Financial Services (Banking Reform) Bill
Lord Whitty Excerpts(11 years, 3 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
My Lords, it is always interesting to follow the noble Lord, Lord Northbrook, in these financial services debates. I regard him as one of the more articulate and deft defenders of the status quo in the banking system. He may have slightly wrong-footed himself by quoting Bob Diamond at an early stage but the noble Lord nevertheless sets out the case.
I come from an entirely different perspective. I want to introduce in this debate the view of the customers of banking services—whether we are talking about individual deposit-holders, like most of us; those who are seeking a mortgage or a bit more credit; the middling businessman who is looking for a little help in expanding their business or some support for their forward business plan; or, as some noble Lords have mentioned, the roughly 20% of our population who are effectively excluded from the services of the mainstream banking sector. I regret to say that I agree with my noble friend Lord McFall, who is not in his place, that the lesson of the past few years is that consumers, whichever category they fall into, have been at the bottom of the pile.
We are five years on from a very serious financial crisis affecting pretty much all the globe and which was started in the banking sector. In this country and in this House, this is the fourth major piece of financial legislation that we have had to consider since that collapse of the system. At the time of government intervention by introducing a degree of state ownership in the banking sector, I probably had slightly better institutional consumer credentials than I have now because I have retired from that role, but I can recall—not in a partisan way but just to say to the Minister—when my noble friend Lord Mandelson was in his place advocating those emergency powers, that I argued that within 18 months of the state acquisition of two of our largest oligopolies there should be, within that statute, a clear commitment to refer to the competition authorities the whole structure of the UK banking system.
After two Governments, four bits of legislation, the Vickers commission and the Parliamentary Commission on Banking Standards, not all of whose recommendations appear in this Bill, as noble Lords have said, we are left with—and are likely to continue to be left with—a structure of banking that is extraordinarily similar, apart from the public ownership bit, to the structure that was there before the 2008 crash. As for the customers, they are left with a rather less responsive and sensitive service. There is less competition in the banking system than there was then. There is less sensitivity to individual account holders and individual businessmen who go to their local bank managers. More of the risk has been shifted from the banks to the taxpayer and bank customers. We have not moved forward from 2008.
In terms of the assessment of what we should be doing in a banking system, we have moved from an opportunity, in the face of that financial catastrophe, to have a serious, comprehensive reassessment of the banking structure in this country. We have gone from a position that considered total separation of investment banking from commercial and retail banking to the Vickers commission proposal for a strong ring-fenced position and then to one that is a pretty weak ring-fencing proposition with or without the additional electrification that the Minister is proposing, which we have yet to see.
That Chinese wall is frankly a little weak. It is a bit like the Great Wall of China itself; it is a fantastic edifice looked at from afar, indeed from outer space, but when we get close to it, it has always been pretty easy for the barbarians to overrun it. Our fear is that there are quite a few barbarians within the banking sector and the stipulations in this Bill, even if enhanced by further amendments by the Minister, are unlikely to stop them. We have an oligopoly in banking. The banks are too big to fail and too big, as the noble Lord, Lord Higgins, and others, have said, to be managed, so in terms of the totality of the British economy they are too big to succeed, as well.
From the perspective of the three groups of customers to whom I have referred, how does that look? What is the individual deposit holder faced with in the period since 2008? First, there is the lowest rate of interest almost since the Bank of England was created. They face a reduction in personal services from their local bank manager and an increase in charges. That has resulted in the financial ombudsman reporting in the past couple of weeks a 179% annual increase in the number of complaints. Some of those relate to the mega crisis of PPI, but half are general complaints about the banking system. On the ground, there are fewer branches, and likely to be yet fewer still, less effective competition and less personal service than 20 years ago.
From the point of view of small or medium-sized business, my noble friend Lord Watson, who is not in his seat at the moment, has stolen my fire. There is a report in today’s paper that the net increase in lending to small firms in the last available year was negative. There is a £4.5 billion reduction in lending from the banking sector to small firms in a period when the deposits from small firms in those very same banks increased by £7.8 billion. Is that a service to depositors? Is it a service to the small businesses in the economy that are supposed to be providing the dynamics for coming out of the economic recession?
On top of that, we have to consider the Government’s attitude to better regulation of the banking system. The Government, with support from the City and elsewhere in the financial pages, are deeply resistant to Brussels innovation in regulation of the financial sector. From the other end—not the bankers’ but the business customers’ end—does the average small and medium-sized business in Britain get a better service than in Germany? Has that been the position in Germany for the past 60 years, never mind more recently, where small and growing businesses can go to the regional and co-operative banks for a personal service? Their advancements are based on their business plans. That includes not only the smaller companies but the all-important Mittelstand in the German economy, which is always pointed to as being a driving force of German economic growth.
In this country, we have had a decline in relationship management between local banks and businesses. Their requests for credit have been referred up to their central computer, based on nationally determined, or possibly internationally determined algorithms, the net result of which is that whatever the pleadings at the local level with local bank managers, the computer says no. That is what a lot of our business customers face. The right reverend Prelate and others said that there is a disconnection between what we expect and need from the banking service—the experience of SMEs, individuals—and what is actually happening in the banking service that is being provided.
The third group of customers that I have identified—those seriously outside the banking system—is one that the Government, on a different plank, recognised as being outside when they had to accept the amendment of my noble friend Lord Mitchell to the previous Financial Services Bill. Roughly 20% of the population either do not have banking facilities or have such basic banking facilities that they can never acquire credit or sophisticated services from the banking system. So what happens to them? They go to Wonga—the noble Baroness, Lady Kramer, referred to this earlier—or to pay-day lenders, or to the even more nefarious high-street lenders which are springing up around the country, or, even worse, they go to illegal money lenders, leading to serious distress in some of the poorest communities in our country.
In other sectors where we have an oligopoly and a regulator who is supposed to operate in the interests of consumers—whether we are talking about energy, water or telecoms, with all their shortcomings—there is something close to a universal obligation. This is because it is recognised in an oligopoly that they are vital to economic and societal needs. In the banking sector there is no such obligation. That leads to 20%, possibly more, of our population being outside the customer requirements of the banking sector.
My noble friend Lord McFall referred to the previous system of regulation and the FSA, in effect, being client-captured by the industry. We now have a new regulator, the FCA, and we have yet to see how it will behave in these circumstances and whether it will ensure that the banking sector provides a serious service to business and individuals and extends its services to the currently excluded part of the population. We need a more competitive structure, but the Bill as it stands is more likely to consolidate the existing structure than it is to challenge it. We need to ensure that during the Bill’s passage through the House we improve on that situation. I appreciate that there are statutory instruments to come, but I am not holding my breath that they will create a more positive, proactive direction to the banking sector to become more competitive and more sensitive to the needs of our business sector and our population.
Part of the problem is psychological. For a long period, we have regarded the banking sector and the City of London as being the apex of our economy. That is seriously wrong and damaging to our economy. The banking sector should be a service to our economy and to our consumers, both business and domestic. I appreciate and accept that further legislation will deal with the standards issue and that there will be secondary legislation under the Bill. I appreciate also that there is behind the Bill at least a vague notion of a nuclear option.
I appreciate, as the noble Lord, Lord Lawson, said, that we cannot deal with this overnight. However, the reality is that we have had five years since the financial crisis and there is still enormous unmet need in both business and society for effective services by our banking sector. I regret to say that the Bill is unlikely to meet that unmet need or to take us very far down the road of so doing. I hope that in the period of consideration that the House now has before it we will improve its ability, but the framework of the Bill is seriously limiting and I do not have great hope that we will improve it substantially. However, improve it we must. The Government must recognise that there will be a serious problem both for our society and our economy if the banking sector continues to fail us.
Queen’s Speech
Lord Whitty Excerpts(11 years, 5 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
My Lords, some have said that this Queen’s Speech is too thin. I do not have a problem with that. Frankly, it is an issue of quality rather than width. If the legislation proposed was going to do something about the economy and improve our economic and societal prospects, I would welcome it, however thin it was and however many Bills were involved. As it is, I welcome some of what is there, and welcome the opportunity to debate the rest. I am very glad that we are about to debate the Energy Bill and the water Bill; both will probably be discussed more tomorrow, but both are vital for issues of living standards and cost of living, and for our investment programme. The Energy Bill seems deeply flawed, and I am sure that we will have some serious debates on that. I agree with what is in the water Bill, broadly speaking, but there are great gaps in it—in particular any reform of the abstraction sector, which will be vital for the economic and environmental future of that sector.
I am glad, although it was not mentioned in the gracious Speech, that we will also get banking reform back before the House. However, I am pretty dubious about the present proposal’s ability to reform a sector which both caused the financial crisis by its recklessness and which is failing and holding back the recovery by its caution. It is a sector in this country which, despite the dramatic changes since 2007, has somehow retained, broadly speaking, the same structure. Some institutions are under different ownership, including state ownership but, basically, we have not tackled the problem of the structure of the banking sector in particular. I was hoping that we would see a more decentralised and more segregated banking system, both horizontally and vertically, and an absence of organisations which, for the future, would be “too big to fail”. I regret that we are not yet in that position, and I cannot see that this proposition on banking reform will get us to it.
On other legislation in the gracious Speech, I think I welcome the Mesothilioma Bill, which should—although it requires some detailed scrutiny—right a serious, long-standing and distressing situation. On the deregulation Bill, I hope that it will raise burdens on small and medium-sized firms, but I suspect that it is largely another rehearsal of saloon bar prejudices, and so I cannot give it an unequivocal welcome.
I hope I will be able to welcome the proposed consideration of the draft consumer protection Bill. As my noble friend Lady Hayter has said, the Government’s record on consumer issues in legislation has not been particularly good. They not only abolished my own organisation, Consumer Focus, but resisted proposals from noble Lords on all sides of the House during the previous Session to improve the protection of consumers in Acts that were passed in that Session. I hope that we will see some real proposals for improvements for consumers this time round.
In particular, I hope the Government will return to the issue that was mentioned by my noble friend Lady Hayter: that of collective redress, which I have been banging on about on every possible occasion over the past few years. It was to be included in one of the last pieces of legislation of the last Government, but unfortunately it was lost during the wash-up when it was objected to by the then Opposition. Collective redress would have avoided a lot of the hassle which consumers face, for example with PPI, where they are exploited first by financial institutions and then by claims companies. To have a proper system of collective redress for consumers would be a major step forward, and I hope that the Government have that in their sights in the production of the draft consumer protection Bill.
Excluded from the gracious Speech are some serious proposals on how to get out of the current economic recession. I follow the noble Lord, Lord Patten, in this, although I have seen the same bad example in Wincanton to which he refers. We need a massive housebuilding programme. The Government, after cutting back even on the rather inadequate programme they inherited from the previous Government, have finally realised this, and they are providing some significant support for the purchase of housing. However, as the noble Lord, Lord Shipley, said, that is not enough. In default of increasing the supply of housing—in other words, acting on the provision and capital side as well as supporting potential buyers and landlords—the net effect of underwriting and providing mortgages under Help to Buy and other schemes will be to raise house prices and increase housing costs, aggravating rather than resolving the problems of dysfunctional housing markets. Help on the capital side for building houses, by raising the limit on borrowing for local authorities and housing associations, by joint ventures and by supporting the private sector in housebuilding, is one way out.
Investment in housing ought to be accompanied by investment in infrastructure. The only serious mention of infrastructure in the gracious Speech was the reference to HS2. I broadly support it, but I will not enter into that controversy now. HS2 will bring jobs and serious investment only in several years’ time. We need investment in ready-to-roll projects now. There is an absence of that both in the Queen’s Speech and in the Government’s thinking.
Of course, behind all this is the problem of the economy, which manifests itself in a number of ways. The political obsessions at the moment with the EU and with immigration are a reflection of the failure of the economy. It is probably too late at night and I have too small an audience—actually, the audience is distinguished enough for me to go into a bit of a rant about the economy. Brussels, Frankfurt and Great George Street are all in thrall to a dangerous economic ideology, and they must get out of it if we are to see any economic progress in this country and in Europe.
The effect of the eurozone and the ECB’s view on how they should impose austerity on the rest of Europe is pretty clear. A single currency requires the transfer of resources and credit from the richer part of the EU to the poorer part. The fact that the Deutsche Bundesbank, German politicians and the ECB do not see that sufficiently clearly will, if they are not careful, ruin the eurozone. I speak as a passionate pro-European. I was even broadly in favour of the single currency at some point. However, they are failing to manage it properly because they are in thrall to an ideology that says that the only way out of economic recession and a public finance crisis is to impose austerity in a way that impacts most detrimentally on the poorest part of the eurozone.
Having been critical of the eurozone, I say in a less dramatic way that we are pursuing the same policy here. The Chancellor likewise is locked in the same ideology. The one great success of the Treasury in the past three years has been to convince the bulk of the press and a large proportion of the British public that the current difficulties in the economy and the public finances are entirely the fault of the previous Labour Government. The noble Lord, Lord Hodgson, who is no longer in its place, said that the Labour Party was in denial about this. My assertion tonight is that it is the Government who are in danger of believing their own propaganda. The financial crisis was started by private debt in America and in Europe. It was compounded by the failure of the banks, and compounded further by the fact that Governments throughout Europe and North America decided that they were going to bail out the banks. That is what caused the crisis in public finances.
