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Pensions Bill [HL]

My Lords, the amendment would require that an annuity without indexation bought by a cash balance scheme member or the pension provided by the scheme must be no less than that available on the open market option. In moving the amendment, the noble Baroness, Lady Drake, raises an important issue. It is important that individuals can shop around to get the best type of annuity for them at the best available rate. This will affect their level of income for the rest of their lives. This clause, which gives members of cash balance schemes more choice about the shape of the income that they take in retirement, will support this. However, in compelling members to take a pension of no less than that available on the open market option, there arises a practical difficulty. Annuity pricing is now highly individualised. Most providers offer rates by postcode. Enhanced and impaired life annuities also offer significantly higher rates for those with health conditions or lifestyles that are likely to reduce their life expectancy. This makes it difficult to establish what the right open market rate for comparison should be and very difficult for schemes to establish a workable process to find out what a member is likely to be offered on the open market. In addition, different types of annuity offer different starting payments. For example, an individual might wish to buy an annuity with a guarantee period. This is likely to give a slightly lower payment, but it gives the member a guarantee that the annuity will continue to be paid if they die before the end of the guarantee period. This is unlikely to represent the best available rate on the market, but is it right to deprive the individual of this choice? For these reasons, I believe that any amendment of this nature would be unenforceable and, as a consequence, unworkable in practice. I would like to pick up one of the questions that the noble Baroness asked with reference to further reforms to the state pension. It is too soon to speculate about those—certainly, it is too soon for me to speculate about them. We believe that it would be too difficult in practice for schemes to separate out periods of contracted-out service. The same scheme member may have periods of contracted-out and non-contracted-out service. There is also a danger of the possible franking of one benefit against increases to another. All those schemes that have been contracted out on a defined contribution basis no longer have to provide an indexed annuity. Schemes that are contracted out on a defined benefit basis, either where a guaranteed minimum pension is payable or on a reference scheme test basis, have to provide indexation to the relevant level. With that explanation, I urge the noble Baroness to withdraw the amendment.