Lord Eatwell
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Lord Eatwell
Lord Eatwell
My Lords, I will speak also to Amendments 118ZA, 118B, 118C and 119A in this group, which in my name and that of my noble and learned friend Lord Davidson. Clause 20(1)(b) is about consultation and reporting in the context of the responsible authority proposing,
“to make scheme regulations containing retrospective provision which appears to the responsible authority to have significant adverse effects in relation to members of the scheme”.
We are particularly concerned that “significant” is not defined and could be open to interpretation. We do not want the responsible authorities to, let us say, be let off the hook when it comes to consulting on changes that might have an adverse effect on members, especially given that the provision relates to that continuous bugbear in this Bill, retrospective changes. In particular, the protections that are present in Clause 20 do not apply to adverse retrospective changes to any of the non-protected elements of public service schemes—they only kick in if the adverse effect is deemed significant. Amendment 116A would ensure that the protections in Clause 20 apply to any proposal to make an adverse retrospective change.
There are only three protected elements in Clause 20(5): the extent to which the scheme is a career average defined benefit scheme—the main purpose of the Bill—members’ contribution rates and benefit accrual rates. However, this means some very important elements of a pension scheme are not protected, most notably the definition of pensionable earnings, early retirement rights and ill-health benefits. If a responsible authority decides to make adverse retrospective changes to something as important as ill-health retirement benefits, or indeed to the definition of pensionable earnings, which will of course knock on to the final pension provision, it is unacceptable for such adverse retrospective changes to be excluded from the protections in Clause 20.
When this issue was addressed in another place the Minister complained that the effect of the amendment would be to make any,
“adverse change to member benefits subject to the additional protections in clause 20, regardless of how minor that change might be”.
He then said that,
“we believe that almost all retrospective changes will either be minor or technical in nature, or beneficial to members”.—[Official Report, Commons, Public Service Pensions Bill Committee, 20/11/12; col.407.]
That is a welcome belief but it is not knowledge: it is merely a belief. Having members’ protections over such things as ill health and pensionable earnings hanging on a belief is entirely unsatisfactory. Given that the Minister has already made concessions or, to put it better, positive statements about the way in which he will bring forward amendments to the insidious retrospective measures in the Bill, I ask him whether the measures on retrospection will also apply to this matter.
Amendment 118ZA in my name adds to the definition of the “protected period”, as it is called, to accommodate the different closure date of the local government pension scheme. Clause 16 closes the local government pension scheme on 1 April 2014, but all other schemes are closed on 5 April 2015, one year later. However, Clause 20 defines the protected period as one of 25 years beginning on 1 April 2015. This means that there is a window of a year in which the protections under Clause 20 will not apply to the local government pension scheme. This amendment would correct what seems to be a drafting error by ensuring that there is no such peculiar window in which the protected elements of the local government pension scheme are not, in fact, protected, as the Government clearly seem to intend, by Clause 20. By aligning the protected period for the local government pension scheme with the other schemes in the Bill, they will all come to an end and all be dealt with and covered at the same time.
The Minister in the other place was sympathetic to this argument. I am therefore somewhat surprised that the Minister here is not reflecting that sympathy by tabling an appropriate amendment to this oversight in the non-alignment of the two schemes.
Amendment 118B again refers to protection. As we have said, Clause 20 lists various protected elements of the scheme. This amendment would overcome some of the deficiencies that we have already indentified by adding the definition of pensionable earnings, ill-health benefits and retirement rights to the protected list. This overcomes the problem of their being subject to the significant adverse consequences of retrospection. This would be a simpler advantage to dealing with some of the issues to which I have referred.
The Minister in another place argued that his rejection of an amendment like this rested on wishing to maintain flexibility in the arrangements. I do not think that that is a very satisfactory argument. Flexibility is often an attractive characteristic of legislation, but not when it is achieved by undermining the pension rights of members of a pension scheme. Let us remember, these are some of the less well paid members of our community who serve us through a variety of public services. Achieving flexibility by reducing their rights does not seem to me to be a very respectable activity.
