Taxation: Tax Havens
Lord Newby Excerpts(12 years, 3 months ago)
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Lord Newby
My Lords, the Government are fully committed to tackling tax avoidance and evasion wherever it occurs. This is an issue of international concern on which we work closely with European Union member states and other countries, in particular through the G20. The G20 focus has been on increasing international tax transparency and identifying gaps in the international tax standard to help better address profit shifting and erosion of the corporate tax base at the global level.
Lord Dubs
My Lords, I have a terrible suspicion that the Minister is saying, in effect, that nothing is happening. Perhaps I may ask him this. If the Government fail to get international agreement quickly, could we as a country at least move forward by doing two things? First, could we take action in those territories where we have power or influence? Secondly, could we change the basis of taxation of those companies that do not claim any profits in this country by basing the tax on turnover rather than on bogus low-profit figures?
Lord Newby
My Lords, the accounting rules are internationally based and it makes sense to change them on an international basis. That is why we, France and Germany, between us, have given €450,000 over recent months to the OECD to come forward with proposals to deal with this issue. Those proposals will come forward and there will be a progress report in February. There is a strong head of steam in this country and in France, Germany and the US to tackle this issue.
Lord Forsyth of Drumlean
My Lords, could my noble friend just remind us what action was taken by the last Labour Government between 1997 and 2010—over those 13 years—on tax havens? Is it not extraordinary that we now have such enthusiasm from the Benches opposite to do something, when they had that opportunity and, I believe, did nothing?
Lord Newby
My Lords, the Government greatly welcome the enthusiasm from the Benches opposite for the initiatives which we are now taking.
Lord Barnett
My Lords, global agreement is clearly important and I am glad that the noble Lord and the Government are seeking it. However, that will take a very long time. Would it not be better to do as I think my noble friend Lord Dubs was saying—to seek agreement among some of the smaller areas where countries are doing these things, such as the Channel Islands and the Isle of Man? Are we doing anything there?
Lord Newby
My Lords, there has been a lot of activity to increase transparency in relation to the Channel Islands and the Isle of Man so that we can now request information about an individual’s tax affairs. A major change is that we are moving towards what is called an enhanced automatic tax information exchange, the first of which was signed with the Isle of Man. This means that every year we will automatically get details of the tax affairs of UK-based individuals with accounts in those countries. We will find out what payments have been made into bank accounts in those countries so that we can make sure that those people are paying adequate amounts of tax. That deals with individuals, however, whereas the Question of the noble Lord, Lord Dubs, deals more with corporates.
Baroness Kramer
My Lords, perhaps I may pick up on the Minister’s comment. On 1 January the Foreign Account Tax Compliance Act, commonly known as FATCA, came into force in the United States. This Act requires all foreign financial institutions—banks, credit unions, pension managers and insurance companies—to find out which of their clients are liable for US tax and to send details of their account balances and transactions to the US authorities. When can we have our own FATCA—and I do not mind if we call it FATCAT—in the UK?
Lord Newby
My Lords, we signed the first agreement based on the FATCA principles with the Isle of Man in December. What is very significant about that Act is that places such as the Cayman Islands will be required to provide automatic information directly to the US about US citizens. We are now in negotiations with all Crown dependencies and overseas territories to see whether we can put in place equivalent provisions with them. If we do, it will revolutionise the amount of information that we get about the affairs of British citizens who are due to pay tax here and who have bank accounts in those territories.
Lord Phillips of Sudbury
My Lords, does my noble friend agree that the root of the problem, beyond discussion and consensus, is a grotesque disparity between the tax authorities and the taxpayers in this country? It is not David and Goliath but David without a sling and Goliath. Unless we do something about that disparity between the numbers and quality of advisers available to unscrupulous taxpayers, on the one hand, and those available to HMRC, on the other, we can forget about the rest.
Lord Newby
Absolutely, my Lords. That is why the Government agreed to put another £900 million during the lifetime of this Parliament into this kind of activity and why we announced in the Autumn Statement that we would add to that another £77 million, which we reckon will bring in £2 billion. The other important thing, in addition to this equalisation of technical expertise, if you like, is that consumers should continue to shine a spotlight on companies that may not be paying the amount of tax that most people would think is reasonable.
Lord Davies of Oldham
My Lords, although I welcome the progress made with the Channel Islands and the Isle of Man, perhaps I may ask the noble Lord on what basis Crown dependencies and overseas territories could refuse information to the Government on this crucial issue.
Lord Newby
As the noble Lord knows, my Lords, any arrangement with any overseas territory or Crown dependency has to be a formal arrangement and agreement. We are not a dictator going into these countries. We are negotiating agreements with them on the FATCA principles and I hope very much that we will conclude those agreements relatively soon.
Lord Brooke of Alverthorpe
My Lords, although the additional £900 million being allocated to HMRC for tax investigations is to be welcomed, will the Minister confirm that the department is also being required to effect very substantial savings which will in fact lead to several thousand staff leaving over the next three years and that this, in turn, could interfere with its means of operating? Is not the root of the issue really about transparency? We should not simply call on consumer groups to seek to get transparency on tax issues—the Government themselves should give a lead to the whole of society in moving towards greater transparency on tax issues. Although my party may not have done that when it was in power, one hopes that some of us may be able to persuade it to do so in future if the present Government will not.
Lord Newby
My Lords, on the latter point, we are doing a lot to try to improve the way in which the system operates. As I said, however, much of the required change in law has to be based on international agreement. As for the resources available to HMRC, it is true that there is a reduction in staff at HMRC. One of the principal drivers for this has been that the way in which HMRC does its business has changed fundamentally given electronic communications—for example, large numbers of people now submit tax returns electronically. The resource needed to deal with that, in terms of numbers, is very significantly less. We are trying to make sure that we beef up those parts of HMRC that collect tax and go after those who have been seeking to avoid it. I think that we are achieving considerable success in that.
Public Service Pensions Bill
Lord Newby Excerpts(12 years, 3 months ago)
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Lord Newby
Lord Newby
My Lords, this is an extremely long group of government amendments. I preface my remarks with an apology to noble Lords who have taken an interest in the Bill. The letter that I circulated about government amendments was done at an extremely late stage. There is nothing Machiavellian about that: it flows directly from the fact that we are having this debate two days after the end of the Christmas Recess. The Bill team, myself and others were not working over Christmas to the extent that would have permitted us to get the amendments down earlier and inform noble Lords about them. However, I hope that in most cases, if not all, noble Lords will find them helpful and so will forgive me for that.
I start by noting that I will not move government Amendment 3, which relates to Northern Ireland civil servants. On reflection, that amendment is considered unnecessary because Amendment 9 to Schedule 1 does what is needed to remove Northern Ireland civil servants from the scope of the Bill.
In line with the recommendations of the noble Lord, Lord Hutton of Furness, the Bill was drafted to provide a legislative vehicle for the reform of all public service pension schemes in the UK to make them fairer and sustainable. However, legislative competence for some of the pension schemes is devolved to the Administrations in Northern Ireland, Scotland and Wales. We have always been clear that the devolved Administrations would have the final decision as to whether or not the Bill should apply to their devolved pension schemes.
On 26 November, the Northern Ireland Executive announced their decision to bring forward their own legislation to reform the pension schemes of their public servants. These schemes will be based on the recommendations of the noble Lord, Lord Hutton. This will affect schemes relating to Northern Ireland civil servants, the devolved Northern Ireland judiciary and, in relation to Northern Ireland, local government workers, teachers, health service workers, fire and rescue workers, and police and public bodies whose pension provision has been devolved.
On 28 November, the Scottish Executive announced their decision to exclude the small schemes for which they have legislative competence from these reforms. This will affect a small number of members of the junior Scottish judiciary and some Scottish public bodies whose pension provision has been devolved. The Bill will still make provision for Scottish schemes for which Scottish Ministers have executive, but not legislative, competence. These are schemes relating to teachers, health service workers, firefighters, police and local government workers in Scotland. Consequently, I beg to move these amendments that will collectively ensure that the Bill is disapplied from those pension schemes for which the Northern Ireland Executive and the Scottish Government have legislative competence.
Amendments 102 and 109 relate to the Scottish Government’s wish to extend a power in the Police and Fire Reform (Scotland) Act 2012 to enable pension and other benefit schemes to be made for Scottish police cadets and special constables. This will be done by way of an order made under the Scotland Act 1998 which will be laid before Parliament shortly and is expected to commence in 2013. In anticipation of that order, these amendments will ensure that these pension schemes will be included in the reforms legislated for in the Bill. As such, the new pension schemes made for Scottish police cadets and special constables will be reformed in the same way as the other public service pension schemes in Scotland.
The amendments also ensure that any compensation or injury benefit schemes made under the extended powers will not be subject to the reforms. This is consistent with the Bill’s treatment of compensation and injury benefit schemes in other areas of public service, such as the main police schemes. I am sure that noble Lords will agree that such equitable treatment is fair and proper, and I beg to move these amendments to the Bill.
Lord Eatwell
My Lords, I am grateful to the Minister for introducing his amendments, and for his apology with respect to their late arrival. It is of course understandable that this comes after the holiday period, although I was slightly taken aback to hear just now that the Northern Ireland announcement was made on 26 November. What has been happening since then? Christmas started a month later. I am very surprised that we now have Northern Ireland effectively removed from the Bill on the day before Committee, and the House not being informed about this when the team apparently knew of it a month and a half ago.
Before commenting on these amendments, I myself apologise to the House for being unable to be here for Second Reading. I am grateful to my noble friend Lord Davies for having stood in on that occasion.
In considering the Bill most broadly, the first thing that strikes one is the list of professions under Clause 1. These people are the very bedrock of our society. It is crucial to ensure that they have the best conditions, including the best pensions, that are affordable. At the same time, we have to recognise the pressures that an ageing society places on pension provision. The key to squaring the circle is trust; this is going to be a theme in discussing all the amendments to come. We need to incorporate into the Bill a framework that provides clear assurance so that people who perform the public services on which we all depend can face the future with confidence. That means that the Government must place clear, unambiguous commitments in the Bill—not vague promises of Ministers—about what they may really intend. Ministerial promises are simply not good enough, because these measures are intended to be long-term. In the long term, Administrations change and no Administration can bind its successor, so in the long term ministerial assurances are virtually worthless. But if future Administrations are faced with clear primary legislation, then change can be made only by returning to Parliament.
It does not assist in the building of trust when the Government table well over 100 amendments on the day before Committee. Most of these—although not all, as the Minister pointed out and I will demonstrate—arise from the refusal of the Northern Ireland Administration to pass a legislative consent Motion in respect of the Bill. In effect, as we have heard, Northern Ireland is being written out of the Bill. It would be interesting to know what Northern Irish colleagues in this House feel about this. Moreover, given that an important objective of the Bill is to manage the cost of pensions, what implications does this last-minute decision have for the public finances? Presumably this will increase long-term deficit projections—by how much?
More importantly, what negotiations are under way with the Northern Ireland Administration about the future shape of pensions in Northern Ireland; and, indeed, with the Scottish Parliament about the future shape of pensions in Scotland; and, indeed, with the Welsh Assembly, which we are told is still to consider the matter? This Bill has passed the Commons and we do not even yet know who is to be included in it because the Welsh Assembly has not reached its decision.
I am astonished that we have this brief note, circulated the night before, with amendments. We have this brief introduction from the Minister when the Bill has been changed in such a radical and fundamental way. What are the Government going to do now about both Northern Ireland and Scotland? What are they going to do about Wales if the Welsh also refuse to pass a legislative consent Motion? Given that the terms of devolution are different in Northern Ireland, Scotland and Wales, the result of all this is going to be a confused plethora of pension conditions throughout the UK—exactly the sort of confused melange that the admirable report by my noble friend Lord Hutton sought to eliminate. Indeed, it was my noble friend’s recommendation 24 that the Government should introduce primary legislation to adopt a new common UK legal framework for public service schemes. This is clearly what the Government are failing to do.
The reference to Scotland is important, because not all the amendments in this group refer solely to Northern Ireland. The Minister referred to Amendment 96, to a “holder of devolved office”. That therefore applies to Northern Ireland and Scotland. Interestingly, the noble Lord did not refer to Amendment 148, which, in defining what a “devolved office” might actually be, excludes Wales. What will happen to Amendment 148 if the Welsh now refuse to accept being included in national procedures? We really ought to be told to whom this legislation is actually going to apply.
Amendments 102 and 109 expressly include Scottish schemes, established under the Police and Fire Reform (Scotland) Act 2012, within the scope of the Bill. Amendment 139 on the approval of new schemes again refers to all devolved Administrations. What does that mean? It certainly does not mean what is defined by Amendment 148, because we do not know what the Welsh are going to do.
What we have here is a bit of a mess. The Minister must tell us how this mess is going to be resolved. How are we going to try to have some degree of consistency in public pension provision in which people can have confidence throughout the United Kingdom? We can go two particular ways. One is to attempt to negotiate an all-UK structure, which has the sort of simplicity and clarity that was suggested by my noble friend Lord Hutton. The Minister should then tell me what negotiations are proceeding to establish that common UK structure, given the devolved responsibilities of the devolved Governments and Assemblies. We should be completely clear that pensions in Northern Ireland are different from pensions in Scotland, different from pensions in Wales and different from pensions in England, and that the relevant authorities have responsibilities for their particular jurisdictions. However, of course, we do not have that. In Scotland, we have a mixture: some pensions are the responsibility of the Scottish Parliament and some are not.
Our Amendment 28A—which noble Lords may have noticed is buried in this group so that it is almost undetectable, but it is there, although the noble Lord did not deign to refer to it in his opening remarks—seeks to make some sense of this mess by recognising that regulations relating to local government workers in Scotland should require the approval of the Scottish Government. I am well aware that local government pensions are a reserved power under the Scotland Act. In the past, as the noble Lord said, Scottish Ministers have had executive responsibility for making regulations for public service schemes, but they require Treasury approval. But these have typically concerned minor matters. There has not been any big issue which has been likely to bring about a significant difference of opinion between the Scottish Parliament and the Treasury.
However, this Bill completely transforms the situation. It is a framework Bill that will be followed by regulations that are very substantial indeed. Moreover, the local government workers’ schemes in Scotland, like those in England, are funded schemes. It is important, given the extensive powers of interference conferred on the Treasury by this Bill, that the Scottish authorities have appropriate responsibility for decision-making on those funded schemes.
Since, as I understand it, the UK Government have not used their reserve power on Scottish local pensions in the past—in other words there has not been any disagreement in the past, although I am quite willing to stand corrected as it is quite difficult to research these things—it is surely inappropriate to do so now. It is surely right that the Scottish authorities should be responsible if we are going to go for this devolved structure of pensions and give up on the idea of my noble friend Lord Hutton’s proposal for a common UK scheme.
Far from being technical, this huge swathe of amendments raises major questions over the scope of this Bill and introduces complexity where there was once consistency. If the devolved Administrations are to have entirely separate schemes, so be it, but make it clear, rather than this hotchpotch of amendments and qualifications. If we are to have a Public Service Pensions Bill, not a “some people in the public service and some others not” pensions Bill, the Government must reach agreement with the devolved Administrations. They must bring back to this House a proper, comprehensive structure so that we can understand the relationship between those schemes that will obviously be national, such as the schemes for the Armed Forces, who are of course servants of the Crown, and those schemes which are to be devolved. If we are to have a common scheme, let us get on with the negotiations and bring the common scheme to this House. Last-minute changes as far-reaching as these are entirely unacceptable.
