Public Service Pensions Bill

Baroness Eaton Excerpts

Wednesday 19th December 2012 Lords Chamber

[Baroness Eaton]

My Lords, as I will be speaking about the Local Government Pension Scheme, I wish to declare my interest as a vice president of the LGA and also a member of the scheme.

I was very pleased to hear the Minister say that he is going to have detailed conversations with the LGA about the Local Government Pension Scheme. As we have already heard, the LGPS is a funded scheme. Its members and employers pay contributions which are invested to meet the costs of paying benefits. The funded nature of the LGPS means that pension benefits are paid for by underlying investment funds and not general taxation. It is therefore unlike the rest of the public sector pension schemes, which are unfunded and paid out of tax receipts—that is, current workers’ contributions and taxes.

The LGPS is collectively the biggest pension fund in the UK and the fourth largest in the world. There are 89 funds in England and Wales holding some £145 billion in investments and assets, which is enough to pay benefits for over 20 years. The 89 LGPS funds in England and Wales are required under scheme regulations to undertake a valuation of the fund every three years setting the employer contribution rates for the following three years. This framework allows for local circumstances—for example, life expectancy—to be considered when determining the employers’ costs.

The scheme has a positive cash flow, with income from investments and contributions exceeding expenditure. Unlike other public sector pension schemes which work on a pay-as-you-go model, the LGPS has sufficient funds to cover benefits for over 20 years. Members contribute an average of 6.5% of pay to the scheme, with higher earners paying proportionately more—currently up to 7.5%—and there is also provision for the lowest-paid workers to pay a lower percentage of contributions, currently 5.5%.

Throughout the process of reforming the LGPS, the Local Government Association worked closely with the UNISON, GMB and Unite unions through the LGPS 2014 project board, leading to a scheme design which received overwhelming support from both employers and trade union membership. The Bill as drafted does not fully reflect this agreement and therefore, in my view, requires amendment. It does not reflect the unique nature of the scheme or the fact that the arrangements have been fully agreed by the unions and the Government.

The scheme regulation provisions contained in Clause 3 could see detrimental changes imposed on scheme members without agreement. This is not the case under current scheme regulations. If left unchanged, the Bill would undermine confidence in the scheme and provision for future benefits. The provision for retrospective changes, which could have a material detriment for scheme members, would be in stark contrast to provision in private sector pensions, which allows for consultation and agreement before introducing any such retrospective changes.

As the noble Lord, Lord Monks, said, there are concerns that measures in Clauses 4 and 5 could impact on the transparency of the LGPS because there is no segregation between the scheme manager and the scheme board. For the LGPS, local boards are responsible for each of the individual 89 funds and are concerned with the effective and efficient administration of the scheme at local level. The scheme board would have concern for the scheme at national level, with a central focus to ensure efficient and effective overall management of the LGPS nationally. The scheme board and scheme manager being, in effect, the same committee would not promote good governance of the scheme and would not allow for effective separation of responsibilities at local and national level. Furthermore, the agreement reached between the unions, employers and the Government specified the need for a national board, as proposed by the noble Lord, Lord Hutton, in order to give it a national focus in line with the treatment of other public service pension schemes under the Bill.

There is a lack of clarity around the impact on fund valuations which are included in the Treasury’s scope within Clauses 10 and 12. This lack of clarity surrounds the apparent inclusion of both local fund valuations and the national notional model fund valuation within the control of Treasury regulations. Individual fund valuations are currently undertaken by fund actuaries under parameters set out in scheme regulations and assumptions agreed with the individual fund. It would be a marked change if such valuations were now to come completely under Treasury control. If the intention were to include only the notional model fund in the Treasury’s scope, the clauses would need to be amended to prevent future misunderstandings.

Clause 11 provides for the Treasury to set the scope, extent and methodology of cost management in the LGPS. It is difficult to see how the principles agreed in December 2011 for self-determination can sit easily with this clause. In contrast to the unfunded schemes, the agreement reached for the LGPS called for a separate cost management process and for the control of cost management issues to be the responsibility of the principal stakeholders of the LGPS. As a funded scheme, this is particularly important, given that funding of the LGPS is carried out independently of the Treasury.

In summary, although I acknowledge the need for the Bill to cover the LGPS, I remain concerned that it does not fully reflect and cater for the unique funded nature of the scheme or the agreement reached by the LGA and unions for the LGPS from 2014. That agreement received overwhelming support from employers and members alike, and the concern is that the progress made following agreement with the Government would be at risk should the Public Service Pensions Bill not fully reflect the unique nature of the LGPS among other public sector schemes.