The UK was more impacted than others because we are more dependent than other countries on the financial sector. The long-run record of the Labour Government was that before 2007-08 we had a debt-to-GDP ratio that was roughly the average of the OECD countries. It got worse because of our dependence on the financial sector. That is something that this Government have to pick up. However, they should not try to do so by imposing a form of austerity on the whole of the country in a way that minimises our chances of getting out of the recession. In particular, they should not focus on the social security budget and misrepresent the way in which it has increased over recent years. The vast majority of that, of course, has been because of the increase in the part of the population of pensionable age. The other two elements include the increase in housing benefit, which has got seriously out of control. But that is due to a failure of the housing market, not of social security policies, and housing benefit should not be included within the universal credit system until we have resolved the problems of the housing market in a way that does not lead to huge increases in housing benefit for those dependent on ever-decreasing opportunities within the housing sector.
If you look at the Government’s credibility in international markets and their inability to stimulate investment within this country, despite the fact, as somebody said, that significant money is available in corporate accounts and pension funds, you can see that people are not investing in the UK because they do not have confidence in this Government’s ability to get growth going in the UK.
Lord Phillips of Sudbury
I am grateful to the noble Lord for giving way. I cannot resist asking him, on his second reference to our position in the international markets—he talked about our credibility—whether the most vivid example of where we stand in the eyes of would-be speculators against sterling is not the fact that the rate at which we have to pay on our admittedly massive international debt is little if any more than the Germans pay. Had we not adopted a programme of some austerity, the cost of our borrowing would have been enormously greater.
Lord Whitty
No, my Lords, I do not accept that. I accept the first part of what the noble Lord, Lord Phillips, says, but not the second. The ability to borrow in international markets, as with borrowing in almost any context, depends on a number of things. It depends on your ability to have a low rate of interest and low cost of borrowing; a reasonable term of borrowing; and an ability to service that borrowing and to repay the borrowing. On all those counts, throughout the desperate period of 2007 to 2011, the UK retained credibility and could borrow at relatively low rates over relatively long periods. The final qualification is that the markets have to be confident that the Government can raise enough money to repay those debts over the medium to long term. What has lost credibility in this Government is the slow growth and flat-lining of the economy, as well as the downturn of financial income for the Government as a direct result of that economic failure, which has reduced the markets’ confidence in the ability of the UK to repay loans. That is why the credit rating has gone. It was not Gordon Brown who lost the credit rating—it is actually George Osborne and his failure to get economic growth within this country. Unless the Government recognise that and start changing course by investing in infrastructure and housing and getting us out of this economic recession, they will be going down the wrong road. I think that they have already gone too far down that road, but there is still time even for this Government to change their direction.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 6 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Harris of Richmond
My Lords, I had not necessarily intended to participate in this debate, knowing that the noble Lord, Lord Eatwell, had put down an amendment which I wholeheartedly approve and agree to. I am very pleased that the Government have decided to accept it, especially after all the work that was done in trying to persuade them about the Ministry of Defence fire service and the Ministry of Defence police. I emphasise this point because it is tantamount to having made them accept that this really must be looked at again, and I think it was the work that was done in Committee in this House that made this happen. Like the noble Lord, Lord Eatwell, I was surprised to find that financial privilege had been put forward as the reason not to accept something a little stronger. So I can assure my noble friend the Minister that during the year that this amendment will be looked at, mulled over and digested, we will be looking very carefully to see the progress that is made and to make sure, through questions and other means, that we keep the Government’s feet to the fire.
Lord Whitty
My Lords, I join the noble Baroness in congratulating the Minister on his change of heart. He has in effect very graciously recognised not only the justice of the case that we on this side of the House, and the noble Baroness, Lady Harris, put in Committee, but that it is pretty absurd for the Government simply to claim financial privilege to resist an amendment that manifestly will bring justice and equity to an extremely special group of workers, putting them on the same basis as people who are doing almost exactly the same job but who are employed by other public sector employers.
I suspect the Minister had some difficulty with the Treasury and the Ministry of Defence in reaching this conclusion. I therefore doubly congratulate him on seeing it through and at least recognising the very difficult position we all find ourselves in. We cannot really resist the Commons claiming financial privilege, but we can ensure by my noble friend’s amendment that the Government think again about this and address the real issues.
I do hope, however, that the Government do not make a habit of using financial privilege to resist a principled amendment from this House that has a minimal cost even in the Government’s terms and, as my noble friend has said, that is probably actuarially inaccurate in any case. If the Government continue to do this, this House has some serious thinking to do about how seriously our amendments and our scrutiny are taken. However, I return to my congratulations to the Minister on seeing sense over this. I hope it is a precedent that will be followed by some of his other colleagues in future.
Lord Newby
My Lord, I am grateful to the noble Lord, Lord Eatwell, and other noble Lords who have spoken in this debate. I would just like to deal with the issue of financial privilege, because there is a widespread misunderstanding of how financial privilege works. Privilege is not determined by the Government. Privilege is determined by the Speaker in advance of debate. In this case, the classification of your Lordships’ amendment as being subject to the Commons financial privilege has been known for a month. Once an amendment has been classified by the Speaker as being subject to financial privilege, obviously the Commons considers whether to agree or disagree with each Lords amendment. If it disagrees, it must offer a reason. The only reason it can give is privilege. The Clerk of the Commons explains this as follows:
“If an amendment infringes privilege, that is the only reason that will be given. This is because giving another reason suggests either that the Commons haven't noticed the financial implications, or that they are somehow not attaching importance to their financial primacy”.
I strongly recommend that all noble Lords who seek enlightenment on this matter look up the Hansard of 14 February last year, when the Leader of the House gave a little tutorial on financial privilege before your Lordships discussed a number of issues relating to a Bill. There is a long-established pattern of financial privilege that has in essence been unchanged for several centuries, and it is not for the Government to decide whether an amendment is covered by it. The Speaker does that.
Lord Whitty
My Lords, I fully accept that it is for the Speaker to designate financial privilege, but the debate last year to which the noble Lord referred related to expenditure of several hundred million pounds of the welfare budget. During that debate, several Members referred to the fact that there must be a threshold beyond which a Lords amendment was considered an issue of financial privilege. The only point I am making is that the Commons, or whoever jogs the Speaker’s elbow in these matters, needs to take into account the issue that a relatively small amount of financial expenditure and alteration in either direction should not be taken as an issue for claiming financial privilege. I do not want to labour the issue, but there would be a danger of the two Houses coming into conflict if this position were to be adopted by the Commons on a regular basis in relation to relatively small amounts of money.
Lord Newby
My Lords, I hope that the Speaker in another place is listening to your Lordships’ debate and taking note.
The noble Lord, Lord Eatwell, asked whether we had sought the views of the heads of the Ministry of Defence fire and police services. The Government are routinely in contact with all their employers and discuss a number of issues with them. We are accepting the idea of a formal review, and the heads of those workforces will be consulted as part of that process. The noble Lord also asked me how many times the Civil Service Compensation Scheme had been used. I simply do not have the answer, but I will seek it out and write to him about it.
I realise that although the Government are accepting the opposition amendment, a number of noble Lords would like us to go further today. In urging patience on noble Lords, I end simply by reminding them of the words of that well known hymn, “Lead, kindly light”, which says,
“I do not ask to see the distant scene.
One step enough for me”.
I hope that we have taken a positive step today.
Motion A1 agreed.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 8 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
My Lords, my name is attached to the first of these amendments and I support the second one. I do not want to add a lot to what my noble friend has said but I concur with him that at some point along the line, there has been either a mistake or an oversight. There can be very little argument but that the uniformed ranks who happen to be employed by the Ministry of Defence do a very similar and, if anything, significantly more dangerous job in certain locations than firefighters generally, and that therefore the exception to the general rule that applies to uniformed staff covered in my noble friend Lord Hutton’s report ought logically to apply to this group of workers. I cannot see a logical argument for excluding them from that exception.
My second point is that this group is in a Civil Service scheme that covers several hundred thousand people. We are dealing here with a unique workforce of 800 firefighters who serve our defence forces in the United Kingdom, in war zones and in other parts where the British Armed Forces operate abroad. They are not like the rest of the Civil Service, and nor would it be a major cost to the Civil Service scheme were this anomaly to be rectified in the Bill. In the other areas of the Bill in which I am interested as regards the local government scheme, the Minister has been pretty flexible over many aspects, which I applaud—and he will, I hope, be more flexible later this afternoon. However, I am surprised that he cannot see that this is an issue on which the Government could easily concede; it would meet with huge approval, would cost very little and would correct an anomaly that has been there for some time but does not need to be aggravated by raising the normal statutory retirement age, which the rest of the Bill does.
I ask—I plead with—the Minister, if he is not prepared to accept the amendment, to take it away again and consider it seriously, because in this respect his civil servants, whether in the Ministry of Defence or the Treasury, are not serving him well. We should have found a way through this. We should find a way this afternoon to ensure that the position of this group of workers is recognised and reflected in statute.
Lord Hutton of Furness
My Lords, perhaps I should briefly join the debate because my report has been cited by my noble friend. I echo the comments of my noble friends and support their argument. I ask your Lordships’ House to indulge me if I revisit some of the issues from my report. It talked about the uniformed services in general, not about whether you happened to be in the Civil Service scheme or any other scheme. I talked about uniformed services—firefighters, police and the Armed Forces. My report made a simple argument that the nature of their service is unique and should be reflected in the pension arrangements that we make for them.
I have to say that if, during the course of my inquiry, I had known about the unique circumstances of the MoD firefighters, I would have referred specifically to them in my report and urged the Government to show some flexibility, support and sympathy for the special role that they play within our Armed Forces. Sadly, this issue was not drawn to my attention, so I did not make any specific recommendations about the MoD firefighters or the MoD police. If I had known about it, I certainly would have done so.
I am sympathetic to the Minister’s position. I am sure that his officials have told him that enormous complexity is involved in changing the normal pensionable age for this group of workers. However, I ask the Minister to remind himself—I know what a decent and honourable person he is—of the fact that this is fundamentally a matter of fairness and of the need to approach the issue in the right way. I do not believe that there is any substantive technical reason why we cannot look again at the role of the MoD firefighters and the MoD Police. If there is a technical issue it has to be addressed on the face of the Bill, as my noble friend suggested, or in the scheme regulations or the discussions with the relevant trade unions. Surely there has to be a way of doing the right thing for these people. The MoD firefighters currently happen to be in the Civil Service pension scheme, which has a higher retirement age than the firefighters scheme or the Armed Forces scheme. It is incumbent on us to address that issue and not to use the technical arguments as an excuse for not addressing this fundamental discrepancy.
I am not familiar with the history of all this—I am sure that there is a lot of history to it—but I wish that it had been raised with me, as I would have referred to it in my final report in the way that I have suggested. However, we now have an opportunity to do the right thing for these people, and I hope that this House takes the right course.
Lord Flight
My Lords, I should be grateful if the Minister could comment on the extent and the manner to which the Government’s amendments to the ability to make changes and to make retrospective changes affect the fundamental issue of affordability. I apologise for raising this issue yet again but it is fundamental. We start, as everyone knows, from the OBR advising that there will be a cash flow deficit of £15.4 billion by 2016-17. My related question to the Minister is: what is the Government’s estimate of the additional cash flow deficit costs of both increasing longevity and, more particularly, the new single-tier pension proposals made by the DWP? It strikes me that two separate silos have been working on this, with the Treasury in one and the DWP in the other. Precisely what the effects of the loss of employer and employee NI contributions and the ending of contracting out will be on the deficit of pay-as-you-go public sector schemes seems to some extent to be a mystery.
I think it was in Committee that the Minister advised that he felt the estimates I suggested were too high; thus I would be grateful if he would comment on what the Government’s estimates are. My revised estimates, done with the assistance of Michael Johnson, who many noble Lords will know has done significant work on the subject, are that there is an additional cash flow cost from longer longevity of the order of £2 billion per annum, and there may now be an additional £3.4 billion resulting from the loss of public sector employers’ NIC rebates with the ending of contracting out and a further £4 billion per annum as a result of public sector employees continuing to enjoy an enhanced occupational pension as if contracted out while still being entitled to further accruals under the new single-tier state pension, once it appears. In contrast, private sector employers who are contracted out will be permitted to change their scheme rules, effectively to reduce pensions paid, without trustee consent. As I have said, I cannot believe that the prospect of a potential cash flow deficit of some £24 billion per annum will be acceptable to whoever is in power at that stage, given the state of the public finances. Dare I say that it seems that not only the Opposition but the Government are ignoring the affordability issue with regard to this legislation as it passes through both Houses of Parliament?
I would be grateful for a response to the question about to what extent room for manoeuvre is being reduced by the government amendments. Secondly, what is the Government’s revised, post-OBR estimate of the total cash flow deficit cost of the arrangements under the Bill?
Lord Whitty
My Lords, as the Minister said, I have Amendments 7, 31 and 35 in this group. I should explain that for the remainder of the discussion of the Bill on Report I am likely to be seeing it through the perspective of the Local Government Pension Scheme which, in response to the noble Lord, Lord Flight, is a funded scheme, not a pay-as-you-go scheme, and, moreover, a funded scheme that has recently reached agreement between the trade unions and the LGA, sanctioned by the CLG and the Treasury, on a new cost-management structure. I therefore think the costs of any limit on retrospection in that scheme are unlikely to arise. I probably should declare that I am an honorary vice-president of the LGA and a member of the GMB, although I have no pecuniary interest in the pensions covered by the LGPS. I was also, until recently, chair of one of its schemes.