Baroness Donaghy
My Lords, when I was chair of ACAS, one of my jobs was to try to read between the lines of documents like this, which is very difficult to absorb at such short notice. In reading between the lines—I am only guessing—it seems possible that the Minister has been placed in a difficult position in terms of timetable, which might not be entirely under his control.
I want to make a slightly narrower point than that made by my noble friend Lord Eatwell and probe a little on this issue of Scotland. When the Minister was summing up at Second Reading, he indicated that the Scottish Government had accepted the “generality” of the Government’s proposals, which he said were very much based on those put forward by my noble friend Lord Hutton. In terms of the more detailed proposals, the noble Lord informed us that,
“the Chief Secretary has written to Scottish Ministers inviting them to propose amendments if they feel the provisions of the Bill are not suitable for the Scottish pension scheme”,
and that as of 19 December, no such amendments had been proposed. He concluded that:
“Any regulations made by Scottish Ministers will be subject to the procedures in the Scottish Parliament”.—[Official Report, 19/12/12; col. 1585.]
I am setting this scene because the point that I want to emphasise is that the Bill is based upon negotiations—these are not technical points that I am trying to make. The Bill is based upon negotiations in England and Wales and has not been subject to the same level of negotiations in Scotland. I am talking about the parties involved in the local government scheme there. I may not know much about the detail of the relationship or the liaison between the Chief Secretary and the Scottish Government, but I do know about genuine involvement and consultation. If you invite someone to a party that is in full swing, they are entitled to feel various emotions, and one of them will almost certainly be resentment that they were not invited earlier. I cannot expect the Minister to be completely frank in the Chamber, but I am slightly puzzled about why the invitation was delayed.
This Bill prescribes the design of Scottish schemes in a way that current UK primary legislation does not. It is vital that the Scots be fully involved in this process and that the Bill should be amended to maintain the powers of the Scottish Parliament to design and regulate the public service pension schemes that are devolved to Scotland. I know that this is a slightly different point from that made by my noble friend Lord Eatwell, but as we are where we are on this. I just want an assurance that the parties involved in this are being fully involved. I hope that the Minister will accept Amendment 28A.
Lord Newby
My Lords, I hope that I can clear up some of the confusion in the mind of the noble Lord, Lord Eatwell, about this, and I am very pleased that the House has not been deprived of his Second Reading speech.
The noble Lord asked about what this meant in terms of the differences in the way in which the schemes will be applied across the various component parts of the UK. I will deal first with Northern Ireland. I point out that I made it clear at Second Reading that the Northern Ireland Executive were intending to proceed in the way to which these amendments give effect. We were not hiding anything from the House. The other point is that the Northern Ireland Executive have accepted the principles of the report of the noble Lord, Lord Hutton, and therefore we would expect that where we end up in Northern Ireland will be very similar to where we are in the rest of the UK.
However, this is a decision for the Northern Ireland Executive, not for us. The Government would have been very happy to include Northern Ireland in the Bill; indeed, that is the basis on which we started, that it would be easier to take something out than to put it in. But it is their decision and their power as a devolved Administration.
In respect of public sector pensions in Scotland and Wales, the areas for which the Scots and Welsh have complete devolved authority are very small. In Scotland, we are talking about part of the judiciary—I gather it involves six judges—and certain public bodies. For the generality of public servants in Scotland, 98% to 99% of them will be covered by the Bill. Those that are being excluded are these small numbers. Equally, in Wales, the number of people for whom the Welsh Assembly has total authority is very small. I think, although I may be wrong, that it only involves councillors and Assembly Members. Again, the vast bulk of the public servants in Wales will be covered by the Bill even as amended. I do not think that we are going to have quite the hotchpotch that the noble Lord is concerned about.
Baroness Donaghy
If this covers so few people—and I come back to Scotland again—why did this not emerge in the Second Reading debate? Why was the House left with the impression that the Scottish devolution issue would cover more than just the few public servants referred to? A slightly misleading impression was given, if the Minister does not mind my saying so, because there is a feeling that the public servants in Scotland have been left behind on this. I emphasise that the negotiations that took place in England and Wales did not take place in Scotland. This is a very important point. I am sorry to keep going on about it, but it is all very well to hide behind technicalities about how many people are involved—I am really quite shocked that it has emerged today that so few people were involved. I just wonder whether this would not have led to a bigger debate at Second Reading.
Lord Newby
The distinction between the very small numbers that I have been talking about and the rest of the public servants in Scotland is that the rest of the public servants in Scotland are covered by the Bill. The schemes established under the Bill for public servants in Scotland were still negotiated in Scotland, but the framework for public sector pensions in Scotland, with the exception of those very small numbers, will be the same as in the rest of the UK. There is devolved power to the extent of the scheme negotiations within the framework of the Bill.
Lord Eatwell
In using the word “power” there, is the Minister aware that it will still require Treasury approval?
Lord Newby
I shall come to that in dealing with the noble Lord’s Amendment 28A. I did not fail to refer to it in any slight meant to the noble Lord. I thought that it was more courteous for me to allow him to make his case and then for me to reply to it.
Amendment 28A would change the current devolution settlement. I know how much importance many noble Lords across all sides of the House attach to devolution matters, but a Bill on the reserved matter of public service pensions is not, in the Government’s view, an appropriate vehicle for reworking the devolution settlement put in place by the Scotland Act 1998 or for rewriting the long-standing Sewel convention. I hope that I can explain what I mean by this.
Part II of Schedule 5 to the 1998 Act makes it clear that, with minor exceptions, this Parliament has exclusive competence to legislate for public service pensions in Scotland. This includes the local government pension scheme in Scotland. Requiring the approval of the Scottish Government in relation to reserved matters would run counter to the principles of the Sewel convention. In constitutional terms, approval of the Scottish Parliament in relation to primary legislation on Scottish local government pensions is not needed under the convention. Furthermore, as the Scottish Finance Minister told the Scottish Parliament on 28 November, the Bill does not contain any provisions,
“over pensions for local government, the national health service, teachers or police and fire staff—that would trigger the Sewel convention”.—[Official Report, Scottish Parliament, 28/11/12; col. 14014.]
I can reassure noble Lords that, although the Bill sets a legislative framework setting the parameters for pension scheme designs, Scottish Ministers have the freedom to decide on many of the details of scheme regulations relating to Scottish local government workers. This includes how generous the scheme is. The Treasury has not set a cost ceiling for any of the Scottish schemes. The cost of Scottish schemes will have to be met from the Scottish block grant. Furthermore, Clause 3 explicitly states that Treasury consent is not needed for Scottish local government scheme regulations. When pension regulations are made for the Scottish local government sector, the Scottish Government will design the terms of those pensions under the framework of the Bill, and will put them before the Scottish Parliament. That is how legislation on this topic falls to be dealt with under the devolution settlement. It would be a novel and unhelpful step to make the application to Scotland of legislation that is reserved to Westminster, subject to the prior approval of the Scottish Government in the way suggested by this amendment.
I hope that goes some way to explaining to the noble Baroness, Lady Donaghy, what the situation is in Scotland and why it is not for the Westminster Government to set out or agree the details of the schemes. It is for us to set out the framework and then, under the devolution settlement, for the Scottish Government to have negotiations that will lead to detailed scheme provisions.
Lord Newby
Lord Newby
Lord Newby
Baroness Harris of Richmond
My Lords, Amendment 15 is grouped with that of the noble Lord, Lord Eatwell, and the noble and learned Lord, Lord Davidson of Glen Clova. I am most grateful to them for adding their names to my amendment. I, too, apologise for not having taken part at Second Reading when I might have raised these particular concerns, which I am very grateful to the Ministry of Defence Police Federation for drawing to my attention. As I have only just started to speak on this matter, I declare an interest as a former member and chair of a police authority and a current member of the Independent Police Commission, which is chaired by the noble Lord, Lord Stevens of Kirkwhelpington.
As we have heard, the commission chaired by the noble Lord, Lord Hutton, recommended that the normal pension age for members of public service pension schemes should be the same as their state pension age, which means that those on the scheme should retire at 65, rising eventually to 67 or 68. As the noble Lord, Lord Eatwell, said, it was also recognised that those who were in the uniformed services—the Home Office police, fire and rescue service personnel and, of course, the Armed Forces—should have a retirement age of 60, but that this would be kept under regular review. The Government were happy to accept this recommendation. However, as the noble Lord, Lord Eatwell, reminded us, for some unaccountable reason, the Ministry of Defence Police are not treated in the same way as Home Office police as they are members of the Principal Civil Service Pension Scheme.
I contend that it is reasonable to say that someone on that scheme would be fairly limited to doing mainly desk work, unless, of course, they are James Bond. However, that is most definitely not the case with members of the Ministry of Defence Police. The reason the noble Lord, Lord Hutton, felt that the age for uniformed service personnel should be 60 in future was to recognise the unique and physically demanding nature of the work that they do. However, because the MDP were lumped in with the Civil Service pension scheme—the reason for which I have never really understood—they were never considered separately in his proposals. Indeed, the MDP were not even consulted on this when the Council of Civil Service Unions negotiated the age increase for all other civil servants. As the noble Lord, Lord Eatwell, eloquently laid out, it seems wholly unfair on a number of grounds that they should be treated differently from colleagues who do very much the same sort of work: namely, Home Office police, fire and rescue personnel and our Armed Forces. The Ministry of Defence Police have a pay structure linked to that of Home Office police forces, so why are they to be treated differently in pension terms?
As we have heard, all MDP personnel are required to be armed. They have to wear heavy body armour and equipment which weighs more than four and a half stones and is removed only when they have meal breaks. This means that in a 12-hour shift, they carry that amount of weight around for 11 hours. This can be even more physically demanding than general policing. Unlike Home Office police forces, MDP officers have no option for to move to unarmed work, should they no longer be able to cope with the physical demands of the job. They either have to retire early, as there is little scope to offer easier work assignments, or they could be dismissed on grounds of inefficiency. That is not much of a state thank you after serving in such high-profile roles.
It is a fact that the MDP’s main role is that of counterterrorism. It is easy to see that their officers, who are routinely armed, are exposed to danger every bit as much as their Home Office colleagues. Indeed, MDP officers continue to serve in Afghanistan and other overseas theatres in support of the Foreign and Commonwealth Office, as well as protecting sites of critical national infrastructure. Did noble Lords know that our Home Office police are not expected routinely to carry guns beyond the age of 55? I certainly did not know that; perhaps I should have done. Therefore, it seems to me even more urgent that this anomaly in pension age provision is hastily cleared up.
The national state pension age is already due to rise to 67 and could well go to 70 and beyond in the future. There is provision, I understand, for negotiation for the normal pension age for MDP officers to be reduced by three years, but I submit that this could still leave a situation whereby officers in their late 60s are expected to carry firearms and their associated equipment weighing four and a half stones. As I say, at the moment, the Government have the power to vary the retirement age from the state pension age by only three years. Therefore, the older these officers are allowed, or expected, to retire, the greater the health and safety issues will become. I urge your Lordships to consider that dilemma.
Like the noble Lord, Lord Eatwell, I would also like consideration to be given to similar arguments relating to the Defence Fire and Rescue Service, where operational firefighters are to be asked to work until they are around 68, whizzing up ladders, rushing about putting out fires and wearing breathing apparatus. As we have heard, they can also be deployed to war zones. Their concerns also urgently need to be addressed.
If this amendment is accepted, it would not reduce the normal pension age for MDP officers to 60 but would allow the Defence Police Federation to continue to negotiate on behalf of its members. I feel that that is a right and proper thing to do. A review of terms of service is being undertaken and the Government will have the power to make a separate decision on the MDP retirement age, if they choose to do so. My amendment simply asks for time to allow those negotiations to continue. Even if my noble friend cannot accept my amendment, I ask him at least to agree to his officials meeting the Defence Police Federation to explore this matter further. However, I hope, of course, that he will accept the amendment.
Lord Newby
My Lords, these amendments seek to add members of the Ministry of Defence Fire and Rescue Service and the Ministry of Defence Police to the categories of “fire and rescue workers” and “members of a police force” set out in the Bill.
I would like to begin by setting out the current situation before responding to the proposals for change. First, as the noble Lord, Lord Eatwell, pointed out, members of these forces are civil servants who currently, and historically, have access to the Civil Service pension scheme. This scheme currently has a pension age of 65. The principle of working beyond 60 for the MoD fire and police services is already established and has existed for a number of years, while the retirement age for the police and fire services has been well below 60.
Secondly, we should remember that the Civil Service scheme is an extremely good pension scheme with benefits which are far beyond the aspirations of many in the private sector. The scheme has provisions in place to ensure that any individuals who face ill health can be provided with their pension early. Alongside this there is, of course, the option for individuals to retire before their retirement age on an actuarially reduced pension. The value of the Civil Service pension scheme is shown in the fact that DFRS and MDP staffing levels remain good and that individuals in this force have already taken employment on the basis of the package of terms and conditions currently in force. The Government do not believe that there are significant recruitment and retention issues associated with the continued use of the Civil Service pension scheme.
Thirdly, it is worth remembering that the employment status of those working in the Defence Fire and Rescue Service and the MoD Police is very different from those working for fire or police authorities. Members of the DFRS and the MDP are direct employees of the Secretary of State for Defence and their remuneration package is managed in a different way. The kind of changes that are suggested by the amendments would make most sense only as part of a fundamental restructuring of not only the terms and conditions of these forces but their roles and responsibilities and they way in which they are managed. They are currently part of a single scheme that is administered at a national level. There would be significant logistical and administrative difficulties in moving them to be part of a locally administered scheme. The Government do not believe that such a restructuring is a way forward.
Having said that, I should point out that, within the new Civil Service scheme, the flexibility will exist for the impact of the later retirement age to be mitigated for certain groups, should this be felt to be justified. This could, for example, be through fully funded early retirement or more generous early retirement factors.
As the noble Lord, Lord Eatwell, pointed out, these issues were not discussed substantively in another place and the amendments have gone down only in very recent days. However, I can give an assurance that the Government will give these matters extremely careful consideration between now and Report. We are very happy to meet members of the Ministry of Defence Police and the Defence Fire and Rescue Service if they would like to do that. I will be in a position to give a more considered response to movers of the amendments and to the House as a whole on or before Report. I therefore urge noble Lords to withdraw their amendment today.
Lord Eatwell
My Lords, I am grateful to the noble Baroness, Lady Harris, for her remarks. I rather pre-empted her discussion of Amendment 15 and I apologise for that. It was, after all, her sensible, balanced and valuable amendment to which we added our names rather than the other way around. I must, of course, accept the Minister’s offer of further consideration. In looking at further consideration, I urge him to put aside the canard of logistical and administrative difficulties. The phrase “logistical and administrative difficulties” is a wonderful excuse for doing nothing on all occasions. As an academic, I recognise that very clearly. It is the doctrine of unripe time: the time is not ripe and therefore we must not do anything. Logistical and administrative difficulties fall into the same pattern.
