Public Service Pensions Bill

Baroness Noakes Excerpts

Tuesday 15th January 2013 Lords Chamber

[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.

[Baroness Noakes]

Can the Minister clarify what he is referring to when he says that not being able to adjust existing accrued rights would also affect increases in pensions that were already in payment? One way of using the amendment proposed by my noble friend would be to constrain future increases through whatever indexation is in use at the time. Would it not be sensible for the Government to have that available to them for getting cost control? It is different from saying that you reduce the number of years accrued or the absolute amount of an accrued pension.

[Lord Newby]

It is, but I think that the same considerations apply. The employee or former employee in effect has a pension contract, which says that he or she is making a payment into a scheme; the employer is making a payment into a scheme and certain payments flow from that. Whether we are talking about rates of accrual or any other component of an agreed pension scheme, my understanding is that retrospective reductions—however they are done; even if we are not talking about a reduction but a freeze, it is a reduction of the implied or explicit rights already in the scheme—would fall foul of the legal issues I raised as much as any other component of the scheme.

I think that I had just about got to the end of what I was going to say on that amendment. Turning to Amendment 70A, I understand my noble friend’s intention in providing for an independent assessment of the operation of the cost-cap mechanism, and for transparency around the cost of public service pensions. However, the Government cannot accept this amendment. The role of the OBR is to improve the accountability of the Government by examining the state of the public finances and the long-term impact of government decisions. While it has a clear remit to analyse the long-term sustainability of the public finances, it has full independence in determining how to fulfil this obligation. The Government cannot specify that the OBR provides any specific data or analysis.

However, as my noble friend alluded to, much of the data that would be required under this amendment is already provided by the OBR. The OBR’s economic and fiscal forecasts, produced twice a year, have included a forecast of public sector pension payments and contributions over a five-year period. Indeed, the noble Lord referred to some of the figures it produced in November. For noble Lords who have not had the opportunity to look at them, I refer them to page 146 of the OBR’s Economic and Fiscal Outlook produced in December.

My noble friend’s amendments would also include provision for the OBR to pass judgment on the effectiveness of the cost-cap mechanism. This would change the role of the OBR. It is not a policy-based organisation and must be seen as impartial and independent. For the OBR to be seen to advocate or arbitrate on policies would draw it into political debate and could undermine this independence. If you allow the OBR to start giving advice or arbitrating on policies across the piece, that would completely undermine the role set for it. For that reason, policy on the cost cap, and public service pensions more broadly, must remain the responsibility of the Government.

Amendment 71A seeks to prevent the pension liabilities of local authorities falling to the Government. I should start by highlighting that the Secretary of State for Communities and Local Government is not a trustee of the pension scheme. Rather, the Secretary of State is the person who may make regulations to establish the scheme. Local authorities are responsible for managing and administering both their own budgets and the Local Government Pension Scheme. The authorities, not the Minister, are responsible for their liabilities under the scheme. Legislation requires local authorities to establish and manage pension funds and then set the appropriate level of employer contribution rates to ensure that those funds are able to meet the liabilities of the scheme. In addition, the new requirements in Clause 12 of the Bill will provide additional scrutiny of LGPS fund valuations. There are, of course, safeguards in place.

[Baroness Noakes]

What the Minister is saying is very helpful. Can he say explicitly that what the noble Lord, Lord Whitty, said—about there being a broad assumption that the Government stood behind local authority pension schemes—is wrong?

[Lord Newby]

My Lords, I shall write to the noble Baroness if I get this wrong—and the noble Lord, Lord Whitty, will shake his head or nod depending on whether or not I get it right—but I think that the responsibility for meeting obligations under local authority pension schemes falls to taxpayers within the local authority areas covered by the schemes.

[Baroness