The Minister deserves considerable credit for moving significantly on this front. It is clear that what appeared to be quite an open-ended ability to amend primary and secondary legislation in the original text of the Bill has been significantly modified by the changes which he has proposed and the procedures that he has outlined, particularly in relation to Amendment 36. It would be nice if he could go a little further, particularly in respect of two points. Amendment 7 would effectively prevent retrospective changes for non-administrative reasons that had a material detriment for any members of the scheme. The reference in Amendment 36 to “significant adverse effects” sounds like a significantly higher threshold than “material detriment”. Does the Minister think there is a real distinction there? Could some quite serious detriment in effect occur without triggering Amendment 36? I would hope not, but I would like some on-the-record reassurance on that point.
Lord Newby
My Lords, I am pleased that I am moving in the right direction, at least as far as the noble Lord, Lord Whitty, is concerned.
On the amendments of the noble Lord, Lord Eatwell, there are two differences between the Alex Ferguson situation and the one that we are discussing. First, while he could of course be relied upon to act impartially in every circumstance, he is not given that freedom. There are a referee and various other officials on the pitch, taking decisions on a second-by-second basis. There is an authority; it is just not him. The noble Lord is concerned about what happens if that authority then acts improperly or unreasonably—if, say, the referee blatantly misses a series of handballs in the penalty area. The answer is that if there is a sense that the authority is behaving improperly, it has an oversight body: the courts. The authorities cannot just make arbitrary decisions, let alone unfair ones, without acting in good faith. If they do act unreasonably, they are also acting unlawfully. It is right that the responsibility lies with them, as they operate the schemes. Somebody has to make an initial decision. The underlying implication of what the noble Lord is saying is that the authorities will act in a malevolent way to do down scheme members. I do not believe that they will, or that that is the history.
Lord Whitty
My Lords, on a point of information, in the LGPS we make a clear distinction between an employing authority and an administering authority, the latter being the equivalent of a quasi-trustee body, whereas this seems to imply the employing authority— that is, the local authority. If it were the administering authority, I think that we would be slightly more reassured.
Lord Newby
My Lords, I simply do not know the answer to that question. I will have to write to the noble Lord. I hope that, in doing so, I will be able to reassure him.
I turn to the amendment of the noble Lord, Lord Eatwell, on the cost cap. Its operation has been extensively discussed here and I hope that noble Lords were reassured that we will not seek to use it to reduce accrued benefits. If noble Lords have not been reassured, I hope I can reassure them now by setting out the Government’s own detailed amendments on retrospective provisions and protections.
As I have stated, the new clause on retrospective protections will require that retrospective changes to pension benefits with significant adverse effects be subject to the consent of members or their representatives. This would include changes made as a result of the operation of the cost cap. I have already made clear that adjustments to benefits or contributions under the cost cap would not be retrospective. The new clause, set out in Amendment 36, also provides protections to this effect. First, there would be the procedure set out in Clause 12(6) for reaching agreement on changes that are contingent on the operation of that mechanism. Then, when scheme regulations were made to give effect to those agreed changes, those regulations would require consent for any provisions that were retrospective and had significant adverse effects on pensions.
Given this, I hope that noble Lords are convinced that Amendment 23 is not necessary either. As the noble Lord, Lord Eatwell, himself said in previous debates, this would be a belt-and-braces provision to provide further protection to members in the event that the cost cap is triggered. There is no need for this additional protection because the response to the cost cap calls for the approval of the members themselves. If that response were to involve a retrospective change with a serious adverse effect, the implementing provisions in scheme regulations would also require consent. So the belt and braces are already in the Bill, were that extremely unlikely scenario ever to happen. In these circumstances and with these reassurances, I hope noble Lords will not press their amendments.
The noble Lord, Lord Flight, asked a couple of questions about whether the changes relating to restricting retrospection would reduce the Government’s ability retrospectively to reduce provisions and thus make it easier, in his view, to get the costs under control. The problem about that from a legal point of view—leaving aside whether it is desirable in practice—is that tinkering with accrued rights falls foul of human rights legislation and the Government have made it absolutely clear that they have no intention of going down that road. On the question of figures in Michael Johnson’s report, the Government simply do not recognise them. The House should be reassured that the costings for these reforms and the single tier have been fully worked through. If, at some stage in the future, the schemes appear unfinanceable, we have the cost cap; that is the whole purpose of having a cost cap. If his worse fears were borne out—and, as I say, we do not recognise the figures that Michael Johnson has produced—
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 8 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
Lord Whitty
My Lords, this amendment relates to revaluation. Clause 9 appears to allow the Treasury to change yet again the basis of revaluation, this time away from the CPI to something else. We discussed this in Committee and various assurances were given in that respect, although they are not as yet reflected in the Bill. However, no reassurances were given—indeed, the Minister was less than his usual emollient self—in relation to the provision in the Bill that in effect allows for negative revaluation in the light of changes in the CPI. That means that the Treasury can on the one hand amend the index and on the other impose a decrease in the accrued pension without any consultation with those affected, and in a way that, in the case of the LGPS, seriously undermines not only long-established practice but the recent agreement between the LGA and the trade unions.
I have looked at the history of the LGPS over the past 30 years, although it has actually run for a longer period than that, and there was only one point at which the relative index, at that point the RPI, actually fell at the point at which it was evaluated, and that was from September 2009 to the 2010 increase.
There were no precedents at that time. We had to refer back to the Pensions (Increase) Act 1971, which allows for increases but does not allow for decreases. The interpretation at that time was that that Act did not permit a decrease, so the 2010 adjustment was, in effect, zero. That is one aspect.
The other aspect of having the potential for a negative adjustment in revaluation is that it is inconsistent between those who are already receiving pensions or who are entitled to deferred benefits and are therefore governed by the Pensions (Increase) Act 1971, in which case their benefits would not be reduced, and active members who are still contributing to the scheme and who would, at precisely the same time when a negative revaluation could be made under this clause, see their benefits go down. We would therefore be treating active members disfavourably compared with members who have left the scheme or are already drawing their pension.
I am grateful for the assurances on the continuation of the CPI, but the fact is that the sudden and unexpected replacement of long-established RPI by the CPI has left a legacy of distrust in the schemes. Part of that is that if the CPI, as is expected, performs, if that is the word, less substantially than the RPI, there is a greater likelihood or possibility of a negative figure. The recent agreement between the LGA and the trade unions made it clear that past practice would continue to operate, and that if there were a negative change in the index there would be a nil adjustment. The implication of this clause is that it is attempting to override that commitment and agreement, which I think the Minister, and certainly some of his predecessors, would accept got the Government out of a very difficult position on pension reform in general and the LGPS in particular. Therefore, unravelling that aspect of the agreement—there are other amendments I will come to with a similar effect—is not helpful.
Amendment 15 would stipulate precisely what is already past practice and in the agreement: namely, that if there is a negative movement in the index, there will be a nil adjustment. I think the Government should accept the amendment. I appreciate the strong words of the Minister last time that the Government are not prepared so to do, despite the anomalies and distrust it would create. There are alternative amendments on this in this group in the name of my noble friend Lord Eatwell. Perhaps the Government could at least show their good will by accepting that if there were a negative increase, it would have to be subject to the affirmative procedure as provided for in my noble friend’s amendment, which no doubt he will speak to more ably than me shortly.
If the Government do not move at all, we are in some serious difficulty. It is causing considerable upset among employers, among those who have to engage in the new cost-management process within the Local Government Pension Scheme, among the unions and among the members of that scheme. The Minister could assuage those anxieties easily tonight by accepting my amendment or, in default of that, my noble friend’s amendment. It would be wrong for the Government to reject both. We would be on some sort of collusion course, whereas in general the LGPS and the arrangements for it from 2014 are done and dusted in a way that frankly was probably beyond the Government’s dreams only a year or so ago. I think that would be most unfortunate not only for the members of and employers in the scheme but for the Government and for future relations. I genuinely hope that the Government can move on this issue tonight. I beg to move.
Lord Eatwell
My Lords, I fully support the arguments put forward by my noble friend Lord Whitty, particularly on the complications that would arise with respect to the Local Government Pension Scheme. The amendment in my name and that of my noble and learned friend Lord Davidson refers to the general proposition in Clause 9(3) that,
“the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate”.
The Treasury has a completely free hand to determine the change in prices or earnings to be applied to the structure of the pension scheme. It seems to us on this side that this is really a step too far, so we have proposed that it should be subject not to a negative Commons procedure but to the affirmative procedure so that there can be a truly substantive debate on any particular proposal that might be unreasonable.
In Committee the Minister said:
“Any attempt to exercise this discretion in such a way that did not produce accurate and appropriate estimates”—
I must say as an economist that there is no such thing; there are estimates, but “accurate and appropriate” is something different—
“with reference to a reasonable index of prices or earnings”—
there is no such thing as that either—
“could be challenged by scheme members. Any decision which is not reasonable”—
that is fine—
“even without this amendment … could be challenged by judicial review and struck down by the High Court”.—[Official Report, 15/1/13; col. 608.]
What a cumbersome procedure. The affirmative procedure may be seen as taking somewhat more time and requiring more effort than the negative procedure, but how much better than saying, “Well, if this goes wrong, you’ve got to take it to the High Court”? That really is truly unsatisfactory.
Introducing this very minor amendment will provide an environment for the discussion of changes in the chosen index that can be deemed to be reasonable and to have the confidence of members of the schemes. I feel that this approach, perhaps allied with that suggested by my noble friend, would provide the confidence in the process of revaluation that from time to time can be enormously important in maintaining standards of living, particularly of more elderly pensioners.
Lord Newby
My Lords, as we are debating a group that started with an amendment moved by the noble Lord, Lord Whitty, I shall take this opportunity to answer the question he asked me earlier about whether the administering authority or the employing authority would determine whether an effect is significant. I am extremely pleased that I did not try to reply at the time because the answer is neither. It will be the “responsible authority”, because that is the authority that will be making the scheme regulations. In the local authority scheme, it would be not the employer but the Secretary of State. I hope that answers that question.
We have debated the amendments in this group before, so I shall try to be relatively brief in explaining why I do not believe it would be fair to restrict the revaluation of accruals from directly tracking growth, including when it is negative. Even though negative changes in prices or earnings are exceptionally rare, the Government firmly believe that if there is no revaluation ceiling, it would be unfair to have a revaluation floor to the benefit of members.
This is the sort of unbalanced risk-sharing between members and the taxpayer that the measures in this Bill seek to remove. The report by the noble Lord, Lord Hutton, specifically criticised this “asymmetric sharing of risk”. In addition, such a revaluation floor could lead to the cost cap being breached, to the detriment of future members who simply end up paying for past members’ accruals growing faster than the scheme revaluation rate. For those reasons, I will not be able to support the amendment of the noble Lord, Lord Whitty.
I am also unable to support the amendment of the noble Lord, Lord Eatwell, which would make the annual Treasury revaluation order affirmative rather than negative. As we have said before, this would not be an efficient use of parliamentary time and would be counter to the long-standing convention with other public service pension indexation. The order will be a run of the mill piece of legislation, and it would be incongruous for it to be subject to the affirmative procedure in each and every year.
However, I hope that I can go some way to meeting noble Lords’ concerns. In the years when the values in the order are negative, there will be a strong expectation that the Government of the day should ensure that there is a full parliamentary debate on the changes, not least because they would be so rare. Perhaps we can go further than that general statement and look at whether to require the affirmative procedure when, as unlikely as these events will be, the order sets out a negative figure. It seems that this would strike the appropriate balance between parliamentary scrutiny and sensible regulation-making.
I would therefore be willing, if the noble Lords were able not to press their amendments, to take this away to consider it further, with a view to returning to the matter at Third Reading with an amendment that would require any annual order to come before the House for affirmative procedure if the CPI index slipped into negative territory. I therefore hope that the noble Lord, Lord Whitty, will feel able to withdraw his amendment.
Lord Whitty
My Lords, I thank the Minister for at least part of that response. I also thank him for the clarification of “authority”, although it alarmed me somewhat more than I thought it would. The only more alarming thing would have been if he had said that it was the Treasury. It is clearly not within the bounds of the scheme to assess it, so my noble friend’s point in a previous debate is rather more valid than I was hoping it was. We will perhaps return to that at a later stage, at least informally.
On the amendments in this group, I read the Hutton report fairly thoroughly at the time. I do not recall the noble Lord, Lord Hutton, advocating that we should have negative adjustment. Clearly there is a balance of risk, which is reflected in the changes to the substance of the scheme that has been proposed by the Government and, in the case of the LGPS, has been accepted in the negotiations between the employers and unions. If the noble Lord seeks further rebalancing of the risk over and above what is already reflected in a scheme, which, I remind him, has been endorsed by the sponsoring department and, however grudgingly, by the Treasury, that reopens a can of worms.
Were I in the Minister’s shoes, which thank the Lord I am not, I would probably have said, “I will not accept the amendment of the noble Lord, Lord Whitty, but I will accept the amendment of the noble Lord, Lord Eatwell”. In that case, I would clearly have deferred to the amendment of the noble Lord, Lord Eatwell, and I and the rest of us could go home reasonably satisfied. As it is, the Minister on the one hand has said explicitly that he is going to reject that amendment, but on the other has described a process that did not seem a million miles from my noble friend’s advocacy of the affirmative procedure.
