Enterprise Bill [HL]

Debate between Baroness Donaghy and Baroness Hayter of Kentish Town

Wednesday 4th November 2015 Grand Committee

[Baroness Donaghy]

In order to save time I will speak to the next group of amendments, if that is all right. There is a lot of overlapping, not because I am boring but because the amendments are all intended to try to elicit from the Government what their intention is regarding the salary level that is going to be affected and to ask whether they think that honouring national agreements is sufficiently important to allow those agreements to take their course, perhaps introducing a two-year period if those agreements are already in place.

These are probing amendments. I will cut down considerably what I was going to say but I want to come back to the question of what the acceptable line on the impact of the exit cap is. We want moderately-paid employees with long service to have peace of mind. I ask the Minister whether the Government have gone back on the statement made by the then Treasury Minister, Priti Patel. In January 2015 she said:

“This commitment, which will be included in our 2015 General Election manifesto, will cap payments for well-paid public sector workers at £95,000. Crucially, those earning less than £27,000 will be exempted to protect the very small number of low earning, long-serving public servants”.

The impression given is that the cap applies to well-paid public sector workers and not to low-earning, long-serving employees. What has happened to the figure of £27,000 that was quoted? Is this another example of reneging on a promise?

The manifesto said that:

“We will end taxpayer-funded six-figure payoffs for the best paid public sector workers”.

Not the better paid, not the moderately paid, or the averagely paid, but the best paid. How misleading is that? Will the Minister clarify what the Government mean by “low earning” and “best paid” and how they will deal with the vast majority in the middle? Does she believe that the manifesto referring to the “best paid” would have rung alarm bells for thousands of public sector workers in their fifties? I do not think so. Some noble Lords may have received correspondence from people who will be affected. I will read some lines from Leona Parker, who said:

“I work at Dungeness A site, one of the original civil nuclear reactor sites where many of my colleagues have worked many dedicated and proud years of service”,

and,

“are being faced with the prospect of long-standing agreements being reneged on. What kind of Government would say this is fair?”

I had other examples that, to save time, I will not use.

In the consultation response, the Government referred to the waiver process and included the line,

“the full council to take the decision whether to grant a waiver of the cap in cases involving local authorities and for local government bodies within their delegated powers”.

There is no reference to this in the Bill. I know that certain assurances have been made about this, but there is no reference in the Bill to the waiver. Ministers are given powers to do something, but there is no indication in the Bill at the moment. I would feel more assured if this could be done.

The Local Government Association is also concerned about how the proposed waiver process will apply in schools, where governing bodies have their own decision-making powers. It is important that the Government make a clear statement that they plan to include regulations that will allow the full council of local authorities, which is a full public meeting of the council, to choose to waive the cap in circumstances of their choosing. Clearly, authorities would be required to publish a policy on the limited circumstances in which they would consider the granting of an exemption. That is only right and proper. I would prefer to see this in the Bill but I will listen with interest to what the Minister says to reassure us. I beg to move.

[Baroness Hayter of Kentish Town]

My Lords, the amendments in this group are pretty crucial. In part, they take forward what we said in the first group about exit payments and helping the good management of the service at local and national levels. There are clear examples of where existing rights and agreements should not be undermined, such as payments in lieu of notice where they are part of a contractual entitlement of employment, which, as has been said, is often a useful tool for employers in managing exits.

In the Civil Service the proposed cap cuts across the negotiating of an agreement. The then Minister for the Cabinet Office, now the noble Lord, Lord Maude of Horsham, described the agreement reached in 2010 as one that would be lasting. He said that it would provide,

“a fair balance between the interests of taxpayers and the interests of civil servants and protect those approaching retirement and the lowest paid”.—[Official Report, Commons, 14/12/10; col. 849.]

This Bill should not undermine that agreement, whatever one thinks about the desirability of the principle of the cap itself. Nor, as we have heard, should the cap hamper the reorganisation and modernisation of public services, as suggested earlier by the noble Lord, Lord Stoneham, and as wanted and supported by other parts of the Government. As my noble friend has said, the Local Government Association is particularly worried that the cap would threaten its future staff restructuring because it is such a rigid cap and because of its particular impact on long-serving employees who may be exactly the ones whose tasks or skills are now less in demand. It would also exclude some staff from early retirement who might otherwise have been part of a headcount reduction exercise, with strategic restructuring now hampered as councils are perhaps forced to keep on their highest-paid staff instead of allowing them to retire and bringing in lower-cost replacements.

