Public Service Pensions Bill

Debate between Lord Flight and Lord Whitty

Tuesday 12th February 2013 Lords Chamber

[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?

[Lord Whitty]

My Lords, as the Minister said, I have Amendments 7, 31 and 35 in this group. I should explain that for the remainder of the discussion of the Bill on Report I am likely to be seeing it through the perspective of the Local Government Pension Scheme which, in response to the noble Lord, Lord Flight, is a funded scheme, not a pay-as-you-go scheme, and, moreover, a funded scheme that has recently reached agreement between the trade unions and the LGA, sanctioned by the CLG and the Treasury, on a new cost-management structure. I therefore think the costs of any limit on retrospection in that scheme are unlikely to arise. I probably should declare that I am an honorary vice-president of the LGA and a member of the GMB, although I have no pecuniary interest in the pensions covered by the LGPS. I was also, until recently, chair of one of its schemes.

The Minister deserves considerable credit for moving significantly on this front. It is clear that what appeared to be quite an open-ended ability to amend primary and secondary legislation in the original text of the Bill has been significantly modified by the changes which he has proposed and the procedures that he has outlined, particularly in relation to Amendment 36. It would be nice if he could go a little further, particularly in respect of two points. Amendment 7 would effectively prevent retrospective changes for non-administrative reasons that had a material detriment for any members of the scheme. The reference in Amendment 36 to “significant adverse effects” sounds like a significantly higher threshold than “material detriment”. Does the Minister think there is a real distinction there? Could some quite serious detriment in effect occur without triggering Amendment 36? I would hope not, but I would like some on-the-record reassurance on that point.

Public Service Pensions Bill

Debate between Lord Flight and Lord Whitty

Tuesday 15th January 2013 Lords Chamber

[Lord Flight]

I thank the noble Lord for giving way. Perhaps I might suggest that the real cause of the trouble is the IFRS accounting standards that require companies to disclose pension liabilities discounted at government gilt yields. That, in turn, has made companies pay contributions to cover the resulting alleged deficits. As the noble Lord points out, that has led companies to close their final salary schemes and to the false rate of interest resulting from QE. However, the real problem has been the uncritical acceptance by Governments of both persuasions of what I believe to be profoundly wrong IFRS accounting standards.

[Lord Whitty]

I thank the noble Lord for that intervention. I had not expected to agree with him this afternoon, particularly on subsequent amendments, but I agree with him on that issue. It is important to recognise that the acceptance of those accountancy standards is causing the problem. That is why the noble Lord, Lord MacGregor, in the speech to which I referred, suggested that the Bank of England, government actuaries and the accounting profession sat down and looked at those assumptions. Slightly more tangentially, the Treasury Select Committee in another place has also touched on this point.

I am suggesting that the Government take the initiative whereby, once the Bill is passed by this House in whatever form, they set up a review looking at whether the present conventions and the way in which these public service pensions are assessed are correct—although there is a wider application—and whether we are getting a seriously misleading impression that has a detrimental effect. As the noble Lord said, there has been a devastating effect on large numbers of private sector providers.

The amendment would have no effect on the rest of the Bill but would give the Government a lever to look at the issue again and provide for expert assessment, which, given that the newly formed schemes are not coming in until 2014, could come into place before the first revaluation of those schemes. I hope that the Government will take this matter seriously and have a look at it. I certainly hope that the House and anyone involved in looking at public and private pension schemes will recognise that this is a serious problem. I beg to move.

--- Later in debate ---

[Lord Whitty]

My Lords, I am afraid that I cannot really support the noble Lord, Lord Flight, in these measures. I point out to him that they are internally inconsistent and, indeed, contradictory. On the one hand, Amendment 71A effectively removes all responsibility from the Government in relation to any potential, unlikely though it may be, default on the Local Government Pension Scheme.

[Lord Flight]

That amendment is intended to remove any financial liability, not to remove any obligation to get it dealt with.

[Lord Whitty]

Just so, my Lords, but the legitimacy of the Government being able to lay down the detailed criteria which his other amendments and indeed many of the Government’s stipulations in the Bill provide in relation to the local government scheme relies on the fact that everybody assumes that the local government scheme has the Government as its underwriter of last resort and that therefore that underwriter has the right to intervene in what is otherwise the equivalent of a private scheme between private institutions; namely, local government and private trade unions. They are not central government creatures. They have certain statutory responsibilities but they are separate entities. Therefore, the legitimacy of the Treasury in any sense making directions, stipulations and interventions, as the Bill provides and as the noble Lord’s other amendments would consolidate or take further, depends, so far as concerns the local government scheme, on that implicit underwriting. It is hoped that it would never be called upon. Nevertheless, it is there in the background. The situation in relation to the other schemes is different, but Amendment 71A relates specifically to the local government scheme and I think that it is contradictory to everything else that the noble Lord was advocating and much of what the Minister is advocating.