Retrospection again rears its ugly head as regards Amendment 118C. The amendment seeks to leave out Clause 20(6), which provides that all the “protected elements” under Clause 20 will not be so protected if a change is required by or as a consequence of a change in the employer cost cap. When we last discussed cost caps, we saw that the definition of the cost cap was entirely in the hands of the Treasury. Therefore, it would be quite possible to place the cost cap at such a position as would lead to a consequential loss of protection under Clause 20.
Once again, the Minister has made a lot of sympathetic noises about the perhaps unfortunate consequences that the current definition and specification of changes in the cost cap bring to this Bill. I hope that his earlier commitment to doing something about the cost cap will carry through to Clause 20 and the various protections that it provides.
Finally, given that we are continuing the same theme into Clause 21, Amendment 119A again refers to the incorporation of “significant” with respect to “adverse effects”. The point is that “significant adverse effects” are designed in the Bill to trigger the use of an affirmative resolution procedure for any changes to scheme regulations. In particular, Clause 21 provides:
“Scheme regulations are subject to the affirmative procedure”,
only,
“if … they amend primary legislation, or … contain”—
and here we go again—
“retrospective provision”,
which would,
“have significant adverse effects in relation to members of the scheme”.
Given the way that retrospection runs continuously through this Bill, creating major uncertainty among members of these schemes, the very least we can expect is that any adverse effects should be subject to an affirmative procedure.
Returning to Amendment 116A about the use of “significant” in defining “adverse effects”, I beg to move.
Lord Flight
My Lords, I rise to speak to Amendment 117A, which—if I may put it thus—heads somewhat in the other direction from the amendment in the name of the noble Lord, Lord Eatwell. As I understand it, Clause 20 says that for 25 years you will not be able to make any changes other than as a result of consultation and agreement among the various parties. The clause refers to the changes containing a provision which,
“changed the protected elements of the scheme”—
defined as where,
“the scheme is a career average revalued earnings scheme”,
in relation to contribution rates and to “benefit accrual rates”, or where the “responsible authority” proposes to make scheme regulations containing retrospective provision which appears to the “responsible authority” to have “significant adverse effects” in relation to members of that scheme. As I said, the protected period is defined as 25 years. My understanding is that although this clause may not cover every detail, it is in effect saying that other than by agreement, no changes can be made which come under the two defined areas for 25 years.
My amendment to reduce that period to 12 years was not entirely random: it was basically part of a previous amendment suggesting a post-2006 review by the OBR of fiduciary valuations. However, the fundamental point is that whatever Government are in power, they will be obliged to make major amendments. We started off with a cash-flow deficit of £15.4 billion by 2017. However, the ONS has advised that the longevity assumption is six years shorter than it ought to be, so that adds another £7.2 billion; and now that we have the government single pension proposals, the public sector pension schemes will not get the contracted-out NI contributions, which worsens the cash flow by about another £5 billion. So, we are going to have a cash-flow deficit per annum of approaching £30 billion.
If anyone thinks that that is sustainable in the present environment of deficits which are well above maintainable levels, they are not seeing reality. I repeat: whoever is in power in the next five years will be obliged to review the whole aspect of public sector pensions if the cash-flow deficits turn out to be at the sort of levels that now look likely. Limiting the protected period to 12 years is hopeful—not being able to change any of the key elements for 25 years is just unrealistic.
Lord Newby
My Lords, this is a rather disparate group of amendments. I will start with government Amendment 117. Amendment 117 is part of the wider package of amendments that seek to meet the desire of the Northern Ireland Executive to be removed from the provisions of the Bill. The provisions in question would have required a report to be laid in the Northern Ireland Assembly, should the responsible authority have sought to make changes to the protected elements in the schemes for which Northern Ireland has devolved competence. Given that this is consequential and in line with many other amendments relating to Northern Ireland, I hope that that amendment will be uncontroversial.
