a brief word as one of those who the noble Lord said had been silent on this issue, although that is partly because we will move our own amendment later. I think that there is a genuine problem here and I sympathise with the Minister on that. I say to the noble Baroness that, even if overall her figures are right, the key difference between pension pots and ISAs is that, although perhaps only a small number is involved, pension pots can be worth several million pounds. I do not know of anyone with an ISA of anything like that sum. That is why I am nervous about these amendments. Potentially there is quite a big tax linkage on some of the very big pots, so I do not think it is right to say that ISAs and pension pots are totally the same.

If someone had a pot of a couple of million pounds and was seeking not to annuitise it, the tax element in it, which might be at least a third and perhaps a half, would go back to the taxpayer. It seems to me that the consequences of the noble Lord’s argument are the reverse of the implications.

Indeed; I am with the noble Lord, Lord Oakeshott, on this. Perhaps I may recap the situation. First, I think that the question is: if I pay the tax back, why cannot I access my retirement savings as I wish? There is no reason for an individual to put substantial funds into a pension and claim the tax relief that goes with it if he does not want a retirement income at the other end. Tax relief on pension savings is not designed as a means of accumulating general savings. That is not the proposition.

Secondly, it would be very hard to work out the exact value of tax relief in any particular case, as it would depend on the profile of a person’s earnings and his tax and pension contributions over the years, plus tax regrowth on his pension investments. Therefore, this option would involve either very complex and expensive processes to work out individual figures—even if it were possible to do so—or a very high flat-rate level of tax recovery to avoid tax abuse. It would lead to the bizarre scenario where an individual saved in a pension vehicle to enjoy the tax relief but then faced the trouble of paying back the tax relief when he could have avoided all the inconvenience in the first place by saving in a savings vehicle such as an ISA, subject to the limits properly referred to by the noble Lord. Those who advocate this approach invariably want to access their pension fund taxed at their marginal income-tax rate, but that would greatly undervalue the tax relief previously enjoyed and would amount to a generous taxpayer subsidy.

I move on to Amendment No. 140. Although the amendment does not directly relate to the RIF, it nevertheless results in the same outcome—that of enabling those with the greatest means to use pension saving for a purpose other than providing an income in retirement. The amendment would remove the upper-age restriction on the payment of an annuity protection lump sum benefit.

An annuity protection lump sum death benefit was a concept introduced by the Government in the Finance Act 2004. It allows a return of pension savings used to secure an annuity, less any payments already made, to be made on a person’s death before age 75. The intention behind an annuity protection lump sum death benefit is to ensure that, should the member die early in his retirement, his family gets something back from the retirement provision that he has made.

Removing the upper-age restriction would go beyond that intention. The provision of this type of death benefit would make it attractive as an inheritance tax planning vehicle, due to the tax relief. An annuity with this form of protection typically costs more than one without it, reducing the income received in exchange for the protection offered. The extra cost of extending that protection beyond age 75 would be significantly more than under the current rules. That would make this option primarily suitable for those who could afford to take the reduced income and wished to use their pension savings for another purpose, such as inheritance planning.

The restriction on the payment of annuity protection lump sum death benefit beyond age 75 is consistent with other lump sum payments on death from pension arrangements and provides consistency between defined contribution and defined benefit pension schemes.

The noble Lord, Lord Hunt, asked me about alternatively secured pensions and referred to the Christian Brethren. For those with specific objections to pooled mortality risks in annuities, ASPs provide an option in drawing a pension. ASPs are not, and have never been, limited by legislation to specific religious groups such as the Christian Brethren. Although they are not a mainstream product, the Finance Act 2007 allows that for a small minority, and if well advised, ASPs exist for people to draw an income in retirement consistent with the principle that pension tax relief should be used to provide an income in retirement and not tax-favoured inheritances. Therefore, in ASPs a product already exists to give people an alternative to annuities from age 75 consistent with our principle of tax-advantaged savings being used to secure an income in retirement.

I have been speaking for some while on this issue and I know that I have disappointed those in favour of the proposition, although I suspect that I have not surprised them. I hope that the Government’s position is very clear on this. It is important to be clear that the amendments all share a common theme: they allow those who are able to afford it to utilise the tax relief available on pension savings for purposes other than providing an income in retirement. Although innovation in the pension market is to be welcomed, and indeed encouraged, the Government are clear that it should not allow the well-off to take advantage of the system at the cost of the taxpayer. I therefore ask the noble Lord to withdraw the amendment.

I am very grateful to the Minister for taking so long to explain the Government’s position. He said that a theme was running through these debates, and indeed there is. In this House, there is general dissatisfaction with the maximum age of 75, and we have voted on several occasions, often by substantial majorities, to remove that age limit.

The Minister also said that it was not his business to try to improve the amendment, but surely he has to accept that he has already lost the argument on several occasions. These amendments were passed last year and in 2004 substantial majorities were secured to remove the age limit of 75. I accept that last year it was not possible to debate the matter further because the other place invoked privilege, but if the Minister is listening to this place, should he not at least agree to sit down with us to see whether there is a way forward? I thought that the noble Baroness, Lady Hollis of Heigham, had a number of very interesting ideas. No one wants to create a serious situation for the Treasury; we just want to encourage more saving. We want to encourage people—particularly those who in the past have been deprived as regards pension arrangements—to save for their pension and to save for their later life, and perhaps we can devise a series of amendments that will achieve that.

The Minister is right that a number of people exercise the option to purchase an annuity at a comparatively early age because they know that by the time they get to 75 they will be forced to annuitise. As my noble friend pointed out, that may well be at just the wrong moment. So, of course, they annuitise in advance and they want to receive the money earlier because they know that they will be compelled to purchase an annuity. Surely there is a way, as my noble friends have pointed out from the Front Bench, by which we can at least meet some of the noble Lord’s concerns. Normally he says that discussions are ongoing; that we will have extensive consultation; and that we will find a way through. Will he do that on this point?

I am more than happy to set up a meeting with officials from the Treasury or HMRC. I do so, in all honesty, without any great hope that they will see a way through this that is satisfactory because there are real concerns, but they may be able to articulate those more effectively than I have been able to. Yes, of course, the Government listen to this House but they also listen to the other place, which has declared itself on this point on several occasions. On the crucial issue of the tax component, the other place has particular primacy.

I cannot let the noble Lord get away with that. The great clunking fist came down when the Commons discussed this amendment and so great was that clunking fist that not a single word was uttered against it in another place. The clunking fist was to invoke privilege.

I have no wish to make a comment on the voiceless clunking fist, except to say: what more could I ask? The Minister has probably gone much further than his brief, for which we all congratulate him. I thank all noble Lords who have participated in the debate. I say to the noble Lord, Lord Oakeshott, that it is important to put his remarks in context. I apologise to him if I did not mention that in the previous sentence to the one I quoted, he said that,

“there should, at the very least, be a substantial increase in the limit”.—[Official Report, 15/11/04; col. 1229.]

He went on to say that he supported the amendment and that at the very least there was a strong argument for an increase in the limit to 75, if the principle of abolishing the limit altogether was not accepted. He then voted to abolish the limit and the amendment won the day. I say to the noble Lord, please do not desert us now.

In our hour of need, as the noble Baroness says. I sense that the noble Baroness, Lady Hollis of Heigham, is moving because in that Division she voted against these amendments as she then held ministerial office. Last year, she did not appear in the voting Lobbies and I sense that there are ways in which we can find some form of accommodation so that the voice of this House can be heard.

I thank my noble friend Lord Fowler for a powerful speech. The noble Baroness, Lady Turner of Camden, shares my concern about final salary schemes. We must find a way through that in our debates. I would especially like to single out my noble friend Lord Skelmersdale on my Front Bench for emphasising that basic human right. It represents personal savings and deferred wages which belong to the individual. My noble friend Lady Noakes pointed out that there are tax implications and that we should be able to find a way through to give individuals choice, freedom and right to property, which I advanced at the outset. It would be churlish not to accept the offer made by the Minister. Therefore, I seek leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 128 and 129 not moved.]

129A: After Clause 88, insert the following new Clause—

“Override of scheme rules

(1) The Secretary of State may by regulations provide that the rules of an occupational pension scheme shall be modified so that they reflect—

(a) changes to the revaluation of accrued benefits introduced by section 88, and(b) limits on annual increases in occupational pensions for category Y pensions allowed by section 51 of the Pensions Act 1995 (c. 26) (annual increase in rate of pensions).(2) Regulations may not be made under this section unless a draft of the statutory instrument containing the regulations has been laid before, and approved by a resolution of each House of Parliament.”

The noble Baroness said: This amendment introduces a statutory override in respect of the indexation capping rules, both in the Pensions Act 2004 as well as in Clause 88 of the Bill. For today, this is a probing amendment, but I would not like the Minister to think that I do not raise this as a very serious issue. The statutory override was examined in the deregulatory review undertaken by Messrs Lewin and Sweeney, which reported last summer, and many are disappointed that the Government have not dealt with the issue.

Employer organisations such as the CBI and the Engineering Employers’ Federation, together with the National Association of Pension Funds, welcome Clause 88, as do we. It allows the indexation of accrued benefits attributable to pensionable service after this Bill is brought into effect to be capped at 2.5 per cent. Those groups similarly welcomed the changes made by the 2004 Act which capped increases for pensions in payment. A cap on increases to benefits, whether in payment or deferred, can have a big impact on the cost to employers. In particular, we are mindful that the inflation genie has now been let out of the bottle, hence the issue of a cap becomes very real and important.

The trouble is that having a statutory permission to cap at 2.5 per cent is not the same as being able to achieve it. Some pension schemes have rules which make it very difficult to implement the changes. Some paid-up schemes administered through insurance companies do not have an employer with which to negotiate. In most cases, employers face having to negotiate changes in their trust deeds and rules. Many employers have found it difficult to implement the 2004 Act changes without making improvements in other scheme benefits. That, of course, negates the purpose of the whole exercise. It is deregulation without meaning.