The Minister said that if there is a negative movement in the index, Parliament should have a full and thorough debate, having a couple of paragraphs earlier said that it was run of the mill legislation. It is clearly not run of the mill if it has not happened for 30 years. That full and thorough debate would normally be accompanied by an affirmative procedure, or something very like it. I am therefore not feeling quite so negative towards the Minister as I thought I would at the beginning of his remarks. He has said that he will go away and look at this. I think that if he looks at it carefully, he will come back and accept, or propose something equivalent to, my noble friend Lord Eatwell’s proposition. In that case, although I will not be completely satisfied, it gives a serious safeguard for the members of these schemes, and for the coherent administration of and trust in them, which are so important to tens of thousands of local authority workers and dozens of local authority employees.
I do not regard the Minister’s reply as satisfactory, but rather than press my amendment to the vote or encourage my noble friend so to do, we have to grab hold of the Minister’s offer of further consideration and see what he comes up with at this rather late stage of the Bill. Nevertheless, an important consideration now faces him. I am grateful for his commitment thus far, and therefore beg leave to withdraw the amendment on that understanding.
Lord Davidson of Glen Clova
My Lords, this amendment, dealing with the fair deal, covers a lot of common ground. But rather as with the last grouping, one finds that the common ground is not found in the Bill. As my noble friend Lord Eatwell has already observed, there is a possibility of an erosion of trust, certainly on the union side, if the outcome of discussions does not find itself reflected in the Bill.
In Committee, the Minister observed that one was not able to accept this type of amendment because one was in the middle of a process of consulting and, therefore, such an amendment might be premature. But the principle appears to be held in common by all sides. The Minister has observed that,
“we are committed to the principle”.—[Official Report, 15/1/13; col. 627.]
We do not in any way doubt his sincerity, but we urge that it could be demonstrated that that commitment is found by putting it into the Bill.
The amendment that is before the House allows the principle to be put in the Bill, and allows for the consultation process. When one looks at the amendment, one sees that it permits the Secretary of State to bring forward the proposals within 12 months. That plainly allows any sensible consultation to take place and be concluded. It would also allow the commitment from Her Majesty’s Government to be honoured expressly.
Ahead of the government amendments in this grouping, I observe very briefly that we were genuinely puzzled as to what they were aimed at and why the Government have seen fit to bring them forward. Elucidation would be gratefully received. I beg to move.
Lord Whitty
My Lords, I speak now according to the convention, although it may be more logical for the Government to explain their amendments. My Amendment 49 is also in this group. It is another one of these whereby what appears to be the implication of this Bill, if nothing else is done, is that it would unravel what has been agreed between the LGA and the trade unions on the Local Government Pension Scheme.
Pensions payable by the LGPS are revalued using the Pensions (Increase) Act 1971. The amendment is required to enable the same methodology to be used for revaluation during service to continue once a scheme member is in receipt of their pensions. But there is a snag. The current situation, under Section 1 of the Local Government Act 2003, is that the Best Value Authorities Staff Transfers (Pensions) Direction 2007 requires this to be applied to those in the best value authorities. So under the existing scheme and direction the provisions relate only to those who are in best value authorities. It does not apply to those members of the LGPS who are employed by other local authorities and other members of the LGPS.
The agreement reached on the position beyond 2014 would provide for all LGPS members who are compulsorily transferred to be able to retain their membership of the scheme subject to the valuations provided in the scheme. I thought that the easiest thing to help the Government out of this one would be to tack on to the back end of the repeals process at the end of the Bill, when everybody is packing their bags to go home, something that simply says that we repeal the direction order. I am informed that it is not possible to do so in that form, but that one way or the other the Government intend to repeal the directions order. If the Minister could tell me how he proposes to do that, and preferably when, my particular concern about this group of amendments might be met.
The measure I am discussing is essentially part of the fair play aspects although the directions order covers slightly wider issues. However, the repeal is essential to achieve what I think most of us are agreed should apply beyond 2014 in the case of the local government scheme. I am really asking the Government to tell us how they are going to do the tidying up. If we cannot do it by repealing that order, how can we do it, and how can we do it so that there is no differentiation between LGPS members who happen to be employed by different member funds of the LGPS scheme? I would be grateful if the Minister could tell me that when he winds up. I hope that that will satisfy me.
Lord Newby
My Lords, I start with the amendment of the noble Lord, Lord Whitty. As he says, the LGPS differs from the unfunded schemes in several respects. While the current fair deal does not technically apply to that scheme, a similar principle is contained in the Local Government Act 2003. That Act requires the Secretary of State to make a direction to specify how pension issues are to be dealt with when staff are transferred out from a best value authority.
The noble Lord is understandably concerned to understand how the Government intend to implement the new fair deal policy for the LGPS, given this existing provision. The Department for Communities and Local Government is currently considering how best to do it. Should it prove necessary to amend the 2003 Act to implement the new fair deal policy, I can assure the noble Lord that the Government will do so at the earliest possible opportunity. I hope that I have given him the answers that he was seeking.
As regards the amendment of the noble and learned Lord, Lord Davidson, the Government have stated a number of times—both in this House and the other place—that we are committed to reforming the fair deal. There are provisions in the Bill to facilitate this. Indeed, the government amendments in this group are concerned with fair deal, which I shall come to in a minute, and work is under way to determine how this commitment will be implemented.
However, consultation closed only yesterday on some of the final policy details of fair deal. We are in the final stages of planning for its implementation. Therefore, in our view there is no need to refer to fair deal in the Bill in the way proposed and we believe that the amendment has serious flaws. As drafted, it would commit the Government to bringing forward proposals for ensuring that compulsorily transferred members of public service schemes can remain in those schemes. It would also seem to commit the Government to bring forward the proposals for the purpose of ensuring that compulsorily transferred staff can remain in their schemes, effectively committing government to implementing the proposals. However, it would not be appropriate to give any member of the scheme an unconditional right to remain an active member if their contract of employment was transferred to an independent contractor. While, of course, it is the Government’s aim that transferred employees would have a right to remain in the scheme when transferred out of the public sector, this right cannot be unconditional. While in the vast majority of circumstances it will be appropriate for fair deal to apply, there may be some cases when it would not.
There have been examples in the past, notably during the financial crisis, of highly paid specialist financial staff who have been brought into government for a time-limited period, and then transferred to independent employers. Although it may have been right to offer these staff access to the schemes while working in government, it would not be appropriate to allow them to retain access to the schemes when they leave, especially as the taxpayer is ultimately responsible for paying these pensions.
Similarly, on the wording of this amendment, a member of staff who was transferred out and then voluntarily moved off the public service contract to do purely private work could remain a member of the public service scheme. Again, this would not be right. The public service pension schemes are in place for those doing public service work, not for everyone who was once engaged in public service work at some point in their career.
These examples demonstrate that the implementation of the fair deal is complex. The Government are carefully considering these complexities to ensure there are no unintended consequences when the policy comes into force. Given this, it is the Government’s view that the fair deal commitment should not be on the face of the Bill. However, I can assure noble Lords that the fair deal will be implemented when we have done all the necessary work.
I hope that I can explain why government Amendment 42 is necessary. This amendment is concerned with people who are admitted to a public service pension scheme but who are not part of the main public service workforces listed in Clause 1. For example, it could apply to staff employed by a hospice who are offering services under a contract to the NHS and whose employer would like them to have the advantage of the NHS Pension Scheme. It is important to note that this amendment does not affect any of the main workforces in Clause 1. It can apply only to other people who are admitted into the scheme under the extension power in Clause 24.
Under the proposed new fair deal, a range of private and third sector bodies will be able to participate in these schemes in future. The amendment is concerned with ensuring that the schemes can be appropriately modified to reflect differences in the structure and nature of those diverse bodies. First, the amendment clarifies that scheme regulations may make special provisions in respect of people who are allowed to participate in the public schemes. The health and local government pension schemes already have a wealth of experience in providing for admitted bodies. The special provisions that are currently applied to those schemes include requirements for indemnities, guarantees, additional record-keeping, et cetera. These provisions are needed to ensure that the body meets the costs of participating in the scheme. The amendment would also allow for modifications that have already been made in respect of admitted bodies in the National Health scheme to be carried forward to the new schemes. Such modifications currently relate to about 60,000 scheme members and it is important that these can be maintained.
Secondly, the amendment allows for modifications to be made where bodies are admitted to the schemes in the future. Where scheme regulations provide for it, the responsible authority will be able to issue a direction to modify how the scheme applies to the staff of a body that is brought into the scheme. The NHS Pension Scheme currently makes between 100 and 150 such directions every year. Allowing for modifications to be made via an administrative direction will ensure that the scheme is applied appropriately in each case without the need to legislate for every single one or the delays that that would cause.
The Bill provides that a direction may be made only for permitted purposes. Those are that the modification is necessary to protect the public purse from costs arising from that body participating in the scheme, where additional information requirements are needed to allow the scheme and the risks to be managed properly by the scheme manager or to reflect the nature of the employment or the structure of the employer. This is not a new or novel power. The Secretary of State for Health has had broader powers to modify the health pension schemes since 1967. For those who wish to study the details, those powers are to be found in Section 7 of the Superannuation (Miscellaneous Provisions) Act 1967. The power explicitly set out by this amendment is more restrictive in scope than this existing power, which provides unfettered scope to modify the existing health schemes. The important safeguards set out in our amendment will ensure that any modifications are appropriate. Allowing bodies to participate in the schemes under Clause 24 will usually be as a result of fair deal. In such circumstances it would not be appropriate for modifications to alter members’ benefits in any way. Modifications that relate to fair deal transfers will, therefore, be limited to ensuring that employers meet their liabilities in full or provide the information necessary to run the schemes properly. I hope I have succeeded in explaining why we think that that amendment is necessary.
Amendment 43 relates to the locally administered public service pension schemes. Under Clause 24(3), scheme regulations may specify bodies or persons that may be permitted to participate in the scheme. It is anticipated that the regulations will prescribe the types of body that may be permitted: for example, a body that is providing services related to the main scheme workforce or a body that staff are transferred to under fair deal. Clause 24(5) then provides for an administrative determination to be made to extend the scheme to persons employed by such a body. Clause 24(8) requires an up-to-date list of persons to whom the scheme has been extended.
All these functions sit with the responsible authority. Our amendment allows for the functions in Clause 28(5) and (8) to be delegated to the scheme manager in a locally administered scheme. This is subject to any condition that the responsible authority considers appropriate. This reflects current practice in the local government scheme, in which it is the local authority that determines to admit a body to its pension fund. There are more than 5,000 admitted bodies in the local government scheme, and local authorities are best placed to determine their eligibility to participate in the scheme and to assist in administering the list of those who participate. They will do so within the limits of the scheme regulations set by the responsible authority. In turn, it is the local authorities that will be responsible for managing and administering the scheme for that body. They will collect data, contributions and provide benefit information and pensions to members.
I commend Amendments 42 and 43 to the House.
Lord Whitty
“(10) This section does not apply to the Local Government Superannuation Scheme.”
Lord Whitty
My Lords, I am sorry if this amendment appears to be another bit of LGPS exceptionalism but I hope that it can actually clarify the situation. There is a bit of confusion between Clauses 12 and 13. On my interpretation, Clause 12 applies to all schemes, whereas Clause 13, to which I have little objection, provides for funded schemes. However, if Clause 12 indeed applies to funded and unfunded schemes, it will cause some difficulty for the agreement that has been reached on the new cost-management system for the LGPS. As the clause stands, it does not reflect the dual process required by the LGPS and the separate cost management that was negotiated.
We have received some relatively friendly indications from the Treasury that it recognises this problem and we would like assurances from the Minister that the Government recognise the dual process. The other implication for the LGPS is that it is ahead of the other schemes in terms of the 2014 start date. I would therefore welcome reassurance from the Minister that the ability of the Treasury, at various points that are set out, to override a funded scheme—in this case, the LGPS—would not be applied to a scheme that had its own government-endorsed cost-management process in place. If I can have that confirmation, or something like it, I would not press the amendment. Clarification would also be useful on whether the whole of Clause 12 is indeed intended to apply to funded schemes. I beg to move.
Lord Newby
I hope that I can go at least some way in giving the noble Lord the reassurances that he seeks. The Government recognise the unique nature of the LGPS and that the cost-control mechanism for that scheme must reflect it. We have therefore developed a dual process to which the noble Lord referred, which will give scheme stakeholders additional flexibility to manage costs, while allowing the Government to retain final control over the costs and design of the scheme.
Clause 12 will provide for the Government to retain this overall control. They will use these provisions to put in place an automatic backstop which will apply if the scheme costs become unsustainable. The additional flexibilities that we will give to scheme stakeholders in their management of costs will operate alongside this backstop. As the noble Lord knows, this mechanism has been developed after extensive discussions with the LGA and the trade unions. We are confident that it will work and that the process envisaged is not inconsistent with the provisions in the Bill.
I know that this is not the noble Lord’s intention, but the effect of the amendment would be to remove the backstop that is part of the agreed mechanism. Given the importance of the cost-cap mechanism in ensuring the future sustainability of all the schemes, it is vital that the LGPS is covered by these statutory provisions in exactly the same way as the other schemes. All schemes need this mechanism to ensure that they are a sustainable way to provide good pensions that last. There is simply no reason to exempt the schemes. I hope that that will help to satisfy the noble Lord.
Lord Whitty
My Lords, I am grateful to the Minister, who clearly recognises the cost-management system that was agreed by the stakeholders of the LGPS. That is now on the record. I am not attempting to sabotage a backstop. However, Clause 12 looks to be a rather more interventionist clause than a backstop would imply. Nevertheless, if it is simply a backstop and the noble Lord recognises that the agreed system will work and will have government backing, then I will beg leave to withdraw the amendment.