The cap, of course, once it is in, will also act as a disincentive to those considering voluntary redundancy. That is likely to mean there will end up being more compulsory redundancies as well as difficulties in modernising the service. This matter is of particular importance to local government, which is partly why we have tabled Amendment 54H to include in the Bill rather than in secondary legislation the ability to make exemptions where the full council of the local authority decides to grant a waiver of the cap. The Government have now published their draft statutory instrument allowing for a waiver where the full council so agrees. However, as my noble friend Lady Donaghy said, this ability could be swept away if it is only in secondary legislation, with local government having no guarantees in this regard. That makes future planning very difficult. We therefore hope that Amendment 54H will be considered a better way forward as the principle has already been signed up to by the Government, but the amendment would give everyone confidence in it.

The amendments containing specific figures that we have now brought into this group seek to push the Government to define the words that we all keep using—that is, what is meant by “the best paid”? Is it people on a salary of £30,000, £35,000 or £40,000 a year? It is important to be clear about that. It is hard to imagine the Government not accepting that anyone earning below the national average wage should be excluded from this provision. Therefore, we hope that Amendment 54BA will be accepted.

We also think it important to exclude from the provision people with long service. That is important not just for their sake, and what they have earnt during their career working for all of us, but because of the advantages that this offers to management. After all, those people have earnt those benefits. We do not consider that the Conservative manifesto wanted to catch people who have given long service to this country. Those are the people we would like to see excluded from this provision. I imagine that the Minister concurs with that objective and hope that she can find a way to accept that amendment.

--- Later in debate ---

[Baroness Donaghy]

This will take three minutes. At least I hope I can be as quick as that. Not because this amendment is not important—it is probably the most important aspect of the discussion on exit caps.

The purpose of this amendment is to exempt pension costs from the exit cap. My objective throughout these debates on Clause 26 is to protect those employees on lower income with long service. If pension strain costs are included in the exit cap it will affect thousands of people in the public services. I will use local government as an example.

The local government pension scheme, LGPS, has approximately 4.6 million members. Recent changes to the pension scheme rules, as a direct result of pension legislation, mean that an employee over the age of 55 years who is made redundant is automatically entitled to early retirement without any reduction in pension. It is important to remind ourselves that in these circumstances the redundant employee would not be receiving a lump sum of money. He or she would simply be entitled to access their pension early. While the redundant employee will not have earned as much pension as they would have if they had remained employed for more years, there would normally be a significant reduction to the pension for accessing it before the normal retirement age. As part of the agreement, the employer pays the pension fund a lump sum to compensate the scheme for having to pay an unreduced pension much earlier than anticipated. This is known as the strain payment.

The employee benefits indirectly because they receive an unreduced pension. They do not receive a direct pay off in the sense normally understood by the high-profile cases. Those with long service, say 20 years, on a moderate salary who are made redundant at 55 could easily be affected by the provisions in the Bill. To give a hypothetical example, a career librarian with an average salary of £25,000 per year reaches 55 and is made redundant after 34 years of service. Her pension would be calculated at £17,346.93 per year. The librarian would receive this 11 years earlier than her normal retirement age, so the initial strain payment would be £190,816. To offset that, money would have been saved in salary and salary increases for 11 years and other factors such as local longevity would also be taken into consideration. So, the strain payment is always lower than the initial calculation. Nevertheless, a cap of £95,000 would almost certainly be breached and the employer would be unable to make the member redundant without either breaching the proposed cap or the current local government pension scheme regulations. These were recently negotiated and would not have been cleared without the Government’s consent. Multiply that by the 99 pension funds which exist and have their own actuarial methods of calculating the actual strain payments.

