21:59 - The House divided: - Ayes: 276 / Noes: 19 - Question accordingly agreed to.
The Chief Secretary to the Treasury (Danny Alexander)
I beg to move, That the Bill be now read a Second time.
The Public Service Pensions Bill represents the final building block of the Government’s commitment to reforming public service pensions. It is an important measure that will affect the pensions of millions of public service workers for decades to come. It is the culmination of a process that started more than two years ago when the coalition Government invited the former Labour Secretary of State for Work and Pensions, Lord Hutton of Furness, to undertake a fundamental review of public service pensions. Lord Hutton’s independent public service pensions commission undertook its responsibilities with thoroughness. It consulted and met a wide range of interests and considered a wealth of expertise and viewpoints, and more than 3,000 pages of evidence were submitted in response to it by more than 250 bodies.
Mr Jim Cunningham (Coventry South) (Lab)
Will the right hon. Gentleman give way?
Danny Alexander
I will give way, although it is rather early in my speech. Perhaps the hon. Gentleman wants to make an urgent point about Lord Hutton.
Mr Cunningham
I appreciate that the Government commissioned the Hutton report, but surely that report would not have been needed had they honoured the previous Government’s commitment to civil servants and public service workers.
Danny Alexander
I shall deal with the good reasons why further reform is needed later in my speech.
Lord Hutton’s conclusions of March 2011 set out a clear and compelling case for further reform. He found that the status quo was not tenable, that there had been an unfair sharing of costs between the employer, the employee and the taxpayer, and that previous reforms had not fully addressed the underlying issues of sustainability and fairness. His recommendations were equally compelling, and those for the future design of schemes fall into three broad categories, the first of which is safeguards to ensure that the long-term costs of pensions are sustainable. That is achieved through a link between the state pension age and normal pension ages in the majority of schemes, and a cost-cap mechanism to protect the taxpayer in the event of other unforeseen costs.
John Healey
The Chief Secretary lays great stress on the Hutton report, so why did not the Chancellor wait until Hutton reported before hitting public service workers with a 3% surcharge on their pension payments?
Danny Alexander
I did not mention Lord Hutton’s interim report, but I am happy to do so now for the benefit of the House. The right hon. Gentleman will know that Lord Hutton produced an interim report in October 2010 that said that there was a case for rebalancing member contributions. We followed that advice and came forward with our proposals as part of the general programme to repair the public finances and clear up the mess that the Labour party left.
Mr Donohoe
The Chief Secretary is a Scottish Member, so I presume that he is aware of negotiations north of the border. If the Scottish Executive make different decisions, how will they fund them? Will the Treasury fund them?
Danny Alexander
The hon. Gentleman makes a good point. I will deal with this subject in detail later in my speech, but I shall turn to it briefly. In respect of the pension schemes that are devolved to the Scottish Government, the Northern Ireland Government—their Finance Minister, the hon. Member for East Antrim (Sammy Wilson), is in the Chamber—and the Welsh Government, those Administrations are free to negotiate within the parameters in the Bill and the cost ceiling that has been set out. I understand that such negotiations are ongoing. Should Scottish, Welsh or Northern Irish Ministers wish to offer more financially generous terms, they are entirely within their rights to do so, but the additional costs will have to be met from their budgets. They have complete freedom to do that and I know that they will want to consider it.
Mr Anderson
The Chief Secretary said that there was a fairness imbalance between employers, employees and the taxpayer. What was fair about a public body such as Royal Mail taking a 13-year pension contribution holiday when the members of the scheme had to carry on paying?
Danny Alexander
The hon. Gentleman will know that Royal Mail is a public corporation, and therefore not within the scope—
Danny Alexander
Let me respond to one intervention before I take another. I know that the hon. Gentleman is keen for me to clarify one of my points—I am sure that I will be able to do so—but let me respond to the important matter raised by the hon. Member for Blaydon (Mr Anderson). As part of our measures to support Royal Mail, we recently took its pension scheme on to the Government’s balance sheet. Many schemes took holidays during the previous Government’s time in office—
Danny Alexander
Indeed. Perhaps schemes took holidays even under the Government before that one. In many cases, members regretted such action in retrospect. The Bill is about public service pension schemes—by and large unfunded, with the exception of the local government scheme—that desperately need reform.
Mr Russell Brown
In response to my hon. Friend the Member for Central Ayrshire (Mr Donohoe), the Minister made it clear that the devolved Administrations would need to fund anything different that they wished to do. However, will he clarify the situation fully? We know that the devolved Administrations must fund those differences, but will there be an additional financial penalty through the block grant allocation?