Lord Whitty
My Lords, this is complicated territory. The way in which the Minister described the implications of my amendment is not the way in which I understand it. The LGA and the unions are concerned that Schedule 7, as it stands, could reintroduce an additional complication —an additional cost—into the LGPS scheme, which was expressly removed by the agreement between the LGA and the unions. That relates not so much to movement between the LGPS employer and different public sector employers but to the situation with people who have been employed by one LGPS employer, who then leave and come back. I do not specifically stand by the wording in the amendment, so I shall withdraw it shortly. However, the Government need to make it clear where the responsibility lies. It seems to us that responsibility for those in pensionable public service could see the original employer being liable rather than the final employer. That would give rise to unknown liabilities lying with the original employer and not with the employer of the individual once they return to LGPS employment.
This could carry on over a substantial number of decades, so the administrative costs of an employer trying to find out where their ex-employees have moved would be quite substantial. It is difficult to estimate, but some actuaries are telling the LGA that it could cost an additional 1% to the scheme. If that were anywhere near an accurate estimate, it would seriously jeopardise the 19.5% cost-management figure that has been built into the LGPS and would increase the overall cost to the LGPS over and above the ceiling.
I understand some of what the Minister says but, having outlined the dilemma, perhaps he could suggest some other way of doing it. At the moment, there is potentially a quite unnecessary cost loaded on to the management of the LGPS. As I say, actuaries are telling us that that could amount to a full 1% of the total cost. Even if it were half that figure, it would be a serious issue. It needs to be solved. My amendment may not solve it, but I would be grateful for more guidance from the Minister. Perhaps he could have some discussions with the LGA on this issue before the passage of this Bill is completed.
Lord Newby
My Lords, we realise that there is concern about the potential costs involved in this policy, but we do not believe that it generates unreasonable costs. It is about offering fairness and consistency. The likelihood is that most people who leave local government service for prolonged periods of time to work in different public service employment would not expect to return. It is therefore most likely that they will transfer their final salary benefits to their new employer’s final salary scheme. However, if liabilities for certain local government funds are increased by the risk of a final salary link attaching to future employment with different local government employers, it would be a matter for individual funds to make appropriate financial arrangements, with the help of scheme regulations if required. Undoubtedly, further discussion will be required on exactly how this should be carried forward. However, we do not believe that it is an insuperable problem for a very good feature of the scheme. We hope very much that negotiations and discussions will take place and that some of the fears of local government actuaries will turn out to be unfounded.
Lord Newby
My Lords, I turn to two government amendments to Clause 25. Amendment 44 is intended to remove any ambiguity as to the persons to whom Clause 25 applies. It has always been the Government’s intention that this clause should relate to any person who qualifies for a public service pension scheme under Clause 1(2) of the Bill, as well as any other persons to whom a scheme has been extended under Clause 24—that is, all those who are eligible for a public service scheme and not just those who are currently members of such a scheme. Doubts have been expressed about whether the clause has that effect. This amendment sets out the Government’s intentions unambiguously.
Noble Lords will remember that at Third Reading we debated a proposed amendment to Clause 25 moved by the noble Lord, Lord Whitty. Noble Lords were concerned that the clause was too general in its scope and could allow local authority employers to undermine the Local Government Pension Scheme by offering alternative pension arrangements as a matter of course. The noble Lord therefore sought to exempt the Local Government Pension Scheme from Clause 25. I gave assurances in that debate that these powers did not allow eligibility for the main schemes to be overridden, nor did they allow employers to make any alternative arrangements mandatory. I stand by those assurances. In short, Clause 25 does not allow scheme managers or employers to act in the unscrupulous manner that a number of noble Lords feared.
However, I am aware that some people, particularly in the local government sector, still have a lingering nervousness about the clause. The LGA and others have explained that, while they accept that the clause cannot lawfully be used in this way, they remain concerned that some employers will misrepresent it. To put the matter beyond doubt, the Government tabled this amendment, which makes the use of Clause 25 subject to any provisions contained in scheme regulations. It makes it clear that provisions in scheme regulations take priority. Furthermore, it will be open to scheme regulations to restrict how the Clause 25 power is used in the scheme, if that is thought appropriate. My officials discussed the amendment with the LGA and I understand that it is content with this approach. I trust that this provides a further level of reassurance. I beg to move.
Lord Whitty
My Lords, I simply thank the Minister for tabling these amendments. Amendment 45 in particular clarifies the position significantly.
Welfare Benefits Up-rating Bill
Lord Whitty Excerpts(11 years, 8 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
My Lords, the noble Lord, Lord Sheikh, said it and, to a large extent, the noble Lord, Lord Wigley, demonstrated it as regards Wales; namely, that this Bill has wider social implications, but they are not welcome implications. They are to put a big burden of the sorting-out of our economic situation on low- paid working people. I follow the noble Lord, Lord Kirkwood, in saying that it is quite a dangerous move, after 20 years of virtual cross-party consensus, that we should virtually automatically uprate our benefits system, to break that system in this way in a Bill which is legislatively unnecessary. The noble Lord also said that we needed some clearer long-term thinking. My main points will be about that because, as many others have said, this Bill is surrounded by hugely misleading propaganda.
It is supposed to be part of a strategy on the part of the Government to reduce benefit costs, simplify the benefits system and increase employment, but any such strategy is put in jeopardy by a government believing their own propaganda and that of their press allies. That propaganda seems to be all about the distinction between the deserving and the undeserving poor—those who work and those who do not—but the burden of the Bill falls on those who do work, who are already squeezed by a cut in real wages, particularly at the lower ends of income, and who will therefore be twice hit by a cut in the real value of their benefits.
The propaganda also suggests that benefit recipients’ real living standards have risen dramatically faster than those who are in work. As the figures that have been provided to us by the CPAG show, the real value of unemployment pay and other social benefits has steadily fallen over several decades. The reason why there has been a slight reversal in the past couple of years is the dramatic fall in real wages at the bottom end. That is not a reason to aggravate that unfairness and retrogression by the means proposed under the Bill.
If the Government were really telling the public that we need to differentiate between those who work and those who do not, they would have provided for a benefit system that differentiated between levels paid to those in work and those out of work. The Bill does not do that. The Government have, rightly, stuck with focusing on need rather than on whether you are in or out of work. Of course, the downside of that is that they have hit both equally. For those who are in work, the Government claim that they have offset that by raising the tax threshold at the same time, but the tax threshold hike has been offset by the cut in housing benefit, the abolition for many and the cut for others in council tax benefit and other benefits. The net effect on the working poor of the Government’s measures has not been positive compared to those who are on benefit and who are out of work. The supposed strategy is as much at odds with the propaganda as the propaganda is at odds with reality.
I hope that the Government will find my second point slightly more constructive, but it is equally critical, not only of this Government but of previous Governments. Elements of the Daily Mail propaganda, as I would call it—to save Ministers’ blushes—are correct. That relates to the soaring cost of housing benefit and, within that context, to occasional, admittedly much exaggerated, stories of ludicrously high levels of housing benefit for particular families in particular situations, especially in London. Those families are obviously chosen to highlight a point. For obvious reasons, they tend to be families who fit the Daily Mail image of benefit recipients by being large in the number of children, probably out of work and almost certainly foreign.
There are thousands of other less dramatic cases in which, inevitably, housing benefit has risen above the rate of inflation. The Government, and all of us, have to ask ourselves why. It is because of the failure of the housing market, compounded, in some cases by the failure of local authority placement policies. It is not, by and large, due to the failure of the benefit system.
I have been banging on about the failures of the housing market for at least 10 years, for the past two years as chair of Housing Voice—as I should have declared—but so have many other people for far longer. The reality is that all parts of the housing market—out-of-reach mortgages, soaring private rents, unaffordable leasehold charges, the inadequate quantity of new social housing, and increasingly expensive social housing at that—reflect a failure to build, a failure to refurbish and a failure to provide housing choice fit for our society at various levels.
Hence, in all forms of tenure, housing costs are rising. Inevitably, that leads to a rise in housing benefit payments. I repeat that that is a failure of housing policy; it is not a failure of social security policy. I predict that the pressure on housing benefit, or what is intended will become the housing component of universal credit, will seriously sabotage and possibly completely undermine what I think is universally regarded as the commendable aim of introducing universal credit, unless housing benefit and the pressures on it are dealt with first in the wider context of housing policy.
Looking back, the roots of this problem go to a serious mistake, made, probably unconsciously, decades ago. Until the 1960s, the vast bulk of government intervention in the housing market was on the capital side: help to local authorities to build social housing; and help to homeowners and landlords to improve their stock. A much lesser proportion was on the revenue side in subsidies to people, and much of that was through tax relief on mortgage payments. We now have a completely switched system, so that more than 90% of state support in the housing market is revenue based and very little is capital based. In the next five years, £90 billion will be spent on housing benefit; £5 billion, at best, on new and improved housing. Within government, the two aspects are dealt with by entirely separate policies and entirely different departments. CLG designs housing policy; DWP decides housing benefit. If the two sides were brought together in one pot with one policy in one department, we could perhaps, over a period of years, develop a sensible housing strategy: building more houses, improving those we have, and providing selective support to tenants and householders who are faced with unaffordable costs.
Unless we do that, unless we take housing benefit out of the plans for universal credit strategy and put it back into housing policy, we will not solve the housing crisis, the pressure on housing benefit and therefore the pressure on the social security budget in total. Unlike other benefits, housing benefit—and, I guess, council tax benefit—depends not on your income or your family circumstances but on the home and the area in which it is situated and on the state of all the housing markets in that area. As long as the housing crisis persists, the total benefit bill will inexorably rise faster than inflation. Then the Treasury will again insist on real-terms cuts to the income of many of the poorest in our society, such as the proposals before us tonight.
I appreciate that in calling for a single approach to housing policy, I am parting company with some of my usual colleagues who are housing and policy campaigners, but I say to the Government and the Opposition that unless they start looking at this in a more strategic way and put both sides of the housing issue together, they will solve neither the housing crisis nor the pressures on the social security budget. Unless we do that, we will be back here in a few years’ time with a Government of one complexion or another unfortunately forced to put the cost of our failure on those who are least able to afford it.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 9 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Eatwell
My Lords, this also refers to administrative matters concerning particular pension schemes. The amendment would implement my noble friend Lord Hutton’s recommendation that pension policy groups should be established for each scheme at national level. To quote my noble friend’s report, he said that,
“even if all schemes have a pension board in future, there will still be a need for separate pension policy groups to consider at national level major changes to scheme rules”.
Many schemes already have such groups or bodies at national level, such as the National Health Service and Civil Service pension scheme governance groups, the teachers’ pensions committee, the Police Negotiating Board, the Firefighters’ Pension Committee and so forth. Part of the role of these groups would, as my noble friend recommended, be to ensure that information about key proposals for change and related costs are publicly available. It is very important to maintain confidence in these proposals to ensure good relations with scheme members and the smooth implementation of any changes.
My noble friend’s report also notes that these existing bodies were often established as part of the consultation and negotiation machinery for handling pensions as an element of a remuneration package, and have member and employer representation as appropriate. The appropriateness of member representation would, we hope, be taken into account if this amendment is accepted and pension groups established.
When this issue was considered in another place, the Minister replied to my honourable friend Mr Chris Leslie, who put forward a similar amendment. Mr Sajid Javid said:
“We will give further consideration as to whether it would be necessary or appropriate for the Bill to provide for a scheme-level group for the local government scheme in England and Wales”.—[Official Report, Commons, Public Service Pensions Bill Committee, 22/11/12; col. 453.]
It was on the basis of that commitment by the Minister in the other place that my honourable friend withdrew his amendment.
I would like to hear from the Minister this afternoon the nature of the consideration given by the Government, which the Minister in another place committed the Government to, and why they have not brought forward their own amendment to place the position of pension policy groups in the Bill. After all, if the advisory measures that we have just passed are administrative measures and are in the Bill, these are also essentially administrative measures, as Mr Javid pointed out, and surely they should be in the Bill as well. I beg to move.
Lord Whitty
I fully support the amendment put down by the Front Bench. However, with regard to the arrangements for the Local Government Pension Scheme, would it not have been better if the Government had set out in one place the totality of the arrangements that were intended for the local government scheme, rather than attempt yet again to generalise the provisions to cover most of the public sector schemes? It is probably too late for the Government to do that; in which case, I hope that they will support my noble friend’s amendment.
Lord Newby
My Lords, I am genuinely confused. In our view, Amendment 45 establishes pension policy groups. I do not know what the noble Lord’s Amendment 46 will do that our Amendment 45 does not. What is the function of his groups that goes beyond the functions of our scheme advisory board? In tabling this amendment, we thought that we had done exactly what my colleague in another place suggested, which was to take it away and bring forward proposals that did what the noble Lord wanted. My view was that our amendment not only does what the noble Lord wants but goes rather further, in providing for the scheme advisory board to advise the responsible authority on any proposed change in the scheme regulations, not just significant changes.
Lord Whitty
“( ) Where the change is negative, the order shall specify a zero increase.”
Lord Whitty
My Lords, I beg to move Amendment 48 and I support Amendments 49 and 50, which are in this group.
I appreciate that the Minister is a bit pained about this, but the need for this amendment is exactly the area to which my noble friend has just referred. There is distrust out there. In respect of this amendment, the distrust was blown out of all proportion by the sudden decision to replace RPI with CPI. I know that for those who run schemes it is quite a useful change as it has put funding on an easier basis, but for millions of pensioners it has reduced their pension expectations and caused considerable distress. What I am addressing here is the continued anxiety that the Government may once again change the terms on which it is based.
