Pension Schemes Bill

Baroness Nichols of Selby Excerpts

Report stage
Monday 23rd March 2026 Lords Chamber

[Baroness Neville-Rolfe (Con)]

My Lords, my Amendment 157 would require the Secretary of State to conduct and publish a review of unfunded public sector pensions. I am very grateful to my noble friends Lord Moynihan of Chelsea and Lady Noakes for their support. My amendment is the same as the one I moved in Committee but, in the light of our debate then, there is one major point I want to stress. My motivation is in no way to denigrate public servants, nor to assert that they are not entitled to proper pensions, nor that we should renege on entitlements already earned. My aims are to draw attention to the fact that there are no savings pots or funds from which these public sector defined pensions are paid; that, with increasing numbers of public servants, the long-term burden is increasing; and that, when public servant DB pensions are paid, they have to be funded from current taxation, and that fact is insufficiently and obscurely reflected in national accounts. There is a real risk that the burden posed by these pensions will eventually come to be seen as unsupportable. Hence, we should set up a high-powered review.

Given these concerns, it is unfortunate in the extreme that this Bill does nothing to address them. The numbers are big: there are over 3 million active members in the NHS, teachers, Civil Service and Armed Forces schemes, 2.2 million deferred members and 2.8 million pensioners, which is a total of 8 million individuals. As people live longer and public sector employment grows, the proportion receiving gold-plated defined benefit pensions will grow if nothing is done.

Most people are aware that Britain has a huge national debt that is growing and sits at £2.9 trillion, or 97% of GDP. However, the obligations of future public sector DB pensions are equivalent to 75% of GDP and probably growing. When I first learned that, I was amazed, but I am afraid it is true. At the heart of the problem is the fact that this is a very long-term problem—like the national debt—with reform difficult to reconcile with electoral cycles.

However, on the surface things look fine. In 2025-26, according to the Treasury PESA analysis of 2025, there was £56.8 billion-worth of these public sector pensions being paid to some 3.5 million pensioners. This compares with a total of employer and employee contributions of £57.3 billion, which has dramatically risen in recent years. Indeed, according to the OBR in March, because of the growth in the public sector payroll, receipts from working employees are growing more quickly than the growth in pensions paid, which are uprated by CPI, with net spending forecast to be £1.4 billion lower by 2030-31.

So, apparently, all is well, but I am afraid that that is not the case. The sums paid in pension contributions by employees do not go towards their pensions but to pay the pensions of those already retired. There are no savings to pay future retirees. The future liability figure from the OBR in July 2025 is £1.4 trillion, somewhat lower than other estimates. However, it is partly a question of how you do the calculations. Estimates on longevity and long-term public sector salaries are particularly difficult to predict. My main point is that, on any credible estimate with, happily, people living longer, the numbers are frighteningly large.

Moreover, the situation may actually be getting worse, as commitments grow over time and per capita growth—which could transform the situation—recedes. It is unfortunate and regrettable that the scale of the problem is not properly reflected in the national accounts. As the OBR commented in its July report, which is well worth a read:

“Unfunded pension liabilities represent the second-largest government liability after gilts, but are not included in the PSNFL”—


public sector net financial liabilities.

The scale of the problem is hidden by a combination of accounting conventions and the moves in interest and gilt rates which have made things look temporarily much healthier than they are. One of the most important variables in pensions is the interest rate applied to notionally invested contributions. Higher interest rates result, according to standard accounting conventions, in lower pension costs, and vice versa.

When the facts are unravelled, even if no new pension commitments are made from this point—that is if all the current schemes were closed to new accruals—existing public sector pension payments will continue to rise until the early 2060s, which on best estimates will by then amount to some £130 billion annually, with no capping mechanism of any sort. Noble Lords will struggle to find any acknowledgement of that in our national accounts.

More generally, comparison with the private sector is enlightening, particularly now most of the generous defined benefit schemes in that sector have been closed. The net effect for those under 40 is that most—in practice, those in the private sector—will have to rely on defined contribution pensions augmented by non-pension savings and the state pension. This contrasts starkly with the position in the public sector.

One salient and growing cause of the problem is the sheer size of the public sector, the generous pay settlements in 2024 and the barely noticed drift upwards in grading which increases pension costs. For example, in the Civil Service in 2016, before Covid, there were 420,000 employees; today, there are 550,000, and the numbers are growing. The extra pension contributions paid by a bigger workforce make the situation look better in the very short term, as I have acknowledged, but this is illusory. They in fact store up trouble for the future when the pensions have to be paid out of current income. This is very different to the private sector, where we have funded schemes.