I will now speak to government Amendment 118 and Amendment 118ZA. Government Amendment 118 recasts the timing of the 25-year period of protection. The amendment will ensure that all schemes made under the Bill benefit from this protection until 31 March 2040. It is currently intended that the new Local Government Pension Scheme will be in place earlier than April 2015. Concern was expressed in another place—which the noble Lord, Lord Eatwell, expressed here today—that the scheme would lack the protection in this clause until 1 April 2015 had passed. The amendment seeks to deal with this concern. Although the Government have no intention of making changes to the core elements of the new Local Government Pension Scheme in its first year, we are happy to rectify the situation. The amendment will ensure that all schemes, even those that might be implemented before 1 April 2015, receive the full protection from Clause 20 for 25 years.
Amendments 116A and 119A would increase the required levels of consultation and parliamentary process for all scheme regulations that make adverse retrospective changes to members’ benefits. As the noble Lord, Lord Eatwell, says, we have debated the issue of retrospection a number of times in your Lordships’ House. As discussed when we were considering the potential amendments laid to Clause 3, the Government are aware of the concerns on this issue and intend to bring forward their own amendments in this area. I plan to have a draft amendment available in advance of Report stage and I hope that it will meet the concerns of the noble Lord, Lord Eatwell.
Amendment 117A in the name of the noble Lord, Lord Flight, would, as he said, end the protection set out in Clause 20 after 12 years. It would require a review of the effectiveness of the cost cap to be conducted by the Office for Budget Responsibility, and that review would determine whether the clause’s protections would be extended beyond 2027.
Although I understand the noble Lord’s reluctance to bind subsequent Administrations for 25 years to a more onerous process, I must reiterate the Government’s position on the new 2015 schemes. First, we believe that if the cost cap is necessary, it will work. If it does not, the solution does not lie in reducing the consultation and reporting requirements that govern fundamental changes to public service pension schemes. To make this amendment would risk causing unjustified concern and uncertainty to scheme members about the commitments that the Government have given in the context of negotiating the important reforms made by this Bill. I am very happy in that respect to repeat the statements of my right honourable friend the Chief Secretary to the Treasury when he described the new schemes as,
“a deal that can endure for at least 25 years and hopefully longer”.—[Official Report, Commons, 2/11/11; col. 929.]
We have committed that this belief should be enshrined in the primary legislation governing these schemes. We do not share the gloom of the noble Lord, Lord Flight, as to their unaffordabilty. Therefore, I hope that he will not press his amendment.
Amendment 118B was discussed in another place, and there the Government set out their belief that the elements of the new pension scheme designs which have been designated as “protected” are the right ones. It is right that members and their representatives should seek reassurance from the Government over their commitment to the new schemes that have been negotiated. However, these schemes must work in the real world. Public service pension schemes require regular tweaking to keep them in line with all kinds of other legislation, and the processes in Clause 20 are not designed for such changes. The protected elements, which have been included by the Government in Clause 20, are those which form the core of the new schemes. The kind of regular, purely administrative, changes that are made to the regulations of public service pension schemes are unlikely to touch on these aspects of design. If they ever do, it would be right for scheme members to be reassured about the impact of such changes through the procedures in Clause 20. Those elements suggested by the amendment go beyond this. These are aspects of design which are likely to require administrative changes, and so the proper consultation requirements which should apply to them are those set out in Clause 19. It is not as though the changes are not consulted on at all.
It may be of benefit to the House if I give a couple of examples of the kind of changes to the three heads under the noble Lord’s amendment that have been made in a couple of years, which demonstrate the kind of thing that we are talking about. In respect of pensionable earnings, for example, we are about to remove all references to primary care trusts in connection with their role in establishing pensionable earnings for practitioners. That is a small administrative change to reflect the fact that PCTs are on the way out. On ill health benefits, we have made changes that allow scheme medical advisers to determine that a member can satisfy the severe ill health condition for the purposes of the Finance Act 2004. It is a small administrative change. In respect of early retirement, changes made from 1 April 2010 required that an employer should pay the costs of the early payment of a mandatory retirement lump sum, paid to a member retiring on the grounds of redundancy. So, again, it is a small administrative change.