This amendment relates to the agreement to which my noble friend referred within the local government scheme between the local government unions and the LGA, which the DCLG and, by implication, the Treasury greatly welcomed. At the moment, the provision in this amendment is the understanding carried forward from the previous scheme in that agreement, which is not reflected in the Bill. Without the amendment, Clause 8 appears to allow the Treasury to change the revaluation again, more generally, from the CPI to another index that may in future be created by the Treasury. That would significantly alter the scheme costs and funding and the likely benefits for pensioners and future pensioners. The scheme design proposal in the agreement between the LGA and the trade unions clearly specifies that the revaluation of pensions shall use the CPI. In setting this revaluation, careful consideration was also given to the value of the accrual rate to be used and to the overall scheme design. In other words, it was a balanced package. The overall cost of the scheme contained that balance and should it change again, clearly those arrangements fall.
These designs were put forward to the employers and were agreed with the unions. There was a vote of union members and a whip around local government employers and, in the circumstances, there was overwhelming support for that agreement. The apparent ability, if we do not adopt this clause, of the Treasury to introduce changes in those arrangements and, in specific terms, to impose a decrease, in certain circumstances, in the accrued pension without consultation or agreement with those affected would seriously undermine the basis of that agreement. One of the benefits—undeserved, in one sense—of the Government’s approach to public service pensions in general was that it forced local government employers and unions to work out what they wanted for the long term. They have done so, and the Government endorsed that agreement. Part of that agreement is that there should be no such reduction and no change away from the CPI. Without provisions similar to those which my noble friend has moved and which are also included in very specific terms in this amendment, the issue of distrust will continue.
This is a relatively simple amendment, but I suspect from the puzzled look on the Minister’s face that he did not even think that the Bill, as it stood, would have allowed a negative adjustment, but it does; while the agreement between the unions and the LGA does not. I therefore hope, for clarification and for some reduction in the degree of distrust out there, that the Minister will be prepared to accept this amendment. I beg to move.
Lord Eatwell
My Lords, my noble friend Lord Whitty has reinforced the issue that I raised in the discussion of the previous amendment. The Government seem to be content to make a deal and then put only their gains in the Bill and cover everything else by declaration of intent. Revaluation is absolutely central to the maintenance particularly of a career averaging scheme. A career averaging scheme requires a structure of revaluation whereby past earnings are revalued to take account of inflation, and earnings related to earlier years of pensionable service will be subject to revaluation year on year—over a very considerable timeframe now that we are looking at a career average as opposed to a final salary scheme, where revaluation is a rather simpler process.
As it stands, the Bill makes this extraordinary statement with respect to revaluation:
“For the purposes of making such an order the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate”.
In other words: any way they like. It does not refer particularly to RPI or CPI; it can just be any way they think appropriate.
The amendment tabled in my name and that of my noble and learned friend Lord Davidson would simply require the Treasury to act reasonably in determining the system of revaluation or the particular index structure that it identifies. This imports into the Bill the objective test of acting fairly. If the Treasury plans to be unreasonable and unfair, I would be grateful if the Minister would tell us. It seems to me that the very least we can ask is that the Government—not just this Government but future Administrations—should act reasonably in their selection of a particular index or revaluation scheme. That is the purpose of Amendment 49, which is grouped with the amendment moved by my noble friend Lord Whitty.
Amendment 50 is, if you like, a belt-and-braces amendment. If the Minister were to accept that the Treasury will act reasonably, we would be quite happy to withdraw this amendment. If there is an arbitrary and unreasonable change in the methods of revaluation, the House has to approve such a change by an affirmative resolution. That is the sort of belt and braces standing behind this notion of reasonableness. However, if the Minister is content to say that the Treasury will act reasonably—which also imports, I am advised, the notion of acting fairly—we will be content to withdraw Amendment 50, which is there in case the Treasury is going to be unreasonable and unfair.
Lord Whitty
My Lords, I thank the Minister for that. I am very glad that he is not bemused. Regrettably, his certainty and clarity in at least part of what he said does very little to assuage anxiety about the possible undermining of this scheme. Indeed, he has just said that the CPI is the preferred index at present. We have had the CPI for only 10 minutes. That reminds me of one partner in a long-standing relationship referring to the other as “my current boyfriend”. The Minister’s comments raise alarm, anxiety and uncertainty to an even greater extent than I presumed would be the case when we started this debate. I do not think that the noble Lord has answered that question.
On the question of whether past practice in the local government scheme has had a special provision for having a floor or negative valuation, certainly there has been no negative downward movement. When the new agreement was reached, the presumption was that that would not be the case in this measure either. Whether I need a clause on the front page of primary legislation is arguable. Nevertheless, it would have been helpful to seek an assurance that that understanding between the employers and the trade unions would stand. However, I will read the rest of what the noble Lord says. Meanwhile, I beg leave to withdraw the amendment.
Lord Whitty
“Basis of valuation
(1) Within six months of the passing of this Act, the Government shall establish a review body to assess the appropriateness of current methods of valuation of a pension scheme’s liabilities and assets, and, if appropriate, to recommend changes that provide a broader base of valuation.
(2) The review body shall report within 18 months of the passing of this Act.”
Lord Whitty
My Lords, unfortunately, I have lost my notes at this point. I would describe this amendment as a probing amendment but it is actually more of a kite-flyer. It raises a very basic issue about how pensions are valued.
At the moment, certainly in relation to the local government scheme and probably others, a pension scheme has to be revalued every three years, which is a fairly substantial exercise based on all sorts of actuarial presumptions working out the value of the current assets, the value of future flows into and out of the scheme, and making an estimation of the future liabilities of the scheme. Those future liabilities can stretch over 80 years or so for future pensioners and, depending on the nature of the scheme, their dependants. Given that, it is important that it is properly reflected in the way in which that evaluation is carried out.
Lord Flight
I thank the noble Lord for giving way. Perhaps I might suggest that the real cause of the trouble is the IFRS accounting standards that require companies to disclose pension liabilities discounted at government gilt yields. That, in turn, has made companies pay contributions to cover the resulting alleged deficits. As the noble Lord points out, that has led companies to close their final salary schemes and to the false rate of interest resulting from QE. However, the real problem has been the uncritical acceptance by Governments of both persuasions of what I believe to be profoundly wrong IFRS accounting standards.
Lord Whitty
I thank the noble Lord for that intervention. I had not expected to agree with him this afternoon, particularly on subsequent amendments, but I agree with him on that issue. It is important to recognise that the acceptance of those accountancy standards is causing the problem. That is why the noble Lord, Lord MacGregor, in the speech to which I referred, suggested that the Bank of England, government actuaries and the accounting profession sat down and looked at those assumptions. Slightly more tangentially, the Treasury Select Committee in another place has also touched on this point.
I am suggesting that the Government take the initiative whereby, once the Bill is passed by this House in whatever form, they set up a review looking at whether the present conventions and the way in which these public service pensions are assessed are correct—although there is a wider application—and whether we are getting a seriously misleading impression that has a detrimental effect. As the noble Lord said, there has been a devastating effect on large numbers of private sector providers.
The amendment would have no effect on the rest of the Bill but would give the Government a lever to look at the issue again and provide for expert assessment, which, given that the newly formed schemes are not coming in until 2014, could come into place before the first revaluation of those schemes. I hope that the Government will take this matter seriously and have a look at it. I certainly hope that the House and anyone involved in looking at public and private pension schemes will recognise that this is a serious problem. I beg to move.
Lord Newby
My Lords, perhaps I might start by saying that the Government take the issue seriously, and it clearly is serious. However, I wish to set out the ways in which different public servants’ pension schemes are, and will be, valued when the Bill comes into effect.
As noble Lords are aware, the majority of the main public service schemes are unfunded. There is no pot of assets that can be valued; future benefit payments are paid out of general tax revenue. They need to be valued in a different way from funded schemes. It is important that these schemes are valued to ensure that contributions paid reflect the costs of employing staff. The Government therefore carry out valuations of unfunded pension schemes to determine the level of contributions. This is done using a number of assumptions and methodologies that adapt to changing circumstances and improvements in the method. These valuations will also be used to set the level of the employer cost cap. The assumptions used in these valuations take account of the risk profile faced by government in providing pension benefits. The valuations can therefore be different from those used by typical private sector funded schemes, where the primary purpose of valuations is to provide security to member benefits.
However, the Local Government Pension Scheme is in a different position. As has been discussed, it is a funded scheme, with benefits paid out of one of 89 different LGPS funds in England and Wales. These funds, as we have discussed many times in our consideration of the Bill, are individually managed. Valuations of the funds perform a similar function to those in unfunded schemes by assessing whether fund assets will be sufficient to meet liabilities and setting the contribution rates to be paid into the funds. This valuation process is managed at the local level and is dealt with in greater detail in Clause 12.
The amendment would place a statutory obligation on the Government to appoint a body to carry out a review of the way in which valuations are carried out in the public service schemes. This is unnecessary for either the funded or unfunded schemes. Under Clause 10, Treasury directions will set out the details of how valuations of unfunded schemes will be carried out. The Treasury will be obliged to consult the Government Actuary before these directions are made to ensure that they are fit for purpose. The Treasury has also committed to involving other stakeholders, such as public service employers, scheme actuaries and trade unions, when considering the approach to valuations.
Turning to the funded schemes, the Bill already provides for a greater level of scrutiny of LGPS fund valuations. Clause 12 specifies that employer contributions to these funds must be sufficient to ensure the solvency of the funds, which is an existing feature of the regulations. The clause also requires that contributions are set at a level that will ensure the long-term cost efficiency of the scheme. This is a new provision, which aims to prevent employers deferring the payment of any costs needed to meet the long-term liabilities. The clause will ensure that local fund managers take this approach. It requires an independent review of each fund’s valuation and the employer contribution rates that result from it. These reviews will result in a report covering all the LGPS funds, which will be made public.
The Government intend to publish a single report for the local government scheme in England and Wales. This will allow straightforward comparisons to be made across each of the 89 funds in the scheme. This new and enhanced level of scrutiny will provide a consistent basis for assessing the assets and liabilities of all LGPS funds, improving their transparency and management of these funds.
In addition, the scheme advisory board proposed by Amendment 45, which we have just debated, may also oversee and advise on the management of pension funds in the local government schemes. These boards will play a role in ensuring that the schemes—and individual LGPS funds—are well managed. As such, there will be an ongoing role for pension boards in the scrutiny of pension fund management and valuations.
Under the existing provisions in the Bill, there are a number of ways in which we can achieve what the noble Lord, Lord Whitty, seeks to achieve. I will go away and look again to make sure that I am not missing anything or whether we do need a belt and braces. I am not sure that we would do it in the way that the noble Lord suggests and I am not sure that we need to do it, but this is definitely a serious issue. The Government want to make sure that nothing in the Bill means that we cannot take that initiative if we decide to do so anyway. I will go away and look at it again. If I think there is anything further that I can usefully say, I will write to the noble Lord, but I am not absolutely guaranteeing the letter.
Lord Whitty
My Lords, I am very grateful to the Minister. I am glad that the Government see this as a serious issue and I am grateful to him for setting out what will be the procedure and structure of valuation in the future, specifically for the LGPS and more generally. I should have said at the beginning that my comments were primarily related to funded schemes, but of course post-2014 will bring a lot of the other public service schemes closer to being fully funded schemes—not quite in most cases. This means that the ratio between liabilities and assets and their correct valuation will be an important issue for all funded defined benefits schemes.
My amendment was intended to allow the Government at some future stage to look at the way in which these schemes would in future be assessed. I do not disagree with the mechanism but, as the noble Lord, Lord Flight, says, some of the presumptions and the passive acceptance of the accounting conventions could mean that the schemes looked seriously underfunded when in practice they were not. There may be other problems with the conventions and it would be wise for the Government to undertake this review whether or not it is seen as part of this Bill. I think it is something that the Government need to deal with.
I am grateful to the Minister for indicating that he is prepared to look at this again, and I think that in some contexts the Government will need to do so. Meanwhile, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, my noble friend Lady Donaghy has identified a considerable problem with cost control as expressed in Clause 10—the valuations section of the cost control part of the Bill. My noble friend’s amendment is very direct and clear with respect to the Treasury directions that she would like to see. My Amendment 63 takes a somewhat more ameliorative and subdued approach to dealing with this problem. However, it would ensure that Treasury directions are tailored to each local government fund and would therefore be much more accurate, rather than the possibility of a single set of directions being expected to apply to 89 local government funds which have significantly different characteristics. After all, each local government fund has its own assets and investment strategy. Different employers are involved and, crucially, most of the funds have different demographics. This means that each valuation needs to take into account the individual characteristics of those funds.
Considerable concern has been expressed about Clause 10 by well informed persons who are much better informed than me. For example, Alison Hamilton, the chair of the local government committee of the Association of Consulting Actuaries, said:
“Clause 10 certainly gives me cause for concern. … It is very important that the valuation takes account of the local demographics, and the local investment of the assets backing those pension funds. I attended a meeting where the Bill team tried to give some sort of reassurance that the valuation would be carried out as a one-size-fits-all under Treasury directions. That was not intended for the local government pension scheme. I would like the Committee to explore that and get something drafted”.—[Official Report, Commons, Public Service Pensions Bill Committee, 6/11/12; col. 169.]
Similar concerns have been expressed by the National Association of Pension Funds. I will not repeat what it said as it echoes what was said by Ms Hamilton.