Nor is the recruitment argument a terribly good one. In this country, where we have 2.8 million people unemployed, it is not hard to recruit people in many professions. The idea that a lack of recruitment difficulties is somehow a justification for maintaining something that is manifestly unfair is not very good. I am delighted that the Government will take this away and consider it. I look forward very much—as, I am sure, does the noble Baroness, Lady Harris—to the Government taking a fair and balanced approach to this issue, which will result in amendments to the Bill that are akin, if not identical, to those we have put down. In the mean time, I beg leave to withdraw the amendment.
Lord Newby
Lord Newby
Lord Newby
Baroness Donaghy
My Lords, I know that the Minister thought that I overdid it a bit at Second Reading when I said that the confidence of public servants was shattered by two successive large sets of negotiations on their pensions. However, I think that this comes back to an issue of trust, and obviously everyone is going through the Bill line by line to see where that trust might be undermined in future.
I support everything that my noble friend Lord Whitty said. As currently drafted, the Bill would allow scheme regulations to make retrospective changes. I made it clear that in principle I did not disagree with that. However, the absolute crunch would be that scheme members or their representatives should agree to any retrospective change and the Government’s commitment that accrued rights up to the date when the scheme was changed would not be reduced. As has already been said, this would simply ensure that workers in public service pension schemes enjoyed the same protection in relation to their accrued pension rights as exist for workers in the private sector under pensions law.
I was concerned about the noble Lord’s reply on this issue at Second Reading. I understand that there is no set standard of protection across the current schemes, as he said. Apparently the Government have chosen not to carry across the protections in retrospectivity that can be seen in previous legislation, such as the Superannuation Act 1972. They are concerned that what the Minister referred to as the “most extreme” of these protections—member consent locks—is not the way forward. The Government say that they are trying to strike the right balance between the protection of members and the efficiency of the scheme, and no one can disagree with that. However, I cannot help thinking that this obsession with member consent locks is all about not getting unanimous agreement to the deal, and that is throwing out the baby with the bath water. What these very reasoned amendments do is codify the Minister’s precise intention. He said that he would take this issue back and further consider the provisions of the Bill, and I hope that he will give the reassurances that we are seeking.
Lord Newby
My Lords, I begin by saying that I completely agree that we are dealing with extremely important provisions in the Bill, particularly with regard to retrospective and legislation-amending powers. I should also say that I am sympathetic to the concerns that have been expressed. I should like to go through each of the amendments in order, and I hope that I will not detain the House for too long.
Amendment 26 is the first of the two amendments in the name of the noble Lord, Lord Eatwell, dealing with retrospection. I should begin by explaining that some powers of retrospection are needed because of the way that pensions legislation is typically split between primary and secondary provisions. This Bill exemplifies that combination. It sets the core framework in primary legislation while the scheme design details, such as the accrual rate, will be set out in secondary legislation. When future changes are made to the secondary legislation, which typically happens in most years to ensure that they run smoothly, it can be necessary to bridge any gaps to the underlying primary legislation, as well as adjusting existing secondary legislation to ensure that it remains consistent. By allowing scheme regulations, which are themselves secondary legislation, to make necessary changes to primary legislation via the affirmative procedure, we believe that we are striking a sensible balance between member protections and parliamentary scrutiny. This approach is commonplace in existing pensions legislation.
However, the Government have listened to what noble Lords have said and have read with interest the 10th Report of the Delegated Powers Committee, which calls into question aspects of the scope of the proposed power. In particular, the report recommends that the power to amend primary legislation should be restricted to amending Acts that have already passed and to making only consequential or consistency provision.
We are considering the recommendations of the Delegated Powers Committee very carefully and on Report I hope to be able to bring forward amendments on this issue that will satisfy noble Lords’ concerns. I was extremely grateful to the noble Lord, Lord Eatwell, for saying that if we are able to do so successfully, he will support those amendments. These are important but complicated issues and we are determined to get them right. In responding to the individual amendments that have been tabled, I hope that I can tease out some of the complications and ensure that we do indeed get these issues right.
Lord Whitty
I am not referring to what is in this Bill or what the Minister or any of his colleagues have said. I make that clear. I am talking about the campaign that has been run decrying and denigrating public sector workers and their pension schemes, calling them “feather-bedded” and “gold-plated” and trying to divide public opinion against public servants. It is that aspect of the political operation that I object to, not anything in the Bill.
Lord Newby
I am very relieved to have that qualification. However, I briefly repeat what I said at Second Reading. The schemes that are now going forward, covered by the legislative framework of this Bill, are, in our view, extremely sensible and generous provisions that reflect the importance that the Government attribute to the work undertaken by all the public servants covered by the schemes.
Having got that out of the way, we quite like the amendment of the noble Lord, Lord Whitty. It has the advantage of simplicity and would allow schemes to make minor and technical changes in the interests of efficiency but restrict changes that were materially detrimental to members. The wording that he has used in the amendment and the sentiments contained in it will certainly form part of our consideration of what we ourselves table on Report.
Amendment 28 deals with member consent locks. I should be clear, as my colleague the Economic Secretary was in the other place, that the Government have significant concerns about the consent locks contained in the amendment. We do not believe that this is the right way forward. I have previously mentioned that there are a number of options in terms of how to facilitate retrospective powers, and in our view consent locks are very much at the extreme end of this spectrum. We do not think that it is appropriate to give members, employers or anyone else the power unreasonably to hold each other or the Government to ransom and to inhibit changes for the greater good. There have been some damaging examples of this in the past. Therefore, the application of universal consent locks is not an avenue that we intend to investigate as we develop our amendment on this subject for Report.
Lord Eatwell
My Lords, perhaps it will assist the Minister if I point out that this is not a universal consent lock; it refers purely to accrued rights and indeed, as I said, it reflects the Superannuation Act 1972.
I am the chairman of a private sector pension fund; I did not declare an interest because, as this is about public sector pensions, there is no particular interest for me to declare. With regard to the extreme end of the spectrum, we have used consent locks in the private sector while negotiating various reforms of rights and have always found that negotiations with members are fruitful and produce generally positive results. I therefore do not think that so-called consent locks should be seen as extreme; they are simply the fruitful basis of consensual reform of a pension scheme.
Lord Newby
I hear what the noble Lord says and I hope that our amendments can satisfy him in this area; I suspect they will do so without having consent locks. However, it will be a good outcome if he is happy at the end.
On Amendment 30, discussed by the noble Lord, Lord Witty, as part of the debate about retrospective powers, our view is that it simply does not do that. Clause 3(5) deals with the generality of Treasury powers and this amendment would loosen up the area that the Treasury would have to consider. The Treasury would not then look at changes to schemes that were revenue-neutral. Our view is that in order to meet the requirement by the noble Lord, Lord Hutton, that we need a greater degree of consistency across the schemes, it would be sensible for the Treasury to look at changes, whether or not they have a financial implication, to try to ensure that we maintain consistency to the maximum possible extent.
Moving to Amendments 116 and 119, which deal with consultation, this takes us back to a debate in the other place about the appropriate statutory consultation requirements for changes in scheme regulations for the new schemes. In the other place the Government set out the reasons why it is not appropriate that primary legislation should require that all consultation on such changes be carried out with a view to agreement. As made clear in the Government’s consultation principles, consultation can have a number of purposes, including garnering views and preferences, understanding possible unintended consequences of a policy or getting views on implementation. The Bill already goes further than those consultation principles, not to mention the arrangements in place for a number of the existing public service pension schemes, in requiring that all changes to scheme regulations would undergo statutory consultation. However, such consultation must be proportionate; it would not be right for us to establish today that all consultation must seek to reach agreement, as that will not always be possible, or indeed the aim of the exercise.
Amendment 119 goes even further, requiring that all changes to scheme regulations should undergo not only consultation with a view to reaching agreement but also a parliamentary reporting process. In the case of changes to the protected elements set out in new subsection (6), scheme regulations could be changed only by agreement. We believe that this is an impractical measure. Changes are required to scheme regulations for the most minor of reasons. Surely it cannot be right or sensible that such an exhaustive consultation procedure be put in place for every such minor instance. Instead, the Government have established a balance in their consultation requirements. Clause 19 puts in place a statutory requirement for consultation. Clause 20 goes further than this and puts in place more onerous requirements for those situations where a future Government may seek to amend the core elements of the new schemes. This already goes further than some feel is appropriate in binding the hands of future Administrations. However, the Government are determined that this protection should remain in order to give confidence to members of those schemes that the Government are committed to the scheme designs that have been negotiated.
Amendment 119 also makes changes to the protected elements set out in Clause 20. These are the core elements of the schemes protected by the extra consultation requirements in the clause. The Government have included the career-average nature of the schemes, member contribution rates and benefit accrual rates in these protected elements, and are convinced that including these elements strikes the right balance between giving reassurance to members and ensuring that schemes are flexible enough to operate in the real world. Finally, Amendment 119 also seeks to require agreement through consultation to any change to the protected elements before such a change could be made.
The Government are committed to the reforms to pensions set out in the Bill and in the separate documents that describe the details of the new schemes that have been negotiated with member representatives. We have put a great amount of time and resource into developing these schemes and have come to what we believe are the right outcomes in the designs that have been established. However, it would be irresponsible and frankly unrealistic for this Government to seek to bind the hands of all future Governments within the next 25 years, as this part of the amendment would seek to do. Instead we have sought to put in place a more onerous process that would cause any future Governments seeking to fundamentally change these pensions to properly consider the impact of their actions and to justify the need for such changes to those affected and to Parliament.
Amendment 120 is intended to be consequential on some of these other changes and would amend the provision in Clause 21 to specify that scheme regulations will be subject to the negative procedure unless otherwise specified. However, the amendments in question do not propose any change to the procedure around scheme regulations, and therefore we believe that the amendment is unnecessary. I hope that in view of the assurance I have been able to give about amendments coming forward on Report, noble Lords will feel able to withdraw their amendments.
Lord Newby
Public Service Pensions Bill
Lord Newby Excerpts(12 years, 3 months ago)
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Lord Whitty
My Lords, this is an amendment that reflects some of the anxiety in local government and other circles about what the Treasury’s ultimate intention is in relation to public sector schemes. The Minister may be gratified to know that I do not expect him to accept the amendment wholesale tonight, either in this form or in some other form within this Bill, but I hope that he will give sufficiently reassuring words that the matter dealt with in the amendment is not the intention, and that there will be some way of making sure that it is not.
The anxiety stems from a number of things. We all know that the Treasury likes to control things. We also know that the Treasury does not like to see the possibility of costs that it does not control but that will count against the public borrowing requirement—albeit that that definition is ludicrously wide compared to most other countries. The Treasury also likes to see large sums on the asset balance sheet. On the other hand, the Treasury likes to deal with liabilities on a pay as you go basis rather than on a long-term funded basis. When looking at the attempt to corral the local government scheme into the same box as the unfunded public sector schemes, where the funding has gone up and down significantly over the decades, all these things might suggest the possibility that if any of the 89 different local government schemes were seen episodically to be failing, the Treasury might take the opportunity to step in and take it over, or perhaps to take over large chunks of the local government scheme.
Local government schemes consist of 89 different schemes, mostly local authority. By and large, they are well run, professionally organised and based on very solid professional advice, and generally they take steps to ensure that the income is changed if the long-term prospects alter significantly. But, of course, in the current economic climate there has been some serious turmoil. The local government scheme of which I was recently chair went from a funding position of 114% down to something under 70% and back up again to 90% in the past four years, which was almost entirely due to the way in which the world stock markets have gone down, with the value of equities and other stocks, and also—and I shall return to this in a subsequent amendment—to the way in which liabilities are valued. At times, it looked as if there was danger of those funds not being sustainable even in the short term.
There is a possibility of the Treasury not liking to face the possibility that it is seen as the underwriter of last resort, which currently it is, although I notice that the noble Lord, Lord Flight, who is not in his place, is attempting to remove that position later on in the Committee’s consideration. In reality, there have been no historic examples of default, but nevertheless there could be an opportunity of the Treasury stepping in, saying that the fund is badly run and that it is going to take it over, count the assets against central government assets and push the liabilities into the long grass.
There is a precedent for this situation, and a rather large one—that of the Post Office pension scheme. Both Governments are guilty of this, although the current Government actually implemented it. It was a very large scheme and, because of previous pension holidays taken by the Royal Mail pension fund, it was somewhat underfunded. Somewhat to our surprise, the Treasury agreed to take over the scheme directly. Part of that was to soften people up for privatisation, but another part of it was that it immediately got the Treasury £26 billion on the asset side of their balance sheet, whereas the liabilities, although they are still there legally and contractually and will have to be met, actually disappear from that balance sheet in the general fund.
If that could happen in a scheme as large as the Post Office scheme—and there is the possibility of a predatory Treasury down the line—then it could happen in relation to failing or allegedly failing local government schemes. The reality is that the boards of the local schemes and the national board would need to take steps within the LGPS to ensure that such schemes did not fail, or that if they failed they would merge with other local government schemes. That responsibility to intervene at the first sign of danger rests within the LGPS, not with the Treasury.
There is a serious suspicion that the blurring between an independent local authority-based wholly funded scheme, and this scheme’s provisions for greater Treasury surveillance, could go further, and that it could allow the Treasury to seize control of a local authority fund in the circumstances that I have described, but possibly in other circumstances as well. I have put this amendment down for the resolution of that suspicion. As I have said, I do not necessarily expect the Minister to accept this amendment, but I would like, in the course of either this or the next stage, an unequivocal declaration or a different form of words in the Bill that make it clear that the Treasury would not act in this way in relation to local government schemes. I beg to move.
Lord Newby
My Lords, this amendment seeks to provide assurance that the Treasury could not take away the assets of the pension funds or place the liabilities of the local government pension schemes on to the Government’s books. I hope that I can reassure the noble Lord, Lord Whitty, that the Government have no intention of doing so, and for a very good reason.
The noble Lord, Lord Hutton, considered the funded nature of the local government pension schemes and concluded that they should continue on that basis, and we agree. Local authority pension funds allow local government to manage its liabilities efficiently and ensure the solvency of the scheme both at a local level and as a whole. Moving to an unfunded model in the local government schemes would risk greater volatility in the costs, and therefore the demands on local taxpayers. In practice, taking on the assets of local government schemes would also mean taking on the liabilities, which would have a greater cost for central government and would therefore make no economic sense. Neither would winding up any of the existing funds make economic sense. That would cost the Government far more in making provision to secure annuities for rights already built up than it would gain the Government in terms of assets.
Furthermore, there are significant legal barriers. It took explicit powers in primary legislation to move the pension assets of the Royal Mail. There are no such explicit powers in this Bill. For the avoidance of doubt, any suggestion that the Government took on the pension fund of the Royal Mail in order to improve the figures, knowing as they did that they were incurring a very significant liability in the long term, is simply misplaced. It was, as the noble Lord put it—although I would not put it in quite the same terms—part of the necessary process of preparing the Royal Mail for privatisation.
When debating closure we have said in your Lordships’ House, in another place and outside Parliament that we have no intention of winding up the existing schemes. Indeed, we have amended the Bill on a number of occasions to allay these fears. The Government, therefore, have no intention of defunding the local government pension schemes, for the very good reasons that I have set out.
I hope that I have reassured the noble Lord, Lord Whitty, that any fears that he might have about the LGPS funds are entirely unfounded, and that this amendment is therefore not necessary.
