EU: Eurozone Financial Transaction Tax

Lord Eatwell Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, I am sure that many noble Lords share that aim. The question is whether such a tax would have that impact, and the academic work on it is ambiguous at best.

[Lord Eatwell]

Will the noble Lord explain why the Government are so allergic to the financial transaction tax, which is to be levied at less than 1% of the value of transactions and by many countries, whereas we are quite happy to have stamp duty levied on transactions at 5%, which is effective only here in the UK?

[Lord Newby]

My Lords, we have some examples of where this kind of thing has been done in the past. In 1989, Sweden introduced its version of an FTT and in the first week the volume of bond trading fell by 85%, even though the tax rate was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. Not surprisingly, Sweden is not now supporting the idea of a Europe-wide FTT.

EU: Budget

Lord Eatwell Excerpts

Monday 4th March 2013 Lords Chamber

[Lord Deighton]

In this budget we are talking about over €900 billion, six separate headings of component parts, and an ‘other items’ budget which includes a range of other things. It is a big and complex budget with many different components. There were lots of parts to the negotiation, and these particular transactions are indeed part of it.

[Lord Eatwell]

My Lords, given that the EU budget is being reduced in real terms, can the noble Lord tell us what the consequential reductions are in expenditure in the UK?

[Lord Deighton]

There were three key things that the Prime Minister wanted to protect in terms of the expenditure coming into the UK. The first was to make sure that our universities were very well positioned to bid for the grants available. That part of the budget has gone up and the rewards are based on excellence, so they should do well there. Secondly, he wished to make sure that our farmers are protected in terms of the environmental programmes that they support, which he did. Thirdly and finally, the structural aid that goes to our less well-off regions has been protected at the existing base level of €11 billion.

Social Security (Contributions) (Re-rating) Order 2013

Lord Eatwell Excerpts

Monday 4th March 2013 Grand Committee

[Lord Newby]

My Lords, I am pleased to introduce the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2013 and the Social Security (Contributions) (Re-rating) Order 2013 to the Committee. As both the regulations and the order deal with national insurance contributions, I hope the Committee will agree that it is sensible that they be debated together. As a matter of course, I confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

All the changes covered by these two instruments were announced as part of the Chancellor’s Autumn Statement on 5 December last year. I should confirm from the start that the basis of indexation that has been used to calculate the changes covered by these two instruments is the same as that used for the 2012-13 tax year. In the Budget in March 2011, we announced that, from the 2012-13 tax year, the basis for indexation of most NICs rates limits and thresholds would be the consumer prices index instead of the retail prices index rate of inflation. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary in order to set the class 1 national insurance contributions lower earnings limit, the primary and secondary thresholds, and the upper earnings limit for the 2013-14 tax year. The class 1 lower earnings limit will be increased from £107 to £109 per week from 6 April 2013. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased to £149 per week from 6 April 2013. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in the Budget in 2011, this is being increased by RPI to £148 per week.

From this April, the personal allowance for people born after 5 April 1948 will be increased above indexation by £1,335, from £8,105 to £9,440—the largest ever cash increase. As part of that increase, the basic rate limit will be reduced by £2,360 to £32,010. This means that the point at which the higher rate tax kicks in will be reduced to £41,450 in 2013-14. As I mentioned, the upper earnings limit is not subject to CPI indexation. In order to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid, the upper earnings limit will be reduced to £797 per week.

The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NICs rates in 2013-14. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold.

The social security regulations set out the NIC rates and thresholds for the self-employed and those paying voluntary contributions. Starting with the self-employed, the order raises the small earnings exemption below which the self-employed may claim exemption from paying class 2 contributions. The exemption will rise in April from £5,595 to £5,725 a year. Many self-employed people choose to pay those contributions to protect their benefit entitlement, even though they may claim exemption from paying class 2 contributions. The rate of voluntary class 3 contributions will also increase, from £13.25 to £13.55 a week.

Today’s measure also sets the profit limits for class 4 contributions. The lower profit limit at which these contributions are due will increase from £7,605 to £7,755 a year, in line with the increase to the class 1 primary threshold. At the other end of the scale, the upper profit limit will be reduced from £42,475 to £41,450 for the 2013-14 tax year. This is to maintain the alignment of the upper profit limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main rate of 9% on a similar range of earnings to employees paying class 1 contributions at the main rate of 12%. Profits above the upper limit are subject to the additional rate of 2%, in line with the 2% paid by employees. I commend the order to the Committee.

[Lord Eatwell]

My Lords, these measures are pretty straightforward and I do not have many comments to make, other than that I noticed that in the noble Lord’s introduction, although he made the traditional argument for CPI over RPI, he mentioned particular rates with respect to RPI. Those are clearly elements which are grandfathered within the social security structure. Are those RPI upratings to be maintained over the medium term, or is this a transitional arrangement? I have lost that in the complexity. That is entirely my failing and I should be grateful if the Minister would help me.

Secondly, and more broadly, can the Minister address the issue of entitlements? Both measures refer to securing entitlements, and that is particularly true with respect to the order on contributions. The whole notion of an entitlement is that one has some predictive expectation of returns, but we know today that there is no such predictive entitlement to returns. Governments—I do not say just this Government—change the pension rules upratings with respect to pensions and the pension age. So the entitlement that individuals are acquiring by making those contributions is simply in the hands of this and any future Administration.

Is that an appropriate way of going about that? The whole notion of national insurance was introduced as insurance—as a relationship, therefore, which would be defined between contribution and entitlement. That relationship has now broken down. Should we be rethinking on what basis the relationship between individual contributions and subsequent returns is calculated?

[Lord Newby]

My Lords, I thank the noble Lord for his comments. On the first point, perhaps I should have said that the RPI, as opposed to the CPI, is used in respect of the secondary threshold and the upper earnings and upper profit limits. Do the Government intend to maintain that in the medium term or to phase it out? We have said that the RPI increase will be for this Parliament, so we have no immediate intention to phase it out.

On entitlements under national insurance legislation and the fact that the Government change the rules, the problem here, I suspect, is that, as the noble Lord said, the link between paying into national insurance and what one gets by way of benefits from the system is very weak. We have gone a long way from the Lloyd George principle, when it was all very straightforward. Because the situation is much less clear than it was when the system was established, it will be quite difficult for the Government either to link national insurance payments more closely to entitlements or to merge income tax and national insurance into a single payment, which I know that my party and others and the Government have considered. We have ended up with a complicated system which succeeds in generating, broadly speaking, the amount of money required to fund the welfare state. I cannot see in the near future, and certainly not in this Parliament, a fundamental rethink about how we do that.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Lord Eatwell Excerpts

Monday 4th March 2013 Grand Committee

[Lord Newby]

My Lords, the Government have been clear that the attempted manipulation of the London interbank offered rate is completely unacceptable and has no place in the UK’s financial services industry. That is why we moved quickly after the initial revelations emerged to ask Martin Wheatley, the chief executive-designate of the new Financial Conduct Authority, to consider what immediate reforms could be made. The Wheatley review, which was published in September, provides a 10-point plan to reform LIBOR, including recommendations to both government and market participants. The Government welcomed and endorsed the Wheatley review’s recommendations, and have asked all institutions to which they are addressed to implement them without delay.

The Government believe that the banks and the British Bankers’ Association have to take responsibility for their failings and act on Mr Wheatley’s recommendations, including the removal and replacement of the BBA as operational LIBOR administrator. HM Treasury and the BBA have been working together and have made significant progress in laying the foundations for this unprecedented process. The noble Baroness, Lady Hogg, is now leading an independent committee that will recommend an appropriate successor. This builds on the legislative changes that we have already made. Following the Wheatley review, we introduced the following amendments to the Financial Services Act, which are relevant to today’s debate, to enable benchmark activities to be brought within the scope of statutory regulation under FiSMA, and to create a new, distinct criminal offence for making false or misleading submissions in connection with the determination of benchmarks.

Following a period of consultation at the end of last year, the two draft orders that underpin these changes, which we are debating today, were laid before Parliament. Last week they were approved by the other place. The Government plan to bring both orders into force at the beginning of April. This will continue the Government’s approach of taking decisive action to reform LIBOR.

The first statutory instrument amends the Financial Services and Markets Act 2000 (Regulated Activities) Order, to denote that submitting to and administering a benchmark are both regulated activities. The draft order specifies LIBOR as the relevant benchmark. The regulation of these activities will enhance and strengthen the FCA’s ability to make rules on benchmark-setting, as well as its ability to supervise directly and take regulatory action against those involved in benchmark-setting processes. It will also implement a key recommendation of the Wheatley review. Under this order, the banks that submit to LIBOR and the successor to the BBA will be regulated by the FCA.

