Finance Bill

Public Bill Committee, 17 June 2004.

Standing Committee A

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 206 - Persons liable to charge

Clause 207 - Individual's lifetime allowance and standard lifetime allowance

George Osborne (Conservative, Tatton)

I beg to move amendment No. 415, in

clause 207, page 173, leave out line 29 and insert—

'(2) The standard lifetime allowance is, for the tax year—

(a) 2006–07, £1,500,000

(b) 2007–08, £1,600,000

(c) 2008–09, £1,650,000

(d) 2009–10, £1,750,000

(e) 2010–11, £1,800,000

together in each case with an amount equal to relevant valuation factor (see section 263) multiplied by the additional pension (if any) that the member would have been entitled to receive at pensionable age (calculated in accordance with Part 1 of Schedule 4 to the Pensions Act 1995) if he or she had not been in contracted-out employment (as defined in section 8 of the Pension Schemes Act 1993) at any time.'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments:

No. 373, in

schedule 34, page 466, line 28, leave out '£1,500,000 ('.

No. 374, in

schedule 34, page 466, line 29, leave out ')' and insert '(see section 207)'.

No. 375, in

schedule 34, page 466, line 39, leave out '£1,500,000 ('.

No. 376, in

schedule 34, page 466, line 40, leave out ')' and insert '(see section 207)'.

No. 387, in

schedule 34, page 473, line 12, leave out '£1,500,000 ('.

No. 388, in

schedule 34, page 473, line 13, leave out ')' and insert '(see section 207)'.

George Osborne (Conservative, Tatton)

Good morning to you, Sir John, and to the Committee. This clause, one of the most important and contentious in the Bill, sets an individual's lifetime allowance for tax-free pension

funding. Because of the way in which we conduct business in Committee, one is always in a bit of a dilemma over whether to wait for a clause stand part debate on the principle of a clause—in this case, the principle of a lifetime allowance—or to have the debate at the beginning, on the amendments, bearing in mind the Chairman's guidance. If it is all right with you, Sir John, I would prefer to have the debate now, because it would seem rather strange to discuss the amendments before the bulk of the clause.

As stated in subsection (2), the clause sets the lifetime allowance for the year 2006–07—the first year in which the Bill will apply—at £1.5 million. However, the clause does not say much else. It does not, for example, say what the figure will be in subsequent years. The figures are set out only in the explanatory notes, and one of the amendments to which I shall speak seeks to incorporate them in the Bill.

The clause does not say how the Inland Revenue will increase the lifetime allowance or whether it will rise in line with prices, earnings or anything else. It merely states that the Treasury will announce the sum every year and that it will not be less than that for the previous year.

To return to a familiar debate from our previous sitting, the clause makes no distinction between those with defined benefit schemes and those with defined contribution schemes, even though, as I explained, a lifetime allowance of £1.5 million means that someone with a defined benefit scheme can have a pension of £75,000, while the pension of someone with a defined contribution scheme is likely to be £20,000 lower. The clause also makes no distinction between those who have contracted out of the state second pension and those who have not. In effect, contracting out erodes one's lifetime allowance, and I shall come to an amendment on that issue.

Although the clause does none of those things, it nevertheless represents a huge climbdown by the Treasury. When the concept of the lifetime allowance was set out in the original consultation document, the amount was set at £1.4 million. The Government said that that was broadly the capital equivalent of the sum required to provide a maximum capped pension under the current tax regime for a man aged 60 who was drawing an indexed pension and providing a spouse's pension. They said, of course, that no more than 5,000 people would be adversely affected and that the number would increase by about 1,000 people a year. Of all the things that have been mentioned in connection with pensions legislation, the £1.4 million limit has been the most contentious. It was the thing that the industry was most upset about. The National Association of Pension Funds said that

''we have urged the Inland Revenue to remove the proposed £1.4 million lifetime limit, which threatens to alienate company executives from occupational pension schemes for which they are responsible. The numbers potentially affected are likely to be far higher than the 5,000 suggested by the Government and compliance monitoring could prevent the benefits of simplification from being fully realised. Capping tax free cash and annual payments into pensions are all that is needed.''

The Chancellor of the Exchequer does not like to be told that he has got things wrong and does not often apologise; in fact, I do not think that he has ever

apologised. Instead, he dug in his heels in the second consultation document, which was published in December 2003, despite receiving all those complaints and evidence from the industry that he, or the people working for him, had got the sums wrong. However, he slipped out a significant concession in that document which would reduce the number of people affected. I am talking about the 20 to 1 valuation factor. I imagine that the concession was partly an attempt to take the steam out of the argument about the £1.4 million limit.

The Chancellor then asked the National Audit Office to confirm that he had been right all along and hinted rather darkly that the whole package could be abandoned if the industry did not agree on this issue. The problem with asking the NAO a question—I say this as someone who served on the Public Accounts Committee, along with the Financial Secretary, who is still a member, although she does not attend particularly regularly—is that we cannot be sure that we will get the answer that we like. The Chancellor found that out to his cost, because the NAO discovered that the Treasury was not just wrong in its forecast, but 100 per cent. wrong. The NAO came to the conclusion that 10,000 people were likely to be affected when the lifetime allowance came in, which is double the Treasury's estimate of 5,000.

I am sure that most of the excited Labour members of the Committee read the NAO report as basic preparation and will need no reminder of what it said. However, some of them look as though they have not done their homework, so I had better remind them. The report stated that

''the Inland Revenue undertook some credibility checks against alternative sources of evidence, but they did not undertake sensitivity analysis and so did not have a range of possible values.

Using alternative assumptions that seem more likely to be tailored to the attributes of high earners drove the estimate of the number affected upwards, compared to the average assumptions made in the original estimates.''

The NAO pointed to other evidence that was consistent with an estimate of 10,000 people being affected.

The NAO was even more critical, in its rather dry way, of the estimate that only 1,000 additional people would be affected in each future year. It stated:

''Even greater uncertainty attaches to the projections into the future which makes it even harder to provide a reliable estimate of the number likely to be affected . . .

The evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome.''

That was its verdict on the way that the Inland Revenue did its sums.

The £1.4 million limit would have a particular impact on those in certain professions, such as members of the judiciary and airline pilots. Manchester airport's second runway is in my constituency, and I represent quite a number of airline pilots who live in the constituency. One of them, a Captain Roberto De Martino—[Laughter.]

I am surprised that the hon. Member for Rhondda (Chris Bryant), who I thought was such a good European, sniggers at a non-English name. Anyway, Captain De Martino wrote to me, not because I have this job in the Committee considering the Finance Bill, but because I am his constituency MP. He stated:

''The Government suggests that only 5,000 will be affected on 'A' Day (6th April 2005) and about 1,000 per year thereafter. This would suggest that the measure only affects a small number of the very rich and therefore is of no concern to most pension savers . . .

I am an airline pilot, as are many of your constituents . . . I have been saving for my pension since the age of 21, and will be retiring in another 13 years. I have been saving prudently and with foresight for my own and my family's future yet I will now be affected by this legislation.''

He went on:

''I am writing to alert you to this unfair measure, which penalises the prudent saver, whilst still protecting the pension funds of the super wealthy (the supposed real targets of Gordon Brown's proposals) . . . The tax avoidance industry is already advising the super wealthy on loopholes and their silence is deafening as they look forward to more fee income from those about to be swept up by these proposals. Whereas professional employees who are above average income earnings, such as myself my fellow pilots, doctors, senior managers, head teachers and directors, to name a few; who already pay full PAYE and are currently shouldering a large part of this Government's increased tax burden, will find themselves most affected in their retirement.''

It is important that members of the Committee understand that we are talking not just about the super-wealthy, who, in any case, will find alternative ways of saving for their retirement if they are caught by the lifetime allowance.

Why did the Inland Revenue get its sums so wrong? It is partly because the methodology was wrong. The NAO picked up on that. It was critical of several things; for example, the Government used the family resources survey as evidence in calculating the allowance, but the survey sample included only 100 people who earn more than £100,000, so it was not of great use in calculating the effect of such measures on high earners.

Another reason is the secretive way in which the Government drew up the proposals. It goes without saying that they did not consult the Department for Work and Pensions. We have long been used to the fact that the Treasury does not tell the DWP anything. However, it did not even consult the Government Actuary's Department. I have with me two extraordinary letters: one is to my hon. Friend the Member for Havant (Mr. Willetts), and the other is to you, Sir John. I know that you were aware that I was to mention the letter, as I sought your permission to do so. The letters are in the public domain, and GAD—which, by the way, is a Government Department—has confirmed that it is happy for the letters to be used.

The letter from the chief Government Actuary, Chris Daykin, to my hon. Friend the Member for Havant, the shadow Secretary of State for Work and Pensions, states:

''I would like to be absolutely clear that GAD was not involved in any way in advising on the figure of £1.4 million. Indeed I think it is safe to say that GAD was not asked to advise at all on the original Inland Revenue proposals, although we have offered our views to the Revenue during the consultation period.

I should be obliged therefore if you could ensure that GAD is not blamed for having calculated (or miscalculated) the figure of £1.4 million!''

That is a letter from a Government Department.

The letter from Grant Ballantine of GAD to you, Sir John, with which you of course are familiar but members of the Committee may not be, states that

''the Inland Revenue did not consult the Government Actuary's Department about the lifetime limit (either on its substance or on the detailed calculations which may have been made to determine the actual quantum of the limit) . . .

We in GAD have a number of concerns about the proposals, particularly in terms of equity between different types of pension provision and fairness between different members of the population (e.g. according to their age at retirement). On the basis of the slightly revised December 2003 Inland Revenue simplification paper which was published yesterday,''—

this was in December 2003—

''it would appear that the Inland Revenue have given no weight to any of the points we made. (Indeed, they appear to have given very little weight to any comments from consultees, since the proposals do not appear to be changed in any matter of substance)''.

Mr. Ballantine goes on to say:

''My own personal views on the proposed lifetime limit of £1.4 million are very much in tune with your views. I believe the imposition of the lifetime limit, particularly at the proposed 'low' level of £1.4 million, will be counterproductive—encouraging a reduction in the level of pension provision (contrary to the Government's stated aim of more private provision) and resulting in more complexity, particularly at the implementation stage (contrary to the Government's stated aim of simplification)''.

In the years I have been involved in politics, both in this place and as a special adviser in the previous Conservative Government, I have not come across a case of a public letter from a Government Department being so critical of what the Government are proposing. They are both extraordinary letters, and I am grateful for your indulgence, Sir John, in allowing me to read them out.

Faced with the evidence from the NAO, the Chancellor of the Exchequer had no real choice but to back down. In the Budget, he announced that he would not dig his heels in any more and the lifetime allowance would be increased from £1.4 million to £1.5 million; indeed, he set out some pretty generous increases for the years up to 2011.

Rob Marris (Labour, Wolverhampton South West)

Does that not suggest to the hon. Gentleman that, contrary to the assertion made in the letter from Grant Ballantine to you, Sir John, the Chancellor had in fact listened to some of the proposals put forward during the consultation?

George Osborne (Conservative, Tatton)

I am afraid that I do not agree with the hon. Gentleman. During the period of consultation with the industry, the Inland Revenue did not listen or change its proposals between the first and second consultation documents. It did not involve the Government Actuary at any stage, as that Department made clear to members of the Opposition. It then commissioned the NAO report, which contradicted the Chancellor, and faced with that he had little option but to back down.

Howard Flight (Conservative, Arundel and South Downs)

I am not certain that this is the case, but I was

advised by a member of the Inland Revenue committee that the committee proposed a £2 million limit so that the existing cap was comfortably covered, and that it was indeed the Chancellor who cut back that amount to £1.4 million.

George Osborne (Conservative, Tatton)

My hon. Friend has better information than I, but it would not surprise me to learn that the good officials of the Inland Revenue had got this issue right all along, and that it was the Chancellor of the Exchequer who overruled them and was then forced to back down. Of course, when he backed down in his Budget speech, there was not a word to say that this was anything other than what he had been planning all along, that he had changed his mind, that he had listened to the NAO or anyone else—it was announced as if he had always planned to take this path.

The Chancellor announced that the lifetime allowance would increase for each of the four years after A-day, which is in 2006, to £1.8 million, and that there would be a quinquennial review of the figure. However, neither the increases after A-day nor the review are provided for in the Bill; nor, I think, is the proposal in the December 2003 consultation document that the lifetime allowance should be uprated annually by the retail prices index. We will come back to that in the next group of amendments, but it is worth noting that a proposal in the consultation document is not repeated in the Bill.

My amendment deals with all those points, but before coming to them, I pray your indulgence, Sir John, in commenting on the new £1.5 million figure, and questioning the need for a lifetime allowance at all. The Government concede that, even with the new figure of £1.5 million, up to 1,000 people could still be hit. Will the Financial Secretary confirm that? I do not know what the latest Treasury estimates are. PricewaterhouseCoopers submitted a memorandum to the Treasury Committee's inquiry into this year's Budget, in which it said:

''The whole basis of the 'pot limit' remains of concern, however. One can understand why there has to be a limit on tax-assistance for pensions savings but by imposing this on the accumulated fund, it does create uncertainty because of the interaction of future factors such as investment performance, work plans and salary growth. Even if the Treasury's figure of 1,000 people a year affected by this limit is correct, many more will worry about their position.''

Indeed, in a letter to you, Sir John, as trustee of the MPs' pension scheme, GAD suggested that several MPs may also be affected. PricewaterhouseCoopers pointed out that many more than 1,000 people may be affected. Rowena Marsh, a partner at Grant Thornton, the firm of accountants, said that the limit might be all right for the average earner, but it is extremely low for a number of mid-range executives.

PricewaterhouseCoopers makes it clear that the lifetime allowance also penalises good investment decisions, because if a pension pot is invested in shares that do very well, a person can be taken over their lifetime allowance thanks to their own good investment decisions. There is a curious and perverse incentive in the very concept of a lifetime allowance.

The result of all that may be that many highly paid executives are encouraged to make their own

arrangements for their retirement, and they will no doubt use many of the opportunities afforded to them in, for example, schedule 34, which we will discuss later. They may leave company schemes altogether and will therefore have a less direct incentive to keep an eye on those schemes and ensure that they remain generous.

The Government had alternatives. They could have scrapped the concept of a lifetime allowance and relied on, say, a restriction on capping tax-free cash and on the annual payment allowance, which is what the NAPF suggested. They could have used the United States model of tax relief for occupational pensions based on one simple condition; it does not have a limit, and every member of the company is allowed to join the scheme and enjoy the same benefits. In other words, everyone from the boardroom to the shop floor has access to the same scheme on exactly the same terms.

Interestingly, in a letter to the Financial Times last year, the chairman of the CBI pensions strategy group said:

''One solution would be for the Treasury to remove the cap for those companies that can demonstrate that senior executives belong to the same pension scheme as other employees. This, at a stroke, would encourage unity and provide equity.''

Many of us in this place would have welcomed that, because we are concerned about two-tier provision in companies whose pension schemes do not apply throughout and where the people at the top often have more generous schemes than those towards the bottom. However, the Government have chosen not to do that, so, as I said, more and more companies are likely to have different schemes for those in the boardroom and those on the shop floor. This is a missed opportunity.

Amendment No. 415 is the most important one in the group; the others are consequential. The amendment seeks to achieve two things: first, to write into the Bill the Government's promised increases in the lifetime allowance over four years after A-day. That is £1.6 million for the year 2007–08, rising to £1.65 million, £1.75 million and £1.8 million by 2010–11. As I said, it is set out at the beginning of the explanatory notes, but it is not included in the Bill. The Bill contains no mechanism for increasing the lifetime allowance with any certainty but merely a requirement that the Treasury state each year what the lifetime allowance will be. Will the Financial Secretary explain why it is not in the Bill?

