Public Service Pensions Bill

Andrew Gwynne Excerpts

Monday 29th October 2012 Commons Chamber

[Danny Alexander]

I agree with that, and I would add that, frankly, these reforms could have been made in the 1980s or 1990s, as well as the 2000s. In fact, we have to go back quite a few decades to find the root of the problems we are having to tackle in this Bill, which I think we are doing very effectively.

The remainder of the £430 billion of savings are generated by the Government’s decisions to change their policy on the indexation of pensions and payments from the retail prices index to the consumer prices index, and, as has been mentioned, to increase the contributions that public servants pay towards their pensions, rebalancing the costs more fairly between them and other taxpayers. The combined effect of those changes will help to restore the health of the British economy, reduce the size of our deficit and correct the unsustainable 40% increase in costs there has been over the last 50 years.

[Andrew Gwynne (Denton and Reddish) (Lab)]

I am grateful to the Chief Secretary for giving way. Does he recognise that the Government have to be careful and approach this issue in a much more balanced manner? There is a danger that if more people opt out of occupational pensions because they find them unaffordable, that could end up costing the Treasury more in the long run through means-tested benefits.

[Danny Alexander]

I would say that we have handled this process in a balanced and sensitive way throughout, in recognition of the fact that the changes affect millions of public service workers. In response to the hon. Gentleman’s concern, which was raised a number of times in the talks, I would say that none of us wants to see increased opt-outs from pensions, for the reasons that have been mentioned on both sides of the House. We have put in place a process for reviewing the next stage of the contribution increase in the light of opt-out data from the first year. I am sure he will be pleased to hear that there is no evidence of increased opting out in response to this year’s increase in contributions. However, we will review the matter again next year before proceeding with the third phase of the increases, so he makes a serious and important point.

The reforms treat not only the symptoms of delayed reform but the underlying problem. Therefore, they are forecast to reduce the cost of providing public service pensions by around 40% over the next 50 years, returning costs to their historic long-term average. Clause 9 deals with the principal risk that needs to be managed if pensions are to be affordable and sustainable: longevity. Longevity has improved significantly over recent decades, which is a very good thing. As a result, the state pension age has increased. The Government are therefore asking public service workers in due course also to retire later. In a society where we are all living longer and where fellow citizens in the private sector are expected to retire later, it is both fair and right that the public sector retirement age should rise with the state pension age. As Lord Hutton says, improvements have continuously been underestimated in the past, which has led to the cost of providing pensions rising significantly over recent decades. As such, clause 9 provides that in future the normal retirement age in the public schemes will be set at the state pension age. As Lord Hutton identified, this change will move the proportion of adult life in retirement for public service pension scheme members back to where it was in the 1980s. More important, by linking the scheme retirement age to the state retirement age, we will ensure that further improvements in longevity are tracked. That is the main way in which the Bill will ensure that the cost of public service pensions cannot again spiral out of control, but will remain affordable and sustainable long into the future.

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[Rachel Reeves]

We have said that we support the shift from the retail prices index to the consumer prices index for the period of this Parliament to reduce the deficit, but we do not support a permanent shift from RPI to CPI that will continue long after the deficit has been eliminated. I will discuss shortly some evidence from the Pensions Policy Institute and the Royal Statistical Society on the appropriate measure of inflation for uprating pensions.

[Andrew Gwynne]

My hon. Friend realises that the vast majority of public sector workers do not have massive gold-plated pensions. Instead they have very modest pensions, and they are concerned about their employment prospects as well as their contributions. Does my hon. Friend agree that those are the kinds of concerns that people out in the real world we speak to are talking about?

[Rachel Reeves]

My hon. Friend is entirely right. The average public sector pension in payment is under £6,000 a year, and it is considerably less for women who work in the public sector, so we are not talking about huge pensions in the vast majority of cases. Instead, we are talking about modest pensions to which people have contributed throughout their working lives.

We support in principle the main measures in the Bill, however, so we will not oppose it on Second Reading, but we will work in Committee to improve it, in order to ensure that it underpins, rather than undermines, the progress made in negotiations. We will seek to ensure it facilitates a smooth and stable transition to new scheme designs, entrenching good standards of governance, transparency, administration and consultation, thereby allowing those who give their working lives to serving the public to save for their retirement with confidence, while establishing a workable system for managing change and controlling costs to the taxpayer.

The Government and public service employees do need to find ways of adjusting to the welcome fact that people are living longer. In government, Labour had agreed and established a framework for negotiating reform and the “cap and share” mechanism to manage long-term costs, and it was always clear that this would mean increases in contributions and, as the population lives longer, a rise in retirement ages.