When faced with this argument in the other place, the Government acknowledged that there was merit in it and stated that the Treasury would,
“take into account the individual nuances and features of the various … schemes”,—[Official Report, Commons, Public Service Pensions Bill Committee, 13/11/12; col. 347.]
when setting directions. They felt that the clause already allows enough flexibility for directions to take account of the differences between schemes. However, our amendment simply states what the Government’s intention apparently is—that the Treasury directions should not be based on, or be rigidly bound by, but should take into account,
“the individual nature of each of the different funded schemes”.
That is in accord not only with what is obviously sensible practice, according to the views of experts, but with what Ministers claimed in another place was their intention.
Lord Whitty
My Lords, I strongly support Amendment 62 and the other amendments that have been spoken to. I have a simple amendment in this group—Amendment 64. Clause 10(4) states:
“Treasury directions … variations and revocations … may only be made after the Treasury has consulted the Government Actuary”.
My amendment probably reflects my general suspicion of the Treasury, which is deplorable, as the Minister is indicating. Nevertheless it is shared by many in the pensions industry and beyond. I would have thought that it should be agreed with the Government Actuary’s Department that the Treasury or that department should come to an accommodation on what the basis for the variations, revocations and directions should be.
I accepted the Government’s argument that in relation to other sorts of consultation—for example, consultation with stakeholders—regrettably, agreement, or certainly consensus, is not usually the outcome. However, as regards an issue relating to the basis of valuation between the Treasury and the Government’s own actuary, surely the Bill should state that those provisions are agreed rather than that the Treasury may act after what may be quite a superficial consultation with the GAD. I hope that that was the Government’s intention anyway but I wish to make the position clear through my amendment. I hope that the Government will agree to it.
Lord Newby
My Lords, the Bill makes provision for pension scheme valuations across all the public service schemes. These will be carried out in accordance with Treasury directions to ensure that valuations are carried out on a clear and consistent basis.
Amendments 62 and 63 seek to clarify how Clause 10 will apply to the valuation of the individual funds in the local government pension scheme or to disapply the provisions of the clause to those valuations. The Government are well aware of the concerns referred to by the noble Lord, Lord Eatwell, and other noble Lords who have spoken, that this clause will be used by the Treasury to impose inappropriate valuation assumptions on individual LGPS funds. The amendments would ensure that this could not happen by removing these funds’ valuations from the scope of the clause or requiring the Treasury to take account of the nature of individual funds when making directions.
I hope that I can reassure noble Lords that these amendments are not necessary. First, the Government have no intention of making directions relating to the valuations of individual LGPS funds. This commitment has already been made in this House and in the policy paper published by the Treasury in November 2012, copies of which are in the Library. Secondly, Clause 10 needs to be read in the light of the Bill as a whole. It is clearly intended to deal with valuation at the scheme level, as can be seen from Clause 12, which makes provision for valuations at the level of individual pension funds. While that clause would provide for greater oversight of the local fund valuations, it will not mandate how they are to be carried out. Accordingly, we do not think that Amendment 63 is necessary.
In relation to the Local Government Pension Scheme, Clause 10 will be used only—I repeat, only—to set directions of how the model fund, an aggregation of the scheme costs at the national level, will be valued. We need to do that for the operation of the cost-control mechanism at a scheme level in LGPS but it will not directly affect the contributions paid into individual funds.
Turning to Amendment 64, Clause 10 already requires that the Government consult with the Government Actuary before making directions on scheme valuations. That amendment would add an additional requirement that the Government Actuary agrees the directions rather than just being consulted. The intention is to ensure that these directions form a sound basis for the scheme valuations and the Government, of course, support this aim. However, the Government cannot accept this amendment, as it does not achieve this aim and has unwelcome consequences.
The aim of the Government Actuary’s Department is to be,
“a highly valued principal provider of actuarial analysis and advice to all parts of the UK Government and other relevant UK and overseas public bodies”.
The highly valuable, actuarial advice that it provides is independent and professional and this aim would be compromised by the amendment. If this change were made, the Government Actuary’s decisions would inevitably influence the policy on valuations and he could come under pressure to determine elements of the directions themselves. This would fundamentally compromise his position as a truly independent adviser. This is not an outcome which anyone, including the Government Actuary, wants to see.
Amendment 65 highlights the importance of Treasury directions that will be made under Clause 10. These directions will set out the detail of how valuations of public service pension schemes should be carried out. Everybody has agreed that these valuations are of vital importance given their implications on both employer contributions and the employer cost cap. As such, all scheme stakeholders will need to be involved as the valuations are developed. However, the statutory consultation requirement that would be imposed by this amendment is unnecessary. I can reassure the Committee that we will seek to discuss these directions as they are developed. All stakeholders, including scheme managers, their actuaries, pension boards, and member representatives, will be given the opportunity to participate in this process.
I hope this reassures the noble Baroness that the consultation of scheme managers and pension boards that she has proposed will be carried out without the need for Amendment 65 and that she will feel able to withdraw the amendment.
Lord Whitty
“( ) This section does not apply to the fund valuations of the Local Government Pension Scheme.”
Lord Whitty
My Lords, Amendments 66 and 70 propose the exclusion of LGPS funds from the aspects of the Bill covered by Clauses 10 and 11 because those aspects are primarily related to the unfunded schemes. Clause 10 attempts to impose criteria commonly determined by the Treasury on valuations of all schemes covered by the Bill. Amendment 66 will clarify that Clause 10 is intended to apply to scheme level valuations only, thus preventing future misunderstandings, particularly in relation to the 89 different local government schemes. Without the amendment, there is a lack of clarity around the impact of fund valuations which are included in the Treasury’s scope within Clause 10. This lack of clarity surrounds the apparent inclusion of both local fund valuations and the national, notional model fund valuation under the control of Treasury regulations.
Individual fund valuations are currently undertaken by fund actuaries under parameters set out in different scheme regulations and assumptions are agreed with the individual fund. It would be a marked change if such valuations were to come directly under Treasury control. If it is intended to include only the notional model fund in the Treasury’s scope, this clause will need to be amended to prevent any further misunderstandings. There are concerns that the assumptions, data and models to be used as directed by the Treasury would not reflect what is currently being used at fund level, thus also undermining the validity of national modelling of costs. The easiest way out of this dilemma is to exclude the LGPS from the operation of those aspects of Clause 10.
Clause 11, which we will discuss later, covers the employment cost cap. The LGA and the trade unions involved in local government believe that this clause should be amended so that we again embed the agreement, reached by employers, unions and Governments, for a separate cost-management process. That agreement ensures that the principal stakeholders of the scheme are responsible for the control of cost management. There is concern that, as it stands, Clause 11 gives the Treasury discretion over how the cost cap is set. This could mean that there would be nothing to prevent the Treasury setting the cap in such a way that it would be easily exceeded, resulting in an increase of employee—and probably employer—contributions or a decrease in benefits. Amendment 70 would make this clear because it would exclude the funded local government pension schemes and funds from the effects of this clause and would better reflect the agreement, supported by the Government, that exists within the LGPS scheme. I beg to move.
Lord Newby
My Lords, I will start with Amendment 66. As previously discussed, the Bill makes provision for pension scheme valuations to be carried out in accordance with Treasury directions. This amendment seeks to clarify that the clause does not apply to valuations of the Local Government Pension Scheme. It would ensure that Treasury directions on valuations would not affect these valuations, which are carried out at the local level. In that respect, it would have a very similar effect to Amendment 62.
The arguments discussed under that amendment also apply here and Amendment 66 is unnecessary. I hope that the Government’s previous commitments, which I have just repeated, have made that clear. The Government simply do not intend to make directions affecting the valuations of individual LGPS funds. Alternative provisions for oversight of these valuations are made elsewhere in the Bill. The amendment is not needed.
Amendment 70 seeks to provide a specific exclusion for the LGPS from the employer cost-cap provisions in Clause 11. A robust cost-control mechanism, on a statutory basis, is still required for the LGPS, even though it is a funded scheme. Clause 11 should apply to the LGPS, as with any other scheme. The Government have had extensive discussions with the Local Government Association and the local government trade unions on this issue. As a result of these discussions, and to reflect the unique position of the LGPS as a funded scheme, the Government will give additional flexibility to the LGA and the trade unions in the management of scheme costs. The full details of these additional flexibilities will be finalised in consultation with key stakeholders and then enacted via the Treasury directions made under this clause and in the scheme regulations.
However, it is vital that the Government maintain a statutory backstop to provide reassurance to the taxpayer that action will always be taken if the cost of the scheme becomes unsustainable. This backstop, which will sit behind the cost-control arrangements that I have described, will apply in the same way as in other schemes. If the costs of accruing LGPS benefits, as measured at a national level by the GAD’s model fund, rise or fall by more than two percentage points, action will be required to bring costs back to the level of the cap, as in any other scheme. The requirement to consult on the action to be taken, with a view to reaching agreement, will apply as in any other scheme. If agreement cannot be reached, scheme regulations will set out a default action to be taken, as in any other scheme.
The cost-control mechanism is a key part of delivering good and sustainable pensions that will last for a generation. Without it, there is a risk that costs will once again spiral out of control and leave us with the choice of looking for higher contributions from, and lower benefits for, members or shunting the extra costs unfairly onto the taxpayer. Given these considerations, I hope that the noble Lord will feel able to withdraw or not move both amendments.
Lord Whitty
My Lords, as regards Amendment 66, I am pleased that the Government are prepared to be explicit in their assurances that they do not intend to set directions in relation to individual local government funds. If I understood the Minister clearly, the situation is to some extent similar to that in Amendment 62. A statement that “the Government do not intend” is not a copper-bottomed guarantee, as we know. Nevertheless, I suspect that it is as far as we will get in our consideration of the Bill, and I therefore thank him for that.
As regards Clause 11 on the employer cap, it is clear that in whatever circumstances there needs to be cost control. The point that I am making is that within the local government schemes it is the responsibility of their governance to ensure that cost control applies. There is a Treasury engagement with the national notional scheme and other provisions oblige the Treasury to ensure that the schemes do not get out of control, as the Minister indicated. In fact, the local government scheme has not got out of control. There have been occasions when individual funds’ investment policies have been less than ideal, which have led to short-term problems, but in no period has the local government scheme, which has operated for decades, got out of control.
Given the ongoing governance of individual schemes and the new provisions that we have just agreed in relation to the national scheme, there is little likelihood of the scheme getting out of control in any case. It is therefore otiose for the Treasury to be able to impose individual employer contribution caps in the crude way in which it may need to do so in relation to unfunded schemes that have historically—on the odd occasion and possibly now—got out of control. I regret that the Government do not recognise that. We will discuss employer caps in more general terms in a moment, but I should have thought that it would be less trouble to the Treasury, and would make it clearer that the responsibility to ensure that cost controls operate rests fairly and squarely on the shoulders of the stakeholders in the local government schemes, if they were exempted from the ability of the Treasury to impose its own cost controls.
However, that is clearly not the road that the Government are prepared to go down. I will therefore not press Amendment 70 and beg leave to withdraw Amendment 66.
Lord Whitty
My Lords, I am afraid that I cannot really support the noble Lord, Lord Flight, in these measures. I point out to him that they are internally inconsistent and, indeed, contradictory. On the one hand, Amendment 71A effectively removes all responsibility from the Government in relation to any potential, unlikely though it may be, default on the Local Government Pension Scheme.
Lord Flight
That amendment is intended to remove any financial liability, not to remove any obligation to get it dealt with.
Lord Whitty
Just so, my Lords, but the legitimacy of the Government being able to lay down the detailed criteria which his other amendments and indeed many of the Government’s stipulations in the Bill provide in relation to the local government scheme relies on the fact that everybody assumes that the local government scheme has the Government as its underwriter of last resort and that therefore that underwriter has the right to intervene in what is otherwise the equivalent of a private scheme between private institutions; namely, local government and private trade unions. They are not central government creatures. They have certain statutory responsibilities but they are separate entities. Therefore, the legitimacy of the Treasury in any sense making directions, stipulations and interventions, as the Bill provides and as the noble Lord’s other amendments would consolidate or take further, depends, so far as concerns the local government scheme, on that implicit underwriting. It is hoped that it would never be called upon. Nevertheless, it is there in the background. The situation in relation to the other schemes is different, but Amendment 71A relates specifically to the local government scheme and I think that it is contradictory to everything else that the noble Lord was advocating and much of what the Minister is advocating.
Lord Newby
My Lords, I agree with the noble Lord, Lord Flight, about the need to keep the ballooning cost of public sector pension schemes under control. That is one of the key features of this Bill. The challenge, which I will come to in a minute, is that it is not straightforward, or indeed possible, to turn the tap off in pensions as you can in some other areas of expenditure.
I think everybody agrees that the cost cap is one of the key elements of these reforms and in order for it to be credible and robust we must ensure that costs will always be adjusted if the cap is breached. This can be done in a number of ways. While it would be preferable if all stakeholders were agreed on the way to do it, we have to allow for the possibility that agreement might not be reached. Clause 11 therefore specifies that scheme regulations must set out the steps to be taken to achieve the target cost if there is no agreement; there simply has to be a default adjustment.