While the hon. Lady is doing that, will she answer a question that struck me last night? Why does the figure increase by £1 million in the first year, £500,000 in the second year, £1 million in the third and then by another £500,000? Why is it not an even increase each year, perhaps of £750,000? The annual allowance increases by the same amount each year—it increases by £10,000 for each of the first four years—but the increase in the lifetime allowance is strangely lumpy. Will the Financial Secretary explain why? That important information will need to be digested by people in the pensions industry. Surely it would be

better if the necessary information was available in one place rather than people having to turn to the explanatory notes to find out what the increase will be in the four years after A-day.

Important though my previous comments were, amendment No. 415 tries to achieve something more substantive. As currently devised, the lifetime allowance discriminates against those who have contracted out of the second state pension. That is because state pension benefits are not included in the lifetime allowance. However, private pension benefits, including those paid for by contracted-out rebates, are included. In other words, contracting out erodes a person's lifetime allowance.

The paragraph at the end of the amendment would add into the lifetime allowance the additional state pension that the member would have received had he not been contracted out. Subsequent clauses provide, in a number of circumstances, for the Government to allow the lifetime allowance to increase, or, in effect, to disregard things such as overseas income. Why is that not done for people who have contracted out of the second state pension? Why are they being penalised? Is it a deliberate Government policy to encourage people not to contract out of the second state pension, or is it an unintended and unforeseen consequence of the pensions legislation?

Several hon. Members rose—

John Butterfill (Conservative, Bournemouth West)

Order. As correspondence between me and the deputy Government Actuary has been quoted, I wish to clarify the situation. That correspondence arose in the course of my duties as chairman of the trustees of the parliamentary contributory pension fund. It was later used by me in a debate on pensions, but that was some considerable time ago, and only after I had clarified with the Government Actuary that he was happy for it to be in the public domain. The hon. Member for Tatton (Mr. Osborne) consulted me to establish that it was indeed in the public domain before using it in today's debate. That, of course, happened long before I knew that I would be chairing this Committee.

David Laws (Liberal Democrat, Yeovil)

Thank you and good morning, Sir John. With your permission, I shall make a few comments on the stand-part element of the debate. However, I start by saying that the Liberal Democrats agree with the amendment moved by the hon. Member for Tatton, which seeks to write into the Bill a number of Government undertakings.

The hon. Gentleman highlighted effectively some of the apparent tensions in the Government—and, perhaps, in the Treasury—over the level of the lifetime allowance. We, too, enjoyed seeing the Government's embarrassment over the fact that they had essentially ended up with a marginal rate of 55 per cent., especially as they had criticised our proposal for a marginal rate of 50 per cent. We now think that the overall level that the Government have set for the lifetime limit is a reasonable compromise. We are therefore happy that that is not unfair to the relatively small number of taxpayers involved, particularly as there are already advantages in the tax system that favour people on higher incomes, as we discussed the

other day. Having elements in the tax system to neutralise those excessive advantages may not be a bad thing.

If there is a criticism to be made of the lifetime allowance, it is the criticism that the hon. Gentleman made. Is the lifetime allowance limit the right approach and will it lead to various anomalies, uncertainty and interesting decisions, based on incentives, about investing in high risk versus low risk assets? It is worth saying that we are talking about only a relatively small number of people. The hon. Gentleman pointed out that the estimated number of people whom the proposals would affect had increased by 100 per cent. However, notwithstanding that, we are still talking about a relatively small number, of about 10,000 in the country, which is perhaps 10 or 15 per constituency. The hon. Gentleman has done well to track down one of those people in his constituency. I have yet to meet any in mine, but his constituency is perhaps more affluent than mine. The point is worth making, because we criticised the Government over the extent to which tax advantages in the system have been consolidated and even extended.

George Osborne (Conservative, Tatton)

First, 10,000 is quite a lot of people and, secondly, we regularly deal with clauses that target far fewer people.

David Laws (Liberal Democrat, Yeovil)

I am grateful for that point. I did not suggest that we should never debate clauses that affect only 10,000 people. However, in the light of both the overall tax advantages in the system and the Government's compromise, the proposal on the lifetime allowance seems reasonable. We must reflect on the fact that the overall increase in the lifetime allowance—or the movement to a lifetime allowance—has increased the amount of tax-free savings that people with a particular type of pension can enter into. Even before the Government decided to increase the previously proposed lifetime limit of £1.4 million, the Institute for Fiscal Studies said in its analysis of the proposals that the limits

''are set at such high levels that anybody who is constrained by them would be unlikely to be considered to be underproviding for their retirement.''

That is something of an understatement.

I welcome the fact that the Government have listened to the debate. As we said earlier, whether or not the number of people involved is small, it is right that we should consider whether the tax system deals with them fairly. The Government have made a sensible concession. I am not sure that I would want them to go any further, given my earlier criticisms of the fact that tax reliefs are already generously skewed in favour of people on upper incomes. The challenge is not to make tax reliefs for that group more generous, but to consider how to distribute those advantages further down the income scale.

I should like to touch on the more profound question of whether the lifetime limit is the right approach at all. Setting the limit in such a way prompts the question of whether people's liability to pay the additional rate of tax or clawback will increase dramatically as a consequence of the performance of

their funds and the assets therein. The Institute for Fiscal Studies paper on the Government's tax proposals says that

''for individuals with pension funds that are approaching the proposed lifetime fund limit, this limit and the associated recovery charge would distort investment decisions towards lower-risk, lower-expected-return assets. A simple cap on the size of the tax-free lump sum would remove this distortion. Again, the government should consider whether this change would have any undesirable consequences not considered here.''

The institute points out that, although its proposal would be more costly than the existing Government proposals, which I would not want, it would be possible to deal with the problem by adjusting the proposed level of the tax-free lump sum. The Government should consider that, whether or not it is difficult to do. They should consider it particularly in the context of tax proposals providing more generous tax relief for most people contributing to pension funds than at present.

The amendment is sensible. We welcome the concession on the lifetime limit, but we question whether the lifetime limit approach will prove to be popular, or enduring in the long term.

Rob Marris (Labour, Wolverhampton South West)

I found the hon. Member for Tatton's remarks interesting, particularly when he referred to schemes in the state—I think that they are called 401 schemes, but he can correct me if I am wrong—with certain tax advantages if everyone in the company is on the same scheme.

I pay tribute to Britain's largest independent brewer, Wolverhampton and Dudley Breweries, which is located in my constituency. It has such a scheme, albeit closed to new members. It is a final salary scheme, where the equivalent of payroll put in is 25 per cent., in addition to which the employer pays 7 per cent and it has been able to maintain a fine final salary scheme on that basis.

The hon. Member for Tatton's remarks are based on two fallacies. The first is that tax relief encourages saving for retirement. I asked the Department for Work and Pensions what evidence there was that tax relief encourages saving for retirement, but there is precious little such evidence. It may affect the vehicle in which those who have money save—they will use a pension vehicle because of the tax relief—but it does not affect their savings. The main determinant of whether people save for retirement is whether they can afford to do so. Crudely speaking, the poor do not save for their retirement because they cannot afford to do so.

Michael Jack (Conservative, Fylde)

Just for the record, can the hon. Gentleman remind us of the legal definition of pension?

Rob Marris (Labour, Wolverhampton South West)

The definition is scattered throughout this Bill and previous Finance Bills. It involves savings vehicles—whether they are money purchase or final salary schemes—that have certain tax reliefs attached to the contributions made to the savings vehicles and the accumulation of assets within those vehicles. They are tightly regulated, and their hallmark is those tax reliefs.

Michael Jack (Conservative, Fylde)

I am surprised that the hon. Gentleman, with his keen legal mind, did not refer to the Barber

judgment, which defined pensions in European terms as pay postponed. It is important that the money is not taxed twice, going in and coming out.

Rob Marris (Labour, Wolverhampton South West)

I will be guided by you, Sir John. I could go into the Coloroll judgment and all such things as well, but I think that you would say that we were straying too far from the amendments and too far even from a clause stand part debate. I will gladly discuss it with the right hon. Gentleman outside if he wishes. I would do it now, if you would give me the latitude, Sir John, but from the shaking of your head I take it that you would not allow it.

Secondly, the hon. Member for Tatton's said words to the effect—he will forgive me and correct me if I paraphrase him wrongly—that the super-wealthy would find alternative ways to save for their retirement if the cap were maintained, but that others would not do so. I think that that is a fallacy. Those who have the kind of assets to which he referred would find vehicles, if there are such vehicles, to get around such restrictions.

Michael Jack (Conservative, Fylde)

Just so that I can understand the hon. Gentleman's remarks with greater clarity, would he be kind enough to tell me what his personal boundaries are between normal, wealthy and super-wealthy?

Rob Marris (Labour, Wolverhampton South West)

The right hon. Gentleman may have noticed that I was quoting the word used by the hon. Member for Tatton. If the right hon. Gentleman can find the opportunity to ask his hon. Friend what he meant by super-wealthy, that will provide him with greater clarity. However, I am putting it forward as a philosophical point, partly to underline the implication of what the right hon. Gentleman said. The category of super-wealthy is a bit vague, but inasmuch as it exists why should those individuals be able to find alternative vehicles, as suggested by the hon. Member for Tatton, but not other wealthy but not super-wealthy individuals?

George Osborne (Conservative, Tatton)

The phrase ''super-wealthy'' was used by my constituent and by the hon. Gentleman. It was not actually used by me.

Rob Marris (Labour, Wolverhampton South West)

The clear implication of the hon. Gentleman when he read the quote and commented on it was that he, too, was adopting that phrase. If he now resiles from that, perhaps he should tell the Committee.

Mr. Osborne indicated dissent.

Rob Marris (Labour, Wolverhampton South West)

I see the hon. Gentleman shaking his head, but that is the second fallacy.

The third point, which the hon. Gentleman understandably sidestepped because he represents, by purchasing power, the richest constituency in the UK—someone has to represent those individuals, and it is no surprise to some of us that it is the able, but Conservative, hon. Gentleman—is that 10 per cent. of earners get 50 per cent. of the tax relief on those savings and pensions.

The annual figure for tax revenue on pension savings forgone by the Government because of the concessions to which I referred is £14 billion a year.

That is incredibly regressive when one considers that 10 per cent. of earners are getting, in one sense, a £7 billion a year handout from the Government—I say in one sense because it is forgone tax revenue—but the hon. Member for Tatton seems to want to increase that figure further. On that basis, if nothing else, I urge my hon. Friends to vote against his amendment.

Quentin Davies (Conservative, Grantham and Stamford)

My hon. Friend the Member for Tatton made a most able speech and analysed the situation extremely well, but I shall go a little further than he did.

My hon. Friend raised the possibility that, instead of introducing the proposed lifetime limit, the Government should go over to the American ERISA—Employee Retirement Income Security Act—system, under which a condition of having a tax-favoured pension scheme is that all employees should benefit from it. I hoped that he would go a little further than he did and commit the Opposition to adopting that policy when we come back to power—which, I hope, will be quite soon—because nothing would be more effective in restoring defined benefit pension schemes in this country.

Defined benefit occupational schemes have suffered the most terrible devastation since the Government took office in 1997. They used to be the pride of our pension system. Occupational pension schemes gradually expanded over 50 years but, over the past seven years, one after another has suddenly been wound up. Almost all of them are now closed to new members, although a minority are still open. That is a terrible reversal in the space of just a few years, which blights the retirement prospects of millions of our citizens. The younger generation will find it extraordinarily difficult ever to benefit from a defined benefit occupational scheme.

I shall go no further into the damage that the Government have done. There is no question but that reversing it will be difficult, and we need to think long and hard about how we might do so. My suggestion would reverse the damage, because it would create an enormous incentive on management not to close off such schemes to new entrants, as is happening, because they would lose the tax benefits of the scheme for themselves. That would make a substantial difference to the way in which matters are viewed. I hope that my hon. Friend the Member for Tatton will carefully consider that. We have the lesson of the US is in front of us; it is always reassuring when one is legislating to see that one is not jumping into the unknown, but basing one's legislative proposals on experience in comparable circumstances in another country or economy.

The Government's proposals for a lifetime limit will have some perverse effects. The IFS has already been referred to. I have not seen its work on this subject. It may well say the same as I am about to say, as, I think, does everyone who has thought about it carefully. I am not sure that the Government have thought about it carefully—indeed, my hon. Friend made it clear that they have been in complete confusion about the £1.4 million and subsequent £1.5 million limit—but anyone who does will see that considerable perversities

will flow from the Government's adoption of that mechanism.

One concerns the savings ratio, which is far too low in this country; it is about half what it was in 1997. Naturally, it is traditionally higher the more people earn—the higher their earnings, the more they save. However, it will collapse among people at the top of the income scale, who will no longer have an incentive to save in pensions funds, as no tax benefit from saving will be available to them with the limiting of other tax-sheltered savings schemes by the Government—personal equity plans and tax-exempt special savings accounts and so forth will not apply beyond very low limits. There will almost certainly be a situation in which those—perhaps only a few thousand or hundred thousand people—who might be expected to save a considerable portion of their total income will no longer do so. They will simply spend whatever they earn beyond a minimal point. That could have a considerable effect on aggregate savings ratios, as those people are relatively rather wealthy. I do not complain especially about that effect, but we must take it into account. It will be a natural consequence of the Government's measures.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman indicates that there is a problem with the savings rate being relatively low. If that is the case, why is money so cheap?

Quentin Davies (Conservative, Grantham and Stamford)

The hon. Gentleman does not entirely understand how such things work. Short-term interest rates are set by the central banking system, in our case by the Monetary Policy Committee of the Bank of England. That is what has caused interest rates to be what he calls cheap, by which I think he means that they are excessively low. I need hardly remind him that private savings are only one element of the aggregate savings in the economy. There are also two major agents, the corporate sector and the Government. The Government are substantially dissaving—in other words, borrowing substantial amounts of money. Against a background of low and falling saving by the domestic sector and rising borrowing by the Government and the corporate sector, which is saving a certain amount but cannot meet the pressure from the Government, it will not be surprising if long-term interest rates are found to be under upward pressure.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman give way?

Quentin Davies (Conservative, Grantham and Stamford)

The hon. Gentleman cannot really want me to pursue the matter now. There will be other opportunities to discuss technical aspects of savings and monetary policy. I do not think that I would have your indulgence for long, Sir John, if I continued to do it now. I must move back to the impact on savings of the Government's proposed lifetime limit.

Another obvious perverse effect is that, when individuals see the total aggregate value of their pension investments approaching £1.5 million, they will have considerable incentive not to allow that limit to be breached. The risk-reward ratio that normally affects investors will be substantially changed. Normally, investors consider that it is worth taking a certain amount of risk with their money. If the

investment proves to be successful, there will be a return and, if it is high risk, there is, of course, a chance of losing it. Investors balance the two. Now they will say to themselves, ''If I make a risky investment and I lose it, I lose it, but if it is successful, I will lose it as well, because I will go through the £1.5 million glass ceiling.'' As a result, people in that situation will not make risky investments. Far from investing in venture capital and such things, they will not even want to make equity investments. They will go in for cash or near-cash fixed-interest instruments of that kind.

Another aspect of a normal, healthy saving system is that those who are relatively wealthy provide a disproportionate amount of the risk capital required by the economy. It is enormously valuable to the economy as a whole that people are prepared to take considerable risks. However, none of us would responsibly advise people on low incomes with small savings and modest prospects for their retirement income to undertake such risks. It would be utterly irresponsible to put widows and orphans into venture capital or something of that sort, but it is important for somebody to go into venture capital.

The Government have produced a system under which, against a worrying background of falling aggregate savings, they will ensure that nobody has an incentive—or that those who do have a much reduced incentive—to go into the higher-risk end of the investment spectrum. That cannot be rational. It would have a disproportionately damaging effect economically.