In view of the reassurance that I have, I hope, been able to give the noble Lord, and my attempt to clarify the way in which the clauses work, I hope that he will feel able not to press his amendments.
Having given reassurance to the noble Lord, Lord Flight, that we believe that the cost caps will work, I am afraid that I cannot support Amendment 118C. This amendment cuts across the provisions relating to the cost cap mechanism set out in Clause 11. As discussed in another place, that mechanism already contains a number of its own consultation requirements. Indeed, the arrangements in Clause 11 are actually more stringent than those set out in Clause 20. It may be to the benefit of the House if I read it out. The Bill says that,
“scheme regulations may provide for … a procedure for the responsible authority, the scheme manager … employers and members (or representatives of employers and members) to reach agreement”.
So there is a requirement in the Bill that they have to reach agreement, whereas Clause 20 requires only consultation with a view to reaching agreement.
Lord Eatwell
The noble Lord is very kind to read out that little piece from the earlier clause. However, it uses the word “may”, and “may” is not a requirement.
Lord Newby
My Lords, we are back to the “may” and “must” issue here. Clause 11(6) states:
“For cases where the cost of the scheme would otherwise go beyond the margins, scheme regulations may provide for—”.
It then lists several things that may be provided for. This is one of those cases where in reality the difference between “may” and “must” is not only negligible, it does not exist. The schemes will include those provisions; that is exactly why they are in the Bill. Having another process for consultation, as the noble Lord suggests, is unnecessary. I hope, therefore, that he will feel able to withdraw the amendment.
Lord Eatwell
My Lords, I am grateful to the Minister for those comments. I am particularly pleased with government Amendment 118, which achieves what we were attempting to achieve through Amendment 118ZA in a very satisfactory and comprehensive manner. Regarding the other amendments which we have proposed, as I have said on numerous occasions, we look forward to the Minister’s amendments with respect to the retrospective measures in this Bill.
I wish to comment on his rejection of Amendment 118B, which seeks to include the scheme’s definition of pensionable earnings, ill-health benefits and early retirement rights under the so-called protected elements in Clause 20. The examples he gave were indeed administrative, but they were not in the least reassuring. The fact that there was a series of administrative changes does not mean that future changes will also be of such limited significance, because the clause allows for greater changes. It is like saying that it might not be very significant if one player on a football team has a shirt that does not quite match those of the others. It is very significant if he is then not allowed on to the pitch. Giving us these so-called reassuring examples is an exercise in which I hope we will not indulge in the future, because it does not address the nature of the argument. However, at this time I beg leave to withdraw Amendment 116A, which deals with the issues of retrospection that we will discuss on Report.
Lord Eatwell
“Scheme participation
The Treasury shall commission an independent review into the appropriateness of increased pension contributions if, following the full implementation of the increases in employee contributions announced in the Government’s 2010 Spending Review, the number of members opting out of any public service pension scheme increases by more than 5 per cent compared with the drop-out rate in the 12 months immediately before any contribution increases were implemented.”
Lord Eatwell
My Lords, the purpose of this proposed new clause is to evaluate scheme participation. I am sure all of us are very concerned that members should participate fully in the pension scheme that is available with their employment. Some of the new measures which will be introduced this year are complex but it will typically be in members’ best interests to remain in their defined benefit scheme—in this case, their average earnings defined benefit scheme.
The role of the proposed new clause is to require the Government to assess the attrition of membership of public sector pension schemes consequent upon the increase in contributions which will take place following the 2010 spending review. The purpose of the amendment is to determine whether the number of members opting out of any public service pension scheme in consequence of the increase in contributions exceeds by 5%—this is an arbitrary number—the drop-out rate immediately before the contribution increases. Therefore, it seeks to pick up what the consequence of contribution increases and the various changes which the Bill will introduce might be.
The amendment is not a challenge to the appropriateness of the contributions but merely seeks to provide the sort of information that the Government, employers who are members of the various schemes and, indeed, the members themselves need in order to understand the dynamics of what is going on in public sector pensions. Providing that information to all those groups would be beneficial and would lead to a better informed debate and better informed consideration in future of the development of public sector schemes. I beg to move.