Danny Alexander
No, there will not. Let me describe how this works. The negotiations that my ministerial colleagues and I conducted in UK Government Departments allow considerable flexibility within the parameters of the Bill—for example, the link between the state pension age and normal pension age, and the move away from final salary—and within the so-called cost envelope set up around the schemes. For example, the hon. Gentleman will note that the teachers pension scheme has agreed a different balance between accrual rates and revaluation factors for its new scheme from that for the health workers pension scheme. There is great flexibility in the provisions, provided things stay within the cost envelope. Under the Bill, the devolved Administrations are free to make more generous provision, as happened with the offer for prison officers. The Ministry of Justice agreed to fund an additional element of the proposed scheme to enable prison officers to have enhanced early retirement factors beyond those that were affordable within the cost envelope. The Ministry had offered to put additional resources on the table from its own departmental expenditure limits, and that was part of the offer that prison officers sadly rejected. Should the devolved Administrations wish to do something similar, they will be within their rights to do so, at their own expense.
Sammy Wilson (East Antrim) (DUP)
One of the options open to the devolved Administrations was for their pension schemes to be included in the Bill. In Northern Ireland, the Executive decided not to take that option, which could mean that, simply because of the timing of the legislation, the new scheme will be in place here, but not in Northern Ireland, even if Northern Ireland decides to follow suit. Will there be a penalty if there is a time gap between the implementation of the legislation in the rest of the United Kingdom and any delayed implementation in Northern Ireland?
Danny Alexander
I am not aware of any technical reason why a time gap should occur, but I know that officials in the Northern Ireland Department of Finance and Personnel discuss this regularly with my officials in the Treasury. If there is any evidence of such an occurrence, I will be happy to consider it in the normal way. There have been regular discussions on these matters, not least in our Finance Ministers quadrilateral. We will meet again in a couple of weeks in Edinburgh, when this subject will be on the agenda, so we can discuss it then.
Katy Clark (North Ayrshire and Arran) (Lab)
The Chief Secretary will be aware that several of the Bill’s provisions will affect Scottish pension schemes for the first time. There is a debate in Scotland about whether a legislative consent order is required, so will he address that point in detail in his speech?
Danny Alexander
I certainly will, when I come to it.
Lord Hutton’s first set of recommendations consisted of safeguards to ensure that the long-term cost of pensions was sustainable through a link between state pension age and normal pension age, and included a cost-cap mechanism to protect the taxpayer in the event that other unforeseen costs arose. He recommended that the new schemes should be fairer by smoothing the current disparities between high and low-income earners and ensuring that benefits are distributed more equally, which was why he recommended a move from final salary provision to career average revalued earnings—CARE—schemes. Finally, he recommended stronger governance provisions for the new schemes so that scheme members and the public could understand how the schemes were run and what they cost.
We accepted all 27 of Lord Hutton’s recommendations as the basis for discussion with trade unions and scheme member representatives across the public service, and designed our blueprint reference scheme in a way that reflected the recommendations of the Hutton report without any cherry-picking. Our aim was to strike a deal that would last, unchanged, for 25 years. Talks with the unions took place on all elements of that deal. I should stress that the Government did not do all the talking in those meetings—we listened carefully, too. Agreeing the design of these pensions has taken a considerable cross-Government effort over the past 18 months. The Minister for the Cabinet Office, the Home Secretary, the Lord Chancellor, the Education Secretary, the Defence Secretary, the Communities and Local Government Secretary and the former Health Secretary worked hard to understand the concerns of the trade unions and member representatives in their sectors.
Richard Fuller (Bedford) (Con)
The Chief Secretary talks about a deal on pensions that will last over the long term. Lord Hutton specifically ruled out moving from defined benefit to defined contribution schemes. We currently do not account for the cost of public sector pensions within our public debt numbers. Would it not have been wiser to have looked for a system that included the long-term costs for public sector pension schemes if the Government wanted to achieve such long-term sustainability?
Danny Alexander
The hon. Gentleman will know that Lord Hutton addressed that issue. The costs of such a transition would have been enormous and very disruptive, and I think that the recommendation on the career average revalued earnings scheme is preferable from that point of view. He will also know that the new whole of Government accounts presentation of the public finances takes detailed account of the unfunded liabilities in public service pension schemes. That means that the public and the House have precisely the information that he wants transparently available, so I hope that he regards that as progress.
Andrew Selous (South West Bedfordshire) (Con)
On the issue of fairness, does the Chief Secretary agree that private sector workers can only look at guaranteed retirement benefits with envy, especially because most of them would have to pay more than one third of their income to achieve equivalent benefits?
Danny Alexander
Yes, I agree. We need better pension provision across the work force. That is why I think the national employment savings trust scheme is an important step forward. That basic pension scheme, which is available to the 12 million or so members of the country’s work force who do not have any pension provision, was recently launched by the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), and had its origins under the previous Government. It is a good thing all round that we have agreed a reform to public service pensions that makes significant cost savings and ensures that public servants continue to have access to among the best pension schemes available.