I turn now to incentives. One reason why this problem has arisen, I suggest, is that pension costs are not properly taken into account in public sector decision-making. Those adding to the workforce, or making people redundant, rarely take into account, or know, what the long-term consequences of their decisions are for pension costs. Consequences are simply passed on to the Treasury—in other words, on to taxpayers great and small. So even if officials want to do the right thing, they cannot calculate what it is.

That brings me on to the final area, which is intergenerational unfairness. We are constantly adding to the burden on coming generations without any thought as to how the burden can be paid off. That cannot be sensible or fair to those already facing the challenges of housing, childcare, student loans and now inflation. If nothing is done, once the youngsters get to pension age, the pensions promised to them will be unaffordable, so there will be a crisis, and hard and damaging decisions will have to be taken. It is becoming clearer by the day that we need much more transparency in the government accounts and a proper and realistic look at the implications of present policies.

In Committee, the noble Lord, Lord Davies of Brixton, argued against our proposed review and cited a Written Statement relating to the Civil Service scheme. He quoted the Cabinet Office Minister, speaking on 20 December 2011, as having given

“a guarantee, outside of the scheme designs parameters … of no further reform for the next 25 years”.—[Official Report, Commons, 20/12/11; col. 151WS.]

The Minister picked this up. She said that was

“in effect committing to no further major reforms”

in public service pensions

“until 2040”.—[Official Report, 23/2/26; col. GC 318.]

That is a generous interpretation, referring, we should note, to the public sector, not just to the Civil Service. It was not a legal guarantee. In any case, such a guarantee in no way precludes examining the situation. Even if such an examination ended in recommendations for action, these would take time to implement—much time, in my experience. I am surprised that the Minister does not see value in a review, particularly as a number of issues on accounting and transparency have already been raised by the Public Accounts Committee.

I fully accept that all this is not the fault of the present Government only. The situation has developed over many years, but we need to act now before the situation deteriorates further. I am conscious that it is an uncomfortable subject, but for the reasons I have set out, there is a strong case for a special review. This is not a call for a public or independent inquiry, which would cost a great deal and drag on, nor am I making any policy recommendations—but I want Ministers to grip the problem, and to do so with an open mind. Because of the long timescales involved in pensions and the importance of public servants, all parties have an interest. I beg to move, and I may seek to test the opinion of the House.

[Baroness Nichols of Selby (Lab)]

My Lords, I am just going to ask a question because I am slightly confused. The noble Baroness did say that it was not just a problem of this Government, but could she explain why the previous Government did not take this on?

[Baroness Noakes (Con)]

My Lords, I have added my name to the amendment of my noble friend Lady Neville-Rolfe, and I congratulate her on pursuing this important topic. I will make just three brief points in support of the review that my noble friend’s amendment calls for.

First, we need greater transparency about the current and future costs of public sector pension obligations. The Government’s Whole of Government Accounts provides some information, but it is massively out of date—the latest available are for 2023-24, and the only certain conclusion from those accounts is that the value of future pension liabilities is so dependent on the underlying accounting and actuarial assumptions that the numbers have no real meaning. That is why the Public Accounts Committee of the other place has constantly called for more information to be given on the gross cash amounts and timing of the pension liabilities—but so far, the Government have refused.

Secondly, the real question is not about numbers—interesting though they are to people such as me—but a political one. It is a fact that defined benefit private sector pensions are now unaffordable and will likely never be seen again in the private sector. How fair is it that the private sector pays the taxes that fund the public sector pension benefits that cannot be afforded in the private sector? How long will the British public accept that?

Thirdly, the Government’s policies are biased against private sector pension provision. The private sector has had to pick up the tab for Gordon Brown’s pension tax raid and the regulatory burdens imposed by the Pensions Regulator. It has had to fund the huge deficits that emerged after the long period of low interest rates, as well as the Pension Protection Fund. The Chancellor’s latest raid on salary sacrifice schemes with national insurance was aimed squarely at the private sector. Little of this ever affects public sector pensions. However, when the rules that affect all employees start to impact public sector employees—for example, judges and doctors—the Government bail them out. This is a policy bias that does not stand up to scrutiny. My noble friend’s review is long overdue.