We have always said that the Hutton report provided a useful starting point for negotiations. Lord Hutton was right to suggest that career average schemes could be fairer than final salary schemes, and we think his proposal that public service pension ages should rise with the state pension age is right in principle. Lord Hutton also stressed the need to approach these issues in a careful and balanced way, however, with particular care for the affordability of any additional contributions for lower paid public service workers, and for avoiding fuelling a race to the bottom on pension provision. Reform needs to be fair to taxpayers and public service employees, as well as being genuinely sustainable for the long term, and that would be endangered by a search for quick cash savings or the playing of political games.

The vast majority of public service workers retire on very modest pensions. The average public service pension in payment is less than £6,000 a year, and even less for women. Tearing up decent public service pension schemes, or imposing punitive and unaffordable contribution increases, would be entirely counter-productive if that resulted in lower saving and inadequate retirement incomes.

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[Rachel Reeves]

I thank my hon. Friend for his intervention. We argued exactly the same point when the Government arbitrarily increased the state pension age for women in their late 50s with just six years’ notice given. When Lord Turner carried out the review of state pensions for the previous Government, he recommended a 15-year notice period be given, and the Pensions Policy Institute recommends a 10-year notice period. Such notice needs to be given and it is not enshrined in this Bill.

[Andrew Gwynne]

Does my hon. Friend recognise that one of the reasons why that notice period is required is that as the retirement age rises careers may also have to change to ensure that employees are not forced into ill health and are not forced to do work that is unsuitable for their age?

[Rachel Reeves]

I thank my hon. Friend for that intervention. We also believe that this Bill should not pre-empt or cut across ongoing discussions—this builds on the point that he raised, as did my right hon. Friend the Member for Rother Valley (Mr Barron)—between the Department of Health, NHS employers and NHS workers about the implications of working longer for some staff groups, especially those, such as paramedics, in physically demanding roles.

We think that the Bill should reflect Lord Hutton’s recommendations that the link between public service pension ages and the state pension age should be kept under review and that this should be conducted by a properly independent body, with public service employees and employers represented and consulted. The Chief Secretary to the Treasury said in his speech that that will happen, but it is not guaranteed in the Bill—indeed, it is unclear whether it is even compatible with the Bill. These are all issues that we will be raising in Committee to get the commitments that public service workers deserve and thought they had been given during the negotiations behind the Bill. These are also issues that we will have in mind as we look to any future increases in the state pension age itself.

For our finances to be sustainable, and for decent pensions to be affordable, it is right that retirement ages rise with longevity. However, as Malcolm Wicks, the late Member for Croydon North reminded us in some of his most recent work, many people doing manual jobs started work at 16 or 18, with some doing so even earlier, and find it harder to continue work into their late 60s. We should be mindful of people’s capacity to work later and later, especially if support is not in place for them in the workplace.

Secondly, there are real worries that the Bill fails to take due account of the special characteristics of the local government pension scheme. Members will know that it is a fully funded scheme administered by local authorities and we should welcome the hard work of local councils and trade unions, who have made very valuable progress in negotiations on a mutually agreeable agenda for reform. The Bill threatens to unravel the agreements that have been reached and destabilise financially the local government pension funds by forcing a disruptive and potentially disastrous closure of existing schemes instead of facilitating a smooth transition to the new scheme design. That extension of Treasury interference into aspects of scheme valuation and design could prevent local authorities from delivering on the deal they have agreed with their work force. Indeed, the view of the pensions manager at the Chartered Institute of Public Finance and Accountancy is that the relevant provisions in the Bill represent

“a major shift in the governance of local authority pensions and”

raise

“questions about future local democratic accountability for those pension funds.”

Again, we expect those concerns to be addressed in Committee.

Thirdly, on the question of good governance, the Bill must underpin and not undermine high standards of scheme governance. As Lord Hutton stated in his final report,

“there is a powerful case for…much stronger governance of all the public service pension schemes. This should keep government, taxpayers and scheme members better informed about the financial health of these schemes. There should be minimum standards set for scheme administration. There is also a proper and legitimate role for representatives of the workforce to be formally involved in these new governance arrangements.”

The Bill fails to include key recommendations from Lord Hutton’s report, such as the inclusion of member-nominated and independent members on pension boards; the establishment of pension policy groups to consider major changes to scheme rules; the need to ensure that pension boards are responsible for the oversight of financial management and, in the case of funded schemes such as the local government pension scheme, for investment management; and the commissioning of a review into how standards of administration in public service pension schemes can be improved. Those measures would improve the efficiency and cost-effectiveness of scheme administration and would ensure that public service pension schemes matched best practice in the private sector.

