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Lord Mackay of Ardbrecknish: My Lords, these amendments, as the noble Lord, Lord Haskel, has carefully explained, deal with various aspects of personal pensions. I believe it would be for everyone's convenience—certainly for mine—if I take them in order. I hope that that way I shall deal with them all and the points that the noble Lord has raised. I shall start with Amendments Nos. 204 and 205. These are about national insurance rebates for personal pensions and occupational money purchase schemes which are contracted out of the state scheme. The amendments seek to align the periods for which the rebates are set.

The Bill provides for the reviews and the orders setting the levels of rebate for personal pensions and occupational money purchase schemes to be completely independent. That includes the year in which the reviews and orders are to be carried out. It also includes the duration of the orders, subject to a maximum of five years. Normally the rebate reviews for personal pensions and occupational money purchase schemes will be carried out simultaneously and the orders made will have the same durations. However, the differences between these two types of pension provision may mean that it makes sense to make orders of differing durations. But I can assure your Lordships that such action is not envisaged at present.

There are two other important points worth noting here. First, when the Government Actuary carries out a review of the rebate, there is normally a full consultation exercise. This gives any interested party an opportunity to comment on the rebate, including the most sensible duration for the rebate order. Secondly, the system of

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age-related rebates will mean that the rebate rates will change every year anyway. This is because the rebate is designed to replace SERPS, which is still maturing. So the rebate rate needed for any given age group one year will be different from that needed the next.

The orders setting the rates of age-related rebates will set out separate levels of rebate for each of the years which they cover. So even if the orders for personal pensions and money purchase occupational schemes were made in different years, it would actually make no difference to the administration of schemes, since new rates of rebate will have to be implemented every year in any case.

The rebate reviews for personal pensions and occupational money purchase schemes are separate because these types of pension provision are separate and have different needs. I suggest that there is no point in linking the orders setting the rebate in the manner proposed by the noble Lord.

I now turn to Amendments Nos. 206 and 207. These amendments are also concerned with the contracted out rebates for personal and occupational money purchase pension schemes. In this case the amendments seek to have the same level of rebates for both types of scheme. The Government believe that there needs to be different levels of rebate. We have already discussed this subject in Committee, and I can do no better than rehearse the arguments I used then, as no doubt the noble Lord, Lord Haskel, would expect.

There are two reasons why the rates for occupational schemes are likely to be lower than those for personal pensions. First, the different types of scheme have different levels of expenses. Occupational schemes relate to a particular employment. Therefore, they would generally be expected to incur lower expenses due to economies of scale. While each member of an occupational money purchase scheme has his or her own fund, all members work for the same employer. Their contributions can be collected from the same payroll and so on.

Personal pensions are entirely individualised and can thus be expected to incur greater expenses. The rebates need to reflect that. The Government Actuary will be asked, in advising on the levels of age-related rebates, to make allowance for the reasonable costs and charges of the more efficient personal pension providers.

Secondly, for administrative reasons, members of money purchase occupational schemes and their employers will receive part of the rebate during the course of the tax year as a reduction in national insurance contributions. The balance will be paid after the end of the tax year. For personal pensions, the whole rebate will be paid after the end of the tax year. This means a loss of investment return on the rebate in respect of this later payment. That will be taken into account in calculating the rates.

The net effect of these differences is that the rebate for occupational schemes is expected to be at a lower rate than that for appropriate personal pension schemes. I must stress that we are not proposing preferential terms for personal pensions. The rebate is intended simply to be the amount required to be invested now to replace

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the future SERPS given up by contracting out. If the rebate is too low to do that, it will generally not make sense to contract out through that route.

If the amendments were accepted personal pensions would be likely to get a lower rebate. It could well be too low to replace the SERPS given up. Most personal pension holders would then be best advised to return to SERPS, as I suspect was the noble Lord's intention. A personal pension is, of course, the only alternative to SERPS for many people, so there would be a reduction in choice. Moreover, it is important to lift the burden of high SERPS expenditure in the next century. Our ability to do that would be jeopardised if, as a result of these amendments, the rebate were set so low that personal pensions were not worth while for most people.

I turn now to Amendments Nos. 220 and 221. These affect Clause 142, which requires annual increases in the rate of pensions from protected rights in an appropriate personal pension. I assume that these amendments seek to extend the provisions to all of the pension derived from a personal pension.

It is a regrettable fact that many people still do not make adequate provision for their retirement. That is a position that we all wish to change. But even where such provision is made, even quite low inflation can erode the value of a pension over time. People are now living longer and spend more time drawing their pensions. I believe that indexation is necessary to help maintain an adequate income stream, protected against possible inflation, throughout retirement. It is right and sensible to apply this indexation to the protected rights in an appropriate personal pension because such schemes replace SERPS, which is itself indexed.

However, we have to recognise that in other circumstances there is a large element of personal choice. Where individuals are not members of an occupational scheme, they are not compelled to save for their retirement. We do not want to deter them from setting aside adequate provision. It is possible that a requirement to index such optional arrangements might have such an effect. The requirement would inevitably mean a lower starting rate of pension, for any given size of personal pension fund. People could well be put off by this.

There is nothing to stop a person having the whole of his personal pension uprated annually if that is his choice. But we do not think it right to make that compulsory, as this amendment would do. Deterring individuals from setting aside adequate provision for retirement is not in anyone's interests. Finally, your Lordships will be pleased to hear me say that I turn to Amendment No. 222. This seeks to extend the circumstances in which the department can refuse to accept the earner's choice of appropriate personal pension scheme. It would include instances where the department considers that it would not be in the earner's best interests to join the scheme for whatever reason. That would mean that my department's officials would be called upon to make complex judgments about the likely returns of the appropriate personal pension plan. They would need to have regard to factors such as the

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individual's age and earnings, the provider's charges and investment returns, and the levels of additional contributions which would be made.

In short, the amendment proposes that my staff should assume the role of financial advisers and undertake a function that they have neither the training nor the authority to tackle. Giving such advice is tightly regulated under the Financial Services Act and can be carried out only by authorised persons. However, I totally agree that people who invest in personal pensions must be able to rely on the highest standards of expert advice from those authorised advisers. They must be able to have confidence that the regulatory framework will protect their interests.

I am glad to say that the Securities and Investments Board, the chief investments regulator, has taken a series of steps to act as an effective watchdog of the standards of professionalism of those who sell personal pensions. These include the requirement for financial advisers to disclose the amount of commission they stand to gain from recommending a particular product; the use of a mandatory transfer value analysis; and the "reason why" letter which explains why a particular product has been recommended.

SIB has also taken steps to ensure that those who are found to have lost out as a result of bad advice in the past will receive appropriate redress. With effective regulation, people making decisions about whether to buy a personal pension can have confidence in the quality of the advice they receive. I do not believe that it would be right to place that responsibility on the officials of the contributions agency.

I have gone into some detail on the amendments because I believe that each amendment is important; it addresses a slightly different issue. I hope that while I may not have entirely satisfied the noble Lord, Lord Haskel, I have at least allayed some of his fears and explained why the Government have included the detail that they have in the Bill and why we are not keen on his amendments.

10.15 p.m.

The Earl of Buckinghamshire: My Lords, before the noble Lord, Lord Haskel, responds, I had put my name to Amendment No. 220. I may have missed some reference in the Minister's reply on indexation and free standing additional voluntary contributions as regards personal pensions. If the choice as to whether or not they should have indexation is to be given to free standing additional voluntary contributions in personal pensions, I fail to understand why the same choice is not given to additional voluntary contributions within occupational pension schemes. The same arguments apply. I look forward to hearing my noble friend's reply.

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