The draft order provides certain exemptions to these activities to cover information that was not created specifically for the benchmark-setting process. Where a person simply supplies publicly available factual data, such as the stock market closing price, to the administrator of a specified benchmark, their activities will not constitute submission to a benchmark. Similarly, if the administrator of the benchmark happens to subscribe to a general information service such as a newspaper, the provider of that service will also not be carrying out the activity of submitting to a specified benchmark. The draft order includes provisions to ensure a smooth transition to the new regulated regime for those currently involved in the setting of LIBOR.

Finally, the order makes two consequential changes to the definition of “consumer” for the purposes of the FCA’s objectives. These changes ensure that individuals whose rights, interests or obligations are affected by the benchmark are classed as consumers by the FCA in meeting its objectives.

The second order under discussion today underpins the new criminal offences created by the Financial Services Act, as recommended by the Wheatley review. The Government have been clear throughout the ongoing enforcement actions that any organisation or individual found guilty of this sort of wrongdoing must take full responsibility and should be punished, if appropriate, by the civil and criminal law. The Serious Fraud Office has launched a criminal investigation into allegations of LIBOR manipulation under the Fraud Act. However, the Government believe that the FCA should also have the powers to investigate and prosecute this type of conduct in relation to benchmarks in the future. Although the FCA will have powers to investigate misconduct in relation to LIBOR and other benchmarks, none of the offences currently provided for in FiSMA apply to misconduct in relation to the kinds of benchmarks revealed by the recent investigations.

To close this gap, the Government created a new criminal offence specifically related to benchmark misconduct in the Financial Services Act. The Government also took the opportunity to review and expand the existing offences which relate to misleading statements made with a view to inducing the recipient to engage in market activity. These offences are backed up by strong and dissuasive criminal penalties of imprisonment for up to seven years and an unlimited fine.

The draft order specifies the activities, investments and benchmarks to which these offences relate and carries forward the existing law which is needed to support the new offences. Article 3 of the new order specifies the benchmarks to which the new offence applies—specifically LIBOR. Rogue individuals may still attempt to manipulate the rate but if they do, the FCA will have the appropriate powers to investigate and prosecute them.

The amendments introduced to the Financial Services Act last year give the Government the power to regulate benchmarks beyond LIBOR through appropriate secondary legislation. While we have taken swift action to deal with LIBOR misconduct, this does not mean that other benchmarks should go unregulated. We have given serious consideration to whether we should extend regulation to other benchmarks where we believe there to be a risk of manipulation.

The Government consulted on the matter at the end of last year. In answer to the Government’s consultation, respondents argued that an international consensus and framework should be developed under the auspices of the International Organisation of Securities and Commissions, the Financial Stability Board and the European Commission before the scope of benchmark regulation is extended beyond LIBOR. Progress is being made on these international initiatives. The Government agree with the consultation respondents and have decided, for now, to apply those new provisions only to LIBOR. We continue actively to engage in and drive forward the international work on this issue. However, as we have done in the case of LIBOR, we stand ready to move ahead of international work streams and table further secondary legislation to extend the scope should we deem it necessary. I commend these orders to the House.

This group also includes the Uncertificated Securities (Amendment) Regulations, which amend the Uncertificated Securities Regulations 2001 to transfer responsibility for the approval and regulation of operators of securities settlement systems from the Treasury—which had delegated the responsibility to the Financial Services Authority—to the Bank of England. The regulatory arrangements for securities settlement systems have always been modelled on those for recognised clearing houses and recognised investment exchanges in Part 18 of FiSMA. The new powers and other changes to these regulations essentially follow the changes that the Financial Services Act 2012 makes to Part 18. Specifically, the regulations provide the Bank of England with new powers to require reports to be produced by skilled persons in respect of operators, to appoint investigators for the purpose of making inquiries about operators and to publicly censure operators in appropriate cases. In addition, the regulations replace the existing provision regarding the prevention of restrictive practices with provision for the purpose of preventing operators adopting excessive regulatory provision.

The final order in this group is the consequential amendments order. A number of changes to other pieces of legislation are required as a consequence of the regulatory reforms introduced by the Financial Services Act. The majority of these were included in Schedule 18 to the Act. However, a small number of amendments have required further consideration during the Act’s passage and are therefore being made through this instrument. Primarily, it amends references to the FSA’s rulebook in primary legislation, taking into account that both the PRA and the FCA will make rules in the new regulatory system. It also amends references to provisions of the Financial Services and Markets Act 2000 which have been amended by the Financial Services Act 2012. These orders are all necessary for the effective implementation of the Financial Services Act and, on this basis, I commend them to the Committee.

[Lord Eatwell]

My Lords, I thank the Minister for introducing these orders. I will take them in reverse order, so to speak, since the major issue of the amendments relating to LIBOR and its subsequent management is the most weighty, and we can take some of the later amendments perhaps more quickly and dispose of them.

First, as the noble Lord says, the consequential amendments refer primarily to the specification of which parts of the FSA rulebook are to be divided between the PRA and the FCA. This seems rather minor but has very significant consequences, because you are taking what was, we hope, an internally consistent document and ripping it apart. The question is therefore whether the consistency that existed in the previous document will be retained in the subsequent two documents. It would be helpful if the noble Lord could elaborate a little on that, particularly in the light of the recent arguments being made by Mr Haldane of the Bank of England, who has argued most strongly that the excessive number of pages of regulation should be significantly reduced in order to reduce complexity. If Mr Haldane’s rule is to be followed, will we end up, when these rulebooks are divided following these measures, with more pages or fewer? A particular element puzzled me in this particular order. In respect of Article 13, which amends the Corporation Tax Act 2009, can the Minister explain how transforming “Insurance Prudential Sourcebook” into “Prudential Sourcebook for Insurers” has any substance whatever?

Uncertificated securities is a very important area and there has been huge growth in electronic exchanges and uncertificated insurances of this type. The order refers at many points to the notion of excessive regulation by the managers or operators of electronic transfer systems. Can the noble Lord elaborate on who is to define “excessive” and, indeed, how it is to be specified? If there is to be some clarity in this law, it would help if the notions of “excessive” and “disproportionate”, which are used at several points throughout the order, were clearly defined. There was one other puzzle, rather like the puzzle I have about the Insurance Prudential Sourcebook, on which the Minister could perhaps help me. In the redefinition of responsibility from the Treasury to the Bank of England, it is clear that “Treasury” is a collective noun while “Bank of England” is singular. Why is that? Is it because the Bank of England is a singular person, namely the governor, whereas the Treasury has responsibility shared out more widely?

I now turn to the meat of the matters before us today, the orders referring to misleading statements and impressions, which essential collect a number of areas which will be responsible if other benchmarks should be developed rather than simply LIBOR, and of course to the major one on regulated activities. First, I was very struck by the list of organisations and responsibilities associated with misleading statements and impressions. In the noble Lord’s description of the creation of those lists, he referred to the possibility of further benchmarks being included within the procedures defined within the Act. He told us that these were now being considered internationally, and that we await international rulings on these matters. It seems that there is a stark contrast between the very prompt action that was taken following the Wheatley report in respect of LIBOR and the effective kicking into touch of all the other areas which are of equivalent importance. Can the Minister assure us that major benchmarks used within the City of London are not today being manipulated? Can he assure us that the delays in international consideration of these matters will not result in some of the same activities as we have seen with respect to LIBOR?

--- Later in debate ---

[Lord Newby]

My Lords, I am extremely grateful to noble Lords who have contributed to the debate and will attempt to answer the questions they have raised. The first questions related to the effect of the tearing up, or bifurcation, of the rulebook and how continuity will be retained. I hope that the cultural commitment which the noble Baroness, Lady Kramer, mentioned, pervades those at the head of the new organisations and that it will be carried forward. In formal terms, consistency will be maintained by the operation of the memorandum of understanding between the two bodies, the PRA and the FCA, which we discussed in relation to other orders last week.

This is of course not the first time that there has been an attempt to reduce the number of pages. The FSA at one point consulted on it, but the answer it got back was, “Actually, we do not want the number of pages reduced significantly, because they tell us what to do, and if you reduce the number of pages, that puts more of a requirement on us to exercise our own judgment”. That is the balance that we are grappling with here. On the one hand, everybody wants less regulation, but when the consequence of less prescriptive regulation is that people have to exercise more of their own judgment, sometimes they become less keen.