I do not know whether the Government took such things into account when they came up with their half-baked proposals, but it is clear from what my hon. Friend the Member for Tatton said about the failure to consult the Government Actuary's Department that an enormous amount of work that should have been done was not, and that everything was careless and slapdash. I am afraid that some of the other relevant considerations were not properly taken into account.

Steve Pound (Labour, Ealing North)

Many of us who could not claim to be experts in the field are learning a considerable amount from the erudition of the hon. Gentleman. He will be familiar with column 571 of the Hansard report of the debate on clause 194, in which the hon. Member for Tatton severely, and rather cruelly, chided and criticised him for failing to move amendment No. 113, and went on to say that there would be a two-hour gap in the schedule because of his absence. I have found many of the comments of the hon. Member for Grantham and Stamford (Mr. Davies) to be so helpful and educational that, were he to feel the need to fill the two-hour gap, I, for one, would not object.

Quentin Davies (Conservative, Grantham and Stamford)

The hon. Gentleman is very kind—at least, I think that he is being kind. My hon. Friend the Member for Tatton has not drawn my attention to the remarks that he made in my absence. I do not spend my free time simply reading Hansard and it happens that I have not come across those comments. No doubt I shall now have to give way to my hon. Friend.

George Osborne (Conservative, Tatton)

Clearly, the hon. Member for Ealing, North (Mr. Pound) has put the worst possible construction on what I said, which was merely that one of my hon. Friend's amendments was selected for debate on Tuesday, but he was not here to move it. I merely said that we should therefore have more time to discuss other things. To suggest, as the hon. Member for Ealing, North did, that that was an attack on my hon. Friend is rubbish.

John Butterfill (Conservative, Bournemouth West)

Order. This is all very amusing and lightens our proceedings, but I think that we are in danger of straying rather a long way from the amendment.

Quentin Davies (Conservative, Grantham and Stamford)

Thank you, Sir John. I think that the hon. Member for Ealing, North is understandably trying to create bad blood between me and my hon. Friend the Member for Tatton, but he will not succeed.

It seems to me that, before I return to the important matter before the Committee, I should apologise for not being here on Tuesday. I knew for some time that I would not be here on Tuesday, but I did not know that my amendment would be reached, because the entire schedule of the Committee's work was changed last week, much to my surprise. We did not keep to the schedule that I expected when I tabled the amendment. However, I understand from other sources that the Government are favourably inclined to action in the context of my amendment, and I hope that that is true and that my effort was not entirely wasted. I am sure that the Committee was able to use the time usefully.

I should draw the Committee's attention to another perverse effect; this affects more than the thousands or tens of thousands of people who may be in danger of going through the lifetime limit of £1.5 million. An oblique reference has already been made this morning to the fact that, in so far as those who may have relatively high salaries and who therefore may be in danger of going through the limit may be members of a defined benefit occupational scheme and may have some influence over its investment policy, clearly, in the present circumstances, for the same reason that I gave in relation to personal pensions, that influence would be in favour of the scheme running no risks, rather than making an effort to make a capital gain.

Capital gain would just result in the imposition of a tax penalty on the individuals with slightly higher wealth. Therefore, that section of the members of such a scheme would favour its adopting a very low-risk strategy and investing in cash or near cash assets. That might be very bad for the economy as a whole and for those scheme members who should, given their position, salary, age and other characteristics, benefit from a scheme that did have a considerable equity element. I see great difficulties there.

One thing that has not appeared in any public comment I have seen is an explanation of why the Government went down that particular route, rather than the obvious one of limiting contributions, perhaps on a lifetime basis. I hope that we will hear why from the Financial Secretary when she addresses the Committee. There is considerable danger and

clumsiness in respect of the present annual basis, and I am happy that the Government have rethought it.

If one has a lifetime limit at all, why not place it on contributions? If people succeed in making good investments, which is good for them and good for the economy, good luck to them. They have taken the risk, so let them enjoy the benefit. The rest of society will certainly enjoy the benefit of people being prepared to put capital with tax protection and tax advantages into high-risk investments. One still has the equity element and the reductions, or at least the constraints, on the total tax loss—the opportunity cost—of the pension system to the Treasury, because one still has the annual limit on contributions. It seems such an obvious way forward.

Can we have a reasoned explanation why the Government have not gone down that route? I can hardly believe that even this Government did not think along those lines before they took what may have been the wrong decision.

Michael Jack (Conservative, Fylde)

My hon. Friend the Member for Tatton made an excellent case for amendment. When he said that he thought that a less than transparent process had been used to determine the £1.5 million lifetime allowance and other matters connected with its calculation, the body language of the Financial Secretary indicated that she felt that it was entirely transparent.

Will the Financial Secretary put on record exactly how the limit was put forward? I suspect that the Government may not immediately agree with the amendment. If she is not totally persuaded by his eloquent argument, I ask her to spell out in detail why the amendment is not acceptable.

In even greater detail, I would be interested to know if the Financial Secretary prays in aid cost as an argument for the measure. What is the net cost of the tax relief contained within the pension proposals before us? I mentioned the Barber judgment to the hon. Member for Wolverhampton, South-West because pensions are effectively pay postponed, as far as I understand it and as defined by the judgment. There is a logic that, if one puts money into a fund, one postpones the taxation on it by virtue of the relief that one receives, only to offer up the income that is therein generated by the fund for subsequent taxation.

There is a difference between the amount of money at one point, to pick up the point made by hon. Member for Wolverhampton, South-West about tax foregone, and the amount of tax that is subsequently brought in from taxation on pension fund income. If there is a difference between the two, it is the net cost of relief on pensions.

We have not discussed the net cost. For the sake of clarity, I would be grateful if the Financial Secretary, if not now then later in writing to the Committee, advised us about the net costs of the proposals. It is very easy for Treasury Ministers to pray in aid very large numbers in arguing against relief such as that in the amendment, but the net cost of relief on pensions may well be a lower number.

Rob Marris (Labour, Wolverhampton South West)

It is extremely difficult for the Treasury to come up with that figure because of the long time

frame between when contributions are put in tax free, and when the money is taken out. The best estimate that the Department for Work and Pensions has been able to provide the Select Committee on which I sit is that the cost of tax relief is £14 billion a year and that the additional tax brought in down the line is about £8 billion. So the net annual cost is £6 billion.

Michael Jack (Conservative, Fylde)

I am grateful to the hon. Gentleman. He speaks with authority and knowledge on the matter. He has set a precedent that the Financial Secretary should follow, because she is even better informed about those matters than he is, or at least she should be.

I conclude my remarks by saying that I support the line that my hon. Friend the Member for Tatton took. I look forward to the points of clarification when the Financial Secretary responds.

Howard Flight (Conservative, Arundel and South Downs)

Pension saving is self-evidently a long-term activity. It is important that, when changes are made, substantial notice is given to the generation whom those changes will affect and that changes should not dishonour the basis on which people have been saving. When the Conservative Government last changed the rules—bringing in the cap on earnings—people were, rightly and properly, grandfathered, as long as they stayed in schemes that were previously not capped.

I accept that, in the main, the boundaries set in the reforms disadvantage only a modest number of people. However, I believe that the intention of the original committee brought together by the Inland Revenue was that the principle should be that the boundaries were at least neutral for everyone. I object to the argument, ''It doesn't matter about 10,000. It affects a load of fat cats.'' The issue of principle is that the rules affecting people's saving process should not be changed partway through that saving process to those people's detriment.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman remind the Committee whether he supported the previous Conservative Government's gradual abolition of mortgage interest relief at source?

Howard Flight (Conservative, Arundel and South Downs)

First, as the hon. Gentleman is well aware, mortgage interest is an entirely different matter. It is not about saving for old age. Secondly, I accept the point in principle. No Government, whatever their complexity, should change the tax rules in relation to people's long-term commitments lightly or wantonly. There is an underlying point of principle. That is particularly important in the area of saving for old age. Whether or not taxation is an incentive, it can become an extreme disincentive if the rules keep changing for people. They will end up saying, ''Why bother? We don't know where we are.''

The narrow point that I make is that the Government have been close to a regime that does not disadvantage anybody. What was the justification for deciding, while tidying up, to take no notice of what was an established principle?

Ruth Kelly (Labour, Bolton West)

We have had an absolutely fascinating debate so far. I was delighted that one Opposition

Member at least professed himself content—even happy—with the basic thrust of the proposals.

David Laws (Liberal Democrat, Yeovil)

I do not want the Financial Secretary to misrepresent what I said. I am sure that she will not. I said that I thought that the change to the lifetime limit was appropriate and that I was happy with it. However, I question the fundamental approach of the lifetime limit. That is different from the impression that she is giving.

Ruth Kelly (Labour, Bolton West)

I shall discuss the principle of the lifetime limit. What I meant to say was that the hon. Gentleman considered it fair that, given that there was going to be a lifetime limit, that limit be set at £1.5 million.

Despite his eloquence, I was extremely disappointed by the contribution made by the hon. Member for Tatton. Indeed, throughout the debate—until relatively recently—we have heard about contributions from several sections of society and several individuals that completely misrepresented the underlying nature of the proposals.

George Osborne (Conservative, Tatton)

Is one of those people the Government Actuary?

Ruth Kelly (Labour, Bolton West)

I shall come on to discuss the role of the Government Actuary in due course. Because of the extensive misrepresentation of the arguments, we thought it wise to ask the National Audit Office to confirm that our estimate of the number of people likely to be affected by a lifetime allowance was reasonable. I have the report in front of me. Far from saying that it is unreasonable, it says that 5,000 people is reasonable, if perhaps at the lower end of the reasonable range. Our estimate is vindicated. Compare that with the figure of 600,000 that was quoted in the press. The NAO's best estimate was about 10,000, but ours was reasonable, and if the hon. Member for Tatton disputes that, I encourage him to stand up and to make his point.

The NAO told us that the evidential base for the estimate of 1,000 people a year exceeding the allowance was completely reasonable, subject to a degree of uncertainty, as such estimates always are. In fact, it could not come up with a better estimate.

George Osborne (Conservative, Tatton)

What the NAO said was that

''The evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome.''

Ruth Kelly (Labour, Bolton West)

But the NAO has no evidence to say that 1,000 is not a reasonable estimate. It says that the evidential basis is thin. We have to make assumptions about the behavioural impact of changes. However, it is a reasonable estimate of the effect of the proposals.

The hon. Gentleman mentions particular groups—for instance, pilots and the judiciary—that might be disproportionately affected by the proposals. I agree that those groups are singled out by the report. It says:

''Two occupations in particular were brought to our attention—the judiciary and airline pilots. Between them they appear to have several hundred people who could be affected due to the specific circumstances of these professions.''

Since the NAO report was published—and before, indeed—we have met representatives of the airline

pilots' union, BALPA, and explained the proposals to them in depth. It is clear that only a minority will be near to, or over the lifetime allowance. The majority of those are already subject to the earnings cap. A few pilots with high salaries and low retirement ages are affected but, as in other industries, all existing rights will be protected under our regime.

Rob Marris (Labour, Wolverhampton South West)

Did my hon. Friend notice that the hon. Member for Tatton mentioned head teachers? I do not know about the toffs at Eton, but for head teachers to be affected—taking the £75,000 that a 20 to 1 ratio would produce on a £1.5 million fund—a head teacher on a half pension would have to be earning £150,000 a year. I defy the hon. Member for Tatton or anybody else to find more than two head teachers in the state sector in the United Kingdom who earn £150,000 a year.

Ruth Kelly (Labour, Bolton West)

My hon. Friend chooses his own way to describe the people likely to be affected by the proposals. However, I believe that our estimate has been vindicated by the NAO report. In the run-up to the publication of the report, after we had commissioned the NAO to carry out the research, the vocal resistance to our proposals melted away. People realised that the NAO was likely to come up with a conclusion that was similar to ours, because ours was reasonable and based on common sense, and was more likely to be correct than the 600,000 that had been widely quoted in the press before that.

Quentin Davies (Conservative, Grantham and Stamford)

The Financial Secretary mentioned pilots with an early retirement age. Does that not highlight one of the great weaknesses of her proposal? Even if we accept the lifetime limit approach—a case can be made for it—is it not absurd that the same limit should apply irrespective of age? Are we not creating a major disincentive for people to stay longer in employment before taking their pensions? A limit of £1.5 million at 60 is not the same as a £1.5 million limit at 70. One should give people an incentive to stay in work for as long as possible. That will be good for them and the community, and they will benefit from the fact that their pension fund is accumulating in the meantime. If one prevents a person's pension from accumulating, or penalises them for allowing it to accumulate, one destroys an incentive that, in other contexts, the Government are trying to do something about.

Ruth Kelly (Labour, Bolton West)

I was going to deal slightly later with the hon. Gentleman's points, which follow on from his earlier contribution. Before I do, however, I want to make a number of other points.

First, the 55 per cent. exit charge on those who go over the lifetime limit is not penal. Following consultation, we reduced the rate, and it has been widely welcomed as fair by the industry. Secondly, we are not preventing people from making alternative retirement provisions, but simply saying that such provisions will not be subject to the generous tax reliefs that we provide for income in retirement. Thirdly, people who build up a full lifetime limit will be perfectly able to enter into income draw-down arrangements and to draw down an income from that

larger lump sum without it yet again being tested against the lifetime limit.

There are very few reasons why someone would be unable to take maximum advantage of such arrangements and why they would be prevented from continuing to work for as long as they liked. In fact, the proposals give far more flexibility to the 14 million or 15 million people who are currently subject to limits that prevent them from taking flexible retirement. Indeed, the proposals open up flexible retirement to the vast majority of people for the first time.

Quentin Davies (Conservative, Grantham and Stamford)

With respect to the hon. Lady, she may have missed my point. Let us not have a semantic argument about whether 55 per cent. is penal—it is 15 per cent. higher than the top rate of tax. My point was that, if it is in society's interests for people to stay in work longer—I believe that the Government recognise that in other contexts—people must surely be given an incentive to do so. However, the Bill clearly gives them a disincentive to do so, because 55 per cent. is much higher than 40 per cent., and higher than the effective rate of tax. The Government have therefore made it less rather than more attractive for people to stay in work and to accumulate a larger pension fund. If people work for longer, they should have the reward of a greater income in retirement because they will be enjoying that income for fewer years.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman seems to have missed the point that flexible retirement is impossible under the current arrangements and that it is being opened up to the vast majority of ordinary people for the first time. To put the numbers in context, let us use the example of someone who builds up a pension pot of £1.5 million. Someone who contributes £20,000 in the most recent year would have to have made equivalent, real-terms contributions for 31 years to reach the lifetime limit. We are talking about very few people, at the margins.

Of course, Government policy is to encourage people to actively age—[Interruption.] My right hon. Friend the Paymaster General points out that I should have said, ''to age actively''. We want people to stay in employment for longer. That is partly because we think that they should have that choice, and we are now making that possible for the first time. However, we also want the vast majority of people to have the opportunity to save for longer, because they may not be providing adequately for retirement. I think that it stretches the point to say that people who are at, or close to, the £1.5 million limit have not saved adequately for their retirement. We trade that possibility off against far greater flexibility for the 15 million people who do not benefit under the current pension tax regime.

I move on to the point about the transparency of the process. I have been involved in the pension simplification process throughout my three years as a Minister. I have had endless meetings with officials and, more widely, with individuals and representatives of groups outside this place. The hon. Member for Tatton is very keen on his letter from the Government

Actuary's Department, but I should tell him what the correct position is. In 2003, the simplification team met representatives from the Government Actuary's Department, including Grant Ballantine, to discuss every aspect of the proposal. Indeed, once the consultation proposals were published, we received responses from them and they had the opportunity to comment in the normal way, as one would expect. I wonder what else the hon. Gentleman would anticipate or expect from a Government.