We all wanted to find a solution that was sustainable, affordable and fair, as did the vast majority of trade unions and negotiators for the non-unionised work force. Thanks to both sides’ commitment to constructive talks, I am pleased to say that the final proposed designs have been issued for all major public service schemes. I thank Brendan Barber and his TUC negotiating team for the mature and constructive way in which they approached these talks. It has taken many hours of discussion to get where we are today, and I am grateful that the majority of trade unions brought sensible, workable solutions to the negotiating table, rather than grandstanding. The final scheme designs reflect that hard work.
The trade unions took those scheme designs to their memberships as the best that could be achieved through discussion, and the majority of the unions have accepted the proposed agreements. The turnout in the ballots held by the unions that rejected reform was low—less than 30% in most cases—which is hardly a compelling mandate for an ongoing dispute. The Public and Commercial Services Union decided to reject the offer before it was finalised, without first seeking the views of its membership, which was not a reasonable way to approach a set of reforms affecting more than six million public servants.
There is no point in further dispute or threats of strikes regarding public service pensions. We have set out a good and fair deal that protects those rights already earned and puts fairness at the heart of future pension provisions.
Mr Jim Cunningham
The comparison between private sector and public sector pension schemes is variable, as not all public sector schemes are good. However, what discussions has the right hon. Gentleman had about the various provisions in the Bill affecting employees? More importantly, if the Bill is passed, what method of consultation will he allow on changes to the various schemes?
Danny Alexander
We have taken great care to work with the TUC. We have taken it through the text of the Bill, listened to its concerns and made adjustments where necessary. This has not just been done through the scheme negotiations; we have also been open by sharing the Bill with trade union colleagues. Given the long-term nature of the reform and the fact that it affects so many people, it was important to engage properly. My departmental colleagues have engaged closely with representatives of the relevant work forces to ensure that that has happened.
The Bill sets out a framework for the schemes, with some restrictions, and in due course we will have to produce regulations to set out the design of each scheme. There are well-established processes within Departments for working with employers and employees on such details. My experience is that those processes work pretty well, and there is a pretty good co-operative spirit among the pensions experts around the table. I therefore do not foresee any problems but, of course, if the hon. Member for Coventry South (Mr Cunningham) does, I would be delighted for him to bring them to my attention so that I can try to resolve them.
Danny Alexander
I will make some progress and give way to the hon. Lady later.
I return to Lord Hutton’s four key tests for the future design of public service pensions: affordability, fairness to public service workers, fairness to the taxpayer and transparency. Those objectives have prevailed throughout the process and remain the cornerstones of the Bill. First, on affordability, it is clear from Lord Hutton’s report that the new scheme should be affordable and sustainable. The Bill represents a significant proportion of the total of more than £430 billion of savings that our reforms of public service pensions are estimated to save over the next 50 years.
James Duddridge (Rochford and Southend East) (Con)
Those of us on the Government Benches are quite often accused of reminding those on the Opposition Benches that they left us with a massive deficit and unsustainable debt, but in fairness is it not true that these reforms would have had to happen even without the awful economic legacy we were left?
Danny Alexander
I agree with that, and I would add that, frankly, these reforms could have been made in the 1980s or 1990s, as well as the 2000s. In fact, we have to go back quite a few decades to find the root of the problems we are having to tackle in this Bill, which I think we are doing very effectively.
The remainder of the £430 billion of savings are generated by the Government’s decisions to change their policy on the indexation of pensions and payments from the retail prices index to the consumer prices index, and, as has been mentioned, to increase the contributions that public servants pay towards their pensions, rebalancing the costs more fairly between them and other taxpayers. The combined effect of those changes will help to restore the health of the British economy, reduce the size of our deficit and correct the unsustainable 40% increase in costs there has been over the last 50 years.
Andrew Gwynne (Denton and Reddish) (Lab)
I am grateful to the Chief Secretary for giving way. Does he recognise that the Government have to be careful and approach this issue in a much more balanced manner? There is a danger that if more people opt out of occupational pensions because they find them unaffordable, that could end up costing the Treasury more in the long run through means-tested benefits.
Danny Alexander
I would say that we have handled this process in a balanced and sensitive way throughout, in recognition of the fact that the changes affect millions of public service workers. In response to the hon. Gentleman’s concern, which was raised a number of times in the talks, I would say that none of us wants to see increased opt-outs from pensions, for the reasons that have been mentioned on both sides of the House. We have put in place a process for reviewing the next stage of the contribution increase in the light of opt-out data from the first year. I am sure he will be pleased to hear that there is no evidence of increased opting out in response to this year’s increase in contributions. However, we will review the matter again next year before proceeding with the third phase of the increases, so he makes a serious and important point.