Finally, we must ensure that the Bill adequately reflects and reinforces the progress made in negotiations. We should give public service workers a system they can trust and pensions that they can save towards with confidence, ensuring protection against retrospective or arbitrary detrimental changes. We also have concerns in this regard, which some hon. Members have already mentioned, and we will seek to address them in Committee. For one thing, the Bill subjects many aspects of public service pension provision to unilateral Treasury control. Although it is right that mechanisms should be in place to ensure that costs to taxpayers are contained, public service employees also have a right to know that critical changes will be consulted on and that their pension savings will not be vulnerable to arbitrary interference and opportunistic cash raids.

Furthermore, Lord Hutton has stated that

“there must…be full protection of accrued rights”,

but the Bill does not rule out retrospective changes that reduce benefits already accrued, going against the fundamental principle that pension benefits accrued are pay deferred and must therefore be honoured. The Government have reiterated their commitment to maintaining defined benefits in the public sector, and the Chief Secretary reaffirmed that to the House last year. He said, as he has on a number of other occasions, that his commitment was that

“public sector schemes will remain as defined benefit schemes, with a guaranteed amount provided in retirement”.—[Official Report, 2 November 2011; Vol. 534, c. 927.]

Clause 7, however, provides for the creation of new schemes that are

“defined benefits…defined contributions…or…a scheme of any other description.”

That should not be a means to drive a coach and horses through the commitments the Government have given and allow another round in the race to the bottom on pension provision.

In addition, the Government have made much of their promise of

“no more reform for 25 years”.

In his foreword to the Treasury’s document on new scheme designs, published last December, the Chief Secretary wrote that

“we need a long term solution that will last a generation”.

Clause 20 specifies “protected elements” of scheme design that cannot be altered for the next 25 years without clearing a “high hurdle” of comprehensive consultation and a report to parliament.

We think it is right that public service workers should be given an assurance that their pension savings will not be vulnerable to further arbitrary and unfair changes without adequate scrutiny and debate, but the Bill seems to be riddled with loopholes, excluding a number of important scheme features from the list of “protected elements” and stating that the “high hurdle” can be bypassed in order to meet a cost cap that is in turn set by the Treasury with no such requirement for consultation and report. Furthermore, it was a critical part of the agreements reached with employee representatives that protection should be provided to staff transferred to alternative providers as a result of public service outsourcing —the so-called fair deal policy. The Chief Secretary told the House last year that

“we have agreed to retain the fair deal provision and extend access for transferring staff. The new pensions will be substantially more affordable to alternative providers, and it is right that we offer workers continued access to them.”—[Official Report, 20 December 2011; Vol. 537, c. 1203.]

Yet there is no guarantee in the Bill that public service workers transferred to new employers will be able to keep their public service pensions. We will seek to address all those issues in Committee to improve the Bill and the protections granted to public service workers.

In conclusion, we think public service workers with understandable fears for their financial futures deserve better than being treated as pawns in this Government’s political games, with the consequence that it has been harder to reach agreement on reasonable reforms that control costs to the taxpayer. Indeed, perhaps the best case for the Bill is that it should ensure that never again can an opportunistic Government create unnecessary conflict and disruption by imposing unfair and arbitrary changes without adequate consultation, scrutiny and accountability. Let us ensure that it fulfils that objective.

Finally, let us remember that the real pensions crisis is not in the public sector but in the private sector. It is right that we should ensure public service pensions are sustainable and affordable for the taxpayer, but we should not allow that to distract us from the unacceptable inadequacy of pension provision in the private sector. Too often, it has sounded as though the Government’s answer to disparities in pension provision across the public and private sectors is to level down, not level up. Indeed, we have seen more than a million lower paid workers excluded from automatic enrolment when we should be ensuring that the National Employment Savings Trust can deliver low-cost, high-quality pensions to all who could benefit.

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[Katy Clark]

My understanding is that there will be a review of the scheme. Having spoken to some of those who are directly involved in the negotiations on the scheme, I am firmly of the view that we need to look carefully at those figures. On the basis of the financial information that we have, which is, of course, dated, because there has not been an up-to-date review, the reality is that the scheme is viable and there is no reason to believe that that will change.

[Andrew Gwynne]

May I advise my hon. Friend of a successful local government pension scheme, namely the Greater Manchester pension scheme, which is administered by my own local authority—Tameside metropolitan borough council—and is fully funded? Is it not the case that best practice therefore exists, and should not other local government pension schemes utilise it?

[Katy Clark]

I am interested in the scheme to which my hon. Friend refers, and I might get more information about it from him later.