George Osborne (Conservative, Tatton)

The Financial Secretary paints a rosy picture of relations between her officials and the Government Actuary's Department. Why does she think that Government actuaries wrote in letters to Opposition Members that

''the Inland Revenue did not consult the Government Actuary's Department about the lifetime limit''?

They also said:

''On the basis of the slightly revised Inland Revenue Simplification paper . . . it would appear that the Inland Revenue have given no weight to any of the points we made.''

Ruth Kelly (Labour, Bolton West)

Clearly, we formed a view as a Government. However, I have produced evidence to the hon. Gentleman and said on the record that we discussed the simplification proposals with the Government Actuary's Department. It is at liberty to make the points it wishes and I would not like to comment or to speculate on the motivation behind that. Clearly, Treasury Ministers are responsible for making such decisions. I made a lot of those decisions, subject to views expressed to me from different quarters.

Rob Marris (Labour, Wolverhampton South West)

Does my hon. Friend agree that the quotation read out by the hon. Member for Tatton is contradictory? It says that no consultation took place, but then it says that the points that were made were not taken into account.

Ruth Kelly (Labour, Bolton West)

My hon. Friend makes his point very well.

PricewaterhouseCoopers, whom the hon. Member for Tatton cited at least once during his contribution, described our consultation as a model consultation. The way in which we consulted and listened to representation was widely welcomed throughout the industry.

George Osborne (Conservative, Tatton)

To clear up the point made by the hon. Member for Wolverhampton, South-West (Rob Marris), the Government Actuary's Department had to take part in the public consultation, after which its views were not listened to.

Ruth Kelly (Labour, Bolton West)

No.

George Osborne (Conservative, Tatton)

The Financial Secretary says no. The letter I have is from the Government Actuary, Chris Daykin. It says:

''I would like to be absolutely clear that GAD was not involved in any way in advising on the figure of £1.4 million.''

We are talking about not some outside organisation, but a Government Department.

Ruth Kelly (Labour, Bolton West)

In fact, the Government Actuary's Department, as I am sure the hon. Gentleman is well aware, operates on a relatively commercial basis and the Government take advice from it as and when they

wish. The Government Actuary's Department was consulted and the matter was discussed with it in November 2003, as I have outlined.

Quentin Davies (Conservative, Grantham and Stamford)

I wonder whether the Financial Secretary will tell us, as she took the decisions, whether she saw fit to speak to the Government Actuary during her consideration of the decisions.

Ruth Kelly (Labour, Bolton West)

I listened to all the representations that were made to me. I met a wide variety of people. I considered written representations from some people. I met others personally. As I said, the simplification team met with the Government Actuary's Department, and it had an opportunity to make any representations that it wished. While the report went to the National Audit Office to allow it to verify our estimates—or not—I attended several consultation meetings. I met several people and the pensions simplification team held a variety of consultation meetings. During the ones I attended, there was not a single voice in the entire room—I am talking about meetings where 50 or 60 people were present—against the lifetime limit, once it was confirmed that we were to be given an independent view by the National Audit Office.

Of course, certain individuals and groups still hold a different view, but the virtually unanimous consensus was that implementing the limit was the right thing to do. It was made clear to me in writing, in person, in every way possible, that we must press ahead with our reforms, and that a huge opportunity would be lost were we not to do that. When the NAO report came back, which vindicated our research, we decided, having listened to the views expressed during the consultation, to defer implementation for a year until 2006 in response to representations from the industry that it needed more time to implement the changes.

At that time, we also decided to uprate £1.4 million to £1.5 million to take account of inflation between the initial announcement in 2004 and implementation in 2006. We listened to representations maintaining that certain people were worried about the planning horizon and whether there would be sufficient certainty about what the limit would rise to in future years. Because there was that worry, we decided to set out in the explanatory notes, as the hon. Member for Tatton said, precisely what we intend the lifetime limit to rise to over the next five years. As a result of the package, we listened to representations on how that limit would be reviewed. People asked us to review it on a five-yearly basis and that is what we have pledged to do.

The hon. Gentleman suggests that we did not listen to the consultation, but the opposite is true. From memory, I can tell him some of the points that we listened to. People talked to us about whether the exit charge was penal; we reduced the exit charge significantly in response to the representations. They suggested that we should have a single valuation factor of 20 to 1; we brought that in. They suggested that, if people went over the lifetime allowance, they ought to be able to take a lump sum subject to an exit charge; we brought that in. We listened on a wide variety of issues. In fact, we could not have been more responsive

to the issues that were raised with us by individuals and representative organisations.

Several hon. Members, including the hon. Member for Yeovil (Mr. Laws), made some philosophical points about the concept of the lifetime limit. Let me deal with one suggestion that might have some inherent, intuitive attractiveness: we should not test the overall pension pot when it is drawn down subject to a lifetime limit, but should instead have a test that works against annual contributions. That would mean that annual contributions could be made up to a certain limit, be it £1 million, £1.5 million or whatever the Government decided. Although a contributions limit has certain attractive features, it would not be simple to administer. It is an extremely difficult issue—I see the hon. Member for Arundel and South Downs (Mr. Flight) nodding in agreement.

To make a contributions limit workable, one would have to stop the tax relief at the point at which the limit was reached. How could that be achieved? It might be possible for an individual who has one long-term pension scheme and one employer, but it immediately starts to get very complicated if the individual switches schemes or employers. How would the new scheme or the new employer know the amount of contributions that had been made in respect of an individual up until that point? As soon as one starts to consider an individual with several concurrent employers or schemes, it becomes as good as impossible to keep track of the cumulative contributions.

There is another possible variant on that scheme: all the separate contributions could be added up and tested right at the end, subject to a lifetime limit on contributions. Presumably, there would be some exit charge if a certain limit were exceeded. However, even that system would be very difficult to implement. When one considers transfers of rights, DB schemes, and unfunded and non-contributory schemes, one can see that the calculation would either be extremely difficult to achieve, or allow great opportunities for avoidance in the system. It would also mean keeping records for a lifetime. In choosing a lifetime limit on the overall size of the pot, we have struck a reasonable balance between a fair system and one that can be easily administered. It allows full flexibility for 99 per cent. of the population.

The hon. Member for Tatton and others drew attention to the US scheme. The CBI has made representations on the subject and said that, if all members of a scheme were treated on the same basis, there should be no lifetime limit whatever. I notice, however, that the hon. Gentleman did not read out the letter published in the Financial Times from Tony Reardon, the pensions consultant. He questioned that view and said that the proposals could lead to far more administration to track individuals as they moved between schemes. Having some capped schemes and some uncapped schemes would, he argued, in no way lead to simplification. We have chosen a simple system that is easier to administer, delivers maximum

flexibility for 99 per cent. of the population and treats the top 1 per cent. fairly.

We said in our consultation, however, that we remain interested in the 401K schemes in the United States. We shall continue to look at the operation of those schemes and schemes in other countries, always seeking to improve our system. We are of course always interested in schemes that would lead to increased take-up of pensions and savings. We rule nothing in or out for the future.

The hon. Member for Tatton argued that a lifetime limit would lead to highly paid executives leaving their company pension schemes and seeking alternative pension arrangements. That argument was put to me several times when we first put the proposals out for consultation, but since then almost no one has done so. It has become clear to most people that it is in everyone's interests to accumulate the £1.5 million under their lifetime limit, even if individuals then seek alternative pension arrangements. The proposals could, in fact, encourage far more people to join their company pension scheme than the reverse. I do not agree with the representations that have been made.

The right hon. Member for Fylde (Mr. Jack) talked about the net cost of our proposals. We have published a regulatory impact assessment, which includes those costs. The net costs of our proposals as published are £25 million for 2006–07, £70 million for 2007–08 and £165 million for 2008–09. Our scheme is not only flexible for the vast majority of people, but much more generous for many millions of people. We have debated that with the hon. Member for Yeovil. The scheme is generous, flexible and fair. However, I ought to discuss the amendment.

Rob Marris (Labour, Wolverhampton South West)

Does my hon. Friend agree that, since the hon. Member for Tatton is, I think, 33 or 34 and has not declared an interest in this debate, he clearly does not anticipate going as far in politics as some have suggested he might?

Ruth Kelly (Labour, Bolton West)

Of course, we all aspire to be in the top 1 per cent. [Interruption.] In fact, I correct myself—in some ideal world, perhaps everyone would qualify. Millions of people, ourselves included, are highly unlikely ever to face that situation.

The hon. Member for Tatton asked for the precise amounts to be set out in the Bill. We have made those commitments publicly. They are in the explanatory notes and there is no reason whatever why they should be set out in the Bill. He made a slightly more substantive point about whether the level of the lifetime allowance ought to be increased by the amount to which the individual would be entitled under a state earnings-related pension scheme, or the state second pension, had he or she not entered into a contracted-out arrangement.

The underlying argument does not stand up to scrutiny. The intention is for the lifetime allowance to be measured against pension funds benefiting from tax privileges, which is precisely what contracted-out pensions are. In the new regime, not only will such pensions benefit from tax-free member contributions, but employer contributions will be free from tax and

national insurance. In addition, there is provision for tax-free investment growth.

Individuals and employers will also benefit, as they do now, from the lower rate of national insurance contributions that contracted-out schemes attract. The lower rate means that the tax position of individuals who contract out has already been put on a par with those who do not. Those who do not contract out receive their benefits later, in the form of the state second pension. Those who contract out benefit from lower national insurance contributions. The lower rate benefits not only those individuals who are fortunate enough to have pensions savings in excess of the lifetime allowance, but the vast majority of individuals who do not. Therefore, perhaps the logical consequence of giving people who contract out a higher lifetime allowance would be to charge them the same rate of national insurance as everyone else. That, of course, would disadvantage the vast majority of people in contracted-out schemes to benefit just a few.

The amendments of the hon. Member for Tatton do not stand up to scrutiny. We have had a stand part debate and our proposals have been widely welcomed as bold and radical. They will benefit millions of ordinary people, so I ask the hon. Gentleman to withdraw his amendment.

George Osborne (Conservative, Tatton)

I think that we all actively aged during the debate, but it was perhaps the best debate that we have had on the clauses on pension expectation. I want to make some brief points, because I know that we want to get on.

First, the Financial Secretary said that the Treasury's estimate was vindicated by the NAO, which is an extraordinary reading of the NAO's report and not the same conclusion reached by anyone else who read the report. The NAO found that the Government were 100 per cent. wrong in their estimate and that is not my definition of being vindicated.

By the way, the NAO did not rubbish the estimates made by companies such as Mercer Human Resource Consulting Ltd., but said in paragraph 97 of its report:

''The alternative calculation examined—suggesting 100,00 and 600,000 people would be affected—are reasonable but different ways of estimating the number of people affected''.

The NAO did not rubbish the estimates in the way suggested by the Financial Secretary.

I am grateful to my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who made some telling points about the collapse of defined benefit schemes, the perverse incentive which may result as a consequence of the lifetime allowance, the possible move away from, for example, venture capital and equities for wealthy people and the importance for the economy of money from wealthy people in venture capital and so on. He recommended that we accept as official Opposition policy something like the scheme put forward in the United States. If he has not already done so, he should read the article that my hon. Friend

the Member for Havant (Mr. Willetts) wrote in the Financial Times on 7 January, which sets out many of the attractions of the scheme. While one should not read that as a complete commitment to its introduction, it points to the direction of future Opposition policy. The Financial Secretary did not rule it out in her comments and said, interestingly, that the Government are continuing to look at that US scheme. It is interesting to have that on the record.

During the debate about the Government Actuary's Department, the intervention of my hon. Friend the Member for Grantham and Stamford revealed that the Financial Secretary did not meet the Government Actuary. It is striking that the correspondence, particularly that from the Government Actuary, makes it absolutely clear that the Government Actuary's Department was not consulted in any way when the proposals were drawn up and was forced to act like an outside organisation and make a written submission to the consultation, which seems a strange way in which to treat a Government Department.

Quentin Davies (Conservative, Grantham and Stamford)

I wonder whether my hon. Friend can imagine, if he were doing the Financial Secretary's job—I certainly cannot—making a decision on a new, far-reaching pension arrangement such as this without consulting the Government Actuary. Surely, the first official to consult is the expert in Government who, above all, would have something to contribute to the discussion.

George Osborne (Conservative, Tatton)

My hon. Friend makes a powerful point. I would, of course, have consulted the Government Actuary. It is the thought of being the Financial Secretary that keeps one going in this job. Thankfully, as the hon. Member for Wolverhampton, South-West pointed out, I have many years to get there, not that I shall need them because things are going so well.

John Burnett (Liberal Democrat, Torridge and West Devon)

Such are the hon. Gentleman's ambitions, has he considered whether there will be a valuation of the fund and a surcharge payable should he become, say, Prime Minister?

John Butterfill (Conservative, Bournemouth West)

Order. I would be grateful if the hon. Gentleman did not respond to that question.

George Osborne (Conservative, Tatton)

Do not worry, Sir John, I shall not respond to it.

I shall make just two final points, as I suspect that Ministers want to leave for Treasury questions in the House. First, the Financial Secretary said that there is no reason why the increases for the next four years should be included in the Bill. However, there is no reason why they should not be included. They should be in the Bill, not in the explanatory notes. Secondly, I did not buy any of her arguments about the state second pension. There are tax privileges associated with having a state second pension, just as there are with contracting out of it, and the lifetime allowance would be eroded. She did not adequately address those points, so we may have to return to them on Report. I shall have to press my amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 12.

Standing Committee A

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 207 - Individual's lifetime allowance and

George Osborne (Conservative, Tatton)

I beg to move amendment No. 416, in

clause 207, page 173, line 32, after 'year', insert

'increased by the percentage increase (if any) in national average earnings over that tax year'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following amendments:

No. 418, in

clause 217, page 183, line 4, after 'year', insert

'increased by the percentage increase (if any) in national average earnings over that tax year'.

No. 381, in

schedule 34, page 468, line 2, leave out 'retail prices index' and insert 'national average earnings'.

No. 385, in

schedule 34, page 471, line 5, leave out 'retail prices index' and insert 'national average earnings'.

George Osborne (Conservative, Tatton)

I am sorry that the Government do not have much enthusiasm for getting their own business through, but we will crack on.

John McWilliam (Labour, Blaydon)

Order. I thought that the delay in our being quorate was due to the fact that Members from all parties had been working so hard, it being Treasury questions today.

George Osborne (Conservative, Tatton)

The Financial Secretary was working harder than most. She announced a U-turn on stakeholder pension charges and conceded that the Government had made a submission to the parliamentary ombudsman on Equitable Life.

John McWilliam (Labour, Blaydon)

Order. I fail to see what that has to do with the amendments.

George Osborne (Conservative, Tatton)

Not a lot, Mr. McWilliam.

I shall deal first with amendments Nos. 416 and 418, both of which attempt to place in the Bill a clear mechanism by which the value of the lifetime and annual allowances can be increased. The Government indicate in the explanatory notes by how much the allowances will increase in the first years after A-day. We had a debate before lunch about including those amounts in the Bill, but the Opposition were defeated in a Division. As a result, all the clause contains is a statement that the lifetime allowance for each year

''is specified by order made by the Treasury.''

The same is true for the annual allowance in clause 217.

The Bill does not go nearly as far as the Inland Revenue did in its consultation document or in the Budget note, which was, of course, introduced on Budget day. The Inland Revenue said in the note that the lifetime allowance would be reviewed quinquennially, but that statement is not repeated in the Bill or in the explanatory notes, although the Financial Secretary mentioned it in her speech this morning. Perhaps she can explain why it is not in the Bill, where it should be, or in the explanatory notes. Will there be just a single quinquennial review or will the process be ongoing; that is, will there be one every five years? How will the review be conducted? Will it be internal or external? Will the National Audit Office again be asked to conduct it? Will the review welcome submissions from outside bodies, perhaps even the Government Actuary's Department? Perhaps the Financial Secretary could answer those questions.