Lord Whitty
My Lords, I thank the Minister for that reply, which provides a fair degree of assurance. I will read the precise words then consult colleagues in local government as to whether that is sufficient. However, I thank him for his reply. I agree that the Post Office was a bit more complicated, but on the other hand there are suspicions out there, and it is part of the distrust to which reference was made earlier that such fears are around. The Government have to ensure that they pacify those fears. I hope that the Minister’s words will help to do that. Meanwhile, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, my noble friend has made some interesting and important points. One of the issues that really need to be faced, on Report in particular, is that in the negotiations that followed the Hutton report, Local Government Employers, the unions and the Government managed to formulate what could be called a “deal” about the way in which pensions were to go forward. Regrettably, elements of that deal do not appear in the Bill. In response to challenges in the Commons, Ministers gave assurances on a number of occasions but, given that this is expected to be a Bill lasting 25 years, covering several Administrations, these assurances should be in the Bill. A deal is a deal and simply going back to assurances is, at least partially, reneging on the deal.
Having said that in support of my noble friend, I will now speak to Amendment 35, which is also in this group. My noble friend Lord Hutton’s report recommends:
“Every public service pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration.”
One can understand why my noble friend recommended this given that, as my noble friend Lord Whitty has commented, there are 89 local government pension funds, with over £150 billion of assets under management, as well as the other pension schemes. Clause 1 currently provides for the establishment of a pension board for a scheme but leaves it completely unclear whether there is a requirement for one pension board for each fund in the Local Government Pension Scheme. Under the clause as drafted, it would be perfectly possible to have one pension board for all 89 pension funds—that is not ruled out. The Minister in another place said the combined effects of Clauses 4 and 5 rule this out. I have studied these clauses carefully and have taken advice, and have been assured that they do not rule this out. Indeed, one could have various combinations of boards servicing the 89 LGPS funds and other schemes.
Given that, as the Hutton report says,
“all scheme members deserve to know that their scheme is being properly run”,
it is entirely desirable to make clear in the Bill that a pension board for each pension fund is a prerequisite, both as a measure of efficient management and to give confidence to the members of individual schemes that they have a board that they can identify with and have access to. I will, in due course, ask the Minister to consider carefully taking on board Amendment 35 to give suitable clarity to what is meant by the establishment of pension boards and ensure that there is a pension board for each scheme.
Lord Newby
My Lords, the noble Lord, Lord Whitty, has proposed Amendments 33, 36, and 44, which are concerned with ensuring that there is a scheme manager and pension board for each local authority pension fund. The amendments also provide for national pension boards in the Local Government Pension Scheme. Amendment 35, tabled by the noble Lord, Lord Eatwell, raises much the same issue.
Both noble Lords seek assurance that there must be a pension board for each local authority pension fund within the local government scheme. I can reassure them on that point. Police, fire and local authorities will be scheme managers in respect of their part of the pension schemes for those workforces. The effect of Clause 5 is that the scheme regulations must provide for a pension board to assist each scheme manager in that role. It follows that there will be a pension board for each scheme manager.
Noble Lords may say that Clause 4 does not in explicit terms require there to be a scheme manager for each local pension fund, and hence a pension board also for that fund, but that is the purpose of Clause 4(5). The intention is also clear from Clause 5(6). This anticipates that the scheme managers of locally administered funds will be the local authority or a committee of the authority.
Amendment 36 is also concerned with requiring national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland.
Lord Eatwell
I ask the noble Lord to return to the point he just made, because it is similar to a point made in another place. There is a scheme manager for each scheme. Clause 5(1) states:
“Scheme regulations for a scheme under section 1 must provide for the establishment of a board with responsibility for assisting the scheme manager”.
That does not suggest that there should be a board associated with each scheme manager. It does not say that, but a board might be just one gargantuan board that serves a variety of scheme managers. I quite understand that the noble Lord is sympathetic on this issue and wishes to assure us that that is what the Government mean but it is not what they say.
Lord Newby
My Lords, that is what we mean and I am advised that that is what the clause says. I will look at it again and if there is any further clarification that I can give the noble Lord, I will write to him. I think that we just have a difference of view about what the current provision states.
Amendment 36 would require national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland. We cannot support these amendments but, as the noble Lord, Lord Whitty, will be aware, we have tabled Amendment 45 to deal with that issue, which we will consider in due course. When we do, I hope that the noble Lord will be persuaded of it.
Amendment 115 concerns Schedule 7, which sets out the mechanism to maintain the final salary link for service in the current schemes. The schedule is designed to allow public servants’ final salary benefits to remain fixed to their final salary on leaving pensionable public service, even after they enter the new schemes. This was a key part of the recommendations of the noble Lord, Lord Hutton, and a vital aspect of the reform deal for public servants. The mechanism also includes provisions for this link to be maintained even if the person moves between public service schemes or leaves public service for periods of not more than five years. Again, this is exactly in keeping with what the noble Lord, Lord Hutton, proposed.
This approach allows public servants the flexibility, for example, to take carer’s leave or gain experience in other sectors, without being inhibited from doing so by the detrimental impact on their final salary pensions. This is consistent with a wider objective to modernise public service terms and conditions, and it smoothes movement between different sectors and departments to enable the sort of skills-sharing that is required for a modern-day workforce. Amendment 115 seeks to remove this flexibility for those in the Local Government Pension Scheme by stipulating that the link is maintained only if the person remains in pensionable service for the purpose of the new local government scheme.
I am not sure that the amendment delivers on its purpose but, none the less, I must oppose it on principle. It would leave in place a movement barrier that we wish to dislodge and be inherently unfair to local government workers. It would lead to the unfair scenario where a teacher who moves to local government for a period before returning to teaching would maintain their final salary link, whereas a local government worker who moves to the education sector before returning to local government could lose their final salary link. That would not be right.
I reassure the House, however, that the Bill does not impose any new liabilities on the funded local government scheme while a person is not in local government scheme employment. Under paragraph 2 of Schedule 7, the link applies only where someone who leaves the local government scheme transfers their rights to benefits from the old scheme, and therefore the liability, to their new employer’s final salary scheme.
Amendment 126 seeks to remove local government pension schemes from the powers set out in Clause 23, which allows pension payments to be made outside schemes that will be established under Clause 1. Although the pensions that will be made under the Bill will continue to be among the best, not every last person working in the public sector will want to be part of them. In these circumstances, it is important that alternative provision can be made so that public servants can continue to save for their retirement, where the scheme manager or employer considers this appropriate. The clause therefore allows for pension payments, or other benefit payments, to be made outside the new schemes to people who are entitled to join the schemes made under this Bill.
An example of an alternative arrangement would be the employer making contributions to an individual’s personal pension scheme where that individual is on a short-term contract and does not wish to be part of the public service scheme for just that short period. This is nothing new across public service schemes as a whole. The power already exists for some of the current schemes; for example, in Section 1 of the Superannuation Act 1972.
However, I recognise that there is some concern, expressed by the noble Lord, Lord Whitty, and no doubt shared by others, that these powers may be used to override eligibility for the schemes that will be established under Clause 1. I can reassure noble Lords that the clause will not allow eligibility for the main scheme benefits to be overridden. The scheme regulations will spell out who is eligible to be a member of a pension scheme made under the Bill. This scheme could not be used to remove these eligibility rights. In short, while this clause could allow alternative arrangements to be offered, where these suit an individual’s personal circumstances, it does not allow schemes and employers to make such alternative arrangements mandatory. I hope I have reassured the noble Lord, Lord Whitty, that any fears he has about the operation of Clause 23 with regard to the LGPS are entirely unfounded, and that this amendment is not necessary.
Finally, Amendment 127 seeks to remove the reformed Local Government Pension Scheme from the provisions of the Pensions (Increase) Act 1971. This Act provides for the indexation of pensions in payment across the public sector. The amendment would mean that the provisions of that Act would not apply to the CARE element of the LGPS, instead, indexation of CARE pensions in payment would be linked to the revaluation of active member benefits, which is provided for under this Bill.
I understand that this amendment has been tabled to overcome a perceived problem with the Pensions (Increase) Act, which creates difficulties for uprating pensions in the year the member retires. However, this amendment is both unnecessary and undesirable. It is undesirable in a piece of framework legislation such as this to carve out one particular scheme for special treatment. This is especially the case when the revaluation of CARE benefits in the year of retirement is a calculation that will have to be made by all the new CARE schemes established under the Bill.
Furthermore, it is unnecessary. I am pleased to be able to reassure the noble Lord that the Government already run a CARE scheme: the Nuvos section of the Principal Civil Service Pension Scheme, which makes provisions for civil servants. This issue was addressed when that scheme was introduced, and is dealt with via the scheme rules. Should the noble Lord care to look at the detail of this, I refer him to rule C.9—the retirement index addition—in the 2007 rules for the existing civil service scheme. The reformed schemes set up under this Bill, including the LGPS, will also be able to overcome any technical difficulties with appropriate provisions in scheme regulations. There is no need to make any further provision in the Bill to allow them to do so.
With these reassurances, I hope that the noble Lord will feel able to withdraw this amendment.
Lord Eatwell
My Lords, before speaking to the amendments in this group tabled in my name and that of my noble and learned friend Lord Davidson of Glen Clova, perhaps I may associate myself most heartily with the words of the noble Lord, Lord Sharkey. That should not be surprising as the first part of my Amendment 41 is virtually exactly the same as his amendment, but I must say that he put the argument beautifully. The idea that one could not accept the notion that one-third of pension board members are nominated by members of the scheme seems extraordinary. One-third is a lower limit which should certainly be accepted.
On the pension fund board which I have the honour of chairing there is one independent member; namely, myself. Otherwise one half of the remaining members are nominated by the members of the scheme and the other half by the employer. It is just under 50% because of one independent member. If that can be the case in what is, I hope, a harmonious pension scheme, I do not see why it cannot be appropriate for public sector schemes. The argument that the public sector is widely spread over different locales and can cover lots of different activities is clearly spurious as a private scheme for a very large company would be doing the same thing. That is the argument which was presented in another place, but it has been dismissed by the noble Lord, Lord Sharkey, and he was absolutely right to do so. It really has no substance at all.
I shall deal briefly with the amendments tabled in my name. Amendment 38 is all about transparency and effective governance. Under Clause 6(2)(c) pension boards are obliged to publish information about,
“matters falling within the board’s responsibility”.
As we can see in Clause 5(2), these include compliance with a whole series of aspects of the scheme’s regulations, whether it be an unfunded scheme, a defined contribution scheme or, indeed, a funded scheme with respect to its investment strategy. All the amendment seeks to do is ensure that the financial information associated with the running of the scheme is available to the board members so that they can comply with the requirements set out elsewhere in the Bill. If they do not have all the financial information they need, how can they fulfil the responsibility of ensuring that the scheme complies with regulations and other legislation relating to governance? Surely having knowledge of the financial structure and oversight thereof is key to this. We learnt from the Financial Services Bill that oversight does not mean control of but simply access to information about, so if this Bill is to be consistent with that Bill, oversight here would mean access to information that will allow the board to fulfil its responsibilities.
Amendment 39 similarly is devoted to transparency and requires that a policy governing the appointment of board members should be published. High quality board members are absolutely essential if public service pension schemes are to be well run. It is vital that the process for appointment is clear and well considered. It is therefore important that this is a transparent process so that members are reassured as to the quality of their board members. This will also promote fairness in appointments. Given that under Clause 5(4) scheme managers have an obligation to ensure that board members do not have any conflicts of interest, a clear and open appointment process with established criteria for appointment will aid scheme managers in fulfilling that statutory obligation. All Amendment 39 does is say, “Publish your policy on your appointment so that everybody knows what the criteria are, how they can apply, and so on”.
Regarding Amendment 41, I have already referred to the part which deals with the one-third of board members, and the noble Lord, Lord Sharkey, has put it better than I could. Amendment 41 also includes the requirement that there be one independent member. It is enormously valuable to have independent members, who often have professional expertise, to assist on pension fund boards. The report of the noble Lord, Lord Hutton, made it clear that it would be desirable for pension boards to have independent members. The amendment seeks to ensure that the recommendation of the noble Lord, Lord Hutton, is taken into account.
Finally, Amendment 42 uses exactly the same definition of member nominee and independent board member as the Pensions Act 2004 and provides for a nomination process for board members. In that respect, it simply mirrors the Pensions Act 2004, and in particular mirrors the definition of an independent board member, referring specifically to the nature of their independence. The criteria set out in Amendment 42 are those which we have already accepted for the private sector, and it seems entirely appropriate that they should fit here. These amendments are to provide transparency, which will enable the boards to do their jobs better. Transparency over an appointments process and a nomination process will enable the boards to be better constructed.
Lord Newby
My Lords, I begin by speaking to government Amendment 40. It deals with matters related to those that have been raised by the noble Lords, Lord Sharkey and Lord Eatwell. Amendment 40 delivers the Government’s policy commitment for scheme members to be represented on pension boards. Our amendment explicitly requires scheme regulations to provide for members of a public pension scheme, and any connected scheme, to be represented on the pension board. Unlike the amendments proposed by the noble Lords, Lord Sharkey and Lord Eatwell, it does not specify a proportion of board members that must be member representatives, nor does it say how member representatives are to be appointed to the pension board.
The noble Lord, Lord Sharkey, asked whether draft regulations could be made available to Members of your Lordships’ House. I confirm that we will make them available to all Members who have spoken in the debate today. In our view, these matters are rightly left to scheme regulations. In their amendments, the noble Lords have broadly sought to replicate the requirements that relate to boards of trustees in other occupational pension schemes. Amendments 34 and 41 seek to adopt the requirement for at least one-third of board members to be members or their representatives in trust-based schemes. Amendment 42 seeks to adopt a similar process for nominating member representatives to the board.
The noble Lord, Lord Sharkey, asked me to explain our rationale from first principles. I am not sure whether I shall go quite that far back, but I will attempt to explain it. We believe that the amendments fail to recognise the major differences between the public service pension schemes and the trust-based schemes that these provisions were designed for. For example, the effect of Amendment 42 would be to require Norfolk County Council to allow every member of the local government pension scheme in England and Wales, directly or indirectly, to participate in the selection of member representatives to their pension boards. The same would apply to each of the other 88 funds in the Local Government Pension Scheme. This is clearly unintended but it serves to highlight the fact that the public service schemes are indeed different. A one-size-fits-all process for nominating member representatives to pension boards would not, in our view, be appropriate, nor is it appropriate to set a quota. The public schemes are not directly comparable to trust-based pension schemes. The public service schemes are significantly bigger than most occupational pension schemes and many involve multiple and diverse employers. For example, there are over 5,000 employers in the LGPS in England and Wales. Those are not just local councils but also local charities and housing associations. That broad range of interests needs to be represented on the public service pension boards too.
Consequently, our view is that imposing a requirement for one-third of pension board members to be members, or their representatives, could lead to them being the largest interest group on the pension boards. Of course this is not an issue in private sector schemes, where there is often only a single employer to accommodate on the trustee board. The Bill already provides the necessary flexibility for the details to be agreed in each scheme, following consultations with members and other interests. This approach will allow the pension board membership to be tailored to the varying structures of each of the public schemes. The pension boards will then be able to appropriately reflect the range of employees and employers in each scheme. We believe that this is the right approach.
