The issue that my hon. Friend has raised is covered by amendment 73, tabled by our hon. Friend the Member for Reigate (Crispin Blunt). If the House will allow me, I intend to allow our hon. Friend and others to make their points and then to respond to them, rather than trying to pre-empt that debate now. However, the FCA will indeed have more to say on these matters in due course.
New clauses 7 to 12 and new clause 13 create a safeguard to ensure that those who transfer from defined benefit to defined contribution schemes have received appropriate independent advice before doing so. That is important, because continuing membership of a DB scheme is likely to remain most people’s best option. However, the Government recognise that the attractiveness of transferring from DB to DC may increase for a limited number of people as a result of the reforms to DC savings.
New clause 7 creates a requirement for trustees and managers of a scheme to check that a member has received appropriate independent advice before converting a “safeguarded benefit” to a “flexible benefit”, or making a transfer payment in respect of safeguarded benefits to a scheme in which the member will acquire flexible benefits. In this context, the term “member”
extends to any current or former employee, and any survivor of a member with subsisting rights to “safeguarded benefits”.
Subsection (2) enables the Secretary of State to set out in regulations the exact details of the regime that trustees or managers must abide by in checking that advice has been taken. Subsection (3) allows the Secretary of State to make regulations to allow exceptions to be made to the advice requirement, which will allow us, for example, to exempt those with a small amount of defined benefit wealth from the requirement to take advice. That approach was set out in the Government’s response to the consultation on freedom and choice in pensions, which was published in July this year.
Subsection (6) establishes that should a trustee or scheme manager fail to carry out a check, the scheme member will not be disadvantaged if the conversion or transfer of his or her benefits is ruled invalid. To ensure that trustees and scheme members carry out the required check, subsection (5) provides for certain civil penalties already used in the regulation of pensions to apply.
New clause 8 enables the Secretary of State to make regulations that set out the circumstances in which employers must pay for advice that is required by the advice safeguard. As we say in our response, we intend these circumstances to be, first, when a transfer is as a result of an employer-led transfer exercise, and secondly when a transfer is between DB and DC sections within the same scheme.
Subsection (2) allows the Secretary of State to ensure that the arrangement is fair for the employer by making regulations that can cap the amount that the employer must pay for advice on behalf of the member. It also allows the Secretary of State to take fairness to the member into account by making regulations preventing employers from attempting to pass the costs of advice back to members. Subsection (3) enables the Secretary of State to make regulations ensuring that employers will have to pay for the advice of former employees who continue to hold accrued DB rights in the employer’s scheme, as well as current employees.
New clause 9 is consequential to new clause 7. It ensures that trustees or scheme managers are not penalised for failing to comply with the provisions in new clause 7 for reasons outside their control—for example, when a check has been carried out, but it has not been possible to establish whether the member received appropriate independent advice. New clauses 10, 11 and 12 and amendments 82, 83 and 84 make provision parallel to that in clauses 7, 8 and 9 for Northern Ireland.
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New clause 13 introduces a specific exemption for income tax purposes that ensures that, where advice provided under new clause 7 is paid for or reimbursed by the employer under new clause 8, it does not count as a benefit in kind or employment earnings and therefore does not become taxable as employment income. There will also be a corresponding disregard for national insurance purposes.
We are introducing the exemption to prevent increased administrative burdens on participating employers in having to report the value to Her Majesty’s Revenue
and Customs, and to prevent any liability to income tax for individual employees or their employers resulting from provision of the advice, which the Government are mandating. The amendment therefore introduces a new section into the Income Tax (Earnings and Pensions) Act 2003 which sets out the broad scope of the exemption. The detailed rules will be set out in regulations and the amendment also provides the power to achieve that.
To ensure that the exemption works as intended, the income tax exemption will not be valid if the employer-funded financial advice is provided as part of a salary sacrifice arrangement, in which an employee gives up a portion of their salary in exchange for a non-cash benefit from the employer. A further minor and technical amendment proceeds from that. Amendment 40 ensures that provisions are extended to Northern Ireland, while amendment 42 ensures that the change to the Income Tax (Earnings and Pensions) Act, among others, comes into force on Royal Assent.
After careful consideration and consultation, the Government decided to allow transfers from private sector DB to DC schemes to continue. For the majority of people, it will remain in their best interests to stay in their DB scheme. However, for some it may be better for their personal circumstances to transfer and access their funds flexibly. The principle underlying the Government’s reforms is that it is the individual who is best placed to make that judgment, not the Government. However, the amendments introduce an important safeguard, which will ensure that individuals are fully informed when they come to make decisions about their pension saving.