Could the Financial Secretary also explain—this comes to the thrust of the amendments—what happened to the commitment in paragraph 1.34 on page 9 of the December 2003 consultation document annually to increase the lifetime and annual allowances by the retail prices index? The document stated that

''the lifetime and annual allowances will be uprated annually by RPI. The lifetime allowance will be rounded up to the nearest £10,000 and the annual allowance up to the nearest £1,000.''

There is nothing about that in the Bill.

RPI can be found in other parts of the Bill as a mechanism for judging and increasing things. I will touch on that when I discuss the other two amendments in this group, but there is nothing in the clauses on the lifetime allowance or the annual allowance about operating them with prices. That seems a bit strange, not least because the Government had ignored their own suggestion in the consultation document. The upratings that they announced, for the lifetime allowance at least, vary for the first four years between about 2.9 and 6.6 per cent. I am not complaining about those generous increases; I am just pointing out that the only evidence the Treasury has given us about the future direction of the lifetime and annual allowances is that they will be increased by very much more than RPI.

What has happened to the December 2003 commitment to increase allowances by RPI? Should there not be a mechanism in the Bill to increase allowances not by prices, nor by the arbitrary whim of the Chancellor of the day, but by earnings? The Financial Secretary will say that the earnings cap has increased by RPI since 1989, but that does not necessarily make it right to continue the policy with the lifetime allowance and the annual allowance. After all, pensions are about earnings in retirement; pension contributions are often made as a percentage of earnings; and final salary schemes by definition increase the benefits paid out as someone's earnings increase. Therefore, logically, the lifetime allowance and the annual allowance should increase with earnings as well.

The Government seem to have accepted that logic. I tabled the amendment and then realised that the Government have accepted the logic because they

announced that in some of the first four or five years allowances will increase by more than earnings. However, because of the statement in the consultation document, there is a nervousness that if, God forbid, this Government were still in power after four or five years they would revert to increasing them by prices. The relative value of the lifetime allowance and the annual allowance would steadily erode, which would mean that the value of tax-privileged pension savings that people can accumulate would also steadily erode. That is no way to encourage saving.

The Financial Secretary or the Chancellor of the Exchequer, whoever it was who made the decision, seems to have accepted the logic of the amendments anyway, because in the first few years after A-day, the allowances will increase by considerably more than RPI in every year—in some years by almost treble RPI. That is good, but the principle is the important thing. There should be a mechanism in the Bill so that people can plan for their retirement with confidence, knowing how things will develop over a longer period, rather than each year hanging on the announcement of the Chancellor of the day about the uprating of the two allowances.

John McWilliam (Labour, Blaydon)

Order. Gentleman may remove jackets. For those who have already removed them, I will not insist on them putting them back on.

Rob Marris (Labour, Wolverhampton South West)

Amendment No. 418 is very useful because it shows that the Conservative party is concerned about the uprating mechanism for those who will contribute £215,000 to their pensions in one tax year. That is not a particularly important matter for this Committee.

George Osborne (Conservative, Tatton)

Our concern to increase allowances by earnings rather than prices extends up and down the income scale, because we want to increase the basic state pension by earnings—something that the hon. Gentleman probably supports.

John McWilliam (Labour, Blaydon)

Order. Before the hon. Member for Wolverhampton, South-West (Rob Marris) responds, I point out that the debate is not about the basic state pension; it is about a very narrow amendment.

Rob Marris (Labour, Wolverhampton South West)

Thank you for your guidance, Mr. McWilliam. I was going to make the same point, and the hon. Member for Tatton (Mr. Osborne) is mistaken about my views on the issue.

Ruth Kelly (Labour, Bolton West)

I am delighted to welcome you back to the Chair this afternoon, Mr. McWilliam, and I look forward to another exciting debate.

John McWilliam (Labour, Blaydon)

Order. That has nothing to do with me; I am not allowed to take part.

Ruth Kelly (Labour, Bolton West)

The hon. Member for Tatton raises the question of the quinquennial review and how we intend to index, or link, the lifetime allowance and the annual allowance. We are committed to a review system, which was made clear by the Chancellor, as well as myself, when he addressed the matter in the

Budget. We have said that the first review will take place in 2010. We expect regular reviews after that, but it is not for me in this Room today to tie the hands of future Administrations.

The quinquennial review was called for by the industry and by people who are interested in the future of the lifetime and annual allowances, and the point of it is to consider the level of allowance and allow it to be adjusted according to the prevailing circumstances of the time. The hon. Gentleman asked how it would be conducted. I imagine it will be conducted by Treasury Ministers, having taken advice from Inland Revenue and Treasury officials, and having consulted and listened to representations made by outside bodies.

George Osborne (Conservative, Tatton)

The Government Actuary?

Ruth Kelly (Labour, Bolton West)

Well, clearly, actuarial factors would be taken into account, as well as factors relating to longevity rates and so forth. Factors such as the inflation rate and the earnings rate may be considered, as well as the number of people bumping their heads against the cap.

The hon. Gentleman asked what happened to the commitment made in December 2003. That was not a commitment, but a proposal that we link the cap to prices, which was put out for consultation. We consulted and we listened. People argued that they wanted certainty; we have provided certainty for the first five years by setting out the likely level of the lifetime and annual allowances in each of the next five years. That is the right approach; it is right to listen to representations.

The hon. Gentleman argues that in future the earnings link should be considered. That would provide for a mechanism that would be, by definition, less certain than the pre-announced arrangements in the Bill. As the hon. Gentleman is so attached to the idea of linking rates to earnings, I would urge him to consider the comments made by a former Member of this House, Norman Lamont, when he was Financial Secretary and he set the earnings cap. During a Standing Committee debate in 1989 he said:

''We gave careful thought to the method of indexation when we designed the pension changes. Despite arguments that have been put forward, we remain convinced that prices indexation is the most appropriate approach.''

He went on to say:

''First, it is used in other parts of the tax system—for example for personal allowances. Secondly, and more importantly, it will be indexed. I say that in response to comments that the cap will be eroded . . . The real value of the limit will be maintained. It is only by maintaining the real value that my right hon. Friend the Chancellor was able to propose other aspects of the package''.—[Official Report, Standing Committee G, 8 June 1989; c. 336.]

Clearly, my predecessor had his own views on the matter.

After consultation, we feel that certainty is the right approach. To those who recommend an earnings link I would make this point: how does one propose an earnings link to people who are maintaining the highest pension pots when so many other aspects of the tax system, including the basic state pension, are linked to prices? Having listened to representations, certainty was given overriding consideration in our

deliberations, which is why we have set out the numbers in the way we have. For those reasons, I suggest that the hon. Gentleman withdraw his amendment.

George Osborne (Conservative, Tatton)

The Financial Secretary has obviously tried to learn a trick or two from her boss, the Chancellor of the Exchequer, who, as we saw at Treasury questions, deploys all sorts of election addresses and past quotes of people speaking against them. It is a pretty effective trick, although I often wonder what the Chancellor and all those on the Labour Benches were saying in 1989, when they had even more outrageous ideas than linking things to prices.

John McWilliam (Labour, Blaydon)

Order. Some of us had the benefit of being here to listen to them, but that does not arise out of the amendment. It is quite narrow, and I would be obliged if the hon. Member returned to it.

George Osborne (Conservative, Tatton)

Thank you, Mr. McWilliam. Norman Lamont was saying those things in my gap year.

I said in my remarks that this Government and previous ones have increased the earnings cap with prices, but I made the point that that was not necessarily a justification for increasing either the lifetime or annual allowance by prices in future. I was interested to hear the Financial Secretary effectively disown the comment in the 2003 document by saying, ''That was only out for consultation; we have listened and we have changed our mind''. Actually, that was not a consultation document in the way that the 2002 document was; it is described as a response to the consultation. In the paragraph that I quoted from to begin with, it is made clear that the issue is not up for discussion. It says:

''Accordingly the lifetime and annual allowances will be uprated annually by RPI.''

I am glad the Government have moved away from that commitment, but they did so not as part of some consultation process but because they have changed their mind on a stated policy position. I welcome that, along with the generous increases in the lifetime and annual allowances that have been set out for the five years after 2006, but I have a question. Are we not to know until the quinquennial review in 2010 what the next set of five lifetime allowances will be? That leaves it late in the day. Whoever is Financial Secretary then—whether it is the hon. Lady, good as she is at her job, or maybe a Conservative—will, I hope, make the announcement about the lifetime allowance for 2011–12 before 2010, because people will need a bit more advance warning than that to make sensible decisions about their retirement.

The Financial Secretary's final argument, which was that the Government use prices to determine things such as the basic state pension, and it would be unfair to raise this figure by earnings, will not carry much weight on these Benches, because we are now in Committee to increase the basic state pension by earnings.

David Laws (Liberal Democrat, Yeovil)

Will the hon. Gentleman give way?

George Osborne (Conservative, Tatton)

I am happy to give way, because I am very interested to hear the Liberal Democrats' current position on this policy.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman. I am not going to derail the Committee in the way that he is trying to, but following his comment about linking the tax system to earnings rather than prices, I wonder whether he would want to see the personal income tax allowance indexed to earnings rather than prices in future. Is that a commitment?

George Osborne (Conservative, Tatton)

I did not say that I wanted to see the tax system linked to earnings. I was merely pointing out that the argument used by the Financial Secretary was about the basic state pension. She denies that, but the record will show that that was what she employed in her defence, and it was not a particularly strong card to play. However, we are pleased with the generous increases way above RPI, and indeed above earnings, for people who are, as I am constantly reminded very wealthy—it is good to see her looking after them. I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 324, in

clause 207, page 174, line 13, at end insert—

'(7) In this Part references (however expressed) to a person's lifetime allowance at any time are to what would be the person's lifetime allowance, calculated in accordance with this section, if a benefit crystallisation event occurred in relation to the person at that time.'.—[Ruth Kelly.]

Clause 207, as amended, ordered to stand part of the Bill.

Clause 208 - Availability of individual's lifetime allowance

Clause 211 - Non-residence: money purchase arrangements

George Osborne (Conservative, Tatton)

I beg to move amendment No. 417, in

clause 211, page 177, line 30, after 'is', insert

'that part of the value of the individual's benefits under the arrangement which relate to'.

Clauses 210 and 211 are about calculating the lifetime allowance for people who have been non-resident in the UK and have, therefore, not benefited from UK tax relief, but are members of UK pension schemes and have made contributions to those schemes. The clauses disregard those contributions for the purpose of the lifetime allowance or, rather, they increase the lifetime allowance by the equivalent of those contributions.

However—this is the point of our amendment—the lifetime allowance increases only by the amount of the contributions made and not by the investment growth on those contributions. That seems unnecessarily harsh and unfair. More and more people work in different countries and attempt are being made throughout Europe to encourage more Europe-wide pension schemes.

One hopes that Britain is well placed to take advantage of that attempt because it has such a successful financial services industry. We want to do what we can to encourage the industry, but it seems that we are placing a small hurdle in the way of the pensions sector. That is, as I said, unfair. The Government have conceded the principle that the contributions have not attracted tax relief and the lifetime allowance should be increased as a result. Surely the same principle extends to any investment growth on those contributions.

Ruth Kelly (Labour, Bolton West)

The amendment seeks to increase the enhanced lifetime allowance available to relevant overseas individuals who have other money purchase arrangements. Such individuals are entitled to a lifetime allowance enhancement factor, which is applied to the standard lifetime allowance to arrive at the increased allowance. The factor is based on the amount of contributions paid during the period when the individual was non-resident. That is a straightforward and simple calculation. The amendment seeks to introduce an additional element to the calculation to bring in the investment build-up on the contributions.

In many respects, the hon. Gentleman makes reasonable points. The aim may be to bring the calculation of the lifetime allowance enhancement factor for money purchase arrangements more into line with the equivalent calculation for other arrangements, such as defined benefit arrangements. However, defined benefit arrangements cannot be calculated by reference to contributions because, in a defined benefit scheme, it is often impossible to identify the contributions made in respect of a particular individual, so there would be different rules according to the different ways in which different types of scheme operate. The amendment would have a disproportionately complicating effect on the calculation and is not precise enough to be workable. It is not clear how that part of the value of the individual's benefits would be calculated.

As I have said, we must help taxpayers and schemes by providing clear and unambiguous valuation rules whenever possible. Our approach is an example of the clarity that people desire, and I urge the hon. Gentleman to withdraw the amendment.

George Osborne (Conservative, Tatton)

To sum up what the Financial Secretary seems to be saying, she has a fair point, but there is an element of rough justice and to make the system work some people will lose out. That is a disappointing answer and I do not accept her argument that the amendment would force the Government to make a great distinction between defined benefit and defined contribution schemes. The method of calculating those points, as we have discussed at length, is different, so it is not as though it is an additional distinction that does not exist at the moment. It might be difficult to apply that principle to defined benefit schemes, but it would not be that difficult to devise a way of calculating investment growth in defined contribution schemes if those contributions were clearly tagged on entry into the scheme.

Rob Marris (Labour, Wolverhampton South West)

I declare an interest as someone who has several years' contributions in the Canada pension plan, which is a state plan and is partially funded. It would be almost impossible for anyone to work out my contributions after a lapse of around 30 years between making the contributions and drawing a pension as an overseas pensioner. I shall probably receive around three Canadian dollars a month.

My second point about the amendment is to ask the hon. Gentleman what ROIC means.

George Osborne (Conservative, Tatton)

First, the hon. Gentleman says that it is difficult to identify his contributions from 30 years ago, but the Government will have to do that anyway under the new regime and uprate his lifetime allowance by the equivalent amount. They clearly believe that that can be done, which is why they have introduced the mechanism.

In reply to the hon. Gentleman's second point, the clause states that the

''ROIC is the amount of the contributions made under the arrangement by or in respect of the individual in any part of the active membership period during which the individual is a relevant overseas individual''.

That is the meaning in the Bill and in our amendment.

Rob Marris (Labour, Wolverhampton South West)

What does ROIC stand for?.

George Osborne (Conservative, Tatton)

I imagine that it stands for relevant overseas individual contributions. It is a Government formula.

The hon. Gentleman touches on a point made by the National Association of Pension Funds which I raised at the beginning of this debate. Many of the formulae in the Bill are unfamiliar to the industry, which believes that they could have been expressed more clearly. I am tempted to try to catch your eye, Mr. McWilliam, during the debate on the next Government amendment, which is about adjusting one of the formulae, and we could have this debate then.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 211, as amended, ordered to stand part of the Bill.

Clause 212 - Non-residence: other arrangements

John McWilliam (Labour, Blaydon)

I remind the Committee that with this we are discussing Government amendment No. 445.

George Osborne (Conservative, Tatton)

There are numerous Government amendments in the Bill, most of which are tidying-up amendments. These two amendments also fall into that category. However, looking at them yesterday evening, I could not see what the practical effect of changing the formulae would be. The amendments involve moving brackets. Those of us who did A-level maths know that moving brackets makes a big difference. However, it does not in this case.

Let us consider amendment No. 438. It would make a difference if a bracket had been inserted before PE so that the formula read, ''RVF x (PE + LSE)'', but the Government have not done that. They have just moved the bracket from after PE to after LSE, which makes no difference mathematically as far as I am aware—and I have checked with a few people who have done their maths. I would be grateful if the Government would explain.

Ruth Kelly (Labour, Bolton West)

I am absolutely delighted that the hon. Gentleman has taken such an interest in the arithmetical formulae before us today. Before I explain what the amendments are about, let me explain what the clause is about. It provides for individuals who do not get relief for contributions paid into registered schemes, because they do not have any UK taxable earnings, to have their lifetime allowance enhanced. Clause 211 sets out the calculation for the lifetime allowance enhancement factor for money purchase schemes. Clause 212 provides the rules for calculating the lifetime allowance enhancement factor referred to in clause 210 for members of schemes that have defined benefit or hybrid arrangements. As with clause 211, clause 212 separates out the increases in benefits under the arrangement for which the individual has not received UK relief. It then divides that by the standard lifetime allowance and applies that factor to increase the individual's lifetime allowance.