[Lord Eatwell]

The noble Lord has put his finger on absolutely the point that Mr Haldane was making, which is that the excessive complexity of regulation these days is actually being trapped in a game between the regulated and the regulators; as the regulated develop yet more complex instruments, the regulator responds with more complex regulation, and then the regulated respond with more complex instruments to evade the regulations that have just been introduced. The whole point of Mr Haldane’s argument was that there should be a much stronger and simpler structure and that chasing complexity was a fundamental mistake. Complexity in regulation just adds complexity in taxation, which is the origin of successful evasion.

[Lord Newby]

My Lords, I have a lot of sympathy with that view. Of course, one of the reasons why, in a slightly different bit of the forest, we are introducing the general anti-abuse rule is to start moving away from a situation in which the regulator is not only almost institutionally behind the game but responds to problems by having to produce vastly long and complicated legislation, which is why the tax code is as long as it is today.

The noble Lord also asked who defines “excessive”. The use of “excessive” is not new and it follows the existing FiSMA provisions. It means not required by UK or EU law; not justified by reasonable regulatory objectives; or disproportionate to any regulatory objectives. So there is a definition and I am glad that I do not have to administer that.

The noble Lord asked why the Treasury is plural and the Bank of England singular. I am sure he will be interested to know that the Treasury is defined in the Interpretation Act 1978 as,

“the Commissioners of Her Majesty’s Treasury”.

This reflects the fact that, for historical reasons, the Treasury has acted through two or more Lords Commissioners rather than a single Minister. I am extremely pleased to know that there is a rationale for that.

The noble Lord asked, in respect of the misleading statements order and the LIBOR orders more generally, about adding further benchmarks, and whether I can be sure that these are not being manipulated now and that delays will not lead to some of the same activities in respect of the other benchmarks. We do not think they are being manipulated now. By definition with these things, one does not always know until long after the event that people are behaving badly, but there is no indication that by sticking to LIBOR at the moment any illicit activities are taking place. We are putting most of our effort into international discussion on these issues at the moment but the legislation is very clear: we can add additional benchmarks unilaterally by secondary legislation if we feel that we need to do so, but at the moment we do not feel that we are in that position.

The noble Lord asked about interim permission. Interim permission is being given to the person who is administering LIBOR on 1 April and to those banks that are submitting to LIBOR. It is being given so that the new regulatory regime can start without any delay and before the longer-term reorganisation of the LIBOR system is in place.

[Lord Eatwell]

I see that, but to whom is interim permission being given—by whom and to whom?

Economy: Rating Agencies

Lord Eatwell Excerpts

Wednesday 27th February 2013 Lords Chamber

[Lord Deighton]

My noble friend raises the question of monetary policy. We have had a number of debates on creativity to restore a focus on growth and not purely on short-term inflation targeting. All these ideas are welcome and demonstrate the importance of generating growth. We should have the debate but be very focused on sticking to a monetary policy that understands the importance of the medium-term inflation target, while accepting a degree of flexibility around output.

Some specific measures that the Government have taken, such as FLS, were recommended in the Moody’s review as a very positive sign, so other ideas should certainly be debated and considered.

[Lord Eatwell]

My Lords, could the Minister tell the House whether it is better to borrow to fund the fiscal costs of negligible growth or to fund the expansion in investment and growth?

[Lord Deighton]

My Lords, I am not sure that I accept the specific question of my noble friend. It is better to have an entirely consistent strategy of fiscal consolidation to ensure that we regain our credibility in the financial markets so that we can continue to borrow at these historic low rates. If we have a choice between funding capital spend—let us call it that—and current spend, all other things being equal, I would choose capital spend. We saw that in the Autumn Statement, when the Government switched £5.5 billion, if my memory is correct, into financing capital spending because that yields better to improve the growth process. However, it all needs to be done in the context of balancing other important consumer and political objectives.

Public Service Pensions Bill

Lord Eatwell Excerpts

Tuesday 26th February 2013 Lords Chamber

[Lord Newby]

My Lords, this group contains a large number of technical amendments. Amendment 1 reflects the fact that some of the obligations in the Bill are set in the main clauses and not in scheme regulations. This means that the drafting of Clause 3, which allows only for consequential, supplementary, incidental or transitional changes as a result of provisions in scheme regulations, leaves a theoretical gap in powers that we would like to plug. If such changes were required solely as a result of provisions in the Bill rather than in scheme regulations, we might not be able to do so without making new primary legislation. We do not believe that that would be appropriate, so the amendments in this group seek to address the slight gap in the current drafting.

Of course, this extends the powers to cover only consequential, supplementary, incidental or transitional changes that result from clauses that have been debated at length in both Houses. Parliament is already aware of the desired effects of the Bill. These powers ensure that the effects can be realised. As we discussed on Report, any use of these powers to amend primary legislation could only be for consequential purposes and to Acts that have already been passed. I therefore hope that noble Lords can support this small but sensible amendment.

Amendments 4 and 5 are minor technical amendments. They are simply to provide consistency throughout the Bill in the form of cross-references to Schedule 4 to the Pensions Act 1995. They ensure that the same format is used in Clauses 34 and 35 as is used in Clause 10.

Amendments 8 and 9 are again minor amendments intended to clarify the wording, in this case of amendments I brought forward on Report. Noble Lords will recall that those amendments give schemes flexibility to define pensionable earnings for the purpose of the final salary link, and also safeguard the value of members’ final salary benefits. The safeguard is that the amount of earnings in the new scheme that are pensionable earnings for the purpose of the final salary link must not be materially less than the amount that would have applied had the person been in the old scheme until the point they eventually left service. The amendments simply clarify the safeguard. They make it clear that it applies to what would have been the person’s pensionable earnings had that person been in active service in the old scheme or deemed transfer scheme, rather than the new scheme. They would, of course, not have been in actual active service in those schemes after 2015, since they would have been in active service in the new scheme instead. The amendments do not change the substance of the meaning of the previous amendments in any way, but are just clarificatory.

Amendment 10 is concerned with circumstances where a pension that is calculated in accordance with the final salary link has been put into payment and the person subsequently returns to public service employment. It is designed to allow flexibility for schemes to continue their current treatment of a final salary pension in payment in such circumstances. Our intention is for the final salary link to accord with the rules on final salary benefits in each scheme that are currently in force. Some schemes currently allow the final salary benefits to be recalculated after a period of re-employment. The provisions in Schedule 7 allow this approach to continue where there is continuity of service, as provided for in paragraph 3. However, many schemes currently treat final salary benefits that have already been put into payment as fully crystallised, and consequently unaffected by any future period of employment in scheme service. Our amendment would allow for scheme regulations to provide that this continues to be the case too, if desired. Rules of existing schemes can also continue to provide for some limited aggregation of periods of employment, as some do at the moment. This amendment assists schemes in the implementation of the recommendation of the noble Lord, Lord Hutton, to honour the benefits built up under the current final salary schemes.

Amendment 11 consists of a series of minor, consequential amendments to the Pensions (Increase) Act 1971. It clarifies how the uprating provisions of that Act apply to those with service in both an existing scheme and a new one. The 1971 Act provides for the uprating of pension benefits for deferred and pensioner members of the public service schemes. The intention is that while a person is a member of a new scheme after 2015, and they have also old scheme benefits, those old scheme benefits should be treated for uprating purposes as though they remained an active member. This should remain the case until the member takes the old scheme pension or leaves the new scheme. This means that for those persons whose existing scheme is a final salary scheme, their benefits in that scheme will be uprated through the final salary link provisions in Schedule 7 to the Bill. For those persons whose existing scheme is a career average scheme, their benefits should continue to be revalued as if they remained an active member. This amendment clarifies how the provisions in the Pensions (Increase) Act apply in the circumstances I have just described.

Where people continue in service, the old scheme benefits should not be treated as deferred from 2015. To do so would mean that those benefits would be uprated in line with prices from 2015, which would run counter to the treatment of old scheme benefits recommended by the noble Lord, Lord Hutton.

The final amendment in this group relates to an amendment I introduced on Report to paragraph 30 of Schedule 8. This paragraph amends Schedule 4 to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 to enable those active members of the Legal Services Commission pension schemes to transfer into the Civil Service scheme on 1 April 2014 to have full access to the transitional provisions contained in Clause 18. This subsequent amendment is a minor tweak to paragraph 30 to ensure that, in addition to those active members, deferred members of the LSC pension schemes who rejoin within a five-year period will also benefit from the transition provisions. This is entirely consistent with wider government policy on the treatment of deferred members of public service pension schemes. It will ensure that employees of the LSC are not unfairly disadvantaged by the changes to their pension provision. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for explaining the content of these essentially technical amendments. I particularly welcome the approach, which is in accord with the recommendation of my noble friend Lord Hutton.