The reforms treat not only the symptoms of delayed reform but the underlying problem. Therefore, they are forecast to reduce the cost of providing public service pensions by around 40% over the next 50 years, returning costs to their historic long-term average. Clause 9 deals with the principal risk that needs to be managed if pensions are to be affordable and sustainable: longevity. Longevity has improved significantly over recent decades, which is a very good thing. As a result, the state pension age has increased. The Government are therefore asking public service workers in due course also to retire later. In a society where we are all living longer and where fellow citizens in the private sector are expected to retire later, it is both fair and right that the public sector retirement age should rise with the state pension age. As Lord Hutton says, improvements have continuously been underestimated in the past, which has led to the cost of providing pensions rising significantly over recent decades. As such, clause 9 provides that in future the normal retirement age in the public schemes will be set at the state pension age. As Lord Hutton identified, this change will move the proportion of adult life in retirement for public service pension scheme members back to where it was in the 1980s. More important, by linking the scheme retirement age to the state retirement age, we will ensure that further improvements in longevity are tracked. That is the main way in which the Bill will ensure that the cost of public service pensions cannot again spiral out of control, but will remain affordable and sustainable long into the future.
Mr Anderson
The Chief Secretary talks about longevity, but what does he think the proposals will mean for the longevity of a mental health nurse who is 67 and a half years old, goes to work every day and ends up literally fighting with patients?
Danny Alexander
We will conduct a regular review, as Lord Hutton suggested, which will enable issues such as those the hon. Gentleman has raised to be taken into account. They were raised and discussed in the scheme talks. In the end, employee and employer representatives both agreed that the modelling we are using—which is similar to that used in the deal struck under his Government—is the right, fair and balanced way to take such matters forward across the whole work force.
John Healey
The Chief Secretary will be aware that there is a working longer review in the NHS that is looking into the question of working longer in particular disciplines in the health service. Will the provisions in the Bill allow flexibility in the link between the normal pension age and the state pension age, depending on the conclusions of that review?
Danny Alexander
If I may, I will come to that issue in a moment. The arrangements for the NHS pension scheme have been agreed, and the reforms have been taken forward on that basis. That includes the link between the normal pension age and the state pension age.
Danny Alexander
I will go on with my speech, if I may. I hope that I will be able to answer the hon. Gentleman’s question as I do so. I will not take interventions at the moment, as this is an important subject. I will perhaps take some at the end of this section.
We have all heard the cries “68 is too late”, along with similar slogans, but it is crucial that people understand the facts behind the proposals in the Bill. The pension age is a calculation point, not a fixed date up to which people must work in order to receive their pension. Public service workers will still be free to choose when to retire, either earlier or later than the state retirement age. When a person retires at a different age, their pension benefits will be adjusted, to take account fairly of the fact that they are taking them earlier or later than the date against which they have been costed. People will still have the freedom to choose when to retire, however. The Bill does not deprive public servants of that choice.
Lord Hutton said that the Government should ensure that the link between the public service schemes and the state pension age should be reviewed to ensure that it continued appropriately to track longevity. We will do that. The Bill does not provide for such a review, however, and nor should it. We have already committed to come forward with details of how the review of the state pension age will be conducted. We will review the normal pension age of the schemes, to consider whether the state pension age appropriately tracks longevity in the public service schemes. The process will be determined once the detail of the state pension age review system is settled. That is the right way to proceed, and it would be inappropriate for the Bill to attempt to second-guess that.
Mark Durkan
The Chief Secretary is emphasising the importance of clause 9 in facilitating future adjustments in relation to pension ages. Why, then, does he also seek to justify the Henry VIII provision in clause 3, which will allow the Government radically and retrospectively to alter pension terms at any time, or times, in the future?
Danny Alexander
The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born, and it has been used by a number of Governments to make adjustments to public service pensions. We have set out in the Bill certain elements of the scheme, particularly the pension age link, and the fact that the schemes need to be CARE schemes and certainly cannot be final salary schemes in future. The provisions to which the hon. Gentleman refers are in fact more limited than those in the 1972 Act. It is appropriate that we continue in broadly the same way, because that has stood the test of time. I hope that, by setting out the Government’s intentions here and in Committee and by undertaking detailed negotiations with work forces, we will have ensured that people know precisely how we intend to use these powers. I think it is clause 23—I might have got that number wrong—that refers directly to the 25-year guarantee that I mentioned earlier. I hope that that will give people some assurance that our scheme designs will stand the test of time.
John Healey
With respect, intentions are one thing but the terms of the legislation are another. Is my reading of it wrong? As I understand it, the provisions will not allow flexibility for some groups of NHS workers in the link between the normal pension age and the state pension age. Clause 9(3) states:
“The deferred pension age of a person under a scheme under section 1”—
including NHS workers—
“must be…the same as the person’s state pension age”.
That suggests that there will be no flexibility. Am I right or wrong?
Danny Alexander
The right hon. Gentleman is absolutely right to say that the link between the state pension age and the normal pension age is fixed in the legislation. That is a matter that was discussed in the negotiations, including the detailed negotiations with health service unions. The point I was seeking to make was that, as Lord Hutton recommended, we have agreed to review how that link operates at each stage at which the state pension age is increased, to enable those issues to be debated.