Rob Marris (Labour, Wolverhampton South West)

Will the Financial Secretary give way?

Ruth Kelly (Labour, Bolton West)

I am sure that my hon. Friend has an interesting point to make.

Rob Marris (Labour, Wolverhampton South West)

My understanding of mathematics might be faulty, because I do not have the benefit of maths A-level. However, I do have the dubious benefit of a maths O-level—taken before the hon. Member for Tatton was born—in which I think I got a grade 4. My memory of algebra is that the position of the bracket is important. It is certainly important in this formula. I will need some convincing by the hon. Gentleman that

the position of the bracket in the formula is immaterial. It looks extremely important. If he gets a chance to speak later, perhaps he will explain a little more about where brackets go and where they do not. The position seems to make a material difference.

John McWilliam (Labour, Blaydon)

Order. As someone who did an electronics degree and, therefore, by definition, an ordinary degree in mathematics, I am sorry that I cannot indulge in this debate.

Ruth Kelly (Labour, Bolton West)

I am coming on to discuss the minor technical amendment before us, which moves the position of the bracket in the formula. Some members of the public have a greater knowledge of arithmetic than the hon. Member for Tatton. It was a member of the public who pointed out to us that the bracket needed to be moved for the formula to make algebraic sense. We could have a debate on the arithmetic behind that, but I hope that the hon. Gentleman will accept the maths on trust. If he really wants to follow this point up, I will write to him explaining the difference that the change makes. I thank the person who pointed this matter out to our team and I ask the hon. Gentleman to withdraw his amendment.

John McWilliam (Labour, Blaydon)

The hon. Gentleman had better be careful when he describes the maths, because I understand it.

George Osborne (Conservative, Tatton)

I shall be very careful. I shall also be careful not to follow the Financial Secretary's advice and withdraw the amendment. If I did, the good work of that member of the public would be undone. In fact, it is not in my power to withdraw the amendment. However, there is a point to be made.

The Government introduce all these amendments. Most of the time, we are assured that they tidy up the Bill. In this case, I believe that it is probably meant just to make the clause look more elegant, as it does not actually affect the maths at all.

John McWilliam (Labour, Blaydon)

Order. I am not seeking to enter this debate, but I have to tell the hon. Gentleman that he is in danger of misleading the Committee if he persists with that argument.

George Osborne (Conservative, Tatton)

We can have this debate in the margins of the Committee. I shall not divide the Committee on the Government amendment.

James Purnell (Labour, Stalybridge and Hyde)

Or multiply it.

John McWilliam (Labour, Blaydon)

We have enough members of this Committee.

Amendment agreed to.

Amendments made: No. 439, in

clause 212, page 178, line 13, leave out from first 'the' to end of line 14 and insert

'annual rate of the pension which would, on the valuation assumptions (see section (Valuation assumptions)), be payable to the individual under the arrangement if the individual became'.

No. 440, in

clause 212, page 178, line 16, leave out from 'would' to 'entitled' in line 18 and insert

', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.

No. 441, in

clause 212, page 178, line 20, leave out from first 'the' to end of line 21 and insert

'annual rate of the pension which would, on the valuation assumptions, be payable to the individual under the arrangement if the individual became'.

No. 442, in

clause 212, page 178, line 23, leave out from 'would' to 'entitled' in line 25 and insert

', on the valuation assumptions, be entitled under the arrangement (otherwise than by commutation of pension) if the individual became'.—[Ruth Kelly.]

Clause 212, as amended, ordered to stand part of the Bill.

Clause 213 ordered to stand part of the Bill.

Clause 214 - Overseas scheme transfers:

Clause 215 - Overseas scheme transfers:

Clause 217 - Annual allowance

George Osborne (Conservative, Tatton)

I beg to move amendment No. 425, in

clause 217, page 183, leave out line 2 and insert—

'(2) The annual allowance is as follows—

(a) for the tax year 2006–07, £215,000

(b) for the tax year 2007–08, £225,000

(c) for the tax year 2008–09, £235,000

(d) for the tax year 2009–10, £245,000

(e) for the tax year 2010–11, £255,000.'.

The clause sets the annual allowance—the amount by which the value of a pension pot is allowed to increase without incurring a tax charge—at £215,000 for the first year. Amendment No. 425, which is similar to my previous amendment on the lifetime allowance, merely seeks to include in the Bill the allowances for the years 2007–08 to 2010–11, which are set out in the explanatory notes but not in the Bill. Perhaps the Financial Secretary could remind us why that should be the case. She said earlier that they could just as easily have been in the Bill as in the explanatory notes. Surely it would be better to put the figures in the legislation with which people will deal.

Perhaps the Financial Secretary could say a little as well about the logic of the annual allowance. It is possible to think of a system with a lifetime allowance but no annual allowance, and one with an annual allowance but no lifetime allowance. Perhaps she could explain why the Government feel that they need both controls.

In the 2002 consultation document, the Government explained that the prime purpose was to limit the

''tax leakage which can occur when a determined opportunist tries to wash contributions through a pension fund quickly, planning to extract the proceeds improperly.''

Say we have a determined opportunist—let us call him Tony. Surely control must be exercised not on the amount going in but on the amount coming out. The Government say that the reason for an annual allowance is to stop people extracting proceeds improperly. If that is the case, the control should be on the extraction of the proceeds, not on what is going in. Will the Financial Secretary confirm that, as the annual allowance does not apply in the year in which the pension vests, this determined opportunist could pull off the same trick in that year? If Tony were over the age of 50, he could pull it off this year, that year, the next year or whenever the pension vests.

If the measure is supposed to be a key control for the Inland Revenue to prevent some sort of tax

evasion or scam, it has some pretty big holes in it. A pension can vest not only on retirement, but when someone receives redundancy, a scheme winds up, there is ill health or whatever. There are a lot of gaps in that control and, if its purpose is as I have just stated, it is not particularly effective.

The provision will introduce another rule to the system and it could hit the lucky investor. The dotcom boom was not that long ago, and it is perfectly possible to imagine someone putting a £20,000 stake into some shares, seeing them go up 10-fold in a year and going close to or over the annual allowance. It will penalise investor decisions. One feature of the system is that it allows people to put in large sums when they are able to make them, but a good or lucky investor could as a result see their pension pot increase by more than £215,000 in a particular year.

Rob Marris (Labour, Wolverhampton South West)

Either the hon. Gentleman or I, and of course I suspect that it is he rather than I, misunderstands the annual allowance. If an individual put £20,000 into their pension scheme and it went up 12-fold, which would be more than £215,000, it would not break the annual allowance because having been put in the pension scheme it would therefore be within the pension scheme. It is the total pension input amount, not the amount within the pension in a given year.

George Osborne (Conservative, Tatton)

The hon. Gentleman may well be right, but even if I withdraw that final point on the grounds that it is not as strong as it could be, will the Financial Secretary explain the broader point about the need for the annual allowance as a check—if it is a check—on the gaps in the system that exists? Surely, the check should exist on the improper extraction of proceeds. Why is the provision not in the Bill?

Rob Marris (Labour, Wolverhampton South West)

With amendment No. 425, the hon. Gentleman seems to retread his unsuccessful amendment No. 418, which sought to link the allowance with the increase in national average earnings. As an optimist, he expects to be in government and, mathematically, according to the figures in amendment No. 425, he expects that under a Conservative Government the increase in national average earnings will fall year on year.

John McWilliam (Labour, Blaydon)

Order. Sums is hard.

Ruth Kelly (Labour, Bolton West)

The real issue is about whether we should have an annual allowance limit, but I will quickly deal with the question that the hon. Member for Tatton raised about whether the limit should be in the Bill. My right hon. Friend the Chancellor announced the limits in the Budget, they are in the explanatory notes and we will use a Treasury order to introduce them. That is the normal way in which such things are done, and I could not make the intention of the Government clearer than I have made it today.

The hon. Gentleman makes an interesting point about whether we need an annual allowance as well as a lifetime allowance. In an ideal world, perhaps we would not need that additional control. It has been set at a very high level and it will affect hardly any people, although no doubt there will be some who want to put more than £215,000 into their pension pot in the first year. My hon. Friend the Member for

Wolverhampton, South-West made an excellent point, however: it affects only contributions to the fund; it does not affect the investment growth in any year.

So, if the case that the hon. Gentleman raised were to occur, people would be fine. They would eventually be tested against the lifetime allowance, but we have debated that.

I remember spending many happy hours in the Treasury, debating whether we needed an annual limit as well as a lifetime allowance. We concluded that it was necessary in order to make sure that certain possibilities for evasion could not occur. In fact, the annual limit is an integral part of the regime.

I will detail one example of the sort of abuse that could occur, and that I was particularly concerned about when designing the scheme, if we had a lifetime allowance but no annual allowance. Imagine the situation in which, to take a country at random, a United States resident came to live and work in the United Kingdom for a short period, possibly a couple of years, as is frequently the case in, for example, the City of London. Between them, the US resident and his employer put £1.5 million into the employer's UK-registered pension scheme. Both would get full UK tax relief on their contributions, up to the maximum allowed under our proposals. That resident would then go back to the United States to continue working, perhaps with his previous employer, and transfer all the funds from the UK into the fund in the United States of America. There would be no tax charge on that. It would be impossible to test his cumulative pension against the lifetime allowance when, in due course, he took his pension. The UK Exchequer would suffer a considerable loss.

George Osborne (Conservative, Tatton)

Will the Financial Secretary confirm that that trick could be pulled off if the person was older than the minimum retirement age and the pension was vested in the year in which that person put the £1.5 million into the scheme? There is no annual allowance in the year when the pension vests.

Ruth Kelly (Labour, Bolton West)

I would not say that that was a trick. In fact, we listened to representations on it, because people need extra flexibility in the year that their pension is vested. However, I gave an example of an opportunistic individual who came to the country, rapidly took advantage of UK tax relief, and then went back to their own country, with us unable to exercise our rights to reclaim some of that money.

Howard Flight (Conservative, Arundel and South Downs)

If that American were a member of a UK pension scheme, it would not normally be possible to transfer out sums to a US scheme. If they went back to the US, whatever pension from the UK was due would be paid, but it would be subject to a standard 20 per cent. withholding tax.

Ruth Kelly (Labour, Bolton West)

Well, of course, we have tax-recovery mechanisms to try to reclaim tax. One of the examples that we might use is the EU directive on mutual assistance and the recovery of debt. There are responsibilities that that individual would have to fulfil. I must say that that is a blunt tool for recovering tax. There would still be avoidance opportunities.

Clearly, if someone was not drawing down benefits in the UK, they would not be taxed on that income in retirement and we would not, perhaps, be able to claim back some of that tax relief. It could pose a significant threat to the Exchequer.

The annual allowance struck us as a reasonable compromise to try to ensure that such short-term, opportunistic behaviour was not able to take place, while affecting few individuals who were resident in the UK for a considerable period and who planned to draw down their pension income in the UK on retirement. As I said, it is an integral part of our reforms. We will keep that aspect of the reforms under review, as we will keep other aspects under review. So, I ask the hon. Gentleman to withdraw his amendment.

George Osborne (Conservative, Tatton)

The Financial Secretary said that the annual allowance was an integral part, and then said that she spent many hours debating whether it should be in or not, so the Inland Revenue must have thought that it was not necessarily integral. As I say, we share the same objective. We do not want loopholes or opportunities for tax evasion, but I wonder how effective they will be under the current system, because the Government have set a generous annual allowance. US citizens are still able to put in £500,000, or near enough—albeit not £1.5 million, but still a large sum. If they do so in the year when the pension is invested, when they claim an ill-health pension or if there is a redundancy package, the annual allowance does not apply anyway.

I am not going to divide the Committee on this issue—it is a complex extra administrative burden on the system. We will take it on trust when the Government assure us that the annual allowance is necessary. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 217 ordered to stand part of the Bill.

Clause 218 ordered to stand part of the Bill.

Clause 219 - Cash balance arrangements

Clause 223 - Defined benefits arrangements

Clause 224 - Defined benefits arrangements:

George Osborne (Conservative, Tatton)

I beg to move amendment No. 422, in

clause 224, page 186, line 17, leave out from '223(4)' to end of line 18.

Clauses 223 and 224 are about calculating the increase in the value of the defined benefit pension over the year for the purpose of testing it against the annual allowance. Clause 223 introduces the simple factor of 10 as a method of evaluation for active members.

Clause 224, to which my amendment applies, is about deferred members of defined benefit schemes. Increases in accrued rights up to the higher of either the rate of inflation or 5 per cent. do not count towards the annual allowance. This might be fair for deferred members, but it seems a bit unfair on active members, and the treatment is inequitable. Our amendment attempts to create a level playing field, as it would extend the adjustment to the pension at the beginning of the pension period by extending it to both active and deferred members: both could enjoy an uprating without it counting towards an annual allowance. It seems a bit strange that the Government are treating deferred members differently from active members. By the way, in the cash balance plans in clause 220, where the measurement method is very similar, there is no distinction between deferred and active members. If that is the case with the cash balance plans, why is it not the case with defined benefit plans?

Ruth Kelly (Labour, Bolton West)

I am afraid the hon. Gentleman has completely misunderstood the purpose of clause 224, which provides for an adjustment to be made to the pension input amount for defined benefit arrangements in cases where the member does not during the year actively accrue rights under the arrangement. The effect of that adjustment is to reduce the pension input amount by the greater of 5 per cent., the rate by which the retail prices index has increased over the year or the rate provided for in Inland Revenue regulations. The amendment seeks to extend the effect of this clause to cases where the member is actively accruing rights, but the hon. Gentleman fails to appreciate that clause 224 is there purely to ensure that members who do not accrue rights under an arrangement are not put to any trouble of calculating their pension input amounts for the purposes of the annual allowance.

I will give the Committee a couple of examples of how that might work in practice. Many deferred pensions are, under the rules of the scheme, increased by a flat rate of 5 per cent. a year. The clause ensures that deferred members of such schemes do not have to worry about the annual allowance charge. That will be the case even when the inflation rate is low, as it is and as we intend to keep it. Furthermore, many pension schemes are obliged to apply what is called statutory revaluation to the future pensions of deferred members. The regulations made under the clause—I have sent draft copies of them to the Committee—will ensure that where the statutory revaluation is greater than the RPI or 5 per cent., the amount of the statutory revaluation is again ignored for annual allowance purposes.

However, we want to capture the savings of active members of defined benefit schemes to calculate their pension input amount. There is no unfairness in that. The generous annual allowance, which we have just been debating, and the annual increase in that allowance will allow their pension savings to grow by a real amount without being subject to a tax charge.

The hon. Gentleman draws attention to the treatment of cash balance arrangements. They are dealt with under clause 220. However, clause 220 is there for an entirely different purpose. It allows members of cash balance arrangements to deduct whichever is higher, RPI indexation or 5 per cent., from their pension input amount. That provides broad parity of treatment with other money purchase arrangements, under which only the contributions and not the investment build-up are taken into account for annual allowance purposes.

Clause 224 is merely intended to help deferred members of schemes. We actively want to capture active members of such schemes. I therefore urge the hon. Gentleman to withdraw his amendment.

George Osborne (Conservative, Tatton)

The Financial Secretary accuses me of misunderstanding the clause. In that case, the people in the pensions industry who proposed the amendment have also misunderstood the clause, which seems to prove that the Government have not made their case very clearly. She says that it is all about saving trouble

for deferred members, and actively capturing active members. However, surely the Government could have spared active members the trouble of going through the process if the increase had been within the 5 per cent. or RPI range. However, I will not press the matter to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 224 ordered to stand part of the Bill.