I have but one question of the noble Lord, and that is why his remarks were not prefaced by an apology to the House for having put down these amendments as late as 5 pm yesterday afternoon.

[Lord Newby]

My Lords, I have my apology prepared and I will now give it. I thought it was the next group of amendments about which the noble Lord was particularly concerned.

I apologise to the House for the late tabling of these amendments. There is nothing sinister about it. As noble Lords will have understood, I hope, from my explanation of them, they were extremely minor technical amendments. The reason for the delay was simply to ensure that all legal issues had been adequately addressed in the final drafting. I had hoped we could have done it sooner, but that was the sole reason for the delay in the amendments being submitted. I repeat, I am sorry that we did not do it earlier.

--- Later in debate ---

[The Lord Speaker (Baroness D'Souza)]

I should advise your Lordships that if this amendment is agreed to I cannot call Amendment 3 for reason of pre-emption.

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing these amendments, and for reacting as he promised on Report to the issues raised there by me and my noble friend Lord Whitty. His speech was slightly imperfectly drafted as it referred on several occasions to the unlikelihood of negative growth. In fact under this coalition Government negative growth has become an all too common characteristic of our economy. He was, of course, referring to the negative growth of prices and earnings. In that dimension, he may hopefully be more accurate.

Our amendment was put down at 4.30 pm yesterday afternoon because of the absence of any government amendment at that time dealing with this issue. The government amendment appeared half an hour later. In the circumstances we are pleased that the Government have understood some of the important issues raised, particularly by my noble friend Lord Whitty, and have brought forward appropriate amendments to take into account the arguments that he made both in Committee and on Report. I will therefore not move Amendment 3, and will be quite happy to see government Amendment 2 nodded through.

Amendment 2 agreed.

Bank of England Act 1998 (Macro-prudential Measures) Order 2013

Lord Eatwell Excerpts

Tuesday 26th February 2013 Grand Committee

Finally, the Government will, of course, be able to add to this suite of macroprudential tools in future by further orders subject to the approval of this House and the other place. At the moment, however, we believe that the measures I have just described are an appropriate and sufficient starting point for the FPC. The Government expect the FPC’s toolkit to adapt and evolve as the international debate and academic literature on this subject develops and empirical experience becomes more widely available. We expect the FPC to make recommendations to the Treasury if its macroprudential measures require amendment or new measures are required. I hope that that explanation has been helpful. I beg to move.

[Lord Eatwell]

My Lords, that was interesting introduction to this order as it spent most of its time discussing measures that are not included. It also began with a preamble that was an extraordinary rewrite of history, referring to a failure to identify macroprudential risks prior to 2008. Will the Minister specify any Government or regulatory document that includes a reference to macroprudential risk before 2008 and before publication of the Turner review? He will be hard put to find it. There are some academic articles on systemic risk but the whole issue of macroprudential risk was simply not on the horizon at that time.

I was also somewhat distressed to find that the Government still believe that following the Basel III approach of using capital related to risk-weighted assets is still at the centre of the approach to the determination of stability, particularly in the banking sector. This is using weapons with which we fought the last war to try to deal with the new war. It is an excessive emphasis on the asset side of the balance sheet to the detriment of the liability side, and indeed has been criticised very strongly recently by the IMF. I hope that the Government will rethink their approach and not continue to rely on this outdated measure.

I want to talk about some of the measures before us rather than some that might appear in the future, although the Minister has tempted me to ask what is happening with the leverage ratio. Leverage collars, which after all apply to the liability side of the balance sheet, have been demonstrated to be far more effective than risk-weighted capital requirements. Do the Government still plan to weaken the Vickers proposal of a leverage ratio of 25:1 and to fix the requirements simply on the Basel minimum of 33:1? When thinking about the leverage ratio, is the FPC planning any distinction between deposits and wholesale funding in the specification of a leverage cap?

In its earlier consideration of these measures, the FPC rejected the adoption of a loan-to-value ratio in mortgage finance, arguing that this was a political decision. In this instrument, though, we find the requirement on financial institutions to maintain additional own funds with respect to exposure to residential property. Will that not have the same effect? Is it not a back-door method of introducing loan-to-value restrictions by the requirement to hold additional capital against residential exposures?

Turning to the sectors specified in this instrument, it is striking that the measures are confined to financial instruments issued by financial sector firms. Why is that? If there were a bubble in the stock market, it could involve predominantly financial instruments issued by non-financial firms. Why is this legislation restricted only to instruments issued by financial institutions?

Another peculiarity of the drafting of this instrument is that it refers only to an increase in requirements of holding of own funds. It refers to “additional funds required” and that the PRA may require additional own funds both by banks and by other financial institutions. How will the PRA reduce the amount of funds required since the instrument only allows it to require additional funds? How will that happen?

I also regret the exclusion of smaller firms, to which the noble Lord referred in his introductory remarks. The Treasury seems to have totally failed to understand that a significant amount of the financial crisis was due to the aggregation of a large number of small firms doing the same thing at the same time, which had the same consequence as a large firm doing the similar thing in terms of the development of systemic risk.

The measures also refer to the requirement to ask or require that banks treat particular exposures as if they give rise to an increased level of risk, which is true not just of banks but also of investment firms. How is this level of risk to be specified by the FPC? Is it as a risk weight or as a modification of the stochastic distribution model used in the calculation of the firm’s value at risk? How is it to be done? If it is with respect to the modelling, does that now mean that the ability of firms to use their own risk models is to be modified and that there is to be a standardisation of risk models used by firms in the calculation of capital requirements?

The noble Lord referred to the use of these measures in what he called a granular way and what in the instrument is referred to as a solo basis. What will the relationship be between the FPC’s requirements of measures and competition policy, in the sense that imposing measures on a single firm would have competition implications? Will the views of the competition authorities be taken into account?

I assume that this is the first of a series of instruments that will implement the various proposals aired in the consultation papers issued by the interim FPC. Perhaps it would be helpful if the Minister gave us some timetable as to when those other instruments will be laid before the House.

[Lord Newby]

I am grateful to the noble Lord for those extremely thoughtful questions, and I will do my best to answer them. He said that systemic risk was not on the horizon before the crisis. I think that the phrase was first used in academic literature in 1979. Although the phrase was not in common parlance, it was well understood, at least by some people, that a bubble was building up that was capable of creating systemic risk. The first problem was that it took a long time for the authorities and the Government to accept that there was a bubble. The second was that when they realised that there was a problem, and indeed when there was a crisis, it was far too late to forestall it. It was then necessary to deal with a crisis rather than dealing with a problem at an early stage.

The noble Lord said that we rely far too much on Basel III and that it is a weapon of the last war. We are part of an international discussion on Basel III. Although Basel III is part of the armoury that we use, it is only one part. Indeed, the measure that we are looking at today is not a Basel III measure. Even if the noble Lord was correct that Basel III does not deal with every issue that we will be grappling with, it is not the only tool that we are looking at.

The noble Lord asked me about the leverage ratio, and whether we still plan to weaken the Vickers ratio. I do not believe that the Government’s view on this has changed.

[Lord Eatwell]

Why not?

[Lord Newby]

The Government said in response to Vickers that they believed he was going too far, and I do not believe that that view has changed. The noble Lord asked about the loan-to-value ratio and whether that tool would not have the same effect as introducing a loan-to-value ratio. In an aggregate sense, in many ways it does so. However, the advantage of this approach over adopting a loan-to-value limit is that it places an overall requirement on an institution in terms of its lending to the property sector, but still gives that institution the flexibility to provide loans at a high loan-to-value ratio. This might take place, for example, in a minority of cases in which the circumstances of the person to whom the loan is being given makes that loan prudent. In many ways it could have the same overall effect on the sector, but it gives institutions greater flexibility than a prescriptive loan-to-value ratio.

The noble Lord asked why the stock market was not included and why we were not including firms in that sector. The answer is that at this point the FPC believes that the definition of which firms are covered includes those firms that are most likely to cause a problem. The FPC has taken the view that firms in the stock market are not creating an equivalent risk to those elsewhere and those already covered. That is its judgement, which one can take a view on. The noble Lord disagrees, but that is the answer to the question.

The noble Lord asked about the order using the word “increase” and how it is envisaged that any increase might be unwound. When the FPC considers that any increase is no longer required, it will revoke the direction.

[Lord Eatwell]

Let us suppose that we are in the situation that we are in today, that there is no direction in place and that we wish to reduce the own funds. How do we do that?