Lord Newby
My Lords, it is probably sensible to remind ourselves why the increases in employee contributions were felt to be necessary. The noble Lord, Lord Hutton, was clear when he said in his interim report that,
“there is clear rationale for increasing member contributions to ensure a fairer distribution of costs between taxpayers and members”.
He sets this in the context of the cost of public service pensions having risen by a third over the past decade to £32 billion and of those increases having fallen mostly on the taxpayer. Subsequently, in 2010, the Chancellor announced a proposed increase in member contributions of 3.2 percentage points, to be phased in progressively over three years from April 2012. Let me be clear: the Government stand behind the justification for these increases and fully expect them to be implemented and carried forward into the new schemes. Proposed scheme final agreements clarify this. The noble Lord, Lord Eatwell, is right to raise the issue of participation, and I welcome the opportunity to set out what we are doing to maximise this.
First, we have protected the lowest earners from the increases. We know that they are those most likely to opt out, so there will be no increases for those earning under £15,000, and limited increases for those earning under £21,000. Secondly, we have split up each year of proposed increases so that we can assess the impact, particularly on opt-out, of year one, before finalising the approach for the next. As a result, I am pleased to be able to say that following the increases in contributions in April 2012, scheme data show that there has been no discernible increase in opt-out. This perhaps should not come as a surprise. Union representatives at the Bill’s evidence session in the other place unanimously stated that they would continue to advocate membership to their members.
We should also remember that the auto-enrolment policy—begun by the Opposition but implemented by this Government last year—will further encourage pension participation more generally. Therefore, given the clear rationale for rebalancing costs fairly, and the specific steps that the Government have taken to minimise opt-out, we do not intend to revisit the contribution increases after their implementation.
Of course, the Government will closely watch what is happening in practice. We monitor opt-out as a matter of course. In the unlikely eventuality that opt-out rates dramatically rise, naturally we will have to consider the best way forward. However, we think that this is highly unlikely, and the evidence bears that out.
We do not, however, believe that a statutory, independent review of the appropriateness of the increases would be right or necessary. We believe that increasing contributions is appropriate and that it will leave public service workers with pensions which remain the envy of many in the private sector. Introducing a statutory review mechanism would be misleading to members about the intended permanence of these increases.
The Government will continue the implementation of the increases and will continue to monitor opt-outs from schemes, but we cannot agree to this amendment to provide for a formal review, as, in our view, this would set an unrealistic expectation that the increases might be reversed.
Lord Eatwell
It would have been very nice if the Minister had addressed the actual amendment instead of the fictional one that he seems to have been discussing. There is no suggestion in this amendment of looking at the “appropriateness”, as he put it, of higher contributions. The intention is simply an information exercise; we want to know what is happening and we want it to be clearly revealed. The various measures that he described to maximise participation are very appropriate and desirable, but will they work? We are told, “We believe they’re going to work”, but some people believe in fairies.
Lord Newby
My Lords, I suggest to the noble Lord that it is not a question of hoping, thinking or believing; it is a fact that the increases have been implemented and there has not been a discernible increase in the opt-out rate.
Lord Eatwell
The point is that, if there is a proper review available to all—which the noble Lord is not relying on; I presume that he is relying just on the evidence provided by his officials—we will be able to assess the consequences of the increases.
Finally, I think that when the noble Lord was discussing the measures to prevent opt-out, he mis-spoke. It is not correct that somebody earning less than £15,000 a year is not subject to higher contributions. I think he will find that part-time workers earning less than £15,000 per year are subject to higher contributions.
However, given what we heard, which was clearly a misunderstanding of the purpose of the amendment, for the moment I beg leave to withdraw it.
Lord Eatwell
Lord Eatwell
My Lords, this amendment refers to Clause 28(10)(b) whereby the Treasury may by order,
“add any body or office to it”—
that is, to Schedule 10, which lists the various schemes that are the subject of the Bill.