The amendment seeks to strengthen this requirement by specifying that this element of scheme regulations must be in accordance with guidelines provided by the Treasury. This would ensure that the default action mandated in scheme regulations would be more consistent across schemes. I understand my noble friend’s intention in this amendment but it is simply unnecessary. Clause 3 sets out that the majority of scheme regulations made under the Bill require the consent of the Treasury before they are made. This requirement for Treasury approval will provide the assurances my noble friend is seeking because it covers the cost cap. He said in relation more generally to the cap that, for all the schemes, cash flow was more important than theoretical deficits and surpluses. At one level it is, but valuations of the theoretical surpluses or deficits are needed in the unfunded schemes because we have to plan how the Government will meet the cash-flow costs of the schemes over a long period going forward.
The intention behind Amendments 67B, 69B and 118A is to allow pensions already in payment to be altered, should action to adjust the costs of the pension schemes be required as a result of the employer cost-cap mechanism. In theory, this is one of the ways in which you constrain the costs. Unfortunately for the noble Lord, the Government cannot accept these amendments. Amendment 67B would allow pensioners’ accrued benefits to be reduced to reduce the cost of the scheme. As the Government have made clear, both in this House and in the other place, we are committed to protecting accrued benefits. Indeed, I hope to bring forward amendments on Report which entrench that view.
There are also significant legal hurdles to altering pensions in payment. In law, pensions in payment are owned by pensioners in exactly the same way as other possessions. Article 1 of Protocol 1 of the European Convention on Human Rights protects these possessions from any interference by the Government that is not only lawful but proportionate. We agree with that provision. Any Government attempting to alter pensions in payment would face a serious risk of legal challenge from pensioners arguing that their possessions should not be taken away in favour of protecting active members in employment from cost control. This would make it very hard for this amendment to work in practice even if we thought it was a good idea, which, sadly for the noble Lord, we do not.
Legal difficulties aside, it is right that those benefits that have already been paid for cannot be reduced. The ability to provide retrospective changes of this nature would mean significant uncertainty for all members of the schemes and potentially destroy any trust in them.
Lord Newby
I will be very happy to write to the noble Baroness about it but the whole purpose of the cost cap is to ensure that we do not get into that mess. Given the experience of the noble Lord, Lord Whitty, in this area, I am very reassured by his confidence that the local government schemes will not get into this mess. The reason why the cost cap covers local government schemes is that, however unlikely it is, we feel that we need a method of dealing with them in this extremely unlikely eventuality.
Lord Whitty
My Lords, I think we all hope that it is an extremely unlikely eventuality and I genuinely believe that it is an extremely unlikely eventuality. Standing behind this is a slightly theological but nevertheless psychologically important matter. I suspect you cannot find it anywhere in statute but, as the noble Lord, Lord Newby, says, the ultimate responsibility of any failure of a local government scheme would rest, in some context or other, on taxpayers, and it therefore becomes the Government’s responsibility. I hope that the noble Lord can write to me as well, and perhaps to other colleagues in the House. I expect it will be quite a difficult letter to write.
Lord Newby
We look forward to that intellectual exercise. I think that I had just about dealt with Amendment 71A. Amendment 118A, to my mind, is grouped with Amendments 67B and 69A. They all relate to the same point about being able to constrain payments. All the considerations that apply to Amendment 67B and 69A apply to Amendment 118A as well.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 9 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Whitty
“Local Government Schemes: exclusion
Nothing in this Act shall be taken as allowing the Treasury to de-fund any individual fund in the Local Government Pension Scheme or to transfer the fund’s assets to HM Treasury and the liabilities to the ONS national accounts.”
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 Whitty
Lord Whitty
My Lords, in moving Amendment 33, I will refer also to the other amendments with which it is grouped.
Clauses 4 and 5 provide that scheme regulations must provide for a person to be responsible for managing or administering a public service pension scheme set up under Bill powers, and any other statutory scheme connected with it. In the case of the LGPS, the agreement reached between the unions, the LGA and the DCLG specified the need for a national board, as proposed in the report of the noble Lord, Lord Hutton, in order to give it a national focus in line with the treatment of other public service schemes. The national scheme board would have concerns for the scheme at national level, with a central focus to ensure efficient and effective overall management of the LGPS. Therefore, the LGPS effectively requires two boards—one at the national level and one at the local scheme level—to ensure effective separation of responsibilities.
We need to clarify this. In commitments given in another place and elsewhere, the Government have already attempted to clarify that this would indeed be the case. However, we would like to see the clause amended or strengthened to separate clearly the role of scheme manager and scheme board—that is the other point of these amendments—which would be achieved through Amendments 36 and 44. Separating the roles through these amendments should provide for more robust management of any conflict of interest. As I say, the Government have reassured me to some extent on this point. It is possible that government Amendment 45, which we will come to later, will provide some clarity in terms of the distinction. I will respond to the Minister, if necessary, when we reach that amendment.
Amendment 126 to Clause 23 deals with contributions to other pension arrangements. Clause 23, as drafted, implies that there is an ability for scheme employers to make contributions to private occupational schemes virtually as an alternative to the schemes set up under the Bill. If that were a general power, it could result in scheme employers offering those schemes rather than the LGPS, which would have serious consequences, including knock-on effects on contributions for employers and members of the LGPS. There would also be demands from other employers running separate schemes for crystallisation payments from those who have transferred or did not take up the LGPS scheme. The ability of employers to pay into other schemes is available in exceptional circumstances but this clause as drafted seems to make it a general provision. However, I think that it needs to be available only in exceptional circumstances, as it is under the existing regulations.
Amendment 127 deals with Schedule 8 and revaluation methodology. The schedule contains relatively minor and consequential amendments to primary legislation. Pensions payable by the LGPS are revalued using the scheme set out in the Pensions (Increase) Act 1971. The amendment is required to enable the same methodology to be used for revaluation during service to continue once a scheme member is in receipt of their pension. That would provide the clarification needed to ensure that members’ benefits are revalued correctly in retirement. I beg to move.
Lord Whitty
My Lords, on that last point, I should be grateful to receive a letter or note from the Minister or his department because that is different from what is understood by those who currently administer the scheme. I agree that it is a minor point but, as a minor point, it should really be dealt with in the scheme regulations rather than in the Bill. Therefore, if the noble Lord would be good enough to let me have more detail on that, I should be grateful.
I have a similar point to make in relation to payments into other schemes. In all the circumstances that the Minister referred to, I am in favour of what local government schemes already do, which is to provide for payments into other schemes for the purposes of temporary absence, short-term contracts and all sorts of other things. However, that is not part of the scheme; it is an arrangement between the individual and so forth. The fear or concern about Clause 23 is that it is written in very general terms. It is written as though a local authority or the pension manager thereof could, as a matter of course, offer an alternative parallel scheme to the local government scheme, which would undermine the finances of the local government scheme. I can envisage circumstances where that might happen. That does not mean that there should not be provision for somebody who wishes to invest in a different scheme themselves, and of course there will also be the complication of automatic enrolment. Therefore, there are circumstances where the current situation allows employers to invest in other schemes, which they do. My concern relates to the generality of the clause and I should be grateful if the Minister could have another brief look at that.
As far as the main amendments in this group are concerned, like my noble friend Lord Eatwell, it seems to me that if the Government mean that there should be two levels of board in a local government scheme, they should say so and make that quite explicit. Of course, there is an additional problem if this matter is left vague. If there is a national scheme, then what happens at local level could vary. There is another problem which I think probably exists in the current local government scheme to some extent because it is unclear. There should be a clear separation between the employer as the employing authority and the body and personnel that deal with the management of the local scheme. That is required by the private sector regulations under the Pensions Act and by the European directive. If what goes on at the second tier is left vague, there is the possibility that the employing authority will simply decide that it will also be the administrator of the scheme. If it is a committee of the authority with clear powers, that is a different matter, and that is often the case with local authority schemes, but there has to be a differentiation. I fear that if we do not spell out in the primary legislation that that is the structure that we are looking for, then a range of possibilities could ensue at the local level.
I have also looked at Amendment 45, which seems to deal with some of the anxieties behind the non-stipulation of a two-tier board scheme, but it does not deal with all of them. I am also somewhat mystified by the fact that the amendment refers to an “advisory board”. What we and the Hutton report are looking for is a governance board, and to call it an advisory board immediately dilutes its potential role. I could not find a lot wrong with the wording of the proposed new clause in the amendment but the heading made me feel that it did not fulfil all that I was hoping for from the Government. Perhaps the noble Lord could ask his officials to get in touch with me and with the LGA to provide some clarification on this front. In any case, I would advise him to be clearer in the terminology in relation to the two boards. However, for the moment, I beg leave to withdraw the amendment.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 9 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Eatwell
I am grateful to the noble Lord because he has reinforced my point in a very satisfactory way. My point is that the issue referred to here is the compatibility of the threat to accrued rights. That is what the full statement is about, and that is why I am so interested that the Explanatory Notes deal fully with the question of accrued rights. The noble Lord is quite right to say that the Explanatory Notes are full and comprehensive, but why are they there if accrued rights are not in any way under threat?
I return to the discussion of this issue. As the Bill proceeded in the Commons, the Chief Secretary to the Treasury asserted very clearly that the Government would not reduce accrued benefits, having previously said, in a speech on 20 June:
“I also want to make it absolutely clear that we are fully committed to protecting the pension that has been earned to date”.
That is great, but it is inconsistent with Clause 3(3)(c). When he was asked about the retrospective provisions in Clause 3 by Mark Durkan MP, the Chief Secretary replied:
“The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born”—
he is younger than me—
“and it has been used by a number of Governments to make adjustments to public service pensions … The provisions to which the hon. Gentleman refers are in fact more limited than those in the 1972 Act”.—[Official Report, Commons, 29/10/12; col. 60.]
However, I am afraid that Mr Alexander misspoke. Section 2(3) of the Superannuation Act provides that accrued benefits can be reduced but only with the consent of affected members. However, the Bill as it stands allows for the reduction of accrued benefits without member consent. As such, it does not mirror the Superannuation Act, as the Chief Secretary said.
Amendment 28 gives effect to the Government’s intention for the Bill to mirror the Superannuation Act 1972 by providing exactly the same protection for members that Section 2(3) of the Act provides. As such, it is difficult to see how the Government could object to this amendment.
I move from the discussion in another place to the debate here at Second Reading. The noble Lord, Lord Newby, said:
“There is a lot of suspicion about this that is misconceived. Pensions legislation has historically contained such powers”—
actually, it has not—
“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”.—[Official Report, 19/12/12; col. 1584.]
If there is no sinister intent, why is Clause 3(3)(c) maintained in this wide form? Why is there no qualification? If this is indeed the way that pensions legislation has historically contained such powers—and I presume that the noble Lord, Lord Newby, was referring to the 1972 Act—why are there not the same protections for members as those contained in that Act?
It is also worth noting that the noble Lord, Lord Hutton, said:
“In relation to retrospectivity, the Government have a serious problem. We have to be mindful if there are to be DB schemes in the public sector. We know that there are fewer in the private sector, but those 2.6 million people in the private sector who still have access to a defined benefit scheme know for certain, because of the current law that their accrued rights cannot be changed”.
Accrued rights in the private sector cannot be changed unless members give their consent to a change, perhaps to deal with minor technicalities or deficiencies, which would ultimately improve the quality of their scheme. The noble Lord continued:
“The same rules should apply in the public sector. I do not believe that we can have a different set of rules in relation to accrued rights for people in public sector schemes”.—[Official Report, 19/12/12; col. 1582.]
Therefore, the scope of Clause 3(3)(c) is unreasonable, unethical and directly undermines the trust that is essential to the effective implementation of the Bill. Amendment 28 achieves what the Government claim they wish to achieve. If the Minister has another suggestion for better achieving the same goal, we will be happy to support it. However, I ask him: why is Clause 3(3)(c) written in these unqualified, global terms? Why do we have a clause in the Bill that states:
“Scheme regulations may … make retrospective provision”?
That is unqualified. Why is that provision there? Why is it not qualified in the way that it has been in previous legislation? I beg to move.
Lord Whitty
My Lords, I have several amendments in the group that all relate to the same issue of retrospection and the way in which there should be consultation and negotiation on any such change.
Like my noble friend Lord Eatwell, I was not here at Second Reading, for which I apologise, but I thought I should make absolutely clear my overall view of the Bill and my approach to it in my amendments. It can be summarised simply: I do not like the Bill. I do not like the campaign that the Government and their media allies have conducted against the public sector workers who serve them, and against their pension entitlements. In many ways it has been a despicable campaign. In more technical terms, I do not like the way in which the Government have interpreted my noble friend Lord Hutton’s recommendations in terms of attempting to achieve a commonality of approach across all public sector schemes—an ambition in which, as it happens, they have singularly failed because we have ended up with a complete hotchpotch of schemes. The history of all these schemes is different. They relate to different sectors, different industries, different patterns of negotiation and different kinds of jobs. It was therefore difficult to get to commonality. Nevertheless, the Government have attempted to reach that commonality and have made a hash of it.
I have sympathy with all public servants who are detrimentally affected, prospectively and currently, by aspects of the Bill. I have sympathy with firefighters, teachers, civil servants, health service workers and so on. I even have some slight sympathy with the judiciary. However, I am going to focus all my subsequent remarks on the local government scheme. One of the differences between the schemes that exist currently in the public sector is that the local government scheme, unlike the vast majority of other schemes, is a fully funded scheme and always has been. It is therefore on a different basis and the Treasury should approach it differently from the way in which it is attempting to approach the other schemes. Ideally, I would like to exclude the local government scheme entirely from the Bill. I recognise we are not at that point, but it would be the more logical outcome.
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.
Public Service Pensions Bill
Lord Whitty Excerpts(11 years, 10 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
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.