[Lord Newby]

My Lords, I do think that that is an eventuality that the order caters for because, as the noble Lord says, it uses “increase”. If I am wrong on that, I shall let him know but, as he has said, the order is relatively straightforward. It will be for the PRA to decide whether it wants to do that, and it may do so, but obviously I will correct the record if I am wrong. It may require an amendment to the order for it to do that.

The noble Lord asked about the aggregation of a large number of small firms. This issue formed part of the consultation. The strong view came back that the effect that was being sought could be achieved by limiting the order at this point to larger firms. If any evidence built up that a large number of small firms could cause a risk beyond that currently envisaged, it would be for the FPC at that point to make appropriate provision.

The noble Lord asked how the FPC would specify risk. It will be for the PRA to determine capital models allowed by firms within the overall levels set by the FPC.

The noble Lord asked me about the timetable—whether there would be more orders and when they were going to be. There may be more orders, but none is envisaged at the moment. There is not a conveyor belt of other orders that are half-thought of. The view is that these measures are adequate for the time being. It is always open for further orders to be brought forward, but there is no perceived need for any further orders at this point.

There is one issue that I have not dealt with concerning the relationship between the FPC and the competition authorities. I hope that the noble Lord will forgive me if I write to him on that subject.

[Lord Eatwell]

Before the Minister sits down, perhaps we could go back to how an increased level of risk is to be specified by the FPC. Is that to be specified as a change in risk weights in old-fashioned Basel I structures, or is it to be specified as a modification of the value at risk models used by the financial institutions? If it is the latter, are we moving away from the ability of institutions to use their own value at risk modelling towards a standardised model?

[Lord Newby]

My Lords, as I said earlier, the PRA will set overall levels; the capital models allowed by firms will, I believe be determined by the PRA.

[Lord Eatwell]

I am sorry, but the noble Lord contradicts the instrument before us. It states clearly,

“if they gave rise to an increased level of risk specified by the FPC”.

It is not the PRA, it is the FPC that has to specify this increased level of risk.

Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013

Lord Eatwell Excerpts

Tuesday 26th February 2013 Grand Committee

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing these orders. Like him, I will deal with them altogether. Before doing so, I declare an interest as a non-executive director of a financial services firm as set out in the Register of Lords’ Interests. Turning first to the PRA-regulated activities order, I still am somewhat puzzled as regards the whole definition of the large investment firm. Are we simply relying on the CRD definition expressed as €730,000-odd or is there some broader definition of what is meant by a “large investment firm” which the PRA has in mind?

Also with respect to that, under Article 6.5, what is the procedure if the FCA disagrees with the PRA’s decision to withdraw a designation? The consultation process should form a check on the PRA and not just act as a rubber-stamping on behalf of other bodies. There should be some scrutiny of important decisions that the PRA wishes to undertake, although of course without undermining its powers. What will be the dynamic when there is some form of disagreement and how are those disagreements to be mediated?

The threshold conditions are entirely appropriate but I want to focus on Article 2A about suitability. I found the discussion of suitability as a threshold condition—a very important threshold condition in any regulatory system—to be rather more vague than I would have expected. For example, under Article 2E(e) those who manage the affairs in investment firms have to have “adequate skills and experience”. Who defines adequate? What is meant by adequate? Does adequacy refer to a particular examination standard or standards of experience which might be expected?

In addition, the PRA might be expected to act with probity. Do we need a more precise definition of probity or will we simply regard it as having not yet been caught? How will we determine the conditions of suitability? Should they not be more precise, as individuals who wish to work in the financial services industry surely should have precise conditions and not be turned down on the basis of those rather general statements?

I have rather more questions on the Financial Services Compensation Scheme. Again, I will start with the problem of consultation between the PRA and the FCA. It seems to me that the PRA and the FCA are required to develop rules for access to the FSCS. How will they disclose that? What is the rule-making procedure referred to in this instrument? What will the procedure look like? Will they review the FSCS’s current rules? Presumably, they will. When we have had that review, will there be a transparent report to Parliament of the substance of that review?

There is a relationship between the discussion of mutuals and the FSCS. As the noble Lord will be aware, there has been considerable disquiet, to put it mildly, among mutuals with respect to the contributions that they make to the FSCS relative to those made by banks. I may have missed it, and if I have I apologise, but has there been any development on the levies made on mutuals in their contributions to the FSCS?

Turning specifically to the order before us, are there any substantial changes to the functions of the regulator in relation to mutuals contained in this order, or is it purely a transfer activity? Let us take one example which attracted my attention as I read through the order and raised this question. Paragraph 5 of Schedule 1 states that the FCA has an obligation to,

“maintain arrangements … to determine whether persons are complying with requirements”.

That is pretty vague. What sort of arrangements do we mean? Could there be some clarity as to what is to be implemented here?

Given the Government’s determination to make five regulators where there was once just one, what will happen with respect to consultation between the PRA and the FCA when action is required rapidly; for example, in criminal proceedings? How can we ensure that the consultation procedure will be prompt?

Overall, we are broadly content with the orders. We are concerned specifically about a lack of clarity at various points, to which I have referred, and about the introduction of additional complexity because of the requirement for consultation at various stages between the PRA and the FCA. I would like some reassurance on those points.

[Lord Newby]

My Lords, if there is a leitmotif running through the noble Lord’s questions, it has to be about how the two bodies work together. This theme ran also through previous debates in your Lordships’ House and gets to the core of arguments about whether the Government were right to split the FSA at all. The view that we took is that we needed to give greater focus to the two elements of regulation. It was very important, having done that, we then set in place ways in which the two regulators would work together. As the noble Lord knows, there are a number of points in the Act where the two bodies are required to establish memoranda of understanding explaining exactly how they are going to work together. The success of the new structure will depend to a very large extent on that working. I know that the bodies as they are establishing themselves are absolutely aware of that and are putting co-ordination and consultation procedures in place.

Perhaps I may deal with some of the specific points that the noble Lord raised. He asked whether the designation of a larger firm was simply the €730,000 capital requirement. The order takes a number of criteria into account, not all of them from the CRD. I read some of them out. The PRA, for example, has to conclude that designation is desirable, having regard to its objectives—this is part of the regulator exercising judgment. That is an additional criterion beyond the €730,000; it is not automatic.

The noble Lord asked what would happen if the FCA disagreed with the PRA’s decision to withdraw designation. This is a decision for the PRA. We expect it to give considerable weight to the views of the FCA, but it is ultimately a matter for the PRA.

The noble Lord asked whether the definitions should be more precise, in particular the definition of “probity”. The Government do not consider that the concept of probity is significantly more subjective than other criteria against which the regulator must make regulatory judgments. Recent conduct and mis-selling scandals have shown more than ever how important it is that firms conduct themselves with probity, and it is right that the regulators can make an assessment on whether this is the case and take action where it is needed. A general question for legislation is how far it attempts to define terms which are in common parlance and have a common understanding. Our view is that in this respect the legislation goes as far as it should do.

The noble Lord asked about mutuals and whether there had been a change in class. This has been a long-standing beef of the mutuals; they feel that they have to bear the burden of the incompetence, folly and recklessness of others. That is a question for the authorities to decide, but for the time being they remain in the same levy class that they have already stayed in.

I shall try to deal with one or two other points. The noble Lord asked about the procedure for FSCS rules. The same procedure applies as for other rules; there is a duty to consult but no duty to carry out a cost-benefit analysis. There are no plans to change the rules as part of the transition. Once the transition has taken place, it will obviously be for the new regulators to decide whether they are happy with them, but we are not planning to do that at the same time.

On the question of consultation between the FCA and the PRA on mutuals functions, the order makes express provision for consultation where it is needed. The general provisions relating to the FCA/PRA MoU, which I referred to earlier and which are set out in Section 6 of the Act, will apply in this area as they will in many others.

I hope that I have answered the majority, if not all, of the questions posed by the noble Lord, and I commend the regulations to the Committee.

Public Service Pensions Bill

Lord Eatwell Excerpts

Tuesday 12th February 2013 Lords Chamber

Moved by

[Lord Eatwell]

1: Schedule 1, page 23, line 6, at end insert—
“(c) the Defence Fire and Rescue Service”

[Lord Eatwell]

My Lords, this amendment refers to the position of the Defence Fire and Rescue Service within the structure of the Bill. Noble Lords will remember that it was revealed in the discussion of the Bill in Committee—the issue had not been discussed in another place—that the Defence Fire and Rescue Service had an anomalous status relative to that of other firefighters within the UK. In particular, while other firefighters within the UK had their retirement age fixed at the age of 60, together with other uniformed services, the Defence Fire and Rescue Service at that time had a retirement age tied to the statutory retirement age. Therefore, it would be 65, rising in accordance with the pattern planned for the increase in the statutory retirement age.