One of the other amendments in the name of the noble Lord, Lord Eatwell, relates to public pension boards having an independent member. The noble Lord, Lord Hutton, did indeed say in his report that it was important that pension boards include independent members. Although we accept that independent members can play a role in pension boards, we do not see a case for mandating each pension board to have such members. The reasons for mandating independent trustees in the private sector do not, in our view, flow through to the public sector schemes. Independent trustees reinforce the separation of pension schemes from the employer in the private sector and, as we have discussed previously, we are not convinced that this is required in the public scheme.
Amendment 39 would require a scheme manager rather than scheme regulations to determine the policy governing the appointment of pension board members. Clause 5 provides that it is the scheme regulations that would provide for the establishment of a board. Within that, schemes are likely to set out the detail of a board appointment process in the scheme regulations. If schemes determine to delegate this matter to scheme managers, then scheme regulations could require the scheme manager to publish these matters. It would be wrong for the Bill to prejudge the outcome of scheme-level discussions about how to best constitute and appoint pension boards in each of the schemes.
Having said that, we agree with the sentiment of the amendment. Pension boards must be transparent and representative of the interests of stakeholders, both members and employers. That is why Clause 6 already requires the publication of details of pension board membership and the board’s responsibilities.
In responding to Amendment 37 from the noble Baroness, Lady Donaghy, I hope she will not mind if I repeat what I said at Second Reading: the Government believe that the Local Government Pension Scheme,
“is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits”.—[Official Report, 19/12/12; col. 1586.]
I am well aware that Unison has long argued that the scheme is not compliant with the European directive, and I recognise that it feels strongly on this issue, but we simply do not agree. The reasons why have been set out in a number of letters from Ministers to Unison over the past five years, not just the past two.
The previous Government implemented EU directive 41/2003 through the Pensions Act 2004. As that Act relates to the governance and administration of pension funds, that legislation is therefore already within the scope of Clause 5(2). I assure the noble Baroness that Amendment 37 is therefore not necessary. I hope that she will feel reassured and not press it at the appropriate time.
The final amendment in this group is Amendment 38, tabled by the noble Lord, Lord Eatwell. This amendment was considered in another place and resisted on the grounds that its application would be inappropriate. One of the key concerns that we have with this amendment is that it seeks to give the pension board of a funded scheme responsibility for the oversight of investment management. The existence, performance or level of any local authority pension fund has no bearing on the benefits that members receive.
Lord Newby
“( ) requiring members of the scheme and any connected scheme to be represented on the board.”
Economy: Effect of US “Fiscal Cliff” Solution
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Lord Barnett
To ask Her Majesty’s Government what assessment they have made of the effect of the “fiscal cliff” solution in the United States on the United Kingdom economy.
Lord Newby
My Lords, the Office for Budget Responsibility based its December 2012 forecasts for the UK economy on the assumption that fiscal policy would be tightened in the US by between 1% and 2% of US GDP. This is what is now happening. The Congressional Budget Office’s assessment of the American Taxpayer Relief Act, the measure agreed by Congress last week, is that it will produce a fiscal tightening of 1.7% of US GDP.
Lord Barnett
Of course, my Lords, the cliff-edge solution did not solve any fundamental problem, any more than our fundamental problem in this country has been solved. That problem requires us to achieve sustainable growth. The Government are taking a few steps in that direction with their infrastructure plans but none of those will do anything now, and urgent action is needed now. Does the noble Lord accept that one way of doing that would be for the Government to find some modest capital, comparatively speaking, because companies are simply not willing to borrow, whether under guarantee or not? The Government will have to kick-start infrastructure if they want to see growth start. Does he agree that that would be a way forward?
Lord Newby
My Lords, the noble Lord will recall that in the Pre-Budget Statement my right honourable friend the Chancellor announced another £5.5 billion of additional capital spending on roads, science infrastructure and schools, and that earlier in the autumn we passed an Act providing guarantees for £40 billion for infrastructure and another £10 billion for housing. The Government are making considerable efforts to increase the amount of infrastructure activity.
Lord Peston
My Lords, as a life-long opponent of the death penalty, I might make an exception for whoever—I hope it was not an economist—invented the expression “fiscal cliff”. Do the Government accept the analysis that if the US goes more deeply into recession it will have devastating adverse effects on the whole of the European economy and no policy envisaged by this Government would be any use whatever?
Lord Newby
I think the noble Lord slightly overstates it. The fiscal cliff—elegant or inelegant—has been avoided and the expectations and the forecast for the US are that it will see relatively modest, but substantive, growth in 2013. As the noble Lord will know, the latest employment figures in the US suggest that there has been a significant addition to the number of people employed. Therefore, the chances of the kind of meltdown in the US economy that he is worried about look extraordinarily remote.
Baroness Kramer
My Lords, the US faces an even worse fiscal cliff in seven weeks. As the British Government are unlikely to have much impact on Republicans infused by the Tea Party, I suggest that it would be a better strategy for this Government to put their efforts into getting formal negotiations on EU/US trade in order to take away the technical barriers that the US is using at the moment to limit UK exports in pharmaceuticals, medical services and advanced electronics. That might be a more positive way forward.
Lord Newby
My Lords, I completely agree with the noble Baroness. That is why the Prime Minister has set promoting a US/EU trade agreement as one of his top priorities for the G8, as well as moving forward on other trade agreements, such as that with Canada, which are already a long way down the pipeline.
Lord Eatwell
My Lords, will the noble Lord consider answering the Question asked by my noble friend Lord Barnett? He asked what the assessment was of the impact of the fiscal cliff solution on the UK economy. As the noble Lord said, this had led to a 1.7% increase in the fiscal burden on GDP, and the debt ceiling debates in seven weeks’ time referred to by the noble Baroness, Lady Kramer, may add further burdens to the US economy. Is this good or bad for Britain?
Lord Newby
Whether it is good or bad for Britain, it is what is happening in the US. What I said in my original Answer was that the estimates, which were published by the ONS at the time of the Autumn Statement, were based on an assessment of what was likely to happen, which is exactly what has happened. The Bill passed last week is having an impact of 1.7% on US GDP. The ONS assumed that the Bill passed last week would have an impact of about 1.7% on US GDP. We factored that into our calculations and the growth forecast produced for this year will be unchanged because what has actually happened is what we thought was going to happen.
Public Service Pensions Bill
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Lord Newby
Lord Newby
My Lords, this Bill offers a rare opportunity to introduce primary legislation that pulls together a new common UK legal framework for public service pensions, and it is right and necessary that we do so. We must have public service pensions legislation that is fit for purpose and ensures that those who commit their careers to delivering our valued public services continue to receive guaranteed benefits in retirement that are among the very best available.
However, we also have an obligation to ensure that these generous arrangements are provided on a fair, transparent and sustainable basis. This Bill is based on the recommendations of the independent Public Service Pensions Commission, which was chaired by the noble Lord, Lord Hutton of Furness, who I am delighted will be taking part in the debate today.
In June 2010, the noble Lord accepted an invitation from the Government to conduct a fundamental structural review of public sector pension provision and to make recommendations on pension provisions that would be affordable in the long term, fair to both the public service workforce and the taxpayer and consistent with the fiscal challenges ahead, while protecting accrued rights. This Bill fulfils the Government’s commitment to bring forward fundamental changes to public service pensions based squarely on his recommendations.
I thank the noble Lord, Lord Hutton, for his significant role in bringing about these important reforms. His recommendations mark an important milestone in the history of public service pension provision, and we are extremely grateful to him for having undertaken this somewhat thankless task. I must also thank those in the other place for their work on the Bill to date.
As was made clear on Report in the Commons by my ministerial colleague the Economic Secretary there are some areas in this Bill that we are reflecting on further, following representations made in another place. For example, we are looking at the best way to reflect our commitment to member representation on scheme boards and at how personalised information is provided. As for the powers that would allow scheme managers to make retrospective changes to schemes, I am aware that this is an issue about which many feel uncomfortable and that the Delegated Powers Committee has also expressed concerns. The Government are considering their response to the Committee’s report, and we will return to that matter.
As we begin our consideration of the Bill, we must not underestimate the importance of what it is trying to achieve. We are in a world where people are living longer. While this is obviously an extremely important and welcome trend, we must face the consequence of this improvement on the costs of providing public service pensions. As well as looking at how to keep the increasing costs under control, we must also consider the fairness of the arrangements. I hope and believe that the Bill gets this important balance right.
The Bill is in one respect rather curious, in that many features of public sector pension schemes are not covered in detail. They will be set out in detailed scheme rules which will eventually come before Parliament in the form of negative resolution statutory instruments. What the Bill does is provide an overarching framework for all public service pensions schemes. This is not a new approach. The Bill before us today supersedes the Superannuation Act 1972, which followed the same principle. The reason for this is simple: detailed pension schemes are extremely complicated, will vary between different parts of the public sector and will need in some respects to change over time. They are much better suited to secondary legislation.
This inevitably means that many of the most important aspects of the schemes—for example, the accrual rates and the revaluation rates—are not in the Bill. The key principles which underpin public sector pensions and the way in which pensions schemes will be determined are, however, covered by the Bill, and I should like to turn to some of its principal provisions. However, I stress at the outset that the Government intend that public service pensions continue to set a high-quality benchmark and one to which many in the private sector could usefully aim.
The Government intend that public sector pensions should continue to be based on defined benefits. For many years, these have been based on an individual’s final salary. This has had a degree of inequity in that, per pound contributed to the scheme, those on high final salaries have received a greater return in terms of the pension that they have received. This Bill proposes that members’ benefits should be calculated on a fairer basis; namely, on an individual’s career-average earnings. By following this approach, low earners will no longer be expected to subsidise the benefits of higher earners.
The Bill links normal pension age to state pension age for most members. This will automatically track changes in longevity and protect the taxpayer from the associated cost risks. Historically, improvements in longevity have not been well managed, and the failure to do so in a timely manner has represented the single biggest risk to the future affordability of these pension schemes. The establishment of the link between public sector and the normal state pension age addresses this problem. As an exception to the link, a normal pension age is set at 60 for firefighters, police officers and members of the armed services in recognition of the unique characteristics of those public servants’ work. We want to be sure that these normal pension age provisions remain appropriate, which is why the Government intend to review the provisions as and when the state pension age changes. This will ensure that a consistent approach to pension age policy is taken across government as a whole.
Of course, normal pension age does not represent the age members must work until; rather, it is a point on which to base the calculations. Members can choose to retire earlier or later if they wish and, should they decide to do so, a fair adjustment will be applied to their benefits. The same principle applies in other pension arrangements—it is built into annuity rates, for example—and it is right that it applies to public service pension arrangements, too.
In addition to the longevity link, the Bill includes provision for an employer cost cap which will provide additional protection against unforeseen changes in the cost of public pensions. If the cost of a scheme rises, the scheme rules must set out a process for agreeing how they can be brought back under control. The cap may well in practice not be breached, but if it is, the Bill provides for a clear way of dealing with what could otherwise be an unacceptably high cost to taxpayers. In effect, the employer contribution to the scheme is being fixed within specified margins. Any change beyond those will result in benefits or member contributions being adjusted to bring costs back under control. Details have been made available in the House Library regarding the practical application of the cap and the Government’s intentions around the valuation procedures to be followed in the new schemes. These are new and important elements of the Government’s policy, and I hope that these papers provide useful clarification to the House.
As I said earlier, I emphasise that this Bill is not just about fairness to taxpayers; it is also about fairness to scheme members. This is why we propose transitional arrangements for members of most schemes who have less time than others to adjust their retirement plans. Those who were 10 years from their current normal pension age on 1 April this year may continue to accrue benefits on their existing terms; their pensions will be unaffected by the Bill—
Lord Naseby
I apologise for making an intervention, and I must declare an interest as a trustee of the Parliamentary Contributory Pension Fund, but I would like to tell my noble friend that in Committee I shall be moving an amendment to Clause 31, concerning the rights of the members of the PCPF and their appropriate protection in legislation. The Bill, as currently drafted, casts doubt in that it could be read as enabling IPSA, in relation to MPs’ future pension provision, to break the link between members’ accrued benefits and their final salaries. I wish to place that on the record.
My understanding is that we are going to have the Committee stage pretty soon after we come back. I hope very much that my noble friend and I can have a discussion on that amendment before we come to the Floor of the House.
Lord Newby
My Lords, I am very happy to have an early discussion with my noble friend and look forward to debating any amendment that he may wish to bring forward.
As I was saying, we want public pension recipients to be reassured that, as a result of the provisions set out here, the new schemes will be administered and governed as effectively as possible. The new open scheme arrangements will ensure greater accountability and transparency through a common approach, an approach that will be independently overseen by the Pensions Regulator. The Bill builds on the regulator’s existing role and powers in relation to public service schemes and, as far as is appropriate, mirrors the existing approach to other occupational pension schemes. The regulator’s new powers will help public service pension schemes deliver good standards of administration and governance, ensuring that scheme costs and risks are understood and managed effectively.
All these changes demonstrate that the end of the current benefit arrangements and the creation of these fairer, more sustainable pension schemes are the right and proper way forward. It is right that public service pensions continue to set a good-quality benchmark for the private sector, and a race to the bottom in terms of pension quality must be avoided.
A consistent approach across schemes regarding consultation processes and the application of financial directions from the Government will also mean that members see unprecedented certainty about how their pensions are handled. It will no longer be the case that a member in one scheme can look over to another public service workforce and marvel at the myriad different quirks and anomalies within the scheme rules. There is some scope for variation to suit the needs of each workforce but, as the noble Lord, Lord Hutton of Furness, recommended, this is a common framework which brings all these schemes together under one legislative umbrella.
We have said that we hope and expect that the new schemes that will be drawn up under this Bill framework will last for at least 25 years. Of course, no Parliament can bind its successors, but we have included in the Bill enhanced consultation procedures, both with those who would be affected by any significant changes and with Parliament, to ensure that there is a high hurdle to be cleared before any such changes could be made.
The approach we are following will apply across all public service pension schemes, including smaller public body arrangements. We are aiming to reform the pensions in those bodies by spring 2018, and there will be no exceptions. This is why I am pleased that the Northern Ireland Government have indicated their intention to maintain parity with the changes set out in this Bill when they bring forward their legislation. Likewise, I hope our colleagues in Scotland and Wales will follow suit for the handful of schemes where competence for pension legislation sits outside Westminster.
Finally, we have also taken the opportunity of the Bill to reconsider whether certain generous historical entitlements remain appropriate in the modern age. The Great Offices of State pension arrangements, which apply to the Prime Minister, the Lord Chancellor and the Speaker of the House of Commons, give unusually generous pensions to these office holders. The scheme will now be closed to new office holders. Future holders of these positions will be entitled to a scheme that is the equivalent of those available to Ministers, thus ending this historical anomaly.
In conclusion, I believe that the package of measures contained in the Bill will fulfil the legitimate and worthy aim of bringing about long-term structural changes that are in the best interests of members, employers and other taxpayers. This is sound, reforming legislation, which I hope will continue to command cross-party support. We must, however, get the detail—
Lord Whitty
My Lords, in everything that the Minister has said, he has failed completely to make a distinction between those public sector pension schemes which are unfunded and those that are funded—principally, the local government scheme. Can he give us a guarantee that he will address that difference during Committee, since the Bill and his speech do not adequately reflect that now?