Danny Alexander
I will give way one more time, then I must make some progress. There is a lot of detail to get through.
Katy Clark
Clause 9(2) means that firefighters would not be able to retire with a pension until they were 60. Many in the industry believe this is unworkable. What would the right hon. Gentleman suggest to firefighters who cannot work until they are 60?
Danny Alexander
In that case, we followed the recommendations of Lord Hutton—and, indeed, previous practice. The point I made just a moment ago—I am sure the hon. Lady was listening carefully—is that the provision does not stipulate the date to which people must work. Clearly, if people wish to retire earlier, they can do so and take an actuarially reduced pension or, indeed, retire later and take an actuarially enhanced pension.
Danny Alexander
I am going to make some progress, if I may.
The second and third tests of Lord Hutton were fairness to public servants and fairness to taxpayers. The Government have worked hard to ensure that the reformed pensions are fair and continue to provide a generous level of retirement income for public servants as a fair reward for a career spent serving the public. The Government made a commitment that these schemes would be at least as generous at retirement for those on low and middle-income earnings. We have delivered that commitment in a number of ways.
First, clause 16 allows transitional protection to be provided for those who have already had a long career in public service and are approaching retirement. I said in November last year that the offer provided that those within 10 years of their normal pension age on 1 April this year would not see any changes to their pension, nor the date at which they can draw it. The Bill ensures that the current final salary schemes will remain open to people who are covered by the transitional protection criteria in those schemes. Most of the proposed final scheme designs include the transitional offer as we set it out; however, the local government scheme in England and Wales has chosen alternative arrangements as sought by their trade unions and employers.
Secondly, we have honoured our commitment to retain the final salary link for people who have already built up some service in final salary schemes, as the provisions in schedule 7 make clear. Although these people will move on to CARE schemes by 6 April 2015 at the latest, their accrued years of final salary benefits will be calculated and paid at their final retirement salary—not their 2015 salary.
Most importantly for low and middle-income earners, we are putting the fairness back into public service pensions. Clause 7 provides that the new default for public schemes will be based on career average earnings, rather than on final salary. Final salary schemes are unfair to the majority of the work force as they disproportionately reward those who progress to senior roles compared with the majority of staff who have more consistent career paths. These outmoded schemes provide lower effective benefit rates to the people that carry out the core front-line work in our public services—the nurses, police officers and our armed forces whose work is so valuable to everyone here.
Career average schemes are fairer to the members and to taxpayers alike. Under final salary schemes, it is the taxpayer that picks up the cost of those high flyers who attain high salaries by the time they leave public service. Such members can receive twice as much in benefits per £1 of contributions that they have paid towards their pension. This is clearly unfair, which is why this Bill will not allow final salary schemes to continue after 2015. For members, pension benefits will be based on the amount that they earn over their career. That means their pension benefits will directly reflect the contributions that they and their employer make over their career.
The Bill ensures that these pensions remain among the very best available—and rightly so, if we are to continue to be able to recruit and retain the right people to undertake these crucially important roles. A key objective of the reforms is to ensure a fair balance of risks between scheme members and the taxpayer. To achieve this, Lord Hutton recommended that the Government establish a mechanism to control the future costs of pensions.
Clauses 10 and 11 establish an employer cost cap in the public service schemes. This will provide backstop protection to the taxpayer to ensure that any unexpected risks associated with pension provision are shared between employers and scheme members. With foreseeable longevity risk controlled through the pension age link, this really is a backstop, which under normal circumstances should not need to be used. Everyone in a public service pension scheme will see their pensions reformed along the same lines. I do not believe in special cases at a time when we are reforming the pension arrangements of those who provide essential services to the public.
John Healey
I promise not to intervene on the Chief Secretary again, but I want to ask about the employer cost cap in clause 11. On the front of the Bill, the Chancellor has signed a declaration that the provisions of the Bill
“are compatible with the Convention”.
It is clear from clause 11(7), however, that the Bill allows schemes to provide for reduction of accrued benefits as part of the employer cost cap. This would be a fundamental breach of scheme members’ rights under article 1 of protocol 1 of the convention, so how can the Chancellor’s statement on the front of the Bill be true?
Danny Alexander
I do not think that the right hon. Gentleman is right in this instance. In fact, had the “cap and share” arrangements introduced by the last Government been allowed to operate, they could have manifested themselves—[Interruption.] No, the right hon. Gentleman is wrong. They could have manifested themselves in both a reduction in benefits and an increase in costs to members. The right hon. Gentleman is free to explore the matter in Committee, and I am sure that he will.
I should add that I have some further information relating to the right hon. Gentleman’s earlier intervention. The working longer review is acknowledged in the proposed final agreement on the NHS pension scheme, which specifically states that early retirement factors allowing retirement before the state pension may be considered should the review suggest that that is necessary.