My hypothesis in Committee was that this was simply a slip and a mistake and that people had just happened to miss the fact that a category of firefighters was not covered in the actual language of the Bill. I therefore expected that, once the Minister had taken the matter back—he conceded in Committee that he had not had the opportunity to consider it with any great care—the mistake would be understood and the firefighters would be included with the other uniformed services, having their retirement age fixed at 60, as is the case with the other uniformed services. However, to my considerable surprise, this has not been the case. I understand that the firefighters—and, indeed, the Ministry of Defence Police, to which I will turn in a moment—have met the Minister and that he has turned down this proposition. He has substituted for it the assurance that their pension age would be maintained at 65 and not, perhaps, go up with the statutory pension age, although his assurance was not terribly clear in the sense that it referred to a three-year differential between the statutory retirement age and that for Ministry of Defence firefighters. In due course, when it gets to 68 or 69, as we all live longer, those firefighters would see their retirement age go up—or so I presume; perhaps the Minister can clarify that later on—while that of their colleagues in the rest of their fire service would stay the same, at 60.

The Minister has one fundamental question to answer. It is an answer that not just this House but the firefighters themselves deserve. How does their job differ from that of local authority firefighters? In what way is it less onerous, when they have to work on military establishments, dealing on occasion with extremely dangerous materials, and occasionally also in war zones? How is their job less onerous? In those circumstances, why should we have this situation in which their retirement age is five years higher?

I wonder whether the Minister has taken the trouble to find out when the Defence Fire and Rescue Service members actually retire. If he did take that trouble, he would find out that the majority of them retire before the age of 60. They retire early, with a significantly reduced pension, and they have to do that because they are physically unable to keep going. A study performed by the Civilian Consultant Adviser in Occupational Medicine for the Defence Fire Risk Management Organisation not only produced data but argued that continuing beyond the age of 60 was detrimental to the long-term health of firefighters in the Ministry of Defence Fire and Rescue Service. If the noble Lord had taken the trouble to find out what was actually happening, he would have found out that firefighters in this service are forced to retire early due to their physical condition or because they are unable to pass the regular physical examinations they undergo to ensure that they can perform their duties to the required standard.

--- Later in debate ---

[Lord Eatwell]

Well, my Lords, we got the answer that we all feared. We were told that somehow the unique position of an injustice is such that the injustice should be maintained. We were told that it was not clear how the changes could be implemented. “It’s just too jolly complicated. Our staff aren’t up to it. We haven’t got enough civil servants who can puzzle through all these problems. There is no way through”. That is ridiculous.

We were told that somehow these firefighters would have to be transferred to other pension schemes. I am afraid that that is not the case. Civil Service pension schemes are flexible and perfectly able, as currently structured, to take into account differing retirement ages.

We then heard the proposition that the differential—the unfairness—should be fixed at five years’-worth of unfairness, with the retirement age of MoD firefighters and police being kept at 65. Apparently this is not too difficult to implement. We can find a way to fix the retirement age at 65 but we cannot find a way to fix it at 60. I am afraid that the Minister has significantly reduced the credibility of his own arguments.

He also completely failed to address two fundamental points. He failed to answer the question: in what way do the working conditions of Ministry of Defence firefighters differ from those of local authority firefighters? He failed to take into consideration that the majority of MoD firefighters are forced to retire before the age of 60 because of physical and other health reasons. He also failed to take into account the point made by my noble friend Lord Hutton that this is a fundamental issue of fairness. Given that that is the position, we owe it to Ministry of Defence firefighters and police to agree this amendment. I urge noble Lords to do so and beg leave to test the opinion of the House.

--- Later in debate ---

[Lord Eatwell]

My Lords, it may be for the convenience of the House if I refer to the amendments tabled in the name of myself and my noble and learned friend Lord Davidson, since the government amendments are substantially responses to the points that we made in Committee. I want to make it clear why we feel that the situation has, let us say, not moved on far enough.

Let me deal first with Amendments 37, 38 and 39 because they make a proper, logical story. They seek to remove from Amendment 36 the role of the authority in deciding whether an adverse effect on the pensions payable has in fact occurred. In other words, the authority has to decide whether its measures should be challenged in consultation. This is as if, in a game involving Manchester United, penalty decisions against it were to be made by Sir Alex Ferguson. I am sure that he, as a talented football manager, would then make a decision on a reasonable basis. However, with all due respect to that distinguished person, do we think that these decisions would be made in a way which was balanced? I could choose any other football manager, including Mr Wenger, who apparently never sees things that happen on football pitches.

I refer to balance because in Committee the noble Lord, Lord Newby, in setting out the criteria that he applied in these circumstances, said that he wanted to achieve a sensible balance between members’ protection and the role of the authority. It seems that while the proposed new clause in Amendment 36 provides for a significant protection for members of the scheme, it is still not balanced in that it leaves the authority with the responsibility for deciding that its own measures have had an adverse effect on those members. In those circumstances, even the most reasonable person is likely to be reluctant to feel that measures which they are taking have a negative impact upon the scheme. Our amendments simply remove the role of the authority so that the new clause would say,

“containing retrospective provision which appears … to have significant adverse effects”.

In those circumstances it seems to me that the authority, facing the responsibilities that the noble Lord referred to, and without the protection of the statute giving it the decision-making responsibility—a decision-making role or power—would take a more balanced and reasonable view. These amendments are to encourage reasonableness on behalf of the authority.

Moving backwards, our Amendments 22 and 23 refer to what is now Clause 12, which deals with the employer cost cap. The problem with this clause is in subsection (7), where it is recognised that steps to change the cost cap may result in an,

“increase or decrease of members’ benefits or contributions”.

In other words it may decrease members’ benefits so that the action of using the cost cap to encourage efficiency and efficient management of pension schemes may result in the retrospective diminution of benefits which members feel that they have accumulated.

The key question is whether Amendment 36 covers that eventuality. The eventuality that it covers is,

“where … the responsible authority proposes to make scheme regulations containing retrospective provision”.

Changing the cost cap may have retrospective consequences but does not contain retrospective provision. Much as we welcome the general intent of Amendment 36, then, it does not deal with one of the significant cases of retrospection that still deface the Bill. Amendments 22 and 23 are designed to protect the benefits of pensioners against retrospective effect, perhaps unintentional, when there is some change in the cost cap. We are delighted to see the noble Lord, Lord Sassoon, here performing duties that were formerly performed for him.

Those two amendments are necessary unless the Minister can find a way for Amendment 36 to refer not simply to regulations containing retrospective provisions but to regulations that have retrospective consequences. That would be a way, I suggest, to transform Amendment 36 from a rather imperfect structure to one that would deal with retrospection throughout the Bill.

The amendments that I and my noble and learned friend have tabled are in the spirit of Amendment 36 and indeed of the Government’s laudable attempts to remove the retrospective elements—the ones, that is, which are unnecessary and potentially harmful to members; I understand that there are technical retrospective elements that are necessary—but I feel that they have not yet managed to achieve what the whole House wishes to achieve. Our amendments would contribute to that goal.

[Lord Flight]

My Lords, I should be grateful if the Minister could comment on the extent and the manner to which the Government’s amendments to the ability to make changes and to make retrospective changes affect the fundamental issue of affordability. I apologise for raising this issue yet again but it is fundamental. We start, as everyone knows, from the OBR advising that there will be a cash flow deficit of £15.4 billion by 2016-17. My related question to the Minister is: what is the Government’s estimate of the additional cash flow deficit costs of both increasing longevity and, more particularly, the new single-tier pension proposals made by the DWP? It strikes me that two separate silos have been working on this, with the Treasury in one and the DWP in the other. Precisely what the effects of the loss of employer and employee NI contributions and the ending of contracting out will be on the deficit of pay-as-you-go public sector schemes seems to some extent to be a mystery.

I think it was in Committee that the Minister advised that he felt the estimates I suggested were too high; thus I would be grateful if he would comment on what the Government’s estimates are. My revised estimates, done with the assistance of Michael Johnson, who many noble Lords will know has done significant work on the subject, are that there is an additional cash flow cost from longer longevity of the order of £2 billion per annum, and there may now be an additional £3.4 billion resulting from the loss of public sector employers’ NIC rebates with the ending of contracting out and a further £4 billion per annum as a result of public sector employees continuing to enjoy an enhanced occupational pension as if contracted out while still being entitled to further accruals under the new single-tier state pension, once it appears. In contrast, private sector employers who are contracted out will be permitted to change their scheme rules, effectively to reduce pensions paid, without trustee consent. As I have said, I cannot believe that the prospect of a potential cash flow deficit of some £24 billion per annum will be acceptable to whoever is in power at that stage, given the state of the public finances. Dare I say that it seems that not only the Opposition but the Government are ignoring the affordability issue with regard to this legislation as it passes through both Houses of Parliament?