Lord Newby
Of course, my Lords, but at the moment I am explaining the common elements of the framework that we are putting in place. At this point, the key thing we all have to have before us is that we are putting in place a common framework, within which all the schemes will fit. The Local Government Pension Scheme is obviously very different, in that it is funded rather than unfunded. There have been many discussions on it; I have agreed to meet the LGA and hope to do so between now and the first day in Committee. The Government are very conscious of the need to ensure that the benefits of current local government arrangements are not undermined in any way by this scheme. I certainly anticipate that we will be discussing aspects of the local government pension arrangements in some detail in Committee.
Indeed, I was about to say that we are committed to getting the detail right and to giving detailed consideration to all these things in Committee. We have to take this opportunity to set in place a sustainable future public service pension landscape. I look forward to our debates on the legislation, and I commend the Bill to the House. I beg to move.
Lord Newby
My Lords, I start by thanking all noble Lords who have taken part in the debate today. It is a great pleasure to hear the noble Lord, Lord Davies of Oldham, twice. It must take him back to his time as a Minister. No doubt he is sorry that he will not be speaking twice more often in the coming months.
At the outset, I must say that while I will try to deal with as many points as I can, I almost certainly cannot deal with them all. We will have ample time in Committee to look at them all. I also declare an interest. Although it is more than 30 years since I resigned as a civil servant, if I live long enough, I will be in receipt of some pension for my time there, although I do not think that anything that the Bill does will have an impact on that. That is a good segue into talking about retrospective powers, about which much concern has been expressed.
There is a lot of suspicion about this that is misconceived. Pensions legislation has historically contained such powers, which have been seen to be necessary for the lawful and efficient operation of the scheme. They are generally used for minor and technical changes, for rectifying errors and making changes for the benefit of members. The intent of the Bill is simply to allow for these minor changes. There is no sinister intent.
There is concern about the broadness of existing powers in the Bill. I should perhaps explain that at the moment there is no set standard of protection offered across the current schemes. That is why we have not carried across the protections in retrospectivity that can be seen in the previous legislation, such as the Superannuation Act 1972. We have also been clear that taking forward the most extreme of these—member consent locks—for any retrospective changes is not the way forward and it would not be right to do that.
However, we understand that there is a considerable strength of feeling on this issue reflected not just in today’s debate but also by the Delegated Powers Committee. We will therefore further consider the provisions of the Bill to make sure we are striking the right balance between the protection of members and the efficiency of the scheme. I hope that gives some reassurance to noble Lords.
The noble Lords, Lord Davies and Lord Sharkey, and the noble Baroness, Lady Eaton, asked about the local government pension fund and the possible crystallisation of liabilities if the fund is closed. We believe these concerns are unfounded. We set out in detail in another place why Clause 16 does not have that effect. It only prevents members of the local government schemes accruing further service under current terms unless transitional protections apply. The existing funds will continue in respect of service prior to and following the reform of these schemes and the crystallisation of liabilities does not arise. I hope we are able to reassure people fully on this in Committee.
There has been an exchange of letters between the Economic Secretary to the Treasury and Chris Leslie. The letters were copied to Sir Merrick Cockell at the LGA. Subsequent correspondence with Sir Merrick should really put the matter to rest. I think it may be of benefit to noble Lords who have spoken in the debate if I circulate that correspondence. It is technical but pretty conclusive.
The noble Lord, Lord Davies, asked why the Bill contained reference to defined contribution schemes when the Government do not intend them to replace defined benefits schemes. There are a couple of reasons for this. First, there is already a defined contribution scheme—the partnership scheme—operating within the Civil Service. It is a small scheme with only a few thousand members but it needs to be covered. Secondly, 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.
The noble Lord, Lord Davies, was concerned about limited parliamentary scrutiny on the Treasury powers. I agree that, as a general principle, a negative resolution instrument does not give you much scope for scrutiny. However, they are not like normal statutory instruments as there will have been a very considerable degree of formal negotiation outside Parliament. I think it is fair to say that Parliament has never seen its role as being to decide on the detailed components of pension schemes. In that respect we will simply continue on the same basis that we have up to now.
Noble Lords, including the noble Lord, Lord Davies, and the noble Baroness, Lady Donaghy, asked about the Scottish Government’s consultation. The overall principles in the Bill are very much based on those put forward by the noble Lord, Lord Hutton, and his recommendations were, I think, accepted by the Scottish Government. They accept the generality of our proposals; in terms of more detailed consideration, the Chief Secretary has written to Scottish Ministers inviting them to propose amendments if they feel the provisions of the Bill are not suitable for the Scottish pension scheme. So far, no such amendments have been proposed. Any regulations made by Scottish Ministers will be subject to the procedures in the Scottish Parliament,
The noble Lord, Lord Davies, asked about MoD firefighters. MoD firefighters are in the Civil Service Pension Scheme at the moment. They will have their pension age linked to the state pension age to ensure consistency within the scheme. The Bill does not move any groups from their current schemes. Indeed, these MoD firefighters have always had different terms and conditions from other firefighters. This already includes a pension age of 65 for new joiners as a result of changes implemented by the previous Administration.
I turn now to the comments made by the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight. They both drew very heavily on Michael Johnson’s paper for the CPS which looked at the cash flow implications of the proposals. The noble Lord, Lord Hutton, dealt extremely eloquently with the question of whether the Civil Service and public sector pension schemes should now, because of their cost, be moved to a newer lower level. I do not want to reiterate his points other than to say in as clear terms as I can that the Government have set their face against defined contribution schemes and are proposing a reformed version of defined benefits schemes.
It is obvious, and nobody disputes it, that the Government are topping up member contributions to fund pensions. This is extremely expensive but it is not surprising. Longevity is increasing and in recent years the size of the public sector has shrunk. I suspect this is a development that the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, probably support. However, one of the consequences is that the inflow of member contributions has fallen as numbers have fallen. We have taken steps to remedy this by rebalancing contributions—saving nearly £3 billion a year by 2014—and as the noble Lord, Lord Flight, pointed out, the total reform package is projected to save £430 billion. It may be over the next 50 years but it is a very significant sum. The employer cost cap means that we cannot have a runaway cost here without formal legal requirements to deal with it through reformed contribution levels or lower benefits.
The noble Baroness, Lady Noakes, felt that the transitional provisions were too generous. There are going to be transitional provisions of some sort. We have taken the view that they are a balanced package. Although people within that transitional phase will get the same pension that they would otherwise have got, they will be paying more for it. They are not completely unaffected.
The noble Lord, Lord Sharkey, made a number of points including retrospection, which I have covered. He asked about the local government pension scheme and, in particular, whether it was in compliance with the relevant IORP directive. The Government believe it is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits. LGPS benefits are guaranteed by statute, not the existence or levels of any funds. There is no risk to members and no means by which local government employers can access pension funds or entitlements. I suspect that that is one of the many aspects of the local government scheme that we will want to clarify in Committee.
The noble Lord, Lord Monks, brought his considerable experience to bear in his contribution. I join him in congratulating Brendan Barber on the role which he played in this scheme. Those negotiations, which led to agreement in principle along much of the framework, were crucial in getting us to where we are today. I join the noble Lord, Lord Monks, in wishing Brendan Barber well for his retirement.
The noble Lord asked specifically asked about Fair Deal, as did other noble Lords. Perhaps I may deal with it because it is very important. The Government are committed to reforming the Fair Deal policy and formally announced their intentions for newly transferred staff back in July. We agreed to maintain the overall approach to Fair Deal but to deliver it by offering access to public service pension schemes for newly transferred staff, which will ensure that those transferred staff will continue to have access to good-quality pensions while helping to remove the barriers to plurality of public service provision. We recently published a formal response to the Fair Deal consultation, with further consultation questions and draft guidance. In the light of the details that emerged from the original consultation, it is appropriate to do some further policy work on contracts retendered under Fair Deal that were let under previous Fair Deal arrangements. We are currently considering how the new Fair Deal should be implemented. A start date for the arrangements will be announced in due course.
Fair Deal has always been a non-statutory policy. The new requirements will be reflected in contracts before public services are tendered, and I see no prospect of this Government moving away from their commitment to providing newly transferred staff access to public service pension schemes. However, it is important that we consider fully the views of stakeholders, including those who will be affected, through further consultation before making a final decision on the issue. It would be inappropriate to include Fair Deal in the Bill until all the policy detail is worked through.
The noble Baroness, Lady Eaton, gave us the benefit of her very considerable experience on local government issues. I do not intend to deal in detail with her points now other than to say that I hope to talk to the LGA before we reach Committee and that we will look very carefully then at all the points that she raised.
The noble Baroness, Lady Donaghy, raised a number of important points. We have one thing in common if nothing else. The noble Baroness is a former president of NALGO. As a boy, I benefited from NALGO because my father was an active member in the Yorkshire Electricity Board branch and we used to take our family holidays at NALGO conferences. I have particularly fond memories of one in Brighton where I got as a present—because he had been given it—a particularly gaudy, purple Biro, which, as a seven year-old or whatever I was, I treasured very greatly.
The noble Baroness slightly overdid it when she said that trust had been shattered as a result of these negotiations and what we are putting forward. As we have heard in the debate, there is not absolute unanimity that everything that we are doing is the best. There are many people who wish that we were being a lot less generous. We think that we are striking the right balance. The noble Baroness asked whether the bar was high enough. Again, it is a question of balance. It is quite tricky to set a very high bar because no Government can bind their successor. We are trying to make it more difficult to make changes. It is quite important to get agreement, as I believe there is, between the parties that there should be no thought at present other than that this should be a persisting scheme and that it should last for at least 25 years. Politicians come and go, but all we can do is make our position as clear as we can and do what we can in the legislation.
The noble Baroness asked whether the Government Actuary should have a more decisive, rather than advisory, role. I am advised that the Government Actuary believes that his role is advisory—that is the nature of the job—and does not want to have in essence a quasi-policy or an actual policy role because that would bring him into the area of public debate, which he believes would be inappropriate.
The noble Baroness asked about the Bill providing for the Treasury to direct how local authority pension fund valuations are to be undertaken. Clause 10 provides for the Treasury to specify how scheme-level valuations are undertaken. This is quite distinct from the valuation of local authority pension funds, which are provided for under Clause 12 instead. Local authority pension fund valuations continue to be a matter for the scheme actuaries. Treasury directions will not apply to those valuations.
The noble Baroness pointed out how under Clause 5 there appeared to be no separation of the scheme manager from the pension board. The clause allows for scheme regulations in the LGPS to establish pension boards that are entirely separate from any existing local government committees. It also provides for them to be combined if that is what is wanted. This is a matter for scheme-level discussions. We are committed to establishing a national board in the LGPS in England and Wales and will consider what is needed in the Bill to deliver that.
Until the last minute or two of the speech of the noble Lord, Lord Hutton, I thought that my only comment was going to be, “I agree with Lord Hutton”. I think that I nearly agree with him in his concerns about employee representation, accrued rights and the LGPS at Clause 16. We will come back to him. It is not in the nature of Ministers, far less Treasury Ministers, to give Christmas presents, so I shall not do that at this point, but we will come back to those points, I hope in a positive and generous spirit, in the new year.
This is, as everybody agrees, an important and much needed Bill which will put public service pensions back on a sustainable and affordable footing. Although the Bill itself does not directly implement the reformed pension schemes’ designs, it provides a sensible framework for their creation. The Bill’s measures on cost control and monitoring, and those to improve standards of governance and administration, go further than previous legislation on public service pensions. I therefore commend the Bill to the House.
Small Charitable Donations Bill
Lord Newby Excerpts(12 years, 3 months ago)
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Lord Newby
My Lords, the gift aid small donations scheme was announced as part of a package of measures to encourage charitable giving in the 2011 Budget. It is a complementary scheme to gift aid, which, as noble Lords will be aware, is one of the main tax reliefs available to charities and their donors and is now worth more than £1 billion per year to the charity sector.
The Government recognised, however, that charities were missing out on a significant amount of potential gift aid income because it is not practical for them to collect gift aid declarations from passers-by in the street or members of a congregation who give small cash donations. This Bill, therefore, enables charities to claim a gift aid-style top-up payment on those small cash donations without the need for a gift aid declaration. Most charities will be able to claim top-up payments on up to £5,000 worth of small cash donations in a tax year. This means that they will have up to an additional £1,250 of income each year to help advance their charitable purposes. This is a significant boost to the charitable sector, which will particularly help small and grass-roots charities. Her Majesty’s Revenue and Customs estimates that this scheme will be worth approximately £100 million in additional funding to the sector each year once the scheme is fully up and running.
In constructing the scheme, the Government have had to strike a balance. The scheme must be fair and affordable, and it must be protected from fraud. Unfortunately, all repayment schemes attract fraud. HMRC already experiences fraudulent claims for gift aid—which is a more secure system than the new scheme will be—because charities have to keep more records of their gift aid donations. The gift aid small donations scheme is cash-based, so there will be only a limited paper trail. That means that it is highly likely that some fraudsters will be attracted to the new scheme, so it has been necessary to put some safeguards in place.
First, a charity must have had at least two years of a good gift aid track record with HMRC and have made successful gift aid claims in at least two out of the last four tax years. This will allow HMRC to get a good picture of a charity’s ability to claim gift aid correctly.
Secondly, charities and community amateur sports clubs must also claim gift aid alongside any claims for top-up payments under the gift aid small donations scheme. This means that a charity will need to successfully claim on traditional gift aid donations worth at least 10% of their claims under the new scheme in the same tax year. For example, to claim top-up payments on £5,000 of small donations, a charity must also claim gift aid on at least £500 of other donations in that year. This matching requirement allows HMRC to monitor the continuing compliance of the charity. The new scheme is designed to be light on paperwork, so it will be difficult for HMRC to comprehensively check whether a charity is compliant. So the ability to check the gift aid claimed by the charity gives HMRC a reasonable proxy to ensure that the charity is also claiming correctly under the new scheme.
Following representations in another place that the eligibility criteria were too strict, the Government tabled amendments that have reduced the matching condition from a minimum of 50% of gift-aided donations to 10%. The Government also agreed to reduce the eligibility criteria to claim under the scheme. A charity may become eligible to claim under the scheme after two complete tax years instead of three. In addition, instead of maintaining a gift aid claims record in at least three years out of seven, charities will need to claim in only two years out of four. These changes make the scheme more accessible, increasing the number of charities that can benefit and reducing the burden placed upon them.
As well as being accessible and protected, the scheme is designed to be fair. The Government recognised that an allowance of £5,000 per charity would have significantly inequitable results for some charities. Charities that perform similar activities are often structured differently for historical reasons. That means that, if every charity received this £5,000 allowance only, some charities could claim many hundreds—if not thousands—of times more in top-up payments than others. For example, every parish church in the Church of England is a charity, while the Roman Catholic Church is structured with a charity at diocese level, with some 200 parish churches forming part of each charity. Without special rules, the Church of England would have been eligible for many hundreds of times more claims under the scheme than the Catholic Church.
For this reason we have introduced the community buildings rules. These enable charities to claim an extra £5,000 allowance if they conduct charitable activities in a community building and meet certain other criteria. Charities that meet the criteria will be able to claim an extra £5,000 worth of small donations for each building in which they carry out charitable activities. HMRC will be issuing guidance to help charities understand the legislation and whether it applies to them. For charities that are unsure of their status, HMRC will be happy to give bespoke guidance.
This Bill represents a boost to the charitable sector by enabling charities to claim new top-up payments on small donations where it is currently difficult or impossible to collect the necessary paperwork for gift aid to apply. I commend the Bill to the House.