There are different ways of achieving a statutory override. My Amendment No. 129A is possibly the most radical solution as it allows the Secretary of State to provide a statutory override of scheme rules so that the changes in Clause 88 and also the changes in the 2004 Act can be implemented directly in scheme rules by regulations. In each case the changes are being made from particular dates and have no retrospective effect. Obviously, my amendment goes along with the scheme of introducing the indexation capping. The Engineering Employers’ Federation supports that approach. An alternative, recommended in the Sweeney and Lewin report, is a narrower override focused on eliminating technical problems about changes to rules but still based on agreement between the trustees and the employer. That would clearly be better than nothing.

I hope that the Minister will see that allowing indexation caps in legislation is not the same as employers achieving them. At a stroke, the Government could help employers to achieve the changes and in so doing provide a small but important lifeline for defined benefit schemes. Clause 88 will not help the preservation of defined benefit schemes unless it can be implemented in short order. This is in the gift of the Government and I hope that the Minister will indicate that the Government are prepared to support this or some other form of statutory override. I beg to move.

I thank the noble Baroness for tabling this amendment. I realise this is of great importance for a number of occupational pension schemes, particularly for those schemes whose rules even preclude any negotiation about changes to future benefits. In response to recommendations made by last year’s deregulatory review, the Government announced that they would regulate for overrides to enable scheme rules to be amended to reflect the 2005 change to the indexation cap for service going forward and for the proposed reduction in the revaluation cap in this Bill. In keeping with the recommendation from the independent deregulatory reviewers, Chris Lewin and Ed Sweeney, we have said that overrides would be exercisable provided trustees agree.

We already have the necessary powers to make these changes by regulation under existing powers in Section 68 of the Pensions Act 1995. We are committed to introducing these new arrangements in regulations in due course, which is what we will do. In fact, we have already begun work on this. Our aim is to consult on the draft regulations later this year and to have the new arrangements in place in the first half of next year. The noble Baroness’s amendment seeks to introduce further regulations on overrides. It would not be appropriate to introduce a further regulation-making power to make changes to scheme rules when sufficient powers already exist. Furthermore, to introduce unnecessary legislation would hardly be in the spirit of the deregulatory review. As I said earlier, we already have powers to introduce what we have proposed and what we think will be appropriate in the circumstances. Further legislation to achieve that is not necessary.

Moreover, if we were to adopt the amendment and regulations were made using the powers provided for in the amendment, it appears that schemes’ rules would have to be amended. The drafting of the amendment suggests that that would be compulsory. However, that is not the primary reason for asking the noble Baroness to withdraw her amendment. We have provision, and we are working on introducing regulations under it.

I repeat what I said. We are committed to introducing these new arrangements in regulations in due course, which is what we will do. In fact, we have already begun work on this. Our aim is to consult on the draft regulations later this year and to have the new arrangements in place in the first half of next year. That is what “in due course” means in this context.

I thank the Minister for that response, which at least confirms that the Government will proceed with the minimalist recommendations of the deregulatory review from last year. He has, however, failed to take the point that although the Government have wisely provided for indexation capping both for pensions in payment and for deferred pensions, employers cannot achieve it except by agreement with trustees, who always extract a price. The Government make a big fanfare about giving these things to employers, but in fact it achieves nothing for them. The Government are offering regulations that may free up scheme rules but do not actually help employers very much at all. If that is all that is on offer, I will go back after Committee to those who have asked us to raise this issue. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

129B: After Clause 88, insert the following new Clause—


(1) The Pensions Act 2004 (c. 35) is amended as follows.

(2) In section 126 (eligible schemes), after subsection (2) insert—

“(2A) A scheme in respect of which an authorised insurer has given an unconditional and irrevocable guarantee or made any other equivalent arrangements for the purposes of ensuring that the scheme’s liabilities are met is not an eligible scheme.””

The noble Baroness said: Amendment No. 129B seeks to insert a new clause after Clause 88. For today, this is a probing amendment, as I freely acknowledge that my new clause would at the minimum require some padding in the form of definitions before it could be accepted. Importantly, it asks whether routes are open to employers to de-risk their defined benefit schemes and in so doing remove their schemes from the ambit of the Pension Protection Fund. If employers could do this, it could be a win-win solution. For an employer, it could bring the advantage of removing the regulatory burdens and relief from the costs of the PPF. At the same time, employees could well gain greater security for their benefits.

The amendment is based on briefing given to us by an organisation called BrightonRock. The issues raised by BrightonRock were significant to an understanding of the future course of defined benefit pension schemes and their relationship to the PPF. We do not necessarily advocate the insurance model suggested by BrightonRock, but we do support a market-based approach to the risks posed by defined benefit pension schemes and do not see the PPF as having a right to a monopoly in handling that risk.

The Committee will be painfully aware that defined benefit pension schemes are in terminal decline, and that the chance of new ones appearing is close to zero; the Pensions Minister, Mr O’Brien, admitted as much in a recent interview with the Daily Telegraph. This is driven partly by cost but also, at least as importantly, by the need for certainty in business.

The Pensions Act 2004 created the Pension Protection Fund to underwrite the risk of failure in defined benefit pension schemes. To avoid the costs being borne by taxpayers, as is the case with the FAS, the PPF had to be paid for by all schemes within the PPF. When that Act was considered in your Lordships’ House, the expectation was that the PPF would raise around £300 million a year in levies. This has already more than doubled to £675 million a year, and some are already predicting that the trajectory of the PPF’s levies will take them to beyond £2 billion a year. This is already a noticeable and increasing burden that employers put as part of the cost of maintaining their defined benefit pension schemes.

It is very difficult for schemes to avoid being within the PPF’s clutches and thus having to pay its levies. At the insistence of your Lordships’ House, the PPF is supposed to raise most of its money as risk-based levies. It is possible to avoid the risk-based element by being excessively well funded or by having certain types of contingent asset in place. However, to avoid the totality of the levy and all the other costs such as valuations and advisory costs that go with being within the PPF, a scheme has to be ineligible. While insured closed schemes are ineligible, the rules currently do not treat an insured open scheme in this way. That may not be surprising, because insured open schemes as a product did not exist when the rules were originally set for what could be ineligible within the terms of the PPF rules.

An insurer underwriting the risk of scheme sponsor failure would be regulated by the Financial Services Authority if it was in the UK. There is no public policy reason for saying that the FSA’s oversight was of a materially lower quality than that provided by the PPF. Indeed, the compensation levels available via the Financial Services Compensation Scheme are higher than the ones that are typically available via the PPF, so the position of members should be enhanced if they are put within a scheme that falls within the FSA and the FSCS. Moreover, of course, if we allow insurance within the UK, we must allow similar insurers who are supervised to EU standards.

The reference in my Amendment No. 129B to authorised insurers is intended to refer to EU-regulated insurers, but it could clearly also extend to other insurers in other countries where the Secretary of State was content with the quality of regulation. This is one of the areas that clearly needs a lot more definition, as I mentioned when I began my remarks.

To date, the Government have resisted changing the PPF rules to facilitate insured open schemes. I am not at all clear about the substance to the objections that have been made to date, such as cherry-picking, which is a non-argument. There seem to be only two reasons for resisting these proposals. The first is that the PPF does not want its natural monopoly to be diminished. Monopolists never do. A monopolist who has the ear of government, which the PPF does, and who is not subject to competition legislation, which I believe the PPF is not, is a very dangerous combination. The second possibility is that the Government are too timid to back innovation in financial services in case they are proved wrong. If that is the case, our financial services industry must fear for its future, and since our financial services are a significant part of the UK economy and a major contributor to UK growth, that is a serious issue for the economy as a whole.

I hope that the Minister will be able to be encouraging about the Government's attitude to insured open schemes and will be able to say when they will be permitted to qualify for PPF ineligibility. I beg to move.

I found the noble Baroness’s speech very interesting. In talking over the proposals of Con Keating of BrightonRock briefly, although not specifically, with Lawrence Churchill of the PPF—I do not wish to attribute any views—I certainly did not recognise the noble Baroness’s monopoly or timidity arguments for saying that the Government would resist this. I have heard neither of those. Before my noble friends responds, perhaps the noble Baroness could help me on who insures the insurers. The point about the PPF is not that it wants to be all-encompassing. It has carefully gone to a risk-related levy in order to encourage funds to have a predictable and sensible approach to risk as faced with the DB schemes. I think we all recognise that there are complexities with hybrid schemes. The trouble with moving into the insurance market is that of the reinsurance proposals behind it. I am not sure that some companies which would like to move into this market place have sufficient resources for reinsurance. As I say, it is not a field I am comfortable with, so I will defer. Ultimately, we could easily have a fallback on the PPF or, almost, a version of why FAS had to be set up.

There are two answers to that. The Financial Services Authority or an equivalent EU supervisory body would regulate that body, which would be the case if reinsurance needed to be put in place as part of the risk management arrangements. The important distinction is the financial services compensation scheme. As I argued in my opening remarks, if there was a failure, that scheme would provide better benefits than would the PPF. The PPF is typically referred to as producing a 90 per cent benefit, which it does not. On average, it produces an 80 per cent benefit and often produces a 60 per cent benefit if a pension scheme has to go into the PPF. If a pension scheme had to go into the financial services compensation scheme, those PPF rules would not apply, so a higher degree of assurance would be provided through that compensation scheme than exists via the PPF.