In Schedule 4 to the Bill it is very clear that the pension regulations will be amended to allow for this cap. This makes a nonsense of the previous Government’s statement that there would be no more meddling with public service pension schemes for 25 years. To renege on an agreement is bad enough. However, the schedule also makes it clear that where a pension strain payment would breach the cap the consequences would either be a reduced pension or that the member would have to find a lump sum in order to buy out that reduction. I remind the Committee of what I said earlier: the member will not receive a lump sum on redundancy in this instance. They would have to find the lump sum from their savings. I do not know how many public sector employees on £25,000 a year have substantial savings. More importantly, neither do the Government. I say that because I am still looking for the impact assessment and I look forward to receiving the copy that I have been promised.

This is an extremely serious issue for all people in public sector pension schemes. It will be treated as if it is going back on very recently negotiated agreements on pension changes.

[Baroness Hayter of Kentish Town]

My Lords, this is the amendment that the Government really ought to grab hold of if they want to achieve their stated objective of stopping big payments to the highest paid rather than to the longest serving of their own employees. It is this amendment which would prevent the longer serving, albeit lower earning, workers from being caught. As my noble friend has said, it is so unfair because these strain payments do not even go to the individual, it is an actuarial change from what is at the moment available from their current employer to the pension scheme. However, it will reduce the amount that they are able to take as their pay.

We have already heard of examples from my noble friend and we are talking about this becoming a bigger problem. We could have someone with 35 years’ service earning perhaps £30,000, but because of the later retirement age now of 65, a person on that salary will undoubtedly hit the cap and not be able to take a well-earned and justified amount of money. It can also happen with much smaller sums in terms of long service. This is going to hit older workers, and to me it feels discriminatory towards them. I do not know whether any challenges will be made on this basis, but they are the people who will be caught—it is not by virtue of their pay, but by virtue of their age.

I will add one more point. As the Bill stands at the moment, it will affect those who, under the present arrangements, can take a non-reduced pension on compassionate grounds. I assume that that is also going to go out of the window. This is an absolutely crux amendment. Solve this on pensions and we will have gone a long way to solving what is between us on this matter.

[Baroness Neville-Rolfe]

I thank the noble Baroness for her amendment. It is late but I will try to respond because the noble Baroness and her noble friend have both made important points about a key area. The amendment seeks to exclude any pension top-up element from the scope of a cap on exit payments. The Government do not believe that such an exclusion would be desirable for reasons that I will explain.

Let me be clear: the Government’s proposals, as I said at Second Reading, do not involve taking away people’s group pension rights, so the cap will not affect in any way an individual’s right to their earned pension, nor does it engage the 25-year guarantee on pension rights. It is focused on limiting the amount that a public sector worker can receive from an employer when leaving employment. The cap is intended to cover all the various types of payment that an employer may make, and the Government think it right that it should include payments made to a pension scheme to fund early access to that payment, otherwise you will have a different problem.

Noble Lords will be aware that where an individual takes early retirement, pension payments are normally reduced to reflect the expectation that they will be paid for longer, and the amount of the reduction is calculated by the scheme actuary to ensure that the consequences for the scheme and for the individual are cost-neutral. In cases where the individual is retiring early on the basis of ill-health or redundancy, certain pension and compensation schemes may allow an employer to make a payment into the pension scheme to buy out any reduction so that the individual can have immediate access to the unreduced pension. These additional costs to the scheme, those of providing a pension of greater value than the individual would otherwise be entitled to, are met by the employer and, ultimately of course, by the taxpayer.

I can make it clear that these provisions do not alter the position in relation to early retirement for ill-health and injury, but I am not sure about compassion, so I will have to look into that. As I alluded to earlier, it is only where such a payment forms part of a redundancy package in place of or additional to a lump sum redundancy payment that it will be within the scope of the cap. The Government do not accept that as a rationale for excluding this type of payment from the cap. Payments of this type are sometimes some of the most expensive and place the greatest burden on employers and taxpayers. I would also like to reassure noble Lords that the Government believe that redundancy packages should still retain flexibility to allow early access to a pension where employers have the ability to top up an employee’s pension. These proposals will simply ensure that any top-up is within the limits of the cap, and Schedule 4 to the Bill gives a power whereby the employer can still make a payment into the pension scheme to reduce the actuarial reduction that would otherwise have been made.

I note the points that have been made and I understand the emotion behind and importance of this issue. It is serious, but the Government have brought forward a scheme. It involves picking up these extra payments that are made to top up pensions, and I hope that, in the interests of time, the noble Baroness will be prepared to withdraw her amendment.