As we have established, public body pension schemes and public service schemes operated by the devolved Administrations are required to make equivalent changes to their schemes as swiftly as possible. In the case of public body schemes, it has not been possible in all cases to complete the reform process according to the same timetable. As I said in a written ministerial statement on 16 July, reform is definitely on the cards for these organisations, and the Government aim to complete the work by 2018.
Speaking of special cases, the House should note that the Bill will also close the generous and outdated “great offices of state” pension schemes. They have outlived their usefulness in the modern world. I am glad that the Bill will close them to new office holders and will ensure that people in such roles are given the same pensions as Ministers. As I am sure Members are aware, the Prime Minister waived his entitlement to such a pension when he took office. The current Lord Chancellor is making arrangements to do likewise, as did his predecessor. Mr Speaker announced on the day that we published this Bill that he would retain the pension, but would take it only when he reached the age of 65 rather than drawing it as soon as he left office.
Lord Hutton’s fourth key test related to governance and transparency. The reformed schemes should be widely understood, both by scheme members and by taxpayers. People understand what is in their pay packet each month, and it should be just as easy to understand how their pension works. Under the Bill, the schemes will have robust and transparent management arrangements.
Clause 5 provides for each scheme to have a pension board which will work to ensure that the scheme is administered effectively and efficiently. There will be local pension boards in the case of the locally administered police, fire and local authority schemes. The boards will consist of member representatives, employer representatives and officials. They will operate in a similar way to boards of trustees, holding scheme administrators to account and providing scheme members and the public with more information about the pensions. The board members will be identified publicly, and their duties will be made clear to scheme members. I welcome the greater transparency that the Bill will bring to this area of public pension administration.
Clause 15 and schedule 4 provide for an extension of the role of the pensions regulator, who will improve and police the management and administration of all the new schemes. The regulator is independent of Government, and will be able to utilise its full range of powers to ensure that the public schemes are managed properly and to consistently high standards. Clauses 12 and 13 will ensure that all schemes collate and publish information to improve transparency and enable comparisons to be made between them.
Since the Bill was published, I have received a number of questions about its design. It establishes a common framework of delegated powers which enable schemes to be made in respect of the public service work forces. The common framework constrains the use of those powers on core parts of pension scheme design, such as the link between state pension age and normal pension age, the career average pension structure, and the abolition of the final salary link. Those core elements are fixed in this legislation in order to create fairness and an even degree of cost control across the work forces.
At the same time, the Bill allows flexibility when that is appropriate, enabling the secondary detail of the pension schemes to be adjusted in recognition of the differences between different areas of public service work. Members will know that the final scheme designs agreed vary significantly from work force to work force, properly reflecting differing priorities and concerns within the cost ceilings that I established. The approach builds on that taken in the Superannuation Act 1972, which set out a framework of delegated powers some 40 years ago.
Mark Durkan
The Chief Secretary has just mentioned the Superannuation Act 1972 again. Does he accept that section 2(3) of that Act specifically prohibits retrospective effects, whereas clause 3 of the Bill specifically allows them?
Danny Alexander
There are some technical areas in which that may be necessary, but in practice the adjustments that we are making in the clause to which the hon. Gentleman has referred—and also in clause 11(7), which was mentioned earlier—allow the design of future benefits to change to ensure that costs are controlled, but do not allow changes to accrued benefits. The Bill, however, takes a more balanced approach than the Superannuation Act. The core elements for all public pensions are set out in the Bill. This serves as an important constraint on the delegated powers, to ensure our main objectives for reform are met.
I have also heard representations from Members of the devolved Administrations, but I think we have addressed that matter through earlier interventions. The Bill contains some minor areas that touch on devolved matters in Scotland and Wales, and I have written to all the devolved Finance Ministers to request that they seek legislative consent motions for the appropriate provisions. The Bill covers Northern Ireland, and the Minister of Finance and Personnel there—the hon. Member for East Antrim—has indicated that the Executive are considering a legislative consent motion to that effect. As to the progress of reform discussions in Scotland and Wales, the Government have made it clear that these Administrations have exactly the same flexibility in discussions with their trade unions as Whitehall Ministers have had, and within those parameters there is a great deal of flexibility.
Members who have followed this issue closely will know that the path to these reforms has been a long one, but it has also been a collaborative journey. The public debate on these pensions has been happening ever since this Government came to power more than two years ago. Some 18 months have passed since the Independent Public Service Pensions Commission published its final report, and discussions with trade unions and negotiators have taken place continuously since then. It is now time to take the final step by codifying the key elements of these reforms in legislation.
The framework set out in the Bill provides Parliament, public service employees and taxpayers with an assurance that the new schemes will be consistent, transparent and effectively managed. More than that, it requires new schemes to have common retirement ages, to provide benefits on a fairer basis and to include cost control mechanisms to protect members and other taxpayers from unforeseen changes in the cost of providing pensions.