Clauses 225 to 227 ordered to stand part of the Bill.

Clause 228 - Scheme sanction charge

Clause 236 - Taxation of non-pension benefits

Clause 237 - Registered pension scheme return

Clause 238 - Information: general requirements

Clause 239 - Notices requiring documents or particulars

Clause 242 - Assessments under this Part

Clause 244 - Registered pension scheme return

Clause 246 - Documents and particulars required by notice

Clause 254 - Lifetime allowance charge

George Osborne (Conservative, Tatton)

I beg to move amendment No. 419, in

clause 254, page 206, line 21, leave out 'and (b)' and insert 'or

(b) the scheme administrator reasonably believed that the liability would be met by another person, and in either case,

(c)'.

I supposed that you would kill me, Mr. McWilliam, if I moved the amendment formally.

John McWilliam (Labour, Blaydon)

Order. If the hon. Gentleman wants to move the amendment formally, he could always reply.

George Osborne (Conservative, Tatton)

Clause 254 allows a scheme administrator to apply to the Inland Revenue to be

excused from a lifetime allowance charge on the ground that an administrator ''reasonably believed'' that there was no such liability. I shall speak narrowly to the amendment because I know that my hon. Friend the Member for Arundel and South Downs (Mr. Flight) wants to catch your eye, Mr. McWilliam, to talk about the stand part debate.

The amendment would simply add another ground upon which a scheme administrator could apply to the Inland Revenue when

''the scheme administrator reasonably believed that the liability would be met by another person''.

If someone takes several pensions from several schemes at the same time and goes over the lifetime allowance and the scheme administrator is told by that person that another scheme is dealing with it, it cannot be right for the scheme administrator to be penalised. I am not sure whether that situation is covered by the clause because the scheme administrator could not claim that they thought that there was no liability. They would have been aware that there was a liability, but thought that someone else was dealing with it.

The point is narrow and one would hope that the Inland Revenue would, in practice, exercise discretion, but I am not sure whether the legislation would allow it to exercise that discretion. Therefore, it might be useful for the Inland Revenue to take that on board.

Ruth Kelly (Labour, Bolton West)

I shall try to respond purely on that point, given that the hon. Member for Arundel and South Downs wants to talk about the purpose behind the clause. It is quite difficult to discuss the amendment without discussing the purpose behind the clause, however. The question is whether it is reasonable for the Revenue to discharge the scheme's liability where the scheme has written an agreement that the member or other scheme will pay. We have to both protect the Exchequer and enforce the lifetime allowance charge where it is legally due, giving schemes a let out only in the very narrow circumstances that I have described.

Schemes have to accept that they are liable for the lifetime allowance charge. It would be unwise of a scheme to enter into an agreement with a member, for example. Such an agreement would not relieve the scheme of its tax obligations. It would be even more unwise for it to enter into an agreement with another scheme because another scheme would have no liability for a lifetime allowance charge arising in respect of a different scheme.

I do not agree that it is appropriate to provide the tax to be discharged to the detriment of the Exchequer simply because the scheme has entered into some understanding with someone that they would satisfy the scheme's liability. On that basis, I ask the hon. Gentleman to withdraw his amendment.

George Osborne (Conservative, Tatton)

There is the potential for some injustice here, where a scheme administrator doing everything possible to discharge their obligations is misled by the member of the scheme and then gets clobbered by the Inland Revenue. However, one would hope that in practice the Inland Revenue will exercise a bit of discretion and, if not, in the event of an appeal to the commissioners, that it would see that

there were grounds for common sense. However, as my hon. Friend the Member for Arundel and South Downs wants to develop some of the broader points during the stand part debate, I shall not press the amendment to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Howard Flight (Conservative, Arundel and South Downs)

The clause provides that the administrator will pay the charge where members of the scheme are over the lifetime limit. It strikes me that in principle and, to a lesser extent, in practice, the Government's proposals are somewhat flawed in that area because there is no obligation for the scheme to recoup what it has paid from the member either in straight money or through adjusting their pension.

A growing number of senior people in the public sector will be caught by the lifetime limit, such as justices, senior people in the judiciary and senior executives in local authorities, and I have even been surprised to discover that a number of doctors in my constituency have pensions that will already be over the lifetime limit. To put it bluntly, any part of the public sector could, if it so chooses, simply pass the bill on to the taxpayer. That would constitute a stealth situation where public sector pensions are increasingly subsidised by the taxpayer, while private sector pensions are increasingly hit by higher taxes.

Even within the private sector, to the extent that there are comfortably funded defined benefit schemes left that become better placed in the next few years, a situation could develop where the scheme foots the bill for senior staff who are generously pension provided. We want to hear what the Government have to say about that, but otherwise we may want to see whether an amendment can be tabled on Report that clearly obliges the pension scheme to recoup the excess from the member.

Rob Marris (Labour, Wolverhampton South West)

Would not the trustees of the pension scheme be in breach of their fiduciary duties if they did not seek to recover that tax in the scenario outlined by the hon. Gentleman? There is already adequate protection.

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his intervention. He is the lawyer, not I, but I am not certain that he is necessarily correct, because the trustees could argue that they had no legal basis on which to recover the tax. There might be certain extant agreements—in local authority pension schemes, for example—where existing agreements with members would be breached.

I hope that the hon. Gentleman is right, but as I am advised that there is not an automatic and secure legal position in which the scheme administrator is obliged to recover the tax that they have paid out, I am interested to hear what the Government have to say. It is not good enough to say, ''We certainly think that that will happen in all cases.'' Will it happen in all cases and, if not, what are the cases in which it will not?

Ruth Kelly (Labour, Bolton West)

We are straight into what happens to the lifetime allowance charge. The hon. Gentleman thinks that there should be a requirement for schemes to reduce members' benefits to fund the tax, arguing that in public sector schemes, for example, the taxpayer could end up footing the bill. In fact, he will be interested to know that the Inland Revenue pensions simplification team benefited from a review conducted by Watson Wyatt, benefits consultants, which asked schemes how they were likely to react in that situation. It says:

''Of the changes being considered, the overwhelming majority are looking at options which do not increase costs to the company with only a very small percentage willing partially to compensate executives for the increase in tax.''

In fact, over 95 per cent. of companies said that they would not consider compensating employees for any increased tax. It is perhaps not surprising that the overwhelming majority will reduce members' benefits to fund the tax.

I put it to the hon. Gentleman that, as part of the recruitment and retention benefits resulting from this change for higher earners, perhaps it is right that employers should have as much as freedom as possible over how and whether they choose to remunerate high earners in different ways. That could be one consequence of the simplification proposal that we introduce. If schemes choose to absorb some of the lifetime allowance charge, they will want to consider how to do so.

Howard Flight (Conservative, Arundel and South Downs)

I would be grateful if the Financial Secretary could confirm that the Watson Wyatt survey covered only private sector pension schemes. I am particularly interested to know the position for public sector pension arrangements, because the taxpayer, not the company, would ultimately pick up that bill.

I appreciate the Financial Secretary's arguments in favour of flexibility, but she confirms the Government hope that the charge will be passed on at the bottom of the heap, citing surveys to demonstrate its likelihood. There is no certainty that it will be passed on. It would be absolutely wrong if, in the public sector, it was not passed on but levied on the taxpayer. If I recollect, it would mean that the Lord Chancellor, the Prime Minister and potentially quite a large number of highly paid people would escape the limits imposed by the new regime.

Ruth Kelly (Labour, Bolton West)

I will deal with both points. First, on the private sector, I do not have a view about how firms arrange their recruitment and retention or form their executive packages. It is a decision best made by the firms themselves. They could either allow the individual member of a scheme to pay the lifetime allowance charge—they could decide under our new arrangements that they wanted to supplement that with an unfunded scheme that is not subject to pension tax privileges—or they could absorb some of the charge themselves. Clearly, the firms should make that decision when they design their recruitment and retention packages. It would not be right for me to tell them what to do.

However, the hon. Gentleman's point on the public sector is of real public interest. Let me put it on the record absolutely plainly that public sector schemes

will ensure that the individual meets any lifetime allowance charge. There will be no exceptions. The Government, as the employer, will not pay the charge for the individual. As the hon. Gentleman rightly pointed out, that would, in effect, constitute an increase in remuneration.

Howard Flight (Conservative, Arundel and South Downs)

Can the Financial Secretary confirm that that includes local government?

Ruth Kelly (Labour, Bolton West)

It includes the other members to which the hon. Gentleman referred, and I believe that it also includes local government. If it does not, I shall write to him to correct that answer.

Question put and agreed to.

Clause 254 ordered to stand part of the Bill.

Clauses 255 to 258 ordered to stand part of the Bill.

Clause 259 - Trustees etc. liable as scheme administrator

Clause 260 - Members liable as scheme administrator

Clause 263 - Relevant valuation factor

George Osborne (Conservative, Tatton)

I beg to move amendment No. 420, in

clause 263, page 214, line 9, leave out '20' and insert

'the number certified from time to time by the Government Actuary which is appropriate having regard to the age of the individual.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to take amendment No. 421, in

clause 263, page 214, line 13, leave out 'than 20' and add

'or less than the appropriate number certified by the Government under subsection (1).'.

George Osborne (Conservative, Tatton)

With these amendments and this clause, we return to the familiar discussion about the relevant valuation factor; in other words, the factor of 20, by which a defined benefit pension is multiplied to calculate the lifetime allowance. As I have said, it allows someone with a defined benefit scheme to draw a pension of £75,000, while those with a defined contribution scheme are likely to be allowed a much smaller pension—some £20,000 less.

In case the Financial Secretary has not been persuaded by my arguments during the past fortnight—there is certainly no evidence that she has been—let me quote a senior Inland Revenue official who, before joining the Revenue, made a submission to the Treasury Committee. I refer to Mr. Edward Troup, who has just become head of the Treasury business unit, as my hon. Friend the Member for Arundel and South Downs reminds me. In a personal memorandum submitted to the Treasury Committee, he stated:

''The debate over the size of the cap on tax privileged pensions has over-shadowed the question of how that cap should be measured. The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefit schemes.''

That is a man whose judgment the Financial Secretary trusts enough to put him in charge of one of the important departments of the Treasury. It is surprising, therefore, that she has not listened to him on this matter. No doubt, once he gets his hand on internal policy advice, the Government's position may change, but for the moment he has had to put his position publicly.

There is also an element of inequity in the defined benefit pension world, because a 55-year-old with a pension of £75,000 has the same lifetime allowance as a 74-year-old, even the day before his or her 75th birthday. In other words, the system is generous to those who retire young, and not so generous to those who work longer and retire later. That runs contrary to everything else that the Government are trying to achieve—getting people to work longer or, as the Financial Secretary puts it, giving people the opportunity to work longer.

I already said that there is merit in having a simple 20 to 1 valuation. I know that the Association of Consulting Actuaries proposed it. I merely raise, through probing amendments, the question of whether there is a danger that it is too simple and unfair on older people.

My amendment would leave it to the Financial Secretary's best friend—the Government Actuary—to provide the valuation factor. I assume that he would group people by age, so, by way of illustration, for 55 to 60-year-olds, there might be a 25 to 1 valuation, for 60-year-olds a 20 to 1 valuation and so on. That would also allow the valuation factor, even if just a single factor, to be varied in light of changing mortality without the need to amend primary legislation.

Before the Government rubbish what I just said, I point out that it is exactly what they proposed in

December 2002 in their original consultation document. When they first considered the issue, it was their solution. The Financial Secretary explained the benefits and the simplicity of the 20 to 1 valuation factor. I agree with that and I have said so. Will she also let us into some of the thinking that went on in the Inland Revenue about the possible disadvantages of a single valuation factor, what perverse incentives it might have on people choosing early retirement dates and whether there is a degree of unfairness for older people in defined benefit schemes? I would be grateful if the Financial Secretary explained why the Government changed their mind.

Rob Marris (Labour, Wolverhampton South West)

Mr. McWilliam, will you allow this debate to drift into stand part, rather than just being on the amendments, because we are talking about the numbers?

John McWilliam (Labour, Blaydon)

The amendment is quite specific, whereas clause stand part is wider. I suggest that the hon. Gentleman wait till clause stand part if he wants to go wider.

Ruth Kelly (Labour, Bolton West)

I was intending to deal with some of the general arguments as well.

John McWilliam (Labour, Blaydon)

The Financial Secretary can do so in clause stand part.

Ruth Kelly (Labour, Bolton West)

Let me deal then with the amendments under consideration. The amendments seek to replace the 20 to 1 valuation factor that we have adopted on the basis of recommendations from the Institute of Actuaries and the Association of Consulting Actuaries, among others. An actuary was seconded to the simplification team from the private sector to work on the issue. The amendments seek to replace that simple approach with a much more complex one, where individual calculations are based on tables produced at intervals by the Government Actuary. A range of GAD tables would be needed for each age group. To be fair, it would probably be necessary to update those tables regularly. One might also argue that one had to factor in the period over which the benefit had accrued, and indeed perhaps to provide differentials between men and women. It is quite easy to see how those tables could become extremely complex over time. In fact, the use of tables could completely undermine one of the main purposes of pension simplification, which is to be as simple and understandable as possible. So, on that very narrow point, I suggest that hon. Gentleman withdraw his amendment.

John McWilliam (Labour, Blaydon)

Order. In view of the ruling that I just gave to the hon. Gentleman, if he has any general points he can make them on clause stand part.

George Osborne (Conservative, Tatton)

It seems strange that the Financial Secretary says that my amendment would completely undermine the simplicity of the pension arrangements. If that is the case, why were tables originally the Government's idea? Let me read you the sentence, Mr. McWilliam, from the 2002 consultation document. The section on the lifetime limit says that

''the Inland Revenue will publish actuarial tables determining the capital value of defined benefit rights for people of different ages in different kinds of scheme.''

That was what the Government were planning to do. It then says that they listened to the Association of Consulting Actuaries, and I am glad that they did on this occasion, although they did not do so on some other amendments that we have advanced in this Committee, some of which the association proposed.

As I said when I introduced this amendment, I am not saying that the Government are wrong.

John McWilliam (Labour, Blaydon)

Order. May I assist the hon. Gentleman? The amendment itself is quite narrow, but he is asking a question that should be put on clause stand part.

George Osborne (Conservative, Tatton)

Thank you, Mr. McWilliam. I was merely wondering why the Financial Secretary and the Government had moved away from the scheme in my amendment, which was something that they had originally proposed. However, I have made the point, and I am looking forward to the lengthy clause stand part debate that we are about to have. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Rob Marris (Labour, Wolverhampton South West)

We have had a debate on the amendment on simplicity, and I now turn to subsection (2), leaving aside for a minute the grossly inelegant wording starting with a conjunction, which was certainly not allowed when I did English language O-level many years ago.

Chris Bryant (Labour, Rhondda)

Dickens did it all the time.

Rob Marris (Labour, Wolverhampton South West)

Dickens may have done, but he did not have an English O-level.

In that subsection the Government are departing from 20 to 1, but what concerns me, as a non-practising solicitor, is that there appears to be no adjudication process built into the provision as to what happens if the Inland Revenue and the scheme administrator are unable to agree on a departure from 20 to a number greater than 20. It does not appear that the individual prospective pensioner, about whom the valuation would be made, has any say in the matter. I would like some clarification from the Minister on that.

Ruth Kelly (Labour, Bolton West)

First, I will deal with some of the other points made in the debate on the amendment which are more relevant to the stand part debate. Let me return to the hon. Member for Tatton's contention that we should somehow depart from the 20 to 1 valuation factor. He points to the quote from Edward Troup, a fine man who has recently been hired by the Treasury rather than the Inland Revenue, I believe, to add his considerable expertise to our deliberations. It is true that we have integrated private sector secondees into the pension simplification team over the last few years when looking at this sort of question, and they are convinced, as are we, that 20 to 1 is the right valuation factor to use. We do not want to introduce extra complications for the pension providers by departing from that simple factor. I do not want to re-run the debate that we have had in previous sittings, but the move away from our original proposals to the

20 to 1 factor has been widely welcomed throughout the pensions industry, although I know that the hon. Gentleman's colleague has a different view as, I am sure, do some other hon. Members. However, in general, the proposals have been widely welcomed.