Lord Newby
My Lords, I am extremely grateful to all noble Lords who have spoken in this debate. I am very pleased that we decided to postpone the Leveson debate because if we had not there would be about 50 people grumbling at the fact that I will now attempt to answer the questions that speakers in the debate raised.
One concern everybody has raised is about whether the scheme is too difficult to administer and overbureaucratic, to which there are several answers. The key thing is that, at one level, it is very straightforward to operate. Charities are already filling in forms for gift aid. Under the scheme they simply have to tick a box to say that they want to claim additional cash under this additional scheme and they will get it. They do not have to fill in another form. If they are operating out of a community building, they have to give the address of the building. We are not talking about a long and hugely complicated form at all. It is very straightforward. That is one of the key things that HMRC is trying to do. It has to strike a balance between something relatively simple and something that is not open to fraud.
I confess that I started my professional life working in Customs and Excise, helping to devise schemes to help small shopkeepers account for VAT. There was a particularly assiduous Scotsman in our group who spent all his time in a corner trying to work out how shopkeepers could defraud Customs and Excise. We ended up with really quite complicated schemes as a result. They were designed to be simple, but because people were very worried about fraud—and you were talking about, as it were, real money then—we ended up with seven schemes which were designed to be simple but none of them was quite as simple as we had hoped. That is a danger of which HMRC have over the years become more aware, and why the scheme is designed to be as straightforward as possible.
Obviously, charities are not going to look at the Act, but at the guidance from HMRC. As a number of people have said, the guidance itself will be extremely difficult. HMRC is planning to produce two levels of guidance. First, a starter level will set out the rules as simply as possible; most charities will only need to use that, which will supplement the very easy form. Secondly, detailed guidance will explain how the law works to larger charities and charity representatives who want that degree of detail. HMRC will also help and advise charity representatives who want to develop their own guidance; we are thinking here possibly of the churches as an example.
A number of noble Lords asked about consultation with the charitable sector. HMRC undertook a public consultation on the detail of the scheme that ran from March until May this year. It was eight weeks long and 83 organisations and individuals responded to it. HMRC also held meetings with groups of interested people during the consultation period. It has been consulting on the detailed proposals with some charity representatives throughout the development of the legislation, including the Charity Finance Group and the Institute of Fundraising.
Over the summer, the Bill was used as a pilot for the public reading stage in another place. This is a new approach, a supplementary consultation stage where members of the public and organisations can give detailed comments on the draft Bill via the web. Sadly— I think it is rather sad—only 23 individuals and organisations responded to the public reading stage, and a number of them had already been involved in the consultation. It was a useful additional scheme, but whether or not it really added a huge amount is slightly doubtful.
The noble Baroness, Lady Hayter, and the right reverend Prelate raised the question of digital donations. The Government said in the Autumn Statement that we are examining whether the administration of Gift Aid can be improved to reflect new ways of giving money to charity, particularly digital giving. Obviously, young people in particular are going to give their money digitally; there is no doubt about that. As we are finding in many parts of legislation, the Government are, if anything, struggling to keep up with reality just as the digital revolution is changing the way we do everything.
We are starting this scheme with cash because we feel that that way we can make it work relatively easily, but we are going to look at digital giving and at digitising Gift Aid administration more generally. It is only a matter of time before we do all these things but, while people are currently worried about some of the complexities of the Bill, we are keen not to make them more complex at this stage and at least get going with straightforward cash donations.
Noble Lords asked about the publicity for the new scheme. HMRC is planning a four-stage publicity campaign over the next few months to alert charities to the new system and donation scheme. As well as media publicity, HMRC is planning to write in the new year to every charity that has claimed Gift Aid within the past three years to tell them about this scheme and about Gift Aid online. HMRC has also asked the charity representative bodies to help it spread the message.
The noble Baroness, Lady Hayter, asked me to commit myself to a review. The Government have committed themselves to a review. That is the good news. Sad to say, from the noble Baroness’s point of view, but entirely appropriately, the review is to be after three years. This is a relatively standard period for review after a scheme has come in and we definitely plan to do that. In the mean time, HMRC publishes national statistics on the cost of charitable tax relief three times a year. Once up and running, HMRC will publish details about the Gift Aid small donation scheme. These figures will be national statistics.
HMRC does not publish details of fraud rates, although as it received about £10 million of fraudulent Gift Aid claims last year, it is not an insignificant amount. Although, obviously, the last thing in the mind of the vast bulk of charities is fraud, there are people who will exploit any scheme if they think that they can do well out of it.
The noble Lord, Lord Hodgson, asked a number of questions. He asked about the detailed wording in the Bill on Clause 2(2), which refers to “2 consecutive … years”. Clause 2(2) does that because charities will need to make a Gift Aid claim at least every other year. The qualifying period is now two years, so it would be inappropriate to allow a charity a gap of two years or more in order to do so. I hope that that clarifies the position.
Baroness Barker
My Lords, could the Minister write to some of us to explain that point a little further?
Lord Newby
I would be only too pleased to write to all noble Lords here. Basically, it is the interaction of the general Gift Aid scheme and this particular element of it; but I will write to clarify that point absolutely.
The noble Lord, Lord Hodgson, asked again about the cost and whether HMRC would be proportionate, not heavy-handed, and efficient. He will not be surprised to hear me say that, of course, that is what HMRC plans to be. I hope it will be. My experience, working in HRMC—or Customs and Excise as it was—was that it did a lot of things extremely efficiently, and every now and then it did something which was less than efficient. It was the less-than-efficient examples which tended to get most of the publicity. I know that the relevant section of HMRC understands the point that the noble Lord is making. The Government are not setting up this scheme in order not to hand out the cash. We are setting up the scheme because we are very keen that it is successful and is able to help charities in this way.
The noble Lord asked about foundations and why they are in a position that is different from that of individuals. I am tempted to say, “Because they are not individuals”, but I will happily write to him with some of the background as to their tax treatment, which I absolutely understand is different from that of an individual.
He asked whether a two-year period was necessary, because a charity must already have been through the registration process, including the “fit and proper person” test. The test helps to ensure that charities, community amateur sports clubs and other organisations entitled to charity tax reliefs are not managed or controlled by individuals who might misuse the tax relief. Unfortunately, as I said earlier, fraudsters have been known to exploit charity tax relief, so the “fit and proper person” test exists to prevent that. However, even if a charity appears to be compliant in the first few years, changes in personnel can affect its attitude to compliance, so HMRC will need to continue to have evidence on which to base its assessment of the risk that the charity poses in relation to the scheme. That is why we have gone for a two-year qualification period. We believe that that gives an adequate protection against potential fraud, because people will have had to be up and running, making the thing work. Equally, it is not too long, which was the concern about the original proposals.
The noble Baroness, Lady Barker, asked specifically whether it would be possible under this scheme to collect funds and claim the gift aid from activities in housing association premises. To take a simple example, if the charity is a small local charity linked to a specific housing association and it wants to raise money from a collection in its premises or in a pub or anywhere else, it can do that. Things get more complicated if it is a branch of a large housing association—somewhat like a Catholic church—which wants to pray in aid the community building rules. In that case, because the housing association premises are essentially residential premises, it will not be able to do that, because that is the definition we have put in place.
That demonstrates that tax is complicated. There is no system we could have put in place that would have had any reasonable protection against fraud and which would not have run up against those kinds of complexities—and undoubtedly there will be anomalies. However, with tax, the choice before you is not whether you have anomalies but whether you do something or not. You are bound to have these anomalies. We took the view that putting in place a scheme that enabled charities to have access to £100 million was worth it, even though we knew that there would be some anomalies, because they come with the territory, as it were.
I believe I have answered the point that the noble Baroness, Lady Barker, raised about guidance to users. We are doing that on the various levels that she talked about. We have consulted, and will continue to consult, the standing body that HMRC has for dealing with the charity sector as a whole.
The noble Baroness made the very interesting suggestion of having a website, on which reports and a financial statement would be put. That is a possibility. I suspect that, if we had done that, someone would say that it was grossly unfair to small charities that did not have a website. However, given that we expect everybody in respect of benefits to use electronic communications, and that HMRC increasingly wants taxpayers to use them, it is not an unreasonable suggestion, and I am sure that my colleagues in HMRC will look at it.
The right reverend Prelate asked a couple of questions about simplicity and whether all the requirements were needed. As I said before, we had to take a view, and that view was that this struck the right balance between ease of access to the scheme and protection against possible fraud.
This debate has demonstrated that, if this were not a money Bill, we would be having extremely interesting discussions in Committee and on Report. Sadly, however, this is a money Bill. I therefore hope that I have been able to deal with the points that have been raised—
Lord Hodgson of Astley Abbotts
I did not hear the Minister address this directly but do I take it from the commencement date of the Act that Gift Aid under the new scheme will be available in the next financial year, starting 6 April 2013? Will it be in by then?
Lord Newby
My Lords, I believe that it will be but, again, if I am mistaken, I will include that in the letter that I have already committed to write to the noble Lord.
We have sought to strike the right balance between effectiveness, accessibility and security, and I believe that we have achieved that. The scheme will deliver an important new stream of revenue to the charity sector. I therefore commend this Bill to the House.
Financial Restrictions (Iran) Order 2012
Lord Newby Excerpts(12 years, 3 months ago)
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Lord Newby
That the order laid before the House on 21 November be approved.
Relevant document: 12th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 11 December.
Taxation: Avoidance
Lord Newby Excerpts(12 years, 4 months ago)
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Lord Newby
My Lords, the Government are fully committed to tackling avoidance and evasion wherever it occurs. HMRC is to receive additional investment of £77 million to expand its anti-avoidance and anti-evasion activity, including resources to identify and challenge multinationals’ transfer pricing arrangements. Following the Chancellor’s call for international co-operation to strengthen international tax standards, the UK, Germany and France have pledged resources to the OECD to speed up work to tackle profit-shifting and base erosion at the global level.
Lord Dubs
My Lords, the Minister will be aware that if companies and individuals complied with the letter and spirit of the law, the Treasury would be £32 billion better off. Is he aware that the public are extremely angry about this and that the whole situation is grossly unfair to those companies that pay their taxes, such as John Lewis and Marks & Spencer? Is he further aware that the army of bankers, accountants and lawyers advising those companies on how to evade their taxes are the same people the Government employ for their own business? Will he take action in the tax havens that make all this possible?
Lord Newby
My Lords, HMRC does indeed estimate that the tax gap in 2010-11 was £32 billion, which represents 6.7% of total tax due. The tax gap as a percentage of tax due has fallen from 8.2% since 2004. It is not good enough but it is going in the right direction. The absolute determination of the Government to bear down on this was evidenced by the decision we took last year to divert £900 million into this area, which has since been supplemented by an additional £77 million to increase the specialist abilities within HMRC to deal with some extremely clever advisers and companies that seek to minimise their tax.
Lord Naseby
Why does HMRC not take action a bit nearer home and look at the smuggling into this country of cigarettes and tobacco? The percentage for this is still 20% to 25%, denying retailers and the trade a normal profit margin and ensuring that cigarettes are cheaper and easier for young people to take up. That percentage has not changed for the past three years.
Lord Newby
My Lords, tobacco smuggling is a significant issue but in the overall quantum of tax that is currently not paid but should be, it represents a relatively small proportion.
Lord Barnett
My Lords, my noble friend Lord Dubs is quite right, but should the answer not be that there is nothing whatever that the Government can do until there is international agreement which, sadly, is unlikely to happen in the very near future?
Lord Newby
We need a greater degree of international agreement and that is why, along with France and Germany, we have just contributed an extra €150,000 to the OECD’s work to change the basis of accounting. We can do only a certain amount ourselves. It would be a counsel of despair to say that we cannot change the rules; the rules exist and can be changed.
Baroness Kramer
My Lords, I am glad that the Government are ending Labour’s indulgence to business on tax issues but, like many others here, I would like to play a part with my purchasing power. Is there a way we can find out who the good guys are so that we do not have to use the likes of Amazon, Google and Starbucks and can transfer our business elsewhere?
Lord Newby
The Government have yet to establish a good guys’ website but it is an extremely good idea. In the mean time, I suspect that the noble Baroness will just have to read the newspapers.
Lord Davies of Oldham
My Lords, the worry would be that if the Government constructed a good guys’ website they would not be on it. The Minister is absolutely right: we need international action. However, the significant European countries taking action with regard to places such as Monaco point a very accusatory finger at the UK Government, with our plethora of regimes that are in fact tax havens. That is why the Government should be taking a lead, not following others.
Lord Newby
I do not remember the noble Lord quite espousing those lines when he was in my position. The Government are working very hard with low-tax jurisdictions to make sure that we get the tax that is due. This is why the Liechtenstein disclosure facility has been so productive and why the agreement with Switzerland will yield many billions of pounds that we never got before. We also have the newly expanded exchange of information, announced with the Isle of Man, which sets an example that we hope to expand to other tax havens. We are trying to bear down slowly on them so that one after another they become less desirable as places for people to put money to evade taxes.
Lord Forsyth of Drumlean
My Lords, on the problem of leakage of tax revenue to tax havens with lower rates, is not the answer to lower the rates of corporate taxation in this country? In answer to a previous question of a similar nature, my noble friend told me that it was an accounting problem. It is not an accounting problem that leads people to base their company headquarters in countries such as Luxembourg—it is because they pay less tax there. If we wish to maximise revenue, should we not cut corporation tax still further in the way that my right honourable friend did in the Autumn Statement?
Lord Newby
We are reducing the rate of corporation tax but there is a danger of a race to the bottom. Corporation tax brings in a substantial amount of money and is an important contributor to the Exchequer.
Baroness Farrington of Ribbleton
My Lords, would the Minister join me in welcoming the fact that Her Majesty’s Government, having cut the money to HMRC for dealing with this problem, have now restored their own cut? Would he see whether it is possible to collate information about those companies with large numbers of employees that do not even pay a living wage to those employees, let alone their tax, and therefore cost the Treasury in additional income support?
Lord Newby
My Lords, I am afraid the noble Baroness is wrong about what has been happening with the resources: we have been reallocating resources within HMRC. Bearing in mind that so many taxpayers now pay their tax online, we do not need as many people opening envelopes. However, we do need highly sophisticated people working as analysts and investigators.
Financial Restrictions (Iran) Order 2012
Lord Newby Excerpts(12 years, 4 months ago)
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Lord Newby
That the Grand Committee do report to the House that it has considered the Financial Restrictions (Iran) Order 2012.
Relevant document: 12th Report from the Joint Committee on Statutory Instruments
Lord Newby
My Lords, the Treasury laid the Financial Restrictions (Iran) Order 2012 before Parliament on 20 November under the powers of Schedule 7 to the Counter-Terrorism Act 2008. The order contains a direction requiring UK credit and financial institutions to cease business relationships and transactions with all banks incorporated in Iran, including their branches and subsidiaries, wherever they are located, and the Central Bank of Iran.
The direction came into force on 21 November 2012 and is in the same terms as that contained in the Financial Restrictions (Iran) Order 2011. The Treasury considers that the conditions required to give a direction under the Act are met. I propose to set out the reasons for this action and provide details of the restrictions and what their impacts are, including what measures have been undertaken to ensure that the UK financial sector can comply.
