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'or a Retirement Failsafe Fund'.

No. 2, in page 1, line 13, at end insert—

'(g) the payment to a member of income from a Retirement Failsafe Fund satisfying the conditions of section 637C.'.

No. 3, in page 2, line 23, leave out "section is" and insert "sections are".

No. 4, in page 2, line 42, at end insert—

'637C Retirement Failsafe Fund
(1) There shall be a vehicle for savings for retirement known as a Retirement Failsafe Fund.
(2) A member may transfer funds into a Retirement Failsafe Fund if he elects not to purchase an annuity.
(3) Regulations may make provision relating to Retirement Failsafe Funds, and in particular in connection with—
(a) the sums to be invested in the fund;
(b) withdrawals from the fund;
(c) the age at which a pension is payable;
(d) preventing the assignment or surrender of withdrawals from the fund.
(4) Regulations under subsection (3) shall be made by statutory instrument subject to annulment in pursuance of a resolution of either House of Parliament.'.

Ruth Kelly: The amendment was intended to correct a defect in the Bill as it left Committee. In Committee, the hon. Members for Arundel and South Downs (Mr. Flight) and for Tiverton and Honiton (Mrs. Browning) tabled an amendment on behalf of the Christian Brethren to allow a personal pension scheme to invest in a retirement failsafe fund. The Committee accepted that amendment but rejected another, which provided for the specification of a retirement failsafe fund and the conditions it would have to meet. Consequently, the Bill is defective. The amendment therefore corrects the defect by removing the reference to a retirement failsafe fund in the clause. It is worth taking some time to consider the substance of the group of amendments.

The amendments are designed to ensure a minimum retirement income without the necessity of buying an annuity. They are a genuine attempt to meet the needs of the Christian Brethren, whose beliefs will not let them participate in insurance products.

As we know, the first definition of a retirement failsafe fund put forward by the hon. Members for Arundel and South Downs and for Tiverton and Honiton did not

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survive the Committee stage. I have sympathy with the aims behind the amendments. I do not believe that they are designed, like the Bill, to extract money other than as retirement income, or to preserve it for heirs after the death of the scheme member. They are intended to provide an alternative means of securing a retirement income that does not involve buying an annuity. The intention is that the retirement failsafe fund will generate an income equivalent to the minimum retirement income, which the Bill defines elsewhere. However, the amendments are silent on the conditions that should apply.

It is not clear, for example, whether money can be placed in the retirement failsafe fund at any time after joining the pension scheme or only when benefits first come to be drawn. Instead, the amendments provided that all the details of exactly what a retirement failsafe fund is and how it would operate are left to regulations, rather than spelled out in the Bill.

Mr. Barry Gardiner (Brent, North): Does my hon. Friend share my incredulity that such an amendment should have been tabled, given the number of times that we have heard the reluctance of the hon. Member for Arundel and South Downs (Mr. Flight) to accept anything that would lead to a Henry VIII clause, leaving the Government free to make their own regulations on a Bill, particularly a finance Bill? I have heard the hon. Gentleman wax lyrical on numerous occasions about the difficulties that that would pose. Does my hon. Friend share my view that the Opposition should not proceed in this way on this occasion?

Ruth Kelly: I thank my hon. Friend for his comments. I sympathise with the aim behind the amendment, which is to meet a genuine concern of the Christian Brethren. However, I do not and cannot sympathise with the way in which that concern would be met, or with the degree of power, to which my hon. Friend rightly refers, that the amendment would grant the Treasury through regulations.

Mrs. Angela Browning (Tiverton and Honiton): Perhaps it would have helped the hon. Member for Brent, North (Mr. Gardiner) and his new-found interest in the Bill if he had been present in Committee when it was made clear, in presenting the amendments on behalf of the Christian Brethren, that they have already been engaged in no fewer than four years' negotiations with the Inland Revenue on the matter. Given the implied agreement in the Minister's opening remarks that she is seeking to resolve the problem, I am surprised to hear such a mealy-mouthed intervention from the hon. Gentleman.

Ruth Kelly: I thank the hon. Lady for her comments. I have said that I sympathise with the aims of the amendment, but I do not think that the Bill can meet them in a successful fashion. My hon. Friend the Member for Brent, North (Mr. Gardiner) rightly draws attention to some of the Bill's deficiencies.

Mr. Gardiner: On a point of explanation, I should make it clear to the hon. Member for Tiverton and Honiton (Mrs. Browning) that I said on Second Reading—a debate for which she obviously was not here—that I had followed the subject of annuities very

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closely in the House over the past four or five years, that I am a member of the relevant all-party group and that I have been extremely active in these matters. If the hon. Lady had done her homework a little better, she would not be quite so flushed in the cheeks at the moment.

Ruth Kelly: I know the interest that my hon. Friend takes in these matters; I have regular discussions with him on these and other financial matters, in which he also takes a great interest.

Mr. Edward Leigh (Gainsborough): Can we please get back to this very important issue of conscience? The Minister is herself a lady of religious conviction. Hers may not be the same religious conviction as that of the Christian Brethren, but they have an honest belief, and the Government must try and find a way forward. I suspect that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) tabled the amendment in the way he did because if it had been prescriptive, the Government would have argued that it was defective and took the wrong approach. My hon. Friend cannot win. Will the Minister explain how she will meet the genuine beliefs of this small but important minority? Minorities are important, even if they are small.