I had a good discussion with the people at BrightonRock, who were kind enough to explain things. The more I talked to them, the less I liked this model. Quite frankly, they were very unconvincing as to what assets or strength they had behind them. In this situation, just to say that you could get reinsurance is not good enough. When one thinks about it, it is almost like a competing fire brigade to the existing fire brigade. We are not just talking about a monopoly. It reminds me of the old joke about Screaming Lord Sutch, who asked, “Why is there only one monopolies commission?”. For a very good reason, there is only one fire brigade that everyone has to pay for. After Northern Rock, I do not share the noble Baroness’s confidence that it is all right for the matter to be left to the FSA. I do not want pension funds to land up in the financial services compensation scheme. With a considerable amount of effort in this House, we set up the PPF. It is not exactly a lender, but it is a good underwriter of last resort.

De-risking pension schemes for employers is not the same thing necessarily as de-risking pension schemes for pensioners and employees. From the past year or two, we all should have learnt that it is much too easy to talk about reinsurance. Some of the very big insurers in America cannot meet their obligations and that ultimate risk is a very serious problem. I would be much more comfortable sticking with the PPF.

Before making my only intervention in this debate, I declare, first, my interest as chairman designate of BrightonRock, which, I would hasten to add, is not to be confused with any other rock. I should also make another declaration of non-interest: I am not a member of the Society of Turnaround Professionals, although I hold its lifetime award for achievement. That is not so very special when one bears in mind that I was once standing backstage at the Oscar ceremony when Mickey Rooney came off stage and immediately deposited his Oscar for a lifetime award in the trash can on the grounds that he thought that it would be more properly identified as a death-time award.

In the case of our friends at BrightonRock, there is one very important distinction, which may answer part of the concerns of the noble Baroness. It is not just intended to be an insurance company but would have a very big role as an interventionist in bringing to bear corporate rescue activity into the parent companies behind the sponsorship of the pension schemes concerned. There will be a proactive role to address the problem which is giving rise to the potential call which would come upon the PPF. That is a very important point and a most fundamental part of the BrightonRock concept.

I shall answer the noble Baroness’s concern on whether it will get the funding necessary. The due diligence for this, effectively, will be dependent on demonstrating exactly that point of financial viability to the City, which we are looking to at present for a substantial fundraising, being handled by City professionals, aimed at achieving full financing capability by the end of September. The arrangements that that implies require us to demonstrate that viability. If we do not demonstrate it, we will not be in business. If we do, it will be because the market has decided that we are able to cover it.

I would also remind Members of the Committee that the most successful corporate rescue ever mounted in this country was for Lloyd’s of London. It was beset widely by failure of reinsurance, but where the reinsurance was capable of being replaced and mutualised to an extent, that overcame the problem.

My final point is that we who have put this BrightonRock scheme together, having read very carefully the Pensions Bill, take the view that it is coming from the wrong direction in a very important respect. It starts from the supposition that the problem that has to be addressed is the failure of management of the pension schemes. I would respectfully suggest that it is not; it is the corporate failure of the sponsoring companies behind them. That is not properly addressed and, in many ways, the Bill tends to put obstacles in the way of the orderly approach to and correction of those problems. BrightonRock would seek to overcome those problems in the way I have indicated.

These concerns worry us greatly because we believe that the future viability of the pensions industry depends on an address to the corporate financial management of the sponsoring companies and not to the fundamental managements of the pension schemes, which we think are generally pretty good. In the world of corporate rescue where I have seen pension schemes fail, the failure usually has come many years prior to the time when it acknowledges the failure as a result of the collapse of the sponsoring company and its inability to maintain the funding.

The position demonstrated in the recent risk-sharing analysis in the risk-sharing consultation on 5 June was completely wrong when it said that the risks here are longevity and health improvement. They are not the risks which undermine the future viability of pensions. They are the risks of solvency to the sponsoring companies. In this respect, the Government and everyone in this country, all pension beneficiaries, need every bit of help that they can get in securing it, which is where what we are talking of would help. The easement of this arrangement by the manner of this amendment would greatly assist in the creation of the management of this company. I believe that it would make a positive contribution towards the Government’s own desire to come at it from the point of view of the corporate financing side, which is where the issue really lies.

I hope that the noble Lord will not take this the wrong way, but is he quite sure that his speech and remarks are appropriate? To start with, he very properly declared his interest, but he is in the middle of a major fundraising, for which he presumably has a financial interest. I wonder whether it is in the right traditions of this House for him, effectively, to promote the prospectus of the company. I would ask him to think again about that.

I shall seek direction on that, but my concern is the challenge to whether this would be useful in the context of what the Bill sets out to do. I have sought to correct what I thought was a misunderstanding on the issue. I am not financially involved at this stage of the process; I will be if and when it becomes a live project, but at the moment I am not seeking to promote it in that sense—only to noble Lords, not outside this Chamber.

I should like to come in on that. If one is promoting a fundraising, one is not going to make any money, but if the fundraising raises money when it does, that really is splitting hairs.

Perhaps I can assist the Committee. In his enthusiasm for his project, I think that my noble friend may not have realised that we are not debating the specific proposition he has in mind. I sought to draw on the essence of the proposition in order to tease out whether the principles are those which could result in ineligibility being established, while recognising that there will be all kinds of questions if any particular company comes forward with a scheme such as that which has been promoted by BrightonRock, one that has interesting features which should be explored. However, it is not for this Committee to get into the detail of the specific proposition—where the money comes from or anything about the success of the particular operation. I am sure my noble friend did not intend to intrude in that way on the Committee’s deliberations.

I support those comments and I am grateful to my noble friend. I am concerned here with the benefits of this amendment on behalf of whichever company comes to create this function. It may or may not be the one about which I have spoken and it was identified before I rose to speak. I am concerned with the principle because other companies will come into this field to provide similar services, and it is appropriate that this amendment should be supported on their behalf too.

Perhaps I may start by acknowledging that in my view the noble Baroness was not in any way seeking to promote a particular company but was talking about the generality. I am not sure whether the effect of what the noble Lord, Lord James, said was the same, and I hope that he will reflect on his words. In the end he has to make his own judgment about how and what he speaks on.

The proposed new clause would amend Section 126 of the Pensions Act 2004. That section deals with eligible schemes for the Pension Protection Fund. It would exempt certain schemes from the PPF if they had guarantees from what the amendment calls an “authorised insurer”. I understand that the amendment has been tabled to explore whether schemes that purchase an insurance product along the lines of the one being promoted by BrightonRock also need to have protection for their members under the PPF. The Minister of State for Pensions Reform and I have met representatives of BrightonRock, including the noble Lord, Lord James of Blackheath. We listened with interest to their proposals on how a product intended to insure schemes so that they could pay scheme members in the event of the insolvency of their sponsoring employer might work. I understand that BrightonRock wants schemes that have purchased one of its products to be exempt from paying levies to the PPF and for scheme members not to be covered by the protection offered by the PPF.

The removal of the protection of scheme members by the PPF is not something to be considered lightly. There are some defined benefit schemes that are not eligible for protection by the PPF which include unfunded public service pension schemes, local authority pension schemes and schemes that provide only for death benefits. Broadly speaking, these schemes already have very secure provision for the protection of their members’ pensions. The likelihood of such schemes requiring PPF assistance therefore is zero. Anticipating that new schemes of this nature could emerge, Parliament ensured that the Pensions Act 2004 has a regulation-making power in Section 126 that allows the list of exempt schemes to be extended. The PPF and the Department for Work and Pensions have also identified a limited number of instances where the risk of a scheme calling on the PPF is extremely unlikely, such as where a scheme has no active members. In these cases, schemes may apply to the board of the PPF for a waiver of their pension protection levy.

Let me remind noble Lords that the PPF is funded by a combination of compulsory levies charged to all eligible schemes, any assets remaining in schemes which transfer to the PPF at the end of an assessment period, and the proceeds from the investment of these levies and assets. So if schemes are not eligible for the PPF or are not required to pay a levy or both, this has an impact on the financing of the fund and the protection it provides to millions of scheme members. BrightonRock suggests that it will only ever be marginal in terms of the number of schemes covered relative to the PPF’s universe. This may be the case, but any change to legislation would open up the market to other competitors, moving away from a “marginal” impact that would clearly have an impact on the financing of the PPF and the protection it provides.

We also need to bear in mind that the Pension Protection Fund is a relatively new institution and it is important that scheme members, people receiving compensation and people due to receive compensation in the future have confidence in the PPF’s financial security and long-term sustainability. However, the Government keep the PPF under review and already have the power to make regulations to exempt certain schemes from the protection provided by the PPF or to waive the pension protection levy if that is desirable. At this stage, however, my ministerial colleagues and I do not consider that it would be right to open up a market in the way suggested by this amendment.

If in the future we opened up the market to products like those of BrightonRock, we would need to be confident that the entry of BrightonRock and others could provide long-term security for those taking out such policies. Confidence in these insurers will be equally important to those members remaining under the wing of the PPF. The noble Baroness said that protection would come from the FSCS, but I would say to her in response that it does not come without cost either in that that protection would also have to be funded.

In conclusion I want to emphasise that there are already powers to exempt schemes if we want to do so in the future, so we do not need the amendment. However, we are not minded currently to open up the market in the way suggested.

Can the Minister explain why the Government are happy with insured closed schemes but are drawing the line at insured open schemes?

What we are not yet happy about is the model which suggests that open schemes with ongoing liabilities would be protected by a third party. We are not sufficiently confident about the extent of that cover, and that is not to impugn BrightonRock or any particular entity. The Pension Protection Fund is not seeking to hold a monopoly position, but it is a fairly new institution that is building confidence with people in the pensions arena, and it should be entitled to do so. I also return to the point that in a model such as BrightonRock—the noble Lord, Lord James, indicated in his contribution that he was speaking more generally, but others would allow that there is a risk of cherry-picking—we would really need to understand exactly how secure the covenants were, particularly as some of the entities involved are not UK-based. In one particular case, it is regulated out of Malta.

That is where we are, but I stress to the noble Baroness that the powers are in place should there be a view to use them.