On the rationale for the order, the Government are clear that activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the United Kingdom. The order was given in response to this risk. The Government continue to have serious concerns about Iran’s proliferation-sensitive activities and these concerns are shared by the international community.
Recent reports of the board of governors of the International Atomic Energy Agency, the UN body charged with monitoring Iran’s activities, reported evidence of Iran’s nuclear programme being used for non-civilian purposes. A report issued on 16 November this year set out the agency’s concerns about the,
“possible existence in Iran of undisclosed nuclear related activities involving military related organisations, including activities related to the development of a nuclear payload for a missile”.
Information available to the International Atomic Energy Agency in 2012 further corroborated analysis indicating that Iran has carried out activities that are relevant to the development of a nuclear explosive device.
A statement issued by the IAEA to its board of governors on 29 November 2012 raised a further concern, setting out that Iran is not co-operating with an investigation into its nuclear activities. The Government view this with the utmost concern.
In response to the November IAEA report, the board issued a resolution stressing that due to a lack of co-operation from Iran it was unable to,
“conclude that all nuclear material in Iran is in peaceful activities”.
Despite intensive efforts throughout 2012 by the IAEA to seek to resolve issues relating to Iran’s nuclear programme this has been without concrete results. The board urged Iran to abide by its international obligations and called on Iran to engage seriously on the nuclear issue. These are concerns of the most serious nature, with far-reaching consequences for the UK’s interests.
The case for UK action is underlined by continued calls from the Financial Action Task Force—the global standard-setting body for combating money-laundering and the financing of terrorism—for countries to apply effective countermeasures to protect their financial sectors from money laundering and financing terrorism risks emanating from Iran. These calls were renewed with urgency on 19 October 2012 and noted FATF’s particular and exceptional concern about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system. The FATF has not expressed such serious and ongoing concerns about any other country.
It is clear, therefore, that activities in Iran pose a threat to UK interests and in particular a threat to the UK financial system. Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes, as companies carrying out proliferation activities will typically require banking services. Many Iranian banks have been sanctioned by the UN and EU for their role in Iran’s proliferation-sensitive activities. Unfortunately, experience under existing financial sanctions demonstrates that targeting individual Iranian banks is not sufficient. Once one bank is targeted, a new one can simply step into its place.
Over the past year the Financial Restrictions (Iran) Order 2011 restricted the options available to Iranian banks in accessing the global financial system by removing the option of utilising the UK, which is an important global financial centre.
The 2012 order will ensure that the Iranian banking sector continues to have its access to the UK financial system restricted. This will make it more difficult for Iranian banks to utilise the international financial system in support of proliferation-sensitive activities. This action also protects the UK financial sector from the risk of unwittingly being used to facilitate activities which support Iran’s nuclear and ballistic missile programmes.
This action is in line with the Government’s dual-track strategy of pressure and engagement with Iran. The aim of the pressure track is to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. It is also in line with action taken by the UK’s international partners. The US, Canada and the EU have all implemented new financial sanctions against Iran in the last year.
Importantly, the EU has announced steps to mirror the UK’s action. The UK strongly supports the decision made by the EU in October 2012 that announced its intention to implement a prohibition on financial transactions between EU credit and financial institutions and Iranian banks. This will see the key elements of the UK order mirrored throughout the EU. When this EU-wide prohibition enters into force, Ministers will review whether it is appropriate to have both the EU and UK prohibitions in place.
I would now like to explain the specifics of the order. Like the 2011 order, this order was made under Schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with the power to give a range of directions to UK credit and financial institutions in response to certain risks to the UK’s national interests. The power under Schedule 7 enables the Treasury to respond to proliferation risks, as we have done in this case, as well as money-laundering and terrorist-financing risks, or where the FATF calls for countermeasures.
The restrictions apply requirements to persons operating in the UK financial sector, which includes FSA-authorised firms, credit institutions, money service businesses and insurers. Firms are required to establish whether any current or future business relationships or transactions are affected, and to take steps to comply with the requirements of the restrictions. Although the restrictions are only given to the financial sector, they will continue to make it difficult for other companies to trade with Iran.
The UK Government actively discourage trade with Iran. The value of UK trade with Iran has declined by 39% in the period between November last year, when the 2011 order was introduced, and September 2012, when the most recent figures became available, compared to exports in the same period in the previous year. Companies affected by the restrictions can apply to the Treasury for a licence of exemption. We will examine each licence application on a case-by-case basis. The restrictions contained in the order sit alongside the existing sanctions measures imposed against Iran by the UN and the EU. However, the restriction goes further than current existing sanctions, because it prohibits certain activities that would otherwise be permitted under those sanctions.
I will now provide some further information on the operation of the restrictions. The order was laid in Parliament on 20 November, and came into force on 21 November. The Treasury published a series of documents on its public website that notify the financial sector about the restrictions and provide detailed guidance on their implementation. These documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system.
The documents published on the Treasury website on 21 November included six general licences that exempt certain activities from the restrictions. These general licences permit credit and financial institutions to provide financial services for humanitarian purposes, and personal remittances between individuals here and in Iran. Where outstanding business relationships or transactions remain, they also permit credit and financial institutions to manage the cessation of business in an orderly and controlled way. A general licence will ensure that all the transactions or business relationships authorised under the 2011 order will continue to be licensed under the current order. The Treasury may grant further specific licences to manage the impact of the order on third parties. This approach is similar to that exercised under last year’s order.
As the direction is in the terms contained in the 2011 order, there are no additional requirements on financial sector firms as a result of this year’s order. Firms will already have in place procedures and systems to comply with the 2011 order and obligations relating to EU financial sanctions and anti-money-laundering measures. This should assist in minimising the burden of compliance with the restrictions. As a result of the 2011 order, since 21 November last year firms have been unable to undertake new transactions or business relationships with banks incorporated in Iran. The UK financial sector will need to continue to ensure that it does not undertake new transactions or enter into new business relationships with any bank incorporated in Iran, including the central bank, and branches or subsidiaries of banks incorporated in Iran. Supervision of the financial sector’s compliance with these restrictions will form part of the existing supervisory regime of the FSA and HMRC.
I conclude by emphasising that this direction was given by the Government to respond to the continuing and severe risk that Iran’s nuclear activities pose to the UK’s national interest. Iran’s proliferation-sensitive activities are a serious and ongoing concern for the UK and the international community as a whole. It is vital that we continue to take steps to increase pressure on the Iranian regime and encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. For these reasons, I commend the order to the House.
Lord Tunnicliffe
My Lords, I will speak very briefly. I thank the noble Lord for repeating this speech, which at least gave me the opportunity to read it beforehand. The key questions here are whether this order is necessary and whether it is effective. The speech refers to a report issued on 16 November to the board of governors of the International Atomic Energy Agency and I have taken the trouble to read through it. It is, as the noble Lord suggested, quite chilling in nature. There is the reference to potential missile capability, to which he has already alluded, but there is also reference to things that have happened in the past year, particularly at Parchin where,
“information provided to the Agency by Member States indicates that Iran constructed a large explosives containment vessel in which to conduct hydrodynamic experiments”.
I have a passing understanding of how to make a bomb, and the one thing you need is the uranium we all talk about; the other is very clever explosives to make the uranium go critical and create the bomb. The existence of this facility is indeed chilling since it is very difficult to believe that it had any non-military use.
Since then, there has been considerable activity during 2012 which seemed to be either trying to hide or dismantle the facility. As the report says:
“In light of the extensive activities that have been, and continue to be, undertaken by Iran at the aforementioned location on the Parchin site, when the Agency gains access to the location, its ability to conduct effective verification will have been seriously undermined. While the Agency continues to assess that it is necessary to have access to this location without further delay, it is essential that Iran also provide without further delay substantive answers to the Agency’s detailed questions regarding the Parchin site”.
I quote those parts of the report merely to emphasise that, in our support of this order, we are sensitive to the fact that the situation with Iran has sadly not improved over the past 12 months, and therefore the continuation of the order is essential.
In his speech, the Minister said words to the effect that the continuation of the order was in line with the Government’s dual-track strategy of pressure on, and engagement with, Iran. He said that the aim of the pressure track was to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. I wonder if the noble Lord has had any reports of any progress that has been made on the dual-track approach over the past year.
Lord Newby
My Lords, I am extremely grateful to the noble Lord for his support of the order. I am not sure what to make of the fact that he knows how to make a nuclear bomb.
Lord Newby
On balance perhaps I should be reassured rather than alarmed. The noble Lord asked about the dual track. What is happening is that on the one hand there is active diplomacy that is being led within the EU by the noble Baroness, Lady Ashton. Since April there have been four meetings between the international group and Iran to discuss its nuclear programme. The pressure has been on Iran to take concrete steps to build international confidence around its nuclear intentions. It is hoped that we will have another meeting. I think that it is fair to say that the meetings have not produced a satisfactory conclusion, but they are ongoing.
The other element of action against Iran definitely is bearing fruit. The economic sanctions seem to have brought the Iranians back to the negotiations that I have just described. Iran’s leaders are increasingly concerned about the prospect of instability driven by economic decline, caused by a combination of sanctions and economic mismanagement. Iran’s oil exports have dropped by about 1 million barrels a day, which in real terms means that almost £8 billion in revenue is being lost every quarter. We are talking about very serious amounts of funding.
On the question of leakage and whether other countries are trading with Iran, the pressure on Iran is tightening, not just from the EU and the US but more generally. We are trying to make sure, as far as we can, that the UK financial sector is not inadvertently used to facilitate proliferation-sensitive activities. Iran will not be able to channel funds through overseas subsidiaries of its banks, as those are also subject to the restrictions. We continue to use all our ongoing close contacts with international partners to ensure that Governments of other countries are aware of our concerns and of the risk that moneys intended to facilitate proliferation-sensitive activities might be channelled through their financial sector, having been denied access to ours.
Finally, the noble Lord asked whether any firms in the UK have been found to be in breach of the restrictions. I am pleased to be able to say that no firms were felt to be in breach of the requirements under the 2011 order and that none has been found in breach of the 2012 order. It is fair to say that there is pretty considerable support across the financial services sector for the line we are taking and considerable willingness to keep very much to the letter and the spirit of the order.
United States Budget: Economic Impact
Lord Newby Excerpts(12 years, 4 months ago)
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Lord Roberts of Conwy
To ask Her Majesty’s Government what assessment they have made of the effect on the United Kingdom economy of the outcomes of the “fiscal cliff” discussions in the United States of America.
Lord Newby
My Lords, the Office for Budget Responsibility, which is responsible for producing independent economic and fiscal forecasts for the UK economy, based its forecasts last week on the assumption that fiscal policy will be tightened in the US by between 1% and 2% of US GDP. This, in turn, assumes that the US Congress will reach a budget settlement by the end of the year and that the fiscal cliff will be avoided.
Lord Roberts of Conwy
Is my noble friend aware, as I am sure he is, that many believe that unless the end-year fiscal crisis in the US is averted, involving as it does some hundreds of billions of dollars’ worth of tax rises and spending, there is a risk that the US could return to recession, and the prospects for our exporters to the United States could be very gloomy indeed? Such prospects are already gloomy in the eurozone and other countries where lower growth is anticipated. Is there a specific remedy for that situation, should it develop?
Lord Newby
My Lords, I agree with the noble Lord that the US economy is extremely important to our exporters. Last year, we exported £80 billion of goods and services to the US, which amounted to 16% of our total exports. However, perhaps I have watched too many episodes of “The West Wing” but I suspect that a deal on the US budget will be done in time, albeit at the last minute.
Lord Bilimoria
My Lords, it is estimated that if the US falls off its fiscal cliff, its GDP will fall significantly. Will the Minister admit that, following the Chancellor saying in the Autumn Statement that deficit reduction will now take three years longer, we in this country have already fallen off our own fiscal cliff?
Lord Newby
No, my Lords, the situation is quite the opposite. The fact that the Government took decisive action in 2010 to effect a fiscal consolidation over a number of years—and then flexed that, given the severe headwinds that we faced from the eurozone—means that we are not faced with a fiscal cliff and we are now looking to a period of growth next year that will be higher than that anticipated in, for example, the eurozone.
Lord Davies of Oldham
My Lords, it is all right for the Minister to wish the Americans well, but why do the Government not emulate them? Is he unaware of the fact that the American economy has been growing at 2%, while we are teetering on the edge of our own cliff towards a third recession?
Lord Newby
Earlier this year, in relation to the US and UK economies, he said that,
“our objectives are common, which is we want to make sure that we have … governments that are lean, that are effective, that are efficient, that are providing opportunity to our people, that are properly paid for so that we’re not leaving it to the next generation”.
Baroness Kramer
I ask the Minister not to emulate the US fiscal cliff and to go for certainty in British fiscal and economic policy. However, does he not agree that British exporters should be careful not to overreact to either the fiscal cliff or the eurozone crisis? In the Autumn Statement, there was more than £1.5 billion in additional government support for exports; should not businesses both small and large be seizing those opportunities—and seizing them now?
Lord Newby
I absolutely agree. The challenge now is for exporters to continue exporting in markets where they already do that. For example, our exports to the US this year have increased by 4% and are therefore still exploiting existing markets. However, in addition, the key is getting more companies exporting to the newer markets. That is why the increases in exports to China, Brazil and India over the past two years have been so significant.
Lord Soley
The Minister referred to the decisive action in 2010. Surely what the Government were doing at that time was talking us into a deeper recession than the one we were already going into. Secondly, does he not recognise that without growth we will not get out of the problems we are in? Historically, cutting deficits does not really work unless you have high growth as well. We do not have that and it does not look as though we will get it under the current policies.
Lord Newby
My Lords, if the Government had not adopted a credible fiscal policy in 2010, it is almost certain that interest rates in the UK would now be significantly higher than they are, as they are in much of the eurozone. Bear in mind that every 1% increase in interest rates means £12 billion extra in mortgage payments. This would have been have been a huge gamble that would almost certainly have failed had we not taken decisive action in 2010.
Lord Forsyth of Drumlean
My Lords, is the lesson that we need to learn from both sides of the Atlantic not that if Governments live beyond their means and raise the tax burden too high, growth disappears—a lesson that my noble friend Lord Lawson taught us in the 1980s and which we need to relearn?
Lord Newby
My Lords, the key challenge for Governments, either in this country or on the other side of the pond, is to ensure that there is a credible fiscal framework and a competitive economy so that businesses can invest. That is what the Government have been seeking to achieve.
Lord Tomlinson
My Lords, if the economy is doing as well as the noble Lord suggests, does he regard the threats from the rating agencies as being a vote of confidence?
Lord Newby
My Lords, the rating agencies, as we all know, have an unblemished record in dealing with businesses and countries. For those countries that have seen their credit rating reduced, including the US, there has been virtually no impact on their ability to borrow.
Baroness O'Cathain
My Lords, can we not realise that trade is a two-way thing? It is import substitution and exports. We should encourage more import substitution in all our purchasing in this country. It is never mentioned and there is no reason why some of the wonderful British goods that are exported to earn foreign currencies should not be bought by people here, thereby reducing our imports.
Lord Newby
My Lords, I absolutely agree with my noble friend, and it is very important that we do all we can to support new initiatives, such as the one being led by my noble friend Lord Alliance to reinvigorate the textile industry in the north-west, where there now appears to be the prospect—if we get it right—of creating almost 250,000 jobs in textile manufacturing for the first time in a generation.