George Osborne (Conservative, Tatton)

The Financial Secretary skirted over the point about Edward Troup, who is a fine man. He was a special adviser to the last Conservative Chancellor and I am delighted that he is now advising the Government. He said:

''The current proposed method of valuation carries a risk of inequities and inappropriate incentives being created between money purchase and defined benefits schemes.''

That is in a public document that he submitted to the Treasury Committee. Does the Financial Secretary agree with her Treasury official?

Ruth Kelly (Labour, Bolton West)

Mr. Troup was certainly not a Treasury official, and if he expressed those views, I am sure that he has been persuaded by his colleagues in the Treasury since he joined them. Mine is the right valuation factor.

We have highly experienced representatives of the pension industry on the simplification team and they are firmly of the view that 20 to 1 is the right valuation factor to use. It is the most simple and accurate method available and they recommended it.

Howard Flight (Conservative, Arundel and South Downs)

May I follow up the point raised by the hon. Member for Wolverhampton, South-West? Subsection (2) says to me that it would empower the Revenue and the administrator to say that people retiring at 55 in a defined benefit scheme should have a 25 to 1 factor applied. What does it mean if not just that?

Ruth Kelly (Labour, Bolton West)

I shall come to that in a moment after addressing the point made by my hon. Friend the Member for Wolverhampton, South-West.

Should we apply a lower factor to, for example, older people such as the hon. Member for Arundel and South Downs, who, if I dare say so, has a keen personal interest in these issues?

John McWilliam (Labour, Blaydon)

Order. Does not the Minister think that I have?

Ruth Kelly (Labour, Bolton West)

I have already explained to the Committee how it is possible for individuals to switch between DB and DC schemes to suit their personal circumstances, but we are not prepared to over-complicate the system to assist the tax planning of a very small minority of people who have pensions at or around the level of the lifetime allowance. A lower factor of, for example, 15 to 1 for people to take their pensions late would encourage them to use registered pension schemes not to provide a pension but merely as a tax-free savings vehicle for as long as possible. That is all very well for those who do not need to crystallise their funds at the usual age, but it would complicate the system for the vast majority of people.

The hon. Member for Tatton made the case that 20 to 1 favours people who take their pensions at 50 compared with 75. We are merely replicating the

system that was introduced by his party in 1989 under which individuals were able to draw up to £70,000 whether at the age of 50 or 75. We are merely replicating the previous regime.

Rob Marris (Labour, Wolverhampton South West)

Is my hon. Friend aware that in personal injury law, which I have practised for many years, a series of actuarial tables known as the Ogden tables set out the multipliers to be used for loss of earnings? If a 35-year-old man, for example, earning a certain amount net each year were sufficiently seriously injured never to be able to work again, the tables show what the multiplier should be. They cover people in such circumstances, who are, I strongly suspect, far fewer than the number of people who retire each year.

Ruth Kelly (Labour, Bolton West)

My hon. Friend makes an interesting point, but he will agree that we should design the system to benefit as many people as possible rather than complicate it just to assist tax planning for a few individuals.

To return to the previous point made by my hon. Friend and the hon. Member for Arundel and South Downs, a higher factor would apply only when both the scheme and the Revenue agreed to it. If there were no such agreement and the scheme rules did not fall within the parameters assumed by the factor of 20, when increases in pensions in excess of inflation of 5 per cent. occurred, scheme members would be subject to the benefit crystallisation event rule. There would be no advantage for schemes or individuals in not negotiating a higher valuation factor were that to be appropriate. I think I have covered the points raised, and I therefore urge the Committee to agree to the clause.

Question put and agreed to.

Clause 263 ordered to stand part of the Bill.

Clause 264 ordered to stand part of the Bill.

Clause 265 - Other definitions

George Osborne (Conservative, Tatton)

I could not let the clause go unremarked because it is difficult to imagine a more seemingly innocuous clause in any legislation having a more profound effect. On the bottom of page 214, in line 43, it states that

'' 'normal minimum pension age' means—

(a) before 6 April 2010, 50, and

(b) on and after that date, 55''.

That is extraordinary. The clause is headed ''Other definitions'', and most of the definitions are of fairly straightforward terms, such as the Board of Inland Revenue, the tax year and the retail prices index. It is the sort of thing you find in Finance Bills, as you will know from your experience, Mr. McWilliam, where mop-up clauses are included at this point in the proceedings. However, the Government are changing the minimum pension age from 50 to 55 in the clause by simply changing a definition. That is a profound change that will affect millions of people every year. I

point it out because it would be extraordinary if the Committee had not at least paused to consider such a big change in working practice.

Of course, the Government consulted on the matter as part of what they rather euphemistically called ''flexible retirement''. Their idea of flexible retirement is to increase the minimum pension age. The Financial Secretary talked earlier about giving people the opportunity of working longer by increasing the age at which they could retire. I do not disagree with the decision, but I shall ask her to comment on a couple of issues.

First, why have the Government decided not to use the tax rules to phase in the new minimum retirement age? Of course, it is up to schemes how they do that, which is made quite clear in the consultation. However, the December 2002 consultation paper asked for further consultation on using the tax rules to achieve that as well as how schemes might go about it. It is perfectly possible that that might be included in the Bill so that, for example, the minimum retirement age would be 50 in 2010, 51 in 2011, 52 in 2012 and so on. That would avoid the cliff edge whereby a person born on 6 April 1960 could not take a pension at the age of 50 but would have to wait five years longer to retire than someone born the day before.

Rob Marris (Labour, Wolverhampton South West)

I was born on 8 April.

George Osborne (Conservative, Tatton)

My poor friend—the hon. Gentleman has felt like a friend during the last two weeks—says that he was born on 8 April 1960.

Rob Marris (Labour, Wolverhampton South West)

I did not say it was 1960.

George Osborne (Conservative, Tatton)

The hon. Gentleman was merely telling us his birthday, in which case it is a less interesting point.

A person born on 6 April 1960 will not be allowed to retire at 50, unlike a person born the day before. That has created quite a cliff edge. As I said, there are other ways of making the change; for instance, the Government could have phased it in over a period of years. I will be interested to hear an explanation from the Financial Secretary since the change will affect many people, and they will feel that they have been unfairly treated.

The Government have also said that people can keep a contractual right to retire at 50 in an occupational scheme. However, that will not apply to people with personal pensions. Some people will have paid higher contributions in order to retire at 50, but will not be able to do so, even though they have paid for the privilege, because it is not a contractual right. Is that another example of one rule for defined benefit schemes and a less generous rule for defined contribution schemes? Does the Financial Secretary have any idea how many people who have defined contribution schemes were planning to retire at 50 and have paid higher contributions to be allowed to do so?

The Bill contains a provision that allows people from certain professions, such as footballers, to retire early. Perhaps the entire England football team will have to retire in a couple of hours if they do not perform. [Hon. Members: ''Oh!''] I am sure that they

will perform—I say that not least because half of them are my constituents. I wish them well. It is sensible to allow people in certain professions—I think the Government have cited ballet dancers as an example—to retire early.

However, what provision is there for the public sector? There are certain jobs in the public sector in which it is pretty normal for people to retire before the age of 55. I think that the average retirement age in the police is below 55. Do the Government envisage that that will continue even after the increase? Does the retirement age apply to everyone, including workers in the public sector? If so, what impact will that have on the Exchequer and on public pay and recruitment policies over the next few years? What impact will it have on the police and the Army? This is a major change. I am not against it, but it is important that the Government set out their position.

Rob Marris (Labour, Wolverhampton South West)

Perhaps surprisingly, I want to echo some of the comments made by the hon. Gentleman. I have had letters from constituents, particularly teachers, who are very concerned about the change, and I suspect that other hon. Members have, too. I would be interested to hear the Financial Secretary's explanation not for the change per se, but for having a cliff edge, as the hon. Gentleman described it, rather than the kind of phasing that we have moved towards for other retirement ages. It seems difficult that someone born a couple of days apart from someone else would face a five-year cliff edge—that is the way I read the clause.

Ruth Kelly (Labour, Bolton West)

I must admit that I was not expecting a debate about the normal pension age under this clause, which deals with other definitions. We will have a full debate next week about the transitional arrangements that will apply to members of different pension schemes. That will include the opportunity to debate the footballers' pension scheme and the transitional arrangements that will apply to the police, the armed forces and the fire service. However, I am happy to touch on some of those points now.

As the hon. Member for Tatton knows, the increase in the normal pension age from 50 to 55 is an integral part of our simplification reform. It is part of the policy agenda put forward and advocated by the Department for Work and Pensions to encourage active ageing—rather than ageing actively—and to push up the distribution of ages at which people retire, so that on average people can stay in the work force longer. As he knows, and as I am sure my hon. Friends know, we have a real problem in this country with people being forced out of the labour market when they are over the age of 50—and in some cases even earlier—or finding it difficult to stay on after that age. That is why we have introduced the new deal for older people. This tax reform fits in neatly with our overall agenda of encouraging people to stay longer in the work force.

The reform is part of a package that facilitates flexible retirement for the first time. If people want to stay in the work force beyond the age of 55, they can now do so on a part-time basis, while drawing down a pension to supplement their income. The Treasury has been considering that idea for many years, but it has

not proved possible to come up with a scheme to accommodate it. We have now been able to produce a package that does that, obviously taking the overall cost to the Exchequer into account. The increase in the minimum normal pension age is essential to allow us to bring in flexible retirement. I hope the hon. Gentleman would agree that that is a useful and essential reform.

We had a choice as to how to bring in the reform. We were aware of the human rights implications and how people would adjust. We carefully considered whether to bring it in at a specified date, or whether we should allow schemes to choose when to bring it in to suit their members and indeed to reflect their members' demographic make-up. We put out that precise question for consultation. The consultation document asked for views on whether it should be left to schemes to decide, or whether the Government should prescribe a phased introduction between A day—the date we turn on the pension simplification—and 2010. The document also asked for views on the need for special transitional rules for people who have already built up rights to a pension before the age of 55 in existing schemes. I intend to deal with the relevant clauses when we debate the transitional provisions next week.

The response to the consultation was mixed. Some respondents agreed that schemes ought to be allowed to phase in the changes. Others argued that the Government should prescribe them. On the whole, we thought that there was more force to the argument that the schemes should be allowed to bring in the changes in a way that suited their members best, which is why we decided to introduce the changes as we did. That is an integral part of our reform.

George Osborne (Conservative, Tatton)

Can the Financial Secretary say what the big public sector schemes are likely to do? Are they likely to phase in the changes, or will there be a single day when suddenly, come 2010, someone born on 5 April 1960 can retire, but someone born on 6 April 1960 will have to wait another 5 years? Many of the defined benefit schemes are in the public sector. Perhaps she could explain what the Government, who are the biggest employer in the country, are going to do.

John McWilliam (Labour, Blaydon)

Order. There are times when I wish I had been born in 1960, but unfortunately it was a bit before that.

Ruth Kelly (Labour, Bolton West)

As the hon. Gentleman knows, my right hon. Friend the Chief Secretary is carrying out negotiations with other Government Departments about reform in respect of the armed forces, the police and the fire service. That has been deliberately left out of the current proposals because there are special factors, including the tradition—and in certain circumstances, the necessity—of some members of those schemes taking early retirement. He will understand that that is the right way to deal with that issue.

George Osborne (Conservative, Tatton)

The Financial Secretary seems to be suggesting that the public sector will look at the

tradition of policemen retiring early and so on, and take that all into account. What about those in private sector occupations where there is a tradition of retiring early?

James Purnell (Labour, Stalybridge and Hyde)

Tory MPs.

George Osborne (Conservative, Tatton)

Well, there are going to be a lot of Labour MPs retiring in the next few years, and it is going to be of interest to them as well. Is there going to be a special consideration for those in the public sector?

Ruth Kelly (Labour, Bolton West)

Yes. I believe the Opposition have been sent the draft regulations on public sector schemes, which suggest that we preserve early retirement ages in certain circumstances, and I suggest that the hon. Gentleman looks at them.

The hon. Gentleman draws attention to the tradition of early retirement ages in the private sector. We will probably re-run this debate on Tuesday, when we come to discuss the transitional provisions. Certain representations have been made to me and to Treasury and Inland Revenue officials that certain professions would have liked to see themselves being carved out and treated differently, for a variety of reasons. We are considering each case on its merits to decide whether there is an objective justification for special treatment.

George Osborne (Conservative, Tatton)

Will the Financial Secretary at least give me an assurance that, in respect of the normal minimum retirement age, the Government will not treat public sector employees any differently from private sector employees? I think that private sector employees would be outraged if they were forced to work longer, while the privileges of the public sector were protected.

Ruth Kelly (Labour, Bolton West)

Given his involvement in all areas of pensions across Government, the hon. Gentleman should know that public sector schemes have begun to move in the direction of age 55. We have been in negotiations with public sector schemes for a number of months, if not years, to arrive at sensible solutions that command the support of both our vital public services and the Government's policy agenda.

It is a different situation for private sector schemes. Certain private sector schemes have a tradition of early retirement. Perhaps it would be better to say that they have a tradition of an early cessation of a particular occupation, before people move into a different occupation.

Footballers fall into that category. I had strong representations on behalf of his members from Gordon Taylor of the Professional Footballers Association. We are considering the points that he made and investigating whether there is a way to accommodate his concerns in the pensions regime. I suspect that that will prove difficult. We are also looking outside the pensions regime to see whether the Professional Footballers Association, for example, might be able to continue its highly redistributive pension scheme without the tax reliefs associated with pensions, which tend to benefit footballers about the age of 35. The same considerations apply to other sporting professionals, members of Equity, ballet

dancers, deep-sea divers and so on, all of whom have early normal pension ages.

Quentin Davies (Conservative, Grantham and Stamford)

The hon. Lady says that she would like to continue the discussion about transitional arrangements for specific occupations on Tuesday. That is fine, but it may, under your stern chairmanship, Mr. McWilliam, be difficult to carry forward to Tuesday the issue of the cut-off that will take place in the year 2010 and the falling-off-the-cliff effect—the fact that, on one day, people will be allowed to retire at 50 and someone who was born a day later will not be able to retire for another five years.

Will the hon. Lady be able to address that point this afternoon and tell us whether there might be any flexibility in the Government's attitude on that point? I think that a genuine anomaly is being created and that it may not have been created on purpose.

John McWilliam (Labour, Blaydon)

Order. That was more a point of order. What we are coming on to is specific and I would not rule out this afternoon's debate having any effect on the issue on Tuesday. I am also conscious that we are talking about 2010. It is 2004 and my sums tell me that 2010 is six Finance Bills away.

Ruth Kelly (Labour, Bolton West)

Mr. McWilliam, you make an excellent point. There is a considerable time before 2010. We consulted on the best way to bring in the provisions. Those we consulted suggested allowing schemes maximum flexibility. As the hon. Member for Tatton said, there was a mixed response, but there was significant support for the position that we took. It was not the case that more were in favour of the prescribed approach, which was the alternative. I suspect that the debate will continue at length on Tuesday. I commend the clause to the Committee.

Question put and agreed to.

Clause 265 ordered to stand part of the Bill.

John McWilliam (Labour, Blaydon)

For the record, I am going to retire at the next election, so that is six Finance Bills that I will not be chairing.Clause 266 Abbreviations and general index

Clause 266 - Abbreviations and general index

Clause 267 - Minor and consequential amendments

Schedule 33 - Pension schemes etc: minor and consequential amendments