I thank the Minister for his response. He said that the PPF is trying to build confidence. What the PPF is doing is convincing the employer community that it is a very expensive route to dealing with the issue of scheme insolvency. That opinion will be expressed by almost any employer with a defined benefit scheme who has received this year’s fees demand and has been looking at what is happening to the costs in this area. There is potentially an issue here, which is why there is an incentive to look at other options.

One of the points I sought to make is that I hope that the department’s mind is not closed because it is too close to the PPF. The fund is the department’s own invention, so of course it is rather protective of it, but I was hoping that the Minister would demonstrate that he is open to open market solutions. I say that because we believe that open market solutions often produce innovation and thus dynamism in a given situation. I completely accept that there are big practical issues to be dealt with, as the noble Lord, Lord Oakeshott, said. I was not advocating the BrightonRock proposals but the use of market-based solutions as an alternative to state-based solutions. That may indicate a doctrinal difference between us.

The Minister for Pensions, Mike O’Brien, is on the record as saying that he welcomes innovation in the market. Obviously there needs to be a full analysis of the innovations and of the risks, but certainly our mind is not closed to those kinds of solutions.

The Minister reassures me. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 2 agreed to.

[Amendment No. 130 not moved.]

Clause 89 [Additional State Pension consolidation: Category A and graduated retirement benefit]:

130ZZA: Clause 89, page 43, line 36, leave out “uprated” and insert “revalued”

The noble Lord said: I shall speak also to government Amendments Nos. 130ZZB to 130ZZM inclusive and 139D.

Clause 89 provides a significant further step along the road of simplification of state second pensions. Of critical importance in the design of the reformed state scheme is the need to define the benefits that people can expect to receive when they retire so that they can make a judgment about how much to save. Last year we took an important step in reforming the state second pension so that in the future the pension would accrue largely as a flat-rate amount. This would be added to the basic state pension so that overall state pension outcomes and forecasts of the outcomes would be simpler to understand for individual contributors. But that is the future: Clause 89 and the amendments simplify the past.

As the Committee knows, the state second pension scheme is extremely complicated. It was complicated when it was introduced in 1978 and every change since then has added to its complexity, to the point where only a handful of people understand a benefit that costs the taxpayer more than £11 billion a year. Left unchecked, the last award of the pre-Pension Act 2007 S2P will be made in the 2060s and, with inheritance, we would still require all the benefit rules and the IT calculation routines for the old system until the end of the century. The bulk of the amendments refine Clause 89, which proposes that we wrap up all SERPS, S2P and graduated retirement benefit accrued to the tax year before we introduce flat-rate S2P. We would calculate the contributions made to that date using exactly the same rules as we would have used when the contributor reached state pension age. The sum that the calculation produces will be credited to people’s pension accounts. The sum, known as the consolidated amount, will be revalued during the contributor’s working life by earnings, the same as now, and uprated by prices once the person retires, the same as now. The measures seek to apply the current rules on revaluation, inheritance and appeals to the consolidated amount.

However, this is only part of the story, as those who have had the opportunity to read the fact sheet placed in the Library will testify. We want people who have been contracted out of the additional pension to have the same clarity over their pension outcomes as people who have not contracted out. This is challenging technically, especially for the 11 million contributors who will retire after 2020 and who have been contracted out of SERPS at some time between 1978 and 1997. This is a legacy of a variety of different rules on revaluation, to the point that it is almost impossible to calculate the pension that a person with contracted-out rights will receive in retirement. We give them some partial information but we cannot tell them with any degree of accuracy what they can expect to receive from the state when they retire. The department keeps a notional record that says each year how much a person would have secured in SERPS had they not been contracted out, and then when the individual retires the department makes a calculation deducting the guaranteed minimum pension, or the notional guaranteed minimum pension, from SERPS. If this contracted-out deduction is less than the SERPS accrual, the balance is paid to the individual.

The difficulty is that there can be up to three different ways in which a guaranteed minimum pension can be revalued before a person retires, so the amounts of SERPS accrued and the contracted-out deduction can often be different. On top of this, these amounts can be uprated differently after retirement. To achieve simplification we need to fix the difference between the SERPS accrued and the contracted-out deduction. If the difference produces a net amount of SERPS, then it needs to be revalued and uprated in exactly the same way as SERPS is now. We need to do all of this in an equitable way.

Amendment No. 130ZZE sets out the solution. Through the process of actuarial equivalence, we will estimate the value of the contracted-out deduction at retirement and through retirement and smooth this into a weekly amount that can be deducted from SERPS. The Committee will appreciate that my explanation of this process is somewhat simplified, as the system is extremely complex, but we will end up with a system where the contributor will have a much better understanding of what they can expect when they retire. We will also remove great complexity from the pension scheme. We have taken the opportunity with Amendments Nos. 130ZZM and 139D to bring forward some minor technical amendments which are consequential to the state pension reform measures and which were inadvertently omitted from the Pensions Act 2007. I am conscious that the Opposition have amendments to our amendment. Before they are moved, perhaps I may say that we look with some warmth on those amendments. I beg to move.

I shall speak to Amendments Nos. 130ZZEA and 130ZZEB, which are amendments to government Amendment No. 130ZZE in this group. This is getting ridiculous.

I thank the Minister for introducing his amendments and for circulating the note which was euphemistically headed “simplification of state second pension”. As he has demonstrated in his opening remarks, this is anything but simple. I learnt more from reading the note than I ever need to know about S2P. I cannot pretend to understand the precise technical impact of all the amendments in this group, but if the department’s note is an accurate reflection of what is planned, then we are broadly content with what the Minister is proposing.

However, there is one exception, which is dealt with by my amendments. I was alerted to this by the reference to actuarial equivalence in the department’s note. When I found out that it was in connection with contracting out—in this case the contracted-out deduction—I was put on full alert because the Government are not to be trusted in this territory. Paragraph 21 of the department’s note on these amendments refers to the way in which the contracted-out deduction will be arrived at. It states:

“The current intention is for the Government Actuary’s Department to consult on the proposed assumptions in the Summer of 2011 to ensure that consolidation can be based on the most up to date information on life expectancy, earnings and earnings growth. These assumptions will be used for the consolidation calculation”.

That seems entirely rational, and we support it. However, it is not what the legislation contained in these amendments says. Instead, proposed new Section 46A of the 1993 pensions Act, as inserted by Amendment No. 130ZZE, says nothing about consultation. Subsection (5) says only that the Secretary of State “may” require the Government Actuary to prepare a report; the Secretary of State is not required to involve the Government Actuary. Subsection (7) says, in effect, that even if the Government have a report from the Government Actuary, they are under no obligation to take it into account when issuing the regulations for determining actuarial equivalence.

The Committee may feel that this is just a technical issue, but very similar provisions on actuarial equivalence already exist in relation to the contracted-out rebates which are set on a quinquennial basis. I know that the Minister recalls our previous discussions on this, and I am sure that the noble Lord, Lord Oakeshott, will remember the debates we had on the order setting out the contracted-out rebate in 2006 after the last quinquennial review. At that time the Government Actuary reported, after consultation, that the rebate should be set at 5.8 per cent, although many of the consultees argued for a higher figure, some for higher than 8 per cent. The Government then plucked the figure of 5.3 per cent from thin air, citing something that was not found in the legislation or indeed in these amendments. They called it “sustainable affordability”—that is to say, if the Treasury says it cannot afford it, the Government will ignore actuarial equivalence determined by the Government Actuary’s Department.

The legislation, which is drawn in very similar terms to the amendments before us, did not stop the Government from acting in that way at the last quinquennial review, as the noble Lord, Lord Oakeshott, will recall. The government amendments give them carte blanche to carry on operating in exactly the same way, and possibly even to invent new bits of doctrine to sit alongside “sustainable affordability” and not do the right thing.

My amendments are modest. They would ensure that the Government of the day, when coming to these difficult and complex decisions, would be guided by what was right for the rights-holders when their rights were being consolidated, not what was convenient for the Treasury. I would replace the word “may” with the word “must” in subsections (5) and (7) of new Section 46A.

Will the Minister comment on the processes that will be used to assure the calculations on a quality basis when the single additional pension amount is arrived at? The department’s note makes it abundantly clear that no ordinary mortal could check the calculations attributable to his particular circumstances. Those calculations will fix an entitlement for all time for post-2020 retirees. Would the department, for example, use specially commissioned audits of the calculations? The ordinary audit of the National Insurance Fund will not give assurance of the granular level of the individual’s own rights and entitlements, and it is at that level that we need confirmation to exist.

We have seen too many government systems collapse in the face of complexity and fail to deliver what they need to. Child maintenance is a prime example, but anyone who has tried to check a contribution record extracted from NIRS2 will find that that is not a simple process either. The calculations that are involved in gathering these various entitlements and deductions are even more complicated, which is why I particularly want the Minister to reflect on the assurance processes that will ensure that individuals get that to which they are entitled once the actuarial rules have been set.

It would be churlish of me not to support these amendments, particularly as the noble Baroness has so kindly made the speech for me and referred to me several times. She asked whether I remember the debates on the order in 2006. I think of little else; I find them far better than counting sheep. I have only one question for the Minister. Could he please explain what the difference is between “affordable sustainability” and “sustainable affordability”?

I will pass on that last question, if I may.

The noble Baroness’s amendments would make it a requirement that the Secretary of State obtain a report from the Government Actuary advising on the method for determining actuarial equivalence and that the recommendation in the report be adopted. Incidentally, I am not surprised that the noble Baroness referred to contracted-out rebates; I thought that they might just be raised in the context of this issue.

Determining the method of actuarial equivalence will clearly require a great deal of expert knowledge. That is why we have made provision in the Bill to obtain a report from the Government Actuary’s Department. I assure the Committee that it is fully our intention to make use of that provision, and we will make a decision based on that advice.