The Government have set out a settlement that represents a good deal for public sector employees and a good deal for the taxpayer. It recognises the enormously valuable contribution that public sector workers make to our society and ensures a fair balance of contributions between public sector workers and other taxpayers. Taken together, these reforms will ensure that these pensions are sustainable for a generation. That is why the Bill proposes to create a high barrier for future changes to these elements of pension scheme designs. That means that any Government wishing to adjust them within the next 25 years would be required to jump a very high hurdle to do so.
In the UK’s long-term interests, we are facing up to tough decisions that Labour failed to address during its time in office, and we have done so while engaging with the unions every step of the way. We have made huge savings that were long overdue while protecting the entitlement of public service workers to a very good pension in retirement, giving public servants the confidence that future Governments will not need to make further reforms, and giving taxpayers confidence that never again will these costs be allowed to balloon out of control. These reforms therefore also help to repair the mess that Labour made of our public finances.
Fair, affordable, sustainable, good pensions that last: this is a new pension settlement for a generation, and I commend this Bill to the House.
The Economic Secretary to the Treasury (Sajid Javid)
I thank Members for the lively debate that we have had this evening. In the short time that I have spent as Economic Secretary, I have been helping the Government to try to get three Bills through Parliament, this being the third. In each case, the Opposition have backed off from calling a Division. I am becoming a little concerned: I hope that that does not become a pattern of behaviour.
The Bill represents a milestone in the history of public service pension provision, and I am not surprised that some Members feel strongly about it. Legislation that affects the pension rights of more than 6 million public servants is worthy of serious consideration and scrutiny.
I think that we should bear in mind the economic backdrop to these reforms. During its last year in government, the Labour party burdened the UK with the largest budget deficit since the second world war and the largest in the developed world. It amounted to £159 billion. Labour was borrowing £5,000 a second, which means that it would have borrowed about £90 million between the moment we started today’s debate and now. [Interruption.] The hon. Member for Leeds West (Rachel Reeves) asks how much we are borrowing. That gives me a good opportunity to remind everyone that we have cut the deficit by a quarter. That is what has brought the country economic credibility, and that is what has kept interest rates low and given us the time in which to make serious long-term adjustments to public spending costs.
Sajid Javid
I will in a moment.
Because of their long-term nature, pension reforms will not save money quickly, but they make an essential long-term contribution to the health of public finances. We have heard that today from a number of Conservative Members, including my hon. Friends the Members for Bognor Regis and Littlehampton (Mr Gibb), for Bromley and Chislehurst (Robert Neill), for Monmouth (David T. C. Davies), and for Thurrock (Jackie Doyle-Price). As the Chief Secretary has said, it has been forecast that the Bill will save UK taxpayers £65 billion over the next 50 years.
Richard Fuller
My hon. Friend talks of savings for the taxpayer. Will he admit that this was a golden opportunity for us to convert public sector pensions from a “tax as you go” model to a fully funded scheme, saving future taxpayers billions and bringing true fiscal prudence to the way in which public sector pensions are set? Why has my hon. Friend missed that golden opportunity to go further and save future taxpayers more money?
Sajid Javid
My hon. Friend raised the same issue in his speech. I think it fair to say that that would have involved an excessive fiscal cost, and would have been much more complex than the approach that we have taken. I hope my hon. Friend accepts that.
In preparing this policy, we have been careful to follow the recommendations set out by the former Labour pensions Minister Lord Hutton in his independent report. We have heard much about trade unions today. The head of the TUC, Brendan Barber, whom I met recently to discuss our reforms, has described the report as a “serious piece of work”. He has taken a very constructive approach to the problems that the Government are trying to address.
While we are on the subject of trade unions—
Sajid Javid
I will give way to the hon. Lady in a moment. If I remember correctly, she said in her speech that she was taken aback by the support for the public sector that she observed among Conservative Members. Well, she had better get used to it. My father was a bus driver. He was a proud trade union member, and he was the first person from whom I learned about the importance of our trade unions, and I will never forget that. That is why, in putting this important piece of legislation together, we have been working with trade unions to win their support, and I am pleased we have got it.
I think the hon. Member for Hayes and Harlington (John McDonnell) said that not a single trade union supported our approach. A majority of trade unions have accepted the deal. Unions representing approximately two thirds of members have accepted our proposed schemes.
John McDonnell
The Minister must listen to debates. What I said was that not a single trade union supports this Bill in its current form.
Sajid Javid
As I said, unions representing two thirds of union members have accepted our proposed schemes, and the vast majority of unions have taken a very constructive view.
Sheila Gilmore
I thank the Minister for giving way. I want to take him back to what he said previously. As usual, he chose to frame his comments in the context of the deficit. His Government came to power saying that they would eradicate the deficit within the term of this Parliament. Now, after two and a half years, he says that we should be grateful that he has reduced it by a quarter. His economic policies are not working.