Ruth Kelly: I completely agree with the thrust of the hon. Gentleman's point. These are valid concerns: I have taken a personal interest in them and would like the Inland Revenue to be able to meet them in a way that is compatible with the Government's overall aims. While I intend to address some of the technical deficiencies associated with this manner of meeting the concerns alluded to, I hope that, through the negotiations that I know are ongoing, we will find a different way of meeting those concerns.

As the hon. Gentleman is no doubt aware, the Government recently published a consultation document on annuity reform on which the Christian Brethren have made representations to the Inland Revenue and the Treasury. I shall be looking at those representations extremely closely, and although this dialogue has been going on for a long time, perhaps in the future we will manage to find a way through it. However, we must bear it in mind that it is not compulsory for people to save in a pension fund. There are other ways of saving, so people have a choice about the way in which they save for their retirement. It is not incumbent on individuals who disagree with our approach to buy an annuity product. They have other methods at their disposal and other ways of saving for their retirement.

Dr. Vincent Cable (Twickenham): I should like clarification of the Government's intention. Is the Minister saying that they are now committed to meeting the concerns of this group and will seek to meet them through regulatory change or negotiations with the Inland Revenue even if primary legislation is not forthcoming? Is that a Government commitment?

Ruth Kelly: It is a commitment to try and understand its concerns and see whether there are ways in which we can meet them. I am afraid that I cannot today give a commitment that we will be able to meet them. Although there is a compulsion to buy an annuity if one saves

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through a pension fund, there are of course other ways of saving for old age, and I shall bear that in mind when considering these issues.

I want to get back to the way in which the amendment has been tabled and the technical difficulties that the Opposition's proposals present. The essential problem remains—that of securing an income for the whole of a person's retirement, no matter how long that might be. The version of the retirement failsafe fund in Committee attempted to cover the detail in the Bill itself. Presumably, the general thrust that Members who tabled the amendments would like to see in regulations remains much the same.

The proposals made in Committee had many drawbacks and would not have provided the necessary guarantees. For example, they attempted to deal with the possibility of the fund running out over time by requiring the size of the retirement failsafe fund to be 150 per cent. of the fund size needed to generate an annual minimum retirement income, presumably by reference to what could be purchased on the annuity market. The minimum retirement income is to be whatever amount was set by the Chancellor for the year in question. It would have to increase each year by reference to increases in the retail prices index, capped at 5 per cent. How much of the fund would be necessary to achieve that were an annuity to be purchased on day one would depend on the age of the scheme member at that time. Even if there were enough money in the pension scheme to cover the 150 per cent. condition at the outset—and most funds would be well below the necessary fund size of around £83,000—there would be no guarantee that the failsafe fund would be able to generate the minimum retirement income year after year. A downturn in the investment fund could easily lead to a depletion of the fund size.

I understand the concerns of the Christian Brethren, but the fact remains that an annuity is the only means of guaranteeing a secure income for the whole of a person's life. A failsafe fund cannot do that. Apart from the possibility of a downturn in the investment market causing funds to deplete rapidly, the pension scheme member would be permanently exposed to mortality drag. That concept may seem arcane to the outside world, but we had discussions in Committee about the importance of mortality drag, and it remains critical to the debate. I think that it would be helpful if I explained the phenomenon in broad terms because of the importance that I attach to it.

Some people believe that it is better for a pensioner to wait to buy an annuity because annuity rates are higher for older people. It is certainly true that annuity rates are higher for older people, but that fact is only part of the story. Annuity providers set their rates by judging the life expectancy of their customers. The judgment determines how much capital they can afford to return each year to people who buy annuities, along with interest. Because older people are more likely to die, this mortality cross-subsidy allows the provider to give a bigger capital boost to its older annuity customers. That is why annuity rates rise with age.

If someone decides to start taking benefits from their pension savings, delays buying an annuity and draws income from their fund, part of their fund remains invested. After a period they could use the residual fund, with any investment growth, to buy an annuity at the rate for their age then. However, the residual fund needs a strong growth rate if it is to allow pensioners to buy the

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same level of annuity income as they could have achieved if they had bought an annuity when they first started drawing benefits from the fund. There are two reasons for this: first, the residual fund does not benefit from mortality cross-subsidy until it is used to buy an annuity. The delay means that older people get less benefit from the early deaths of people born at the same time, because their capital was never pooled with them.

Secondly, life expectancy increases with age. For example, a man of 65 might on average expect to reach age 82, but if he survives to age 75, he can expect to reach age 85. This may at first seem odd. It happens because people who die younger have fallen out of the picture when the life expectancy for people at any given age is calculated. So the older people are when they buy an annuity, the greater the age the annuity provider must expect them to achieve, and the longer the annuity has to last. Taken together, those two effects mean that the residual fund has to make sustained and reliable returns well above those of fixed interest securities such as gilts in order to keep pace with the income that an annuity would have provided.

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