The Government have made a couple of amendments to the clause, particularly regarding the provisions dealing with devolved authorities, on which we spoke earlier, but the Treasury is still given the power to amend quite drastically any career average or other defined benefit scheme relating to a public body simply by adding that body to Schedule 10 at the flick of a pen. That is rather reminiscent of the most notorious part of the Public Bodies Act, which noble Lords will remember, whereby public bodies could just be added to the list of those to be abolished or otherwise changed at will. This House was not willing to accept that position. Similarly, I do not think that the House should be willing to accept this particular situation in which, without any by your leave whatever, public sector schemes or other arrangements in a public body that is not part of our consideration should be simply added at will. Surely there should be a degree of consideration before that is done.
The amendment suggests that paragraph (b), which refers to adding any body or office to Schedule 10, should be left out. The Treasury can remove any body or office from Schedule 10 and the issue relating to devolved authorities will also stand. We cannot rely on a flick of the pen to incorporate bodies into the Bill. We need to know the list that will be incorporated. I appreciate the difficulties that exhaustive lists create but we are dealing with people’s pensions, which is an aspect of life about which people are most nervous and insecure. We cannot say that one day somebody will decide that a fund that was previously not part of these conditions now will be, and that the issue will not be debated—that there is nothing anyone can do and it will just be done by fiat. That is not appropriate. I beg to move.
Lord Newby
My Lords, the Government have always been clear that pension reform should extend to all public service pensions. Clause 28 and Schedule 10 are the means by which that work will be continued, even after enactment of the Bill. To date, the Government have focused their resources on reforming the largest public service pension schemes as these affect the vast majority of public service employees. As such, pension reform for the smaller public bodies is not as advanced as the reforms to these major schemes. Noble Lords may be reassured to know that reform of these smaller schemes is anticipated to be completed by 2018, after the reforms to the larger schemes are operational in 2015.
The Government’s policy with regard to these schemes is clear: any public body whose defined benefit pension scheme needs to be reformed is listed in Schedule 10 or may be added to it. Members of these schemes should be well aware that their pensions are in scope of the reforms. However, the arrangements surrounding some of these pension schemes are complex and it may be unnecessary to include them in Schedule 10 if they are able to reform on their own initiative. If so, they will not need to be listed.
To date, we have worked hard to ensure that all the public bodies that operate pension schemes eligible for reform by the powers under Clause 28 have been listed in Schedule 10. However, we are trying to be realistic with this provision: of the more than 400 public bodies that provide pensions to their employees or officeholders, some may not yet have been identified appropriately. That said, I can assure the noble Lord that the vast majority of public bodies that provide pensions through one of the major public service schemes will be reformed by Clause 1, so the number of public bodies that may have to be added will be extremely low. However, if we need to include such schemes, the Bill needs to provide for the Treasury to add them via Schedule 10.
I note what the noble Lord says about draconian powers but it is worth noting that the Delegated Powers and Regulatory Reform Committee did not express any concerns whatever about this power as currently drafted. It is a sensible way of dealing with the addition of a small number of public bodies to the universal principles of public sector reform. I hope therefore that the noble Lord will withdraw his amendment.
Lord Eatwell
My Lords, perhaps the Minister will clarify for my edification his reference to schemes reforming themselves and then not needing to be incorporated into Schedule 10. What will be the criteria of satisfactory reform and who will do the judging?
Lord Newby
My Lords, the criteria for satisfactory reform is that we want all public bodies to adopt schemes which are in line with the provisions of the Bill. So, if the schemes do that, that is fine. There are a number of schemes, some of which are listed already and some of which may need to be listed subsequently, when the Government and the Treasury believe that the process will be helped if they are formally listed in the Bill or under the Act.
Lord Eatwell
I thank the Minister but this is unsatisfactory. It leaves an area of uncertainty hovering over smaller schemes, which may be in or may be out. I presume, therefore, that the Treasury will make a judgment as to what it thinks in its wisdom is right. I do not think that is a proper way to go forward and may return to this issue later. For the moment, I beg leave to withdraw the amendment.