I can, however, see considerable merit in the amendments. But there is a slight concern, about which we need to talk to the Government Actuary. It is suggested that the draft amendments compel the Government to accept the Government Actuary’s advice. That depends a bit on whether there is going to be a range of advice or a single proposition, and whether that places the responsibility for determining actuarial equivalence on the Government Actuary rather than on the Secretary of State. We would like to discuss that further. Subject only to that, I am hopeful that we can bring back on Report something that has the same effect, if not the same wording, as the noble Baroness’s amendments, because we are fully in agreement.

The noble Baroness rightly raised the issue of quality assurance. There are two strands of the work. There is the calculation of the growth of the additional pension before the contracted-out deduction. Of course that is a calculation that happens currently when people retire, but it is being done specially in 2012 to try to get this system under way. There are already systems in place that cater for that, but we would certainly consider the use of the NAO to quality-assure these calculations. That has not yet been looked at in detail. The suggestion is helpful and we will take it forward.

That is as much reassurance as I can give the noble Baroness. I hope that, on that basis, she will feel able not to press the matter today.

I am delighted. I look forward to seeing the amendment that the Minister produces on Report.

On Question, amendment agreed to.

130ZZB: Clause 89, page 44, line 2, leave out from first “the” to end of line 3 and insert “amount referred to in subsection (2)(d).”

130ZZC: Clause 89, page 44, line 4, leave out subsection (5)

130ZZD: Clause 89, page 44, line 9, leave out “paragraph 3 of Schedule 4C to this Act” and insert “paragraph 1A of Schedule 4C to this Act by virtue of paragraph 1D(a) of that Schedule (the GRB amount)”

On Question, amendments agreed to.

Clause 89, as amended, agreed to.

130ZZE: After Clause 89, insert the following new Clause—

“Entitlement to guaranteed minimum pensions: effect on payment of additional pension etc

(1) The Pension Schemes Act 1993 (c. 48) is amended as follows.

(2) In section 46 (effect of entitlement to guaranteed minimum pensions on payment of social security benefits) after subsection (1) insert—

“(1A) Subsection (1) does not apply in relation to a relevant benefit if the weekly rate of the additional pension in that benefit is determined under section 45(2A) of the Social Security Contributions and Benefits Act 1992 (retirement in tax year after 5th April 2020).

(1B) In subsection (1A) “a relevant benefit” means—

(a) a Category A or Category B retirement pension, or(b) a widowed parent’s allowance.”(3) After section 46 insert—

“46A Retirement in tax year after 5th April 2020

(1) Subsection (2) applies where—

(a) for any period a person is entitled to a Category A or Category B retirement pension, or a widowed parent’s allowance, under the 1992 Act (“the benefit”),(b) the person is entitled to one or more guaranteed minimum pensions for that period, and(c) the weekly rate of the additional pension in the benefit is determined under section 45(2A) of the 1992 Act (retirement in tax year after 5th April 2020).(2) The weekly rate of the benefit shall, for the period mentioned in subsection (1)(a), be reduced by an amount calculated in accordance with regulations.

(3) Regulations under subsection (2) must provide for the amount of the reduction to be calculated in such a way that it does not exceed such part of the weekly rate of the additional pension in the benefit as is attributable to earnings factors for tax years ending before the principal appointed day.

(4) The effect of the reductions made under subsection (2) in relation to any person must be actuarially equivalent to the effect of the reductions that, but for section 46(1A), would be made under section 46(1) in relation to that person.

(5) The Secretary of State—

(a) may require the Government Actuary or Deputy Government Actuary to prepare a report on how actuarial equivalence should be determined for the purposes of this section, and(b) must lay any such report before Parliament.(6) Regulations may make provision for determining actuarial equivalence for the purposes of this section.

(7) Regulations under subsection (6) may, in particular, include provision by reference to a report under subsection (5)(a).

(8) In this section “the 1992 Act” means the Social Security Contributions and Benefits Act 1992.””

[Amendments Nos. 130ZZEA and 130ZZEB, as amendments to Amendment No. 130ZZE, not moved.]

On Question, Amendment No. 130ZZE agreed to.

130ZZF: After Clause 89, insert the following new Clause—

“Additional State Pension etc: minor and consequential amendments

Schedule (Additional State Pension etc: minor and consequential amendments) (Additional State Pension etc: minor and consequential amendments) has effect.”

On Question, amendment agreed to.

Schedule 3 [Additional pension consolidation]:

130ZZG: Schedule 3, page 69, line 32, leave out from “date”” to end of line 36 and insert “means the first day of the flat rate introduction year.”

130ZZH: Schedule 3, page 69, line 37, leave out “The consolidated amount” and insert—

“1A The Secretary of State must, in accordance with the following provisions of this Schedule, calculate an amount representing the weekly rate of the additional pension in a pensioner’s Category A retirement pension in relation to tax years before the flat rate introduction year.

1B The Secretary of State must comply with paragraph 1A before the pensioner attains pensionable age.

1C The calculation under paragraph 1A shall be treated for the purposes of Chapter 2 of Part 1 of the Social Security Act 1998 (c.14) (social security decisions and appeals) as a decision under section 8 of that Act.

1D The amount to be calculated under paragraph 1A”

130ZZJ: Schedule 3, page 70, line 17, leave out “paragraph 3 or 4” and insert “paragraph 1A”

130ZZK: Schedule 3, page 70, line 24, leave out “uprated” and insert “revalued”

130ZZL: Schedule 3, page 70, line 25, leave out from first “the” to end of line 26 and insert “sum of the following amounts—

(a) the amount calculated under paragraph 1A;(b) that amount multiplied by the revaluing percentage specified in the last order under section 148AB of the Administration Act to come into force before the beginning of the tax year in which the pensioner attains pensionable age.”

On Question, amendments agreed to.

Schedule 3, as amended, agreed to.

130ZZM: After Schedule 3, insert the following new Schedule—

“Additional State Pension etc: minor and consequential amendmentsSocial Security Contributions and Benefits Act 1992 (c. 4)1 The Social Security Contributions and Benefits Act 1992 (c. 4) is amended as follows.

2 In section 21(5A)(c) (contribution conditions) after “5(2)(b) and (4)(a)” insert “, 5A(3)(a)”.

3 In section 39(1) (rate of widowed mother’s allowance and widow’s pension) for “46(2)” substitute “46”.

4 (1) Section 39C (rate of widowed parent’s allowance and bereavement allowance) is amended as follows.

(2) In subsection (1)—

(a) for “45” substitute “45AA”;(b) for “and Schedule 4A” substitute “and Schedules 4A to 4C”;(c) for “46(2) and (4)” substitute “46”.(3) In subsections (3) and (4)—

(a) for “45” substitute “45AA”;(b) for “and Schedule 4A” substitute “and Schedules 4A to 4C”.5 (1) After section 45 (additional pension in Category A retirement pension) insert—

“45AA Effect of working families’ tax credit and disabled person’s tax credit on earnings factor

(1) For the purposes of calculating additional pension under sections 44 and 45 where, in the case of any relevant year, working families’ tax credit is paid in respect of any employed earner, or disabled person’s tax credit is paid to any employed earner, section 44(6)(a)(i) shall have effect as if—

(a) where that person had earnings of not less than the qualifying earnings factor for that year, being earnings upon which primary class 1 contributions were paid or treated as paid (“qualifying earnings”) in respect of that year, the amount of those qualifying earnings were increased by the aggregate amount (“AG”) of working families’ tax credit, or, as the case may be, disabled person’s tax credit paid in respect of that year, and(b) in any other case, that person had qualifying earnings in respect of that year and the amount of those qualifying earnings were equal to AG plus the qualifying earnings factor for that year.(2) The reference in subsection (1) to the person in respect of whom working families’ tax credit is paid—

(a) where it is paid to one of a couple, is a reference to the prescribed member of the couple, and(b) in any other case, is a reference to the person to whom it is paid.(3) A person’s qualifying earnings in respect of any year cannot be treated by virtue of subsection (1) as exceeding the upper earnings limit for that year multiplied by 53.

(4) Subsection (1) does not apply to any woman who has made, or is treated as having made, an election under regulations under section 19(4), which has not been revoked, that her liability in respect of primary Class 1 contributions shall be at a reduced rate.

(5) In this section—

“couple” has the same meaning as in Part 7 (see section 137);

“relevant year” has the same meaning as in section 44.”

(2) Sub-paragraph (1), together with paragraphs 4(2)(a) and (3)(a), 9(2)(a) and (3)(a) and 11 (which make amendments consequential on sub-paragraph (1)), are referred to in the following provisions of this paragraph as “the relevant provisions”.

(3) Subject to sub-paragraphs (4) and (5), the relevant provisions apply to a person (“the pensioner”) who attains pensionable age after 5 April 1999 and, in relation to such a person—

(a) have effect for 1995-96 and subsequent tax years, and(b) are deemed so to have had effect (with the necessary modifications) during the period—(i) beginning with 6 April 2003, and(ii) ending with the coming into force of this paragraph.(4) Where the pensioner is a woman, the relevant provisions have effect in the case of additional pension falling to be calculated under sections 44 and 45 of the Social Security Contributions and Benefits Act 1992 (c. 4) by virtue of section 39 of that Act (widowed mother’s allowance and widow’s pension), including Category B retirement pension payable under section 48B(4), if her husband—

(a) dies after 5 April 1999, and(b) has not attained pensionable age on or before that date.(5) The relevant provisions have effect, where additional pension falls to be calculated under sections 44 and 45 of the Social Security Contributions and Benefits Act 1992 (c. 4) as applied by section 48A or 48B(2) of that Act (other Category B retirement pension) if—

(a) the pensioner attains pensionable age after 5th April 1999, and(b) the pensioner’s spouse has not attained pensionable age on or before that date.6 (1) Section 46 (modifications of section 45 for calculating the additional pension in certain benefits) is amended as follows.

