Pension Annuities (Amendment) Bill

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The Chairman: Order. Before I call the Minister, I shall briefly explain that, although the hon. Gentleman's contribution was wide ranging, the amendments are at the heart of the Bill so I thought it entirely appropriate.

Ruth Kelly: In light of those comments, it would be wise for me to respond briefly to the points raised by the hon. Member for Arundel and South Downs, particularly to those about the move from defined benefit to defined contribution. I shall not analyse that situation for hon. Members, but say that the Government are seriously considering whether rules for defined benefit and defined contribution schemes can be simplified so that no artificial bias is in the system. I am sure that the hon. Gentleman is aware of the Pickering review that the Department for Work and Pensions is carrying out, the Sandler review that the Treasury is carrying out and the Inland Revenue simplification exercise.

Perhaps more important than the move from defined benefit to defined contribution is the underlying fact that employers are using the opportunity of the move to cut the value of their contributions. That should concern Committee members. On average, in five benefit schemes, employers contribute 16 per cent. of earnings, but when they move to defined contribution schemes, that tends to drop to an average of 10 per cent.

The hon. Gentleman points to the halving of annuity yields. I refer him, and other interested hon. Members, to the chart on page 19 of the consultation document on modernising annuities. It is a fascinating chart that shows that while the nominal annuity rate has fallen starkly since 1986, the pension delivered in terms of earnings deflated has risen since then, although there has been a slight fall-off in the past couple of years.

Much misunderstanding still exists. Annuities still provide by far the most efficient way of delivering retirement income, but we must make the market work better. The hon. Gentleman pointed to the imbalance in the gilt market, but the Bill will make that imbalance far worse by forcing those at the age of 65, or thereabouts, to buy an index-linked annuity. At the moment, about 80 per cent. of people buy flat-rate annuities, and 20 per cent. buy other forms, presumably mainly index-linked. If everyone at the age of 65 bought an index-linked annuity, such pressure would be put on the gilts market that it would probably collapse, although I do not like to make such dire predictions. [Interruption.] Well, the

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market would not function, or deliver what supporters of the Bill would like. We must live in the real world and the hon. Gentleman is right that the gilts market already has a shortage of long-term gilts.

Lynne Jones (Birmingham, Selly Oak): On that point, it might be appropriate for the Government to increase public investment, thus releasing more gilts.

Ruth Kelly: As my hon. Friend is aware, we are increasing public investment. However, even if we doubled the investment in the pipeline, it would not deal with the issue before us. Fundamentally, the gilts market is not able to deliver a reasonable balance between supply and demand and would not be able to deliver that if people were forced to buy an index-linked annuity at the age of 65. There have been suggestions that it should be earnings linked, but that would not be possible.

Through our consultation document, we have tried to tackle issues that people find frustrating about the annuities market, such as not being given proper advice and not having the option to switch providers when they find themselves with a poorly performing provider. There needs to be more flexibility and competition in the market. To give the Committee a flavour of what we are considering, the document proposes limited-period annuities for discussion. One could take out such an annuity for four or five years, reassess one's circumstances at the end of that period, and then choose a different product. People under 75 could use income draw-down. A limited period annuity, backed by short-term gilts, would take pressure off the gilts market. The result would be that everybody, no matter what their income, would benefit in their retirement. We need to consider those matters seriously, but I do not think that this private Member's Bill tackles them. It actually exacerbates them to the point of making the Bill unworkable.

9.30 am

Mr. Flight: The table to which the Minister refers is interesting and useful, but it also illustrates a real problem that people perceive. It shows that in 1986, an annuity yield was about 14 per cent. That meant that 14 per cent. was the fixed income regardless of capital. If inflation—I have forgotten what inflation was in 1986, but I think it was about 5 per cent.—were to fall, one was well placed, and one received a pretty good nominal yield. Given the long-term declining trend of inflation that started in the late 1970s, people rightly took the view that annuities were an attractive vehicle.