Sajid Javid
I was expecting a lot more than that from the hon. Lady. I am proud that this Government have already cut the deficit her Government left behind by a quarter. That is a significant achievement. The shadow Chief Secretary, the hon. Member for Leeds West, said she was unable to commit to keeping the CPI change we have introduced to public sector pensions beyond the term of this Parliament. According to the Office for Budget Responsibility, that would leave a black hole in the public finances of up to £250 billion in current GDP terms over the next 50 years. I look forward to hearing how the Opposition plan to fill that black hole.
John Healey
The Minister spoke warmly about his father and trade unions. Which trade unions support this Bill as it currently stands? Can he name even one?
Sajid Javid
Since we received the first interim report from Lord Hutton, we have been in negotiations with trade union representatives from almost all the major trade unions. I am pleased to say that most of them have taken a very constructive approach. As I said, trade unions that represent two thirds of trade union members have accepted the schemes we have put forward.
These reforms are not easy, but they are the right thing to do for the long term because they are in everybody’s interests. We must stop the cost of these pensions spiralling out of control. I shall now turn to some of the issues raised today.
Several Members, including the hon. Members for Banff and Buchan (Dr Whiteford) and for Blaydon (Mr Anderson), mentioned the link between the normal pension age and the state pension age. The reality is that we are all living longer and enjoying healthier lives in retirement. The average 60-year-old is now expected to live 10 years longer than in the 1970s. Pension ages of 60 and 65 were set in times when people spent only a few years in retirement, but that is no longer the case. Some fortunate people spend more years drawing their pension than earning their salary. If everyone is living longer, it is only fair that people work a bit longer, too; otherwise we will be asking those in the private sector to work longer and pay more so that those in the public sector can retire earlier having paid less. We cannot ask those people to pay twice over—once for their own pensions and once for those of public servants.
Let me be clear, however: this Government are not forcing anybody to work for longer. As now, it will remain possible to retire earlier than the normal pension age and draw a reduced pension, subject to any minimum age rules that exist. Of course, any benefits from the current schemes can be assessed in full and reduced at the current pension age for those schemes.
Secondly, I must remind the House that the Government have honoured their commitment to protect the rights of those closest to retirement. The Chief Secretary has made it clear that people who were 10 years or less from their normal pension age on 1 April 2012 will see no change in their pension. The Bill delivers that in clause 16.
Dr Whiteford
I take the Minister back to the point he made a moment ago. Will he concede that most people who give up work early do so not through choice but because their health has collapsed or they have developed long-term debilitating conditions that prevent them from doing their job?
Sajid Javid
The hon. Lady makes a fair point, which is why in many of the schemes, particularly those where that might be a bigger issue, the rules try to take it into account. I hope that she will welcome that.
I do not have much time left and I wish to address some of the specific points that have been made. Some questions were asked about the cost cap embedded in the Bill. That cap is designed as a backstop only, and it will be triggered in unforeseen circumstances that lead to large potential changes in costs. It ensures that cost increases do not go unchecked again, as they did for decades before the introduction of this Bill.
A number of Opposition Members talked of the “cap and share” arrangement put in place by the previous Government as though it meant that no further changes were required to public sector pensions. Let me remind hon. Members of what Lord Hutton said in his report:
“cap and share cannot take account of the increases in cost of pensions over recent decades because people have been living longer.”
Had we kept the arrangements introduced by the previous Government, these questions would not have been answered.
A number of hon. Members also talked about opt-outs. As my hon. Friend the Member for Bromley and Chislehurst said, and as my hon. Friend the Member for Gloucester (Richard Graham) explained well, the incidence of opt-outs as a result of the changes to payments that have already been introduced has had no discernible effect on the use of these pension schemes, but the Government will continue to monitor opt-outs and take opt-out data fully into account before making any decisions on individual schemes.
A number of Opposition Members also raised the issue of public sector pay. Again, Lord Hutton’s commission examined that, and said that public sector workers, on average, had higher pay if account was taken of different qualifications, ages and experience levels. That was also borne out in a report by the Institute for Fiscal Studies.
We also heard some questions about the devolved parts of this Bill, with the hon. Member for Banff and Buchan asking a number. I will not have time to go into them all, but she is right to say that for parts of the Bill we will require a legislative consent motion, and we hope that that will be forthcoming. For the small parts of pension legislation where there is some flexibility for Scotland, Scotland has the flexibility to do something differently, but that would involve a change.
Sajid Javid
I am afraid I do not have time.
In conclusion, we believe that the changes we have made are generous. They provide a fair settlement and deal with public sector pensions in a manner that is sustainable in the long term. The pensions allowed for under the Bill will continue to be among the best available, providing levels of retirement income that many in the wider economy cannot hope to achieve. There will be tapered protections. Public servants will know how much money they can expect to retire on and will have a greater say in the scheme. I therefore commend the Bill to the House.
Question put, That the Bill be now read a Second time.