(2) In subsection (2) for “, 48B(2) or 48BB(5)” in both places it occurs substitute “or 48B(2)”.

(3) After subsection (4) insert—

“(5) For the purpose of determining the additional pension falling to be calculated under section 45 above by virtue of prescribed provisions of this Act, that section has effect subject to the following modifications—

(a) the omission in subsection (2) of the words “but before 6th April 2020”, and(b) the omission of subsections (2A) and (2B).(6) Regulations under subsection (5) may prescribe a provision in relation to—

(a) all cases, or(b) cases of a prescribed description.”7 In section 48A(4) (category B retirement pension for married person)—

(a) for “and 4B” substitute “to 4C”;(b) for “46(2)” substitute “46”.8 In section 48B(2) (category B retirement pension for widows and widowers)—

(a) for “and 4B” substitute “to 4C”;(b) for “46(2)” substitute “46”.9 (1) Section 48BB (category B retirement pension: entitlement by reference to benefits under section 39A or 39B) is amended as follows.

(2) In subsection (5)—

(a) for “45” substitute “45AA”;(b) after “45AA” (inserted by paragraph (a) above) insert “and 45B”;(c) for “and 4B” substitute “to 4C”;(d) for “46(3)” substitute “46”.(3) In subsection (6)—

(a) for “45” substitute “45AA”;(b) after “45AA” (inserted by paragraph (a) above) insert “and 45B”.10 In section 48C(4) (category B retirement pension: general) for “and 4B” substitute “to 4C”.

11 In section 51(2) and (3) (category B retirement pension for widowers) for “45” substitute “45AA”.

12 (1) Schedule 4B (additional pension: accrual rates for purposes of section 45(2)(d)) is amended as follows.

(2) In paragraph 2 (application of Part 2 of Schedule)—

(a) after “if” insert “—(a) ”;(b) after paragraph (a) (created by virtue of paragraph (a) above) insert “and (b) there is a surplus in the pensioner’s earnings factor for the year.”(3) In paragraph 3 (appropriate amount for year)—

(a) in paragraph (a), for the words from “there is” to “which” substitute “the pensioner’s earnings factor for the year”;(b) in paragraph (b), for “there is such a surplus which” substitute “that earnings factor”.(4) In paragraph 5(a) for “surplus” substitute “earnings factor”.

(5) In paragraph 6 (application of Part 3 of Schedule)—

(a) after “if” insert “—(a) ”;(b) after paragraph (a) (created by virtue of paragraph (a) above) insert “and(b) there would be a surplus in the pensioner’s earnings factor for the year if section 48A of the Pension Schemes Act 1993 did not apply in relation to any tax week falling in the year.”(6) In paragraph 8(1) (calculation of amount A: assumed surplus not exceeding LET), for the words from “there” to “which” substitute “the pensioner’s assumed earnings factor for the year”; and, accordingly, in the heading before paragraph 8 for “surplus” substitute “earnings factor”.

(7) In paragraph 9 (calculation of amount A: assumed surplus exceeding LET)—

(a) in sub-paragraph (1), for the words from “there” to “which” substitute “the pensioner’s assumed earnings factor for the year”;(b) in sub-paragraph (2)(a), for “assumed surplus” substitute “assumed earnings factor”,and accordingly in the heading before paragraph 9 for “surplus” substitute “earnings factor”.(8) In paragraph 10(1)(a) (amount B), for “assumed surplus” substitute “pensioner’s assumed earnings factor”.

(9) In paragraph 12 (interpretation)—

(a) omit the definition of “assumed surplus”;(b) after the definition of “the QEF” insert—““the pensioner’s assumed earnings factor”, in relation to a year, means the earnings factor that the pensioner would have for the year if section 48A(1) of the Pension Schemes Act 1993 did not apply in relation to any tax week falling in the year;”.

13 In Schedule 7 (industrial injuries benefits) in paragraph 3(3) after “section 46” insert “or 46A”.

Social Security Administration Act 1992 (c. 5)14 After section 148AA of the Social Security Administration Act 1992 (c. 5) (revaluation of flat rate accrual amount) insert—

“148AB Revaluation of consolidated amount

(1) The Secretary of State shall, in the tax year following the flat rate introduction year and in each subsequent tax year, review the general level of earnings obtaining in Great Britain and any changes in that level which have taken place during the review period.

(2) In this section “the review period” means the period since such day in the tax year preceding the flat rate introduction year as the Secretary of State may determine.

(3) If on a review it appears to the Secretary of State that the general level of earnings has increased during the review period, the Secretary of State must make an order under this section specifying the percentage of the increase.

(4) The percentage specified in the order is the “revaluing percentage” for the purposes of Schedule 4C to the Contributions and Benefits Act (additional pension: calculation of revalued consolidated amount).

(5) Subsection (3) does not require the Secretary of State to make an order if it appears to the Secretary of State that the effect of the order on amounts calculated in accordance with that Schedule would be inconsiderable.

(6) The Secretary of State may, for the purposes of subsection (3), adjust any amount by rounding it up or down to such extent as the Secretary of State thinks appropriate.

(7) If on a review the Secretary of State determines that no order under this section is required, the Secretary of State must lay before Parliament a report explaining the reasons for arriving at that determination.

(8) For the purposes of a review under this section the Secretary of State shall estimate the general level of earnings in such manner as the Secretary of State thinks fit.”

Pension Schemes Act 1993 (c. 48)15 The Pension Schemes Act 1993 (c. 48) is amended as follows.

16 (1) Section 46 (effect of entitlement to guaranteed minimum pensions on payment of social security benefits) is amended as follows.

(2) In subsection (6), in the substitute paragraph 3(3) of Schedule 7 to the Social Security Contributions and Benefits Act 1992, after “section 46(1)” insert “or 46A(2)”.

17 (1) Section 47 (further provisions concerning entitlement to guaranteed minimum pensions) is amended as follows.

(2) At the end of the heading add “and s. 46A”.

(3) In subsections (2), (3), (5), (6), (7), (8) and (9), for “section 46” substitute “sections 46 and 46A”.

18 In section 48(2) (reduced benefits where minimum payments or minimum contributions paid) for “section 46” substitute “sections 46 and 46A”.

19 In section 49(b) (women, married women and widows) after “46(1),” insert “46A(2),”.

20 In section 164(5) (Crown employment) after “46(1),” insert “46A(2),”.

21 In section 165(2)(b) (cases with a foreign element) after “those subsections),” insert “section 46A(2),”.

22 (1) In section 167(4) (application of provisions relating to social security administration) for “section 46” substitute “sections 46 and 46A”.

(2) Sub-paragraph (1) has effect only until the repeal of section 167(4) by the Social Security Act 1998 (c. 14) has come into force for all purposes.”

On Question, amendment agreed to.

Clause 90 agreed to.

130ZZN: After Clause 90, insert the following new Clause—

“Contracting-out: abolition of all protected rights

(1) As from the contracting-out abolition date, pension schemes are not required to make special provision in relation to the protected rights of members.

(2) Accordingly—

(a) the provisions of the Pension Schemes Act 1993 (c. 48) (“the 1993 Act”) within subsection (3) cease to have effect as from that date, and(b) sections 25A, 27A and 32A of the 1993 Act (as inserted by paragraphs 9, 10 and 12 of Schedule 4 to the Pensions Act 2007 (c. 22)) are not to have any effect as from that date (in spite of section 15(4) of that Act of 2007).(3) The provisions of the 1993 Act within this subsection are—

(a) section 10 (protected rights and money purchase benefits),(b) section 26 (persons who may establish scheme),(c) section 27 (identification and valuation of protected rights),(d) section 30 (securing of liability for protected rights), (e) section 32 (suspension or forfeiture), and(f) section 33A (appropriate schemes: “blowing the whistle”).(4) In this section—

“the contracting-out abolition date” means the day appointed under section 30 of the Pensions Act 2007 (c. 22) for the coming into force of section 15(1) of that Act (abolition of contracting-out for defined contribution pension schemes), and

“protected rights” has the same meaning as in the 1993 Act (see section 10 of that Act).”

The noble Lord said: I shall speak also to government Amendments Nos. 139ZC, and 139E. The new clause and associated amendments are concerned with the changes we are making to the arrangements for contracting out of the additional state pension. In particular, they deal with the use of protected rights. These are contracted-out rights held in a defined contribution pension scheme.

The Pensions Act 2007 already contains provisions to abolish contracting out on a defined contribution basis, and we expect that change to take place in 2012. The Act also contains provisions to remove most of the rules concerning the use of protected rights already accrued at the point of abolition. The exception is the rule on survivor benefit. Currently, protected rights have to provide for a survivor benefit if a scheme member is married or a civil partner at the time the annuity is purchased. Following detailed consideration of the survivor benefit rule and the open market option review, we have decided to remove this rule too. That is what the new clause and associated amendments will achieve.

The main changes are being made on the face of the Bill; however, we are also expanding a power in the Bill so we can make the necessary consequential amendments and ensure a smooth transition to the new arrangements. Removing the survivor benefit rule means that once contracting-out on a defined contribution basis ceases, there will be no requirements for how past protected rights might be used. This will mean greater clarity for individuals, who will be free to choose an annuity that is appropriate for their circumstances. At the moment, people have to buy an annuity that provides a survivor’s benefit, even if that is not in their best interests; for example, if their spouse has a good pension in their own right.

The change provides a big simplification for schemes, which will no longer have to track protected rights and apply separate rules to them. It is in line with the Government’s objective of reducing administrative burdens on employers and pension providers. I hope that this explains our approach. I beg to move.

I understand where my noble friend is coming from; obviously we all wish to see this simplification, particularly regarding the very complicated issue of protected rights when people are not in contracted-out schemes, or, indeed, contracted-out schemes in the future.

My noble friend is pursuing three or four objectives which sometimes clash with each other and are not reconcilable. I understand that this is an awkward bit of protected rights and there is therefore a different rule when it comes to the rest of the annuity; people can end up having two types of annuity. As we were saying earlier regarding the amendment of the noble Baroness, Lady Howe, women live longer, and we also wish to ensure that couples, particularly women, have protection and do not need recourse to income-related benefits, particularly pension credit, in widowhood. They are best protected against that, until the happy day when women have an annuity or pension in their own right of sufficient size, comfort and affordability, by having joint lives on their husbands’ pensions—in other words, survivors’ benefits. But we are stripping out even that benefit, which is available through protected rights.

That push to simplify is at odds with the push to keep as many people as possible off income-related benefits in older age. I do not have an easy solution: this is a problem that one hopes will diminish over time as more women carry their own pension. However, if we want to keep widows in particular off income-related benefits, we may do more to help them by changing the annuity rules rather than the pension credit rules. At the very least, spouses should be required to sign their spouse’s annuity forms so that they know what they are signing up to when they choose a single life annuity. From now on, such spouses will be even more vulnerable to having to receive income-related benefits than in the past.

I acknowledge the issue that my noble friend has raised concerning vulnerable survivors. The best way in which to help people make the right choice is to ensure that they have access to clear and appropriate information. My noble friend will be aware that we are working to facilitate and encourage improvements to the information on annuity choice so that people have the information they need. In particular we are working with the Pensions Advisory Service, supporting it on the development of its web tool to provide people with information about choosing an annuity. This is an important issue and we need to get the balance right.

On Question, amendment agreed to.

Clause 91 [Scope of mechanism]:

[Amendment No. 130ZA not moved.]

Clause 91 agreed to.

Clause 92 agreed to.

Clause 93 [Activation of pension compensation sharing]:

130ZB: Clause 93, page 46, line 23, leave out subsection (2)

The noble Lord said: I shall speak also to government Amendments Nos. 130ZC, 130ZD, 130BZA, 130BZB, 130BZC, 130BAA, 130DA, 130DB, 130DC, 130DD, 130DE, 130DF, 130DG, 130DH, 130DJ, 130DK, 130DM, 130DN, 130DQ, 130DT to 130EK and 140A. Before I explain the purpose of the amendments in detail, I thought it might be helpful to offer a brief reminder of the content and purpose of this chapter.

Since 1997, the Government have been committed to ensuring that divorcing couples can reach fair and equitable financial settlements. As part of that, in 1999, we legislated to enable couples undergoing a divorce or annulment to share pensions where that was appropriate to their circumstances. In 2004, we extended that in the Civil Partnership Act to couples who were dissolving a civil partnership. Although I shall refer mainly to divorce throughout my speech, the provisions being introduced refer equally to divorce or the dissolution of a civil partnership or an annulment.

When couples divorce they can, if appropriate, share their pensions like other assets in a way that ensures a clean break, and thus independence of income in later life. Where a person undergoing a divorce has pension rights, the court can transfer the value of some or all of those rights to their former spouse. That former spouse can then buy a pension of their own to ensure that they have independence and security. The courts can also do this while a pension scheme is being assessed for transfer into the PPF, but once a pension scheme has transferred, things change. As pointed out by my noble friend Lady Hollis during debate on the Pensions Act 2007, unlike cash, property or pensions, pension compensation cannot be shared even if a couple or court decide that that would be the best way of dividing their assets.

Where compensation is the only significant asset belonging to a divorcing couple, that could mean that one party was disadvantaged. To avoid such a situation and ensure a fair and equitable settlement, Clauses 91 to 104 ensure that sharing pension compensation is an option. These government amendments are about ensuring that the compensation-sharing provisions operate as effectively as possible.

I hope that Members of the Committee will bear with me as I go through this rather long list of amendments, all of which are important. Amendments Nos. 130ZD, 130BZC, 130BAA, 130DA, 130DT, 130DU, 130DV, 130DX, 130DY and 130DZ—the first batch—amend Clause 94 and Schedule 4. They are intended to ensure that the compensation-sharing provisions operate appropriately where a person has entitlement to compensation resulting from membership of more than one scheme that has been transferred to the PPF. They do this by allowing the courts to make a sharing order that relates to the individual parts of a person’s compensation where appropriate. They also provide for the PPF to calculate compensation accordingly.

Amendments Nos. 130DC, 130DF, 130DG, 130DH, 130DM, 130DN and 130DQ—the second batch—amend Schedule 4. They ensure that the provisions relating to compensation paid to survivors on the death of a member apply equally to surviving civil partners, other partners, widows and widowers. They do so by ensuring that references to “widow” or “widower” are replaced by “surviving partner”.

Amendments Nos. 130DD, 130DE, 130DJ and 130DK—the third batch—amend Schedule 4. They ensure that compensation is calculated correctly by not reducing compensation to the 90 per cent level where the transferor’s compensation would already have been reduced. They amend the provisions so that the calculation of compensation following a compensation share does not include inappropriate reductions to 90 per cent.

Amendments Nos. 130DW and 130E—the fourth batch—amend Schedule 5. They are intended to ensure that discharged attachment orders do not prohibit a compensation share or further attachment. They do this by specifying the circumstances in which an outstanding attachment order prohibits a fresh order being made.

Amendments Nos. 130EH, 130EJ, 130EK and 140A—the fifth batch—amend Clause 104 and Schedule 9. They will ensure that the board of the PPF can make payments to the fund to meet its liabilities to pay compensation following a pension compensation share by amending the provisions in the Pensions Act 2004, which specifies which payments may be made out of the fund.

The remaining amendments, Amendments Nos. 130ZB, 130ZC, 130BZA, 130BZB, 130DB, 130EA, 130EB, 130EC, 130ED, 130EE, 130EF and 130EG amend Clauses 93 and 94 and Schedule 6, and introduce a new clause after Clause 93. The noble Lord, Lord Kirkwood, will be pleased to hear that all the amendments relate to Scotland. They will make sure that the compensation sharing provisions operate properly in Scotland. I thank noble Lords for their forbearance in allowing me to explain these complicated amendments. I hope that they receive noble Lords’ agreement, but I shall seek to explain them further if required. I beg to move.

I am grateful to my noble friend the Minister and to the officials of both departments who have worked closely on this matter. I also pay tribute to Maggie Rae, the solicitor, who held my hand back in 1995 when we first raised this issue, and we have seen it all the way through. I am delighted. Most people have only two major assets in their lives: their house and their pension. The PPF could have meant the pension pot falling the wrong side of a divorce and access being lost as a result. I do not need to rehearse the arguments. I am very grateful to the Minister and the officials who have worked so hard. I have only one question: what about FAS?

Like the noble Baroness, Lady Hollis, we on these Benches have no problem with the Government’s policy on pension sharing, either on divorce or the dissolution of a civil partnership. That extends to that occurrence within the ambit of the Pension Protection Fund.

I am not surprised that the Minister read his brief at such speed. I certainly did not understand all of it and I cheekily rather wonder whether he did either. However, the key amendment in the group, as I understand it, is Amendment No. 130ZC, which relates only to Scotland. It reads a little oddly when compared with Clause 93. Subsection (2) states that Clause 93(1)(f) or (g) is to be disregarded if the board of the PPF does not receive certain information before two months have elapsed. I have no problem with paragraph (f) being disregarded, but paragraph (g) states that,

“any provision corresponding to provision which may be made by such an order, and which … is contained in a qualifying agreement between the parties to a marriage or the partners in a civil partnership, … is in such form as the Secretary of State may prescribe by regulations, and … takes effect on the grant, in relation to the marriage, of decree of divorce or a declarator or nullity or (as the case may be) on the grant, in relation to the civil partnership, of decree of dissolution or of declarator of nullity”—

those, I assume, are Scottish expressions—

“except where the provision relates to the same rights to PPF compensation as are the subject of an order made under section 12B(2) of the Family Law (Scotland) Act 1985 (order for payment of capital sum: pension compensation)”.

Why is the disregarding provision in the Scottish clause but not in the English clause? I would be very happy to receive one of the Minister’s letters if he could not answer me now—and I would readily understand why he could not.

Like the noble Baroness, Lady Hollis, I have only one question: if officials have worked for so long on this provision, why do we have to deal with it now by means of an incomprehensible alphabet soup of government amendments in Committee in the Lords? Why has it taken so long? Why was it not drafted much earlier?

I have had the benefit of meetings with the officials and Maggie Rae to discuss the amendments. It is fair to say that it involved the most technically difficult drafting that I have ever seen in the pensions Acts with which I have been involved. One would have liked the provisions to be included in 2004, but it was impossible because we were building PPF. It was not appropriate last year. At least it has come in Committee and not on Report or at Third Reading.

I look forward to hearing a Minister reply. I do not want to be told what is happening by someone else. That was not a satisfactory answer and it was not from the Minister anyway. Perhaps we could hear the Minister’s answer.

I thank my noble friend Lady Hollis for her support and welcome for the provisions. I thank her for raising and pressing the issue, and engaging with officials to make sure that it becomes a reality. I am not sure that I can give a better answer to the noble Lord, Lord Oakeshott, than that given by my noble friend. I know that a whole raft of amendments is not helpful to Members opposite, and it is certainly not helpful to the Minister who has to run through them. In answer to the noble Lord, Lord Skelmersdale, I say that I thought that I understood most of them when I read them over the weekend, but these things go from the mind quite quickly.

He raised a question about Scotland. I should like to look at the record and go back to the provisions about which he spoke. I am certain that we will be able to provide him with a written answer on his point.

My noble friend raised FAS and pension sharing on divorce. Having achieved one thing, it is good to see her campaigning on the next issue. We recognise concerns about enabling the sharing of FAS payments on divorce. We are focused on delivering as quickly as possible all the legislation needed for the extensions to FAS which we announced in December. Once we know the detail of how reform of FAS payments will be structured and delivered, we will be in a far better position to determine how they should be treated when couples separate. I guess that one would summarise that as being work in progress.

I have tried to pursue this question already and have not received very satisfactory answers in meetings with officials and by correspondence. Does that mean that the Government have powers by regulation to extend the proposals to FAS in due course as and when they see their shape? Do they have power subsequently to introduce regulations to that effect? If so, I am well content.

If the question was whether these powers give us authority in relation to FAS, my answer is that I doubt that they do. I would need to take advice on what powers we have in legislation to then by regulation introduce them. If I receive a note from my officials’ box by the time that I sit down, I shall give that answer to my noble friend now. If not, I shall certainly follow up the point because I understand the issue that she raises.

Surely 90 per cent of FAS is operated by regulation. Therefore, I suspect that the answer that the Minister will, I hope, be able to give in due course is that there is no need to amend the Bill to achieve the noble Baroness’s objective.

The noble Lord, Lord Skelmersdale, is exactly right. It is not so much whether we need to amend primary legislation—it is confirmation that we have powers through existing regulations or general regulations in this Bill, so that subsequently, if necessary, they conform to the shape of FAS.

I shall write on that issue and share that correspondence with noble Lords. It is turning out quite well tonight—people keep answering the Minister’s questions. This is a really good precedent.

On Question, amendment agreed to.

Clause 93, as amended, agreed to.

130ZC: After Clause 93, insert the following new Clause—

“Activation of pension compensation sharing: supplementary (Scotland)

(1) For the purposes of this Chapter, a qualifying agreement is an agreement which—

(a) has been entered into in such circumstances as the Secretary of State may prescribe by regulations, and(b) is registered in the Books of Council and Session.(2) For the purposes of section 93, an order or provision mentioned in paragraph (f) or (g) of that section is to be regarded as never having taken effect if the Board does not receive before the end of the period of 2 months beginning with the relevant date—

(a) a copy of the relevant documents, and(b) such information relating to the transferor and transferee as the Secretary of State may prescribe by regulations under section 98(1)(b)(ii). (3) The relevant date for the purpose of subsection (2) is—

(a) the date of the extract of the decree or declarator responsible for the divorce, dissolution or annulment to which the order or provision relates, or(b) if the order is made in relation to disposal of an application under section 28 of the Matrimonial and Family Proceedings Act 1984, or of an application under paragraph 2 of Schedule 11 to the Civil Partnership Act 2004, the date of the disposal.(4) The relevant documents referred to in subsection (2) are—

(a) in the case of an order mentioned in paragraph (f) of section 93, that order and the decree or declarator responsible for the divorce, dissolution or annulment to which it relates,(b) in the case of provision mentioned in paragraph (g) of that section—(i) that provision and the decree or declarator responsible for the divorce, dissolution or annulment to which it relates, and (ii) documentary evidence that the agreement containing the provision is one to which subsection (1)(a) applies.(5) The Court of Session or the sheriff may, on the application of any person having an interest, make an order—

(a) extending the period of 2 months referred to in subsection (2), and(b) where that period has already expired, providing that, if the Board receives the documents and information concerned before the end of the period specified in the order, subsection (2) is to be treated as never having applied.”

On Question, amendment agreed to.

Clause 94 [Creation of pension compensation debits and credits]:

130ZD: Clause 94, page 46, line 30, after “compensation” insert “that derive from rights under the specified scheme”

On Question, amendment agreed to.

130A: Clause 94, page 46, line 31, leave out “debit” and insert “reduction”

The noble Baroness said: I shall speak also to the other three amendments in this group. This is a small bid for the proper use of the term “debit and credit”. As the Minister knows, these are hallowed terms in accountancy and can be directly related back to the father of accounting, Fra Luca Pacioli, who recorded double-entry book-keeping in the late 15th century. Most people think of a credit as good, because they think that when they are in credit with the bank that is a positive thing, but in fact this credit is seen from the perspective of the bank’s accounts; they are on the liability side of the bank’s balance sheet. If an individual drew up their own accounts, they would have it on the debit side, representing an asset. As generations of accounting students learnt—including the Minister and me—debits can be assets, expenses or losses and credits can be liabilities, income or profit. So the term “debit and credit” does not have an unequivocal good-bad, positive-negative connotation.

There are of course many more subtleties to double-entry book-keeping, but I shall not weary the Committee with them today. But for anyone who knows what a debit and a credit are—and that certainly includes the noble Lord, Lord McKenzie, and me—the wording of Clause 94 jars. We would never say that something becomes subject to a debit because an account is debited by an amount. In fact, we would not use the terms as they are used in the clause at all. My plea in these amendments is that the Department for Work and Pensions leaves accountants’ language alone and sticks to plain English, which is what my amendments seek to do. I beg to move.

Is this amendment not in fact defective? Should we not also amend the clause heading, “Creation of pension compensation debits and credits”?

We are never allowed to change the titles. I was always told that it is an administrative consequence.

It is with disappointment that I rise to speak for the Government on this clause, not being an accountant.

In responding to Amendment No. 130A, I shall also speak to Amendments Nos. 130B, 130C and 130D. Clause 94 sets out how the pension compensation due to a member can be reduced and a credit of the same amount created in respect of the former spouse. These amendments would remove the terms “debit” and “credit” from the clause and replace them with terminology that has similar meaning.

“Debit” and “credit” are terms currently used in pension sharing, and we believe it is important to take account of the existing pension-sharing legislation. Clause 94, like the rest of this chapter, has been drafted so that, as far as possible, compensation sharing follows the same principles and uses the same language and mechanics as currently apply to pension sharing. In this way we have sought to capitalise on familiarity and avoid unnecessary additional complexity. The same terms are used in Section 29 of the Welfare Reform and Pensions Act 1999, which contains a provision equivalent to Clause 94 of this Bill. Other legislation uses the same terminology as that Act. For example, Section 220 of the Finance Act 2004 uses pension credit and pension debit when setting out how a pension credit affects a person’s lifetime allowances. In due course, the Finance Act 2004 will be applied to compensation credits and debits in the same way, through regulations made by Treasury Ministers after the passage of this Bill.

The feedback that we have had from lawyers—not accountants—who are likely to have to interpret this legislation, is that they welcome this approach. In addition, the provisions in the Finance Act 2004 which set out the tax treatment of pensions and PPF compensation carefully follow the same terminology as pension sharing. If we were to stray away from the existing terminology relating to credits, Parliament would need to make further changes to tax law to ensure that the beneficiaries of compensation sharing were not subject to charges for having received unauthorised payments. Again, this would only add to the complexity.

I sympathise with efforts to simplify legal drafting, but rejecting the existing, accepted terms could lead to confusion. For example, were Parliament to apply these different terms, there may be an expectation that it meant there to be a difference between pension sharing and compensation sharing, when the intention is to encourage the opposite. I hope that I have been able to reassure the noble Baroness that the wording of clauses on compensation sharing has been carefully chosen to ensure consistency and familiarity. I urge her to withdraw her amendment.

I thank the Minister for that response. It was not unexpected, but I have made my point. The Minister tempts me to produce a more extensive series of amendments for Report but, for today, I shall leave my plea on the record that the Department for Work and Pensions does not pinch accountants’ language in future, without getting its lawyers to learn about the words they are using. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 130B not moved.]

130BZA: Clause 94, page 46, line 34, leave out from “means” to “of” in line 35 and insert—

“(a) where the relevant order or provision specifies a percentage to be transferred, that percentage”

130BZB: Clause 94, page 46, line 36, at end insert—

“(b) where the relevant order or provision specifies an amount to be transferred, the lesser of—(i) that specified amount, and(ii) the cash equivalent of the relevant compensation on the valuation day.”

130BZC: Clause 94, page 46, line 40, leave out “under those provisions” and insert “to PPF compensation that derive from rights under the specified scheme”

On Question, amendments agreed to.

[Amendment No. 130BA not moved.]

130BAA: Clause 94, page 46, line 43, after “section” insert “—

“the specified scheme” means the pension scheme specified in the relevant order or provision;”

On Question, amendment agreed to.

[Amendments Nos. 130C and 130D not moved.]

Clause 94, as amended, agreed to.

Clause 95 agreed to.

Clause 96 [Reduction of compensation]:

130DA: Clause 96, page 47, line 7, after “Where” insert “any of”

130DB: Clause 96, page 47, line 18, at end insert “, or

(b) if the pension compensation sharing order or provision on which the debit depends specifies an amount to be transferred, the percentage which the appropriate amount for the purposes of subsection (1) of section 94 represents of the amount mentioned in subsection (2)(b)(ii) of that section.”

On Question, amendments agreed to.

Clause 96, as amended, agreed to.

Clauses 97 to 99 agreed to.

Schedule 4 [Pension compensation payable on discharge of pension compensation credit]:

130DC: Schedule 4, page 71, line 14, leave out “widower, widow or dependant of” and insert “person connected with”

130DD: Schedule 4, page 71, line 34, leave out “the appropriate percentage of”

130DE: Schedule 4, page 71, line 39, leave out sub-paragraph (4)

130DF: Schedule 4, page 72, line 8, leave out “or widower” and insert “, widower or surviving civil partner (“the surviving partner”)”

130DG: Schedule 4, page 72, line 9, leave out “widow or widower” and insert “surviving partner”

130DH: Schedule 4, page 72, line 16, leave out “widow or widower” and insert “surviving partner”

130DJ: Schedule 4, page 72, line 25, leave out “the appropriate percentage of”

130DK: Schedule 4, page 72, line 31, leave out sub-paragraph (4)

On Question, amendments agreed to.

I suggest that we break and do not reconvene before 8.29 pm. I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.