We are now looking through the other end of the telescope. Annuity yields are about 6 to 7 per cent. and the margin of risk would be enormously greater if inflation rose to 3 per cent. Therefore, no responsible financial adviser would advise people to lock in for up to 20 years all their capital to a fixed rate of interest the value of which would erode quickly with the fixed yield at only 7 per cent. That is precisely the issue: a change in circumstances has turned something that, on a sensible economic assessment, was a very attractive vehicle in the mid-1980s and early 1990s into a high-risk vehicle today.

The Chairman: Order. Before I put the question on the amendment, I should advise Members that should

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amendment No. 10 be agreed, amendment No. 30 would fall.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 3.

Division No. 4]

Kelly, Ruth Quinn, Lawrie
Ryan, Joan

Curry, Mr. David Flight, Mr. Howard
Jones, Lynne
Chairman's casting vote No.

The Chairman: I am advised that my casting vote should be no, to leave the Bill in its present form.

Question accordingly negatived.

Lawrie Quinn (Scarborough and Whitby): On a point of order, Mr. Winterton. Does that advice also mean that amendment No. 30 will fall?

The Chairman: Given my comments before I took the vote, the hon. Gentleman's point is fair. Does the hon. Member for Arundel and South Downs wish amendment No. 30 to be moved formally?

Mr. Flight indicated assent.

Amendment proposed: No. 30, in page 2, line 10, leave out from ''member'' to end of line 11 and insert—

    ''(i) attains the state retirement age; and

    (ii) ceases to be in full or part time work for a period of more than three months.''.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 4.

Division No. 5]

Curry, Mr. David
Flight, Mr. Howard

Jones, Lynne Kelly, Ruth
Quinn, Lawrie Ryan, Joan

Question accordingly negatived.

The Chairman: We now come to amendments Nos. 15 and 16. As hon. Members will recall, these were grouped with amendment No. 6, which the Committee agreed to at its first sitting. Does the Minister wish to move amendments Nos. 15 and 16 formally?

Ruth Kelly: If I do not move the amendments, may I reserve my right to bring them back on Report?

The Chairman: Indeed. This is a procedural issue. Will the Minister confirm that she does not wish to move any other amendments to clause 1?

Ruth Kelly: Yes, although I reserve my right to bring the amendments back on Report.

Amendment proposed: No. 5, in page 2, line 41, at end insert—

    ''637 Retirement Failsafe Fund

    (1) Where a member elects not to purchase an annuity he may transfer funds into a Retirement Failsafe Fund as follows—

    (2) The sum to be placed into the Retirement Failsafe Fund shall be the lesser of

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    (a) 150 per cent. of the fund size needed to ensure the member has an income the equivalent of the Minimum Retirement Income, or

    (b) the whole person pension scheme fund

    (3) Withdrawals from the Retirement Failsafe Fund must be taken such as will ensure the member has an annual income equal to the Minimum Retirement Income set under section 2 of the Pensions Annuities (Amendment) 2002.

    (4) Any balance remaining in the personal pension scheme after the Retirement Failsafe Fund is established may be withdrawn as income as and when the member elects until he attains the age of 80.

    (5) At the age of 80 the balance in the Retirement Failsafe Fund shall be transferred back into the personal pension scheme and withdrawals made from the whole scheme as follows—

    In each successive year starting at the age of 80 a sum shall be withdrawn equal to the balance of the fund at the commencement of that respective year divided by the number of years then remaining to the age of 100.

    (6) All withdrawals under subsections (3), (4) and (5) shall be regarded as ''income'' within section 1 of this Act.

    The right to all withdrawals under subsections (3), (4) and (5) must not be capable of assignment or surrender.''.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 2, Noes 4.

Division No. 6]

Curry, Mr. David
Flight, Mr. Howard

Drew, Mr. David Kelly, Ruth
Quinn, Lawrie Ryan, Joan

Question accordingly negatived.

Question put, That the clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 4, Noes 3.

Division No. 7]

Curry, Mr. David Drew, Mr. David
Flight, Mr. Howard Jones, Lynne

Kelly, Ruth Quinn, Lawrie
Ryan, Joan

Question accordingly agreed to.

Clause 1, as amended, ordered to stand part of the Bill.

Clause 2

Minimum retirement income

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Prepared 28 February 2002