I would be grateful for a response to the question about to what extent room for manoeuvre is being reduced by the government amendments. Secondly, what is the Government’s revised, post-OBR estimate of the total cash flow deficit cost of the arrangements under the Bill?

Public Service Pensions Bill

Lord Eatwell Excerpts

Tuesday 12th February 2013 Lords Chamber

Moved by

[Lord Eatwell]

14: Clause 8, page 5, line 4, at end insert—
“(3A) A scheme under section 1 which replaces a defined benefit scheme may only be established as a defined benefits scheme.”

--- Later in debate ---

[Lord Eatwell]

My Lords, this amendment, which is a reprise of something that we debated in Committee, derives from a peculiarity of the process through which this Bill has gone, in that many of the measures in the Bill derive from negotiation between the trades unions, other interested parties and the Government. Having reached agreement, the Government’s side seems to appear in the Bill but the assurances given to the other side in the negotiations do not. What we have instead is simply a continuous series of government assurances.

This amendment requires that a defined benefit scheme should be replaced with a defined benefit scheme. This reinforces the Government’s oft-repeated commitment to maintaining the defined benefit structure once the definition of the defined benefit has been changed, in the way that was proposed by my noble friend Lord Hutton. However, Clause 8 still provides that any scheme, once closed, can be replaced by,

“a scheme of any other description”.

Those are the exact words. As I said just now, the Government have continuously sought to give assurance that they would not replace a defined benefit scheme by anything other than a new defined benefit scheme but they have proved peculiarly reluctant to place such a condition in the Bill. This persistent reluctance is becoming quite disturbing and is significantly undermining the confidence of pension scheme members that their rights are going to be protected in the ways that have been suggested.

As I pointed out in Committee, the noble Lord, Lord Newby, further undermined the confidence of members when he said on 19 December that,

“although the Government have absolutely no intention to change the basis of the schemes, it makes sense for a piece of legislation, which we hope has a long life itself, to allow flexibility in the future if there are unforeseen changes”.—[Official Report, 19/12/12; col. 1585.]

Therefore, the Government are making a commitment: they continuously assure members that they will replace defined benefit schemes only with newly constructed defined benefit schemes—but, on the other hand, perhaps unforeseen circumstances mean that they will not.

I feel it is appropriate that the Government keep their side of the deal, which was that the defined benefit schemes would move from a final salary scheme to a salary-averaging scheme, which was a deterioration in the future pension benefits available to scheme members. They accepted that because the other side of the deal was that the Government said that they would commit not to move away from defined benefits. The Minister really has to tell us why the Government are so reluctant to keep their side of the deal. I beg to move.

[Lord Newby]

My Lords, this is indeed a reprise of a debate which we had in Committee. I believe that the Government have been extremely clear about their position on this issue throughout the legislative process, both here and in another place. Let me explain again why we remain unmoved. At the risk of stating the obvious, the Government have no desire or intention to replace the defined benefit schemes that have been negotiated. Officials, employers and member representatives have worked extremely hard to agree scheme designs that meet the needs of the different workforces and which are fair and affordable.

We believe that the new schemes are fit for purpose. Everyone is now working to implement these schemes from April 2015 for most workforces, but earlier than that in some cases. Draft regulations for the Civil Service scheme have been shared with the House, while the local government scheme in England and Wales has gone out to informal consultation on its own draft regulations.

While each set of regulations remains a work in progress, there can be no doubt that they would establish a defined benefit scheme of the agreed career average design. So when the Government say that we have no other intention than to create defined benefit schemes, those are not mere words—we are putting them into practice. The Government say that we have no intention of replacing defined benefit schemes with other designs, and that intention is underpinned clearly in the Bill by Clause 22.

The extent to which a scheme is a CARE scheme is explicitly one of the protected elements in the clause. That means that for a full 25 years—26 years in some schemes—the defined benefit design could not be easily changed. To do so, the responsible authority would have to consult on the proposed changes with all those affected,

“with a view to reaching agreement”.

That is a higher standard of consultation than in most other statutory consultations. The authority must do more than seek out and consider the views of interested parties; it must engage with them, with the aim of reaching agreement with them. In addition, the authorities must present a case to Parliament, or the devolved legislature, for changing the scheme design from career average, notwithstanding an explicit presumption written into the Bill that it would not be desirable to change the design before 2040.

There is no ambiguity here. Noble Lords and scheme managers can be fully reassured of our commitment to a defined benefit arrangement. It would be misleading and unnecessarily alarmist to imply anything to the contrary. So I say again: there is no prospect of the Government wanting to replace the defined benefit schemes that we are working so hard to develop, and I believe that that is the position of the party of the noble Lord, Lord Eatwell, also. The noble Lord may say, as he has in the past, that Governments come and go, but the status of the new defined benefit schemes will be protected by the Bill. I therefore urge the noble Lord to withdraw his amendment.

[Lord Eatwell]

That was an intriguing reply. The usual reply in circumstances where the Government feel that they have covered all bases is that an amendment is unnecessary, but the Minister did not feel that he could say that. It is striking that, despite his variety of assurances, a simple statement is unacceptable. However, under the circumstances, I will take this away and think about it further. For the moment, I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

--- Later in debate ---

[Lord Whitty]

My Lords, this amendment relates to revaluation. Clause 9 appears to allow the Treasury to change yet again the basis of revaluation, this time away from the CPI to something else. We discussed this in Committee and various assurances were given in that respect, although they are not as yet reflected in the Bill. However, no reassurances were given—indeed, the Minister was less than his usual emollient self—in relation to the provision in the Bill that in effect allows for negative revaluation in the light of changes in the CPI. That means that the Treasury can on the one hand amend the index and on the other impose a decrease in the accrued pension without any consultation with those affected, and in a way that, in the case of the LGPS, seriously undermines not only long-established practice but the recent agreement between the LGA and the trade unions.

I have looked at the history of the LGPS over the past 30 years, although it has actually run for a longer period than that, and there was only one point at which the relative index, at that point the RPI, actually fell at the point at which it was evaluated, and that was from September 2009 to the 2010 increase.

There were no precedents at that time. We had to refer back to the Pensions (Increase) Act 1971, which allows for increases but does not allow for decreases. The interpretation at that time was that that Act did not permit a decrease, so the 2010 adjustment was, in effect, zero. That is one aspect.

The other aspect of having the potential for a negative adjustment in revaluation is that it is inconsistent between those who are already receiving pensions or who are entitled to deferred benefits and are therefore governed by the Pensions (Increase) Act 1971, in which case their benefits would not be reduced, and active members who are still contributing to the scheme and who would, at precisely the same time when a negative revaluation could be made under this clause, see their benefits go down. We would therefore be treating active members disfavourably compared with members who have left the scheme or are already drawing their pension.

I am grateful for the assurances on the continuation of the CPI, but the fact is that the sudden and unexpected replacement of long-established RPI by the CPI has left a legacy of distrust in the schemes. Part of that is that if the CPI, as is expected, performs, if that is the word, less substantially than the RPI, there is a greater likelihood or possibility of a negative figure. The recent agreement between the LGA and the trade unions made it clear that past practice would continue to operate, and that if there were a negative change in the index there would be a nil adjustment. The implication of this clause is that it is attempting to override that commitment and agreement, which I think the Minister, and certainly some of his predecessors, would accept got the Government out of a very difficult position on pension reform in general and the LGPS in particular. Therefore, unravelling that aspect of the agreement—there are other amendments I will come to with a similar effect—is not helpful.

Amendment 15 would stipulate precisely what is already past practice and in the agreement: namely, that if there is a negative movement in the index, there will be a nil adjustment. I think the Government should accept the amendment. I appreciate the strong words of the Minister last time that the Government are not prepared so to do, despite the anomalies and distrust it would create. There are alternative amendments on this in this group in the name of my noble friend Lord Eatwell. Perhaps the Government could at least show their good will by accepting that if there were a negative increase, it would have to be subject to the affirmative procedure as provided for in my noble friend’s amendment, which no doubt he will speak to more ably than me shortly.

If the Government do not move at all, we are in some serious difficulty. It is causing considerable upset among employers, among those who have to engage in the new cost-management process within the Local Government Pension Scheme, among the unions and among the members of that scheme. The Minister could assuage those anxieties easily tonight by accepting my amendment or, in default of that, my noble friend’s amendment. It would be wrong for the Government to reject both. We would be on some sort of collusion course, whereas in general the LGPS and the arrangements for it from 2014 are done and dusted in a way that frankly was probably beyond the Government’s dreams only a year or so ago. I think that would be most unfortunate not only for the members of and employers in the scheme but for the Government and for future relations. I genuinely hope that the Government can move on this issue tonight. I beg to move.

[Lord Eatwell]

My Lords, I fully support the arguments put forward by my noble friend Lord Whitty, particularly on the complications that would arise with respect to the Local Government Pension Scheme. The amendment in my name and that of my noble and learned friend Lord Davidson refers to the general proposition in Clause 9(3) that,

“the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate”.

The Treasury has a completely free hand to determine the change in prices or earnings to be applied to the structure of the pension scheme. It seems to us on this side that this is really a step too far, so we have proposed that it should be subject not to a negative Commons procedure but to the affirmative procedure so that there can be a truly substantive debate on any particular proposal that might be unreasonable.

In Committee the Minister said:

“Any attempt to exercise this discretion in such a way that did not produce accurate and appropriate estimates”—

I must say as an economist that there is no such thing; there are estimates, but “accurate and appropriate” is something different—

“with reference to a reasonable index of prices or earnings”—

there is no such thing as that either—

“could be challenged by scheme members. Any decision which is not reasonable”—

that is fine—

“even without this amendment … could be challenged by judicial review and struck down by the High Court”.—[Official Report, 15/1/13; col. 608.]

What a cumbersome procedure. The affirmative procedure may be seen as taking somewhat more time and requiring more effort than the negative procedure, but how much better than saying, “Well, if this goes wrong, you’ve got to take it to the High Court”? That really is truly unsatisfactory.

Introducing this very minor amendment will provide an environment for the discussion of changes in the chosen index that can be deemed to be reasonable and to have the confidence of members of the schemes. I feel that this approach, perhaps allied with that suggested by my noble friend, would provide the confidence in the process of revaluation that from time to time can be enormously important in maintaining standards of living, particularly of more elderly pensioners.

[Lord Newby]

My Lords, as we are debating a group that started with an amendment moved by the noble Lord, Lord Whitty, I shall take this opportunity to answer the question he asked me earlier about whether the administering authority or the employing authority would determine whether an effect is significant. I am extremely pleased that I did not try to reply at the time because the answer is neither. It will be the “responsible authority”, because that is the authority that will be making the scheme regulations. In the local authority scheme, it would be not the employer but the Secretary of State. I hope that answers that question.

We have debated the amendments in this group before, so I shall try to be relatively brief in explaining why I do not believe it would be fair to restrict the revaluation of accruals from directly tracking growth, including when it is negative. Even though negative changes in prices or earnings are exceptionally rare, the Government firmly believe that if there is no revaluation ceiling, it would be unfair to have a revaluation floor to the benefit of members.

This is the sort of unbalanced risk-sharing between members and the taxpayer that the measures in this Bill seek to remove. The report by the noble Lord, Lord Hutton, specifically criticised this “asymmetric sharing of risk”. In addition, such a revaluation floor could lead to the cost cap being breached, to the detriment of future members who simply end up paying for past members’ accruals growing faster than the scheme revaluation rate. For those reasons, I will not be able to support the amendment of the noble Lord, Lord Whitty.

I am also unable to support the amendment of the noble Lord, Lord Eatwell, which would make the annual Treasury revaluation order affirmative rather than negative. As we have said before, this would not be an efficient use of parliamentary time and would be counter to the long-standing convention with other public service pension indexation. The order will be a run of the mill piece of legislation, and it would be incongruous for it to be subject to the affirmative procedure in each and every year.

However, I hope that I can go some way to meeting noble Lords’ concerns. In the years when the values in the order are negative, there will be a strong expectation that the Government of the day should ensure that there is a full parliamentary debate on the changes, not least because they would be so rare. Perhaps we can go further than that general statement and look at whether to require the affirmative procedure when, as unlikely as these events will be, the order sets out a negative figure. It seems that this would strike the appropriate balance between parliamentary scrutiny and sensible regulation-making.

I would therefore be willing, if the noble Lords were able not to press their amendments, to take this away to consider it further, with a view to returning to the matter at Third Reading with an amendment that would require any annual order to come before the House for affirmative procedure if the CPI index slipped into negative territory. I therefore hope that the noble Lord, Lord Whitty, will feel able to withdraw his amendment.

--- Later in debate ---

[Lord Kennedy of Southwark]

I think the noble Lord is absolutely right that there is a difference in fitness. That is the problem. A regime could be put in place for people when they first come as recruits. By accepting my amendment, the Government could set the age in scheme regulations, whereas at the moment the age would normally be 60. I beg to move.

[Lord Eatwell]

My Lords, there are also in this group a pair of amendments in my name and that of my noble and learned friend Lord Davidson, both of which seek to add flexibility and that famous characteristic, future-proofing, to the Bill. It is a laudable objective of the Government to have a common movement—a standard process—that can be seen as fair and generally acceptable across the entire structure of public service pensions. However, it is an objective which will, inevitably, from time to time, run up against reality. We have already seen it run up against reality in the case of the uniformed services, which we discussed earlier. It could also run up against reality in a whole series of other circumstances where the best would be the enemy of the good. In other words, the commitment to uniformity would produce elements of unfairness and, perhaps, elements of unsatisfactory performance because individuals were staying in employment longer than they ought to in some circumstances.

We need a degree of flexibility and Amendment 19 relates flexibility to a scheme-specific capability review. These reviews are now becoming quite common within public services, as they already are in private industry. They are designed in some circumstances to relate to the capabilities of individuals with respect to age. If there were to be a thorough review which a Government at the time accepted, this amendment would give the Government the flexibility to amend the pension ages set out in Clause 10(1) and (2). This would provide a degree of flexibility and that is all it is intended to do.

I questioned the noble Lord in Committee about a number of reviews that are currently under way. He pointed out to me that those reviews were not considering issues of pension age and I accept that entirely. However, this does not mean that considering pension age relative to capability will not occur or is not likely to occur. On the contrary, it is highly likely to occur over the next 10 years or so. Amendment 19, therefore, provides the Government with the necessary flexibility to respond to scheme-specific capability reviews.

Amendment 20 would incorporate into the Bill a proposition directly taken from my noble friend Lord Hutton’s excellent report. He argued at the time that the relationship between the state pension age, which is the sort of anchor of the whole structure, and the structure of pension ages in the public sector should be reviewed from time to time. This amendment incorporates my noble friend’s proposition.

In Committee, the Minister said:

“The DWP White Paper published yesterday says that we intend to hold a review every five years, so the link will be reviewed when a review is announced”.—[Official Report, 15/1/2013; col. 621.]

He got a bit muddled there but we know what he meant. That is fine, but could he tell us what is going to happen to this DWP White Paper? Is it the forerunner of some legislation? If so, when will that legislative proposition appear? Would it not be comfortable, given the structure of this Bill, to include Amendment 20, taken from the Hutton report, to achieve the goal he declares to be the Government’s goal, as set out in that DWP document?

I entirely understand the commitment to having a standardised, clear, comprehensible system, but there will always be anomalies which have to be appropriately addressed. I believe that these two amendments provide flexibility and would ensure that the Government could do exactly that.

--- Later in debate ---

Tabled by

[Lord Eatwell]

20: Clause 10, page 6, line 14, at end insert—
“(4B) The link between the state pension age and a person’s normal or deferred pension age shall be regularly and independently reviewed to ensure that the link remains appropriate in light of scheme members’ longevity.”

[Lord Eatwell]

My Lords, the Minister has said that, with respect to the notion of the review, the Government will have reviews, because the DWP White Paper says so, but they are not quite sure what those reviews would be—it is all too complicated at the moment and they have not worked it out. Therefore, they cannot include it in the Bill. That is pretty unsatisfactory. On the one hand, they are prepared to make an assurance that there will be reviews but, on the other hand, they are not sure what form those reviews might take, who might be involved or what sort of procedures there might be. They are not willing to back up that assurance in the Bill. Finally, we are told that legislation does not matter very much and that it is just as good as an assurance. That is entirely unsatisfactory.

The issues that have been raised by the noble Baroness need to be considered on another occasion, and we will need to return to this issue at Third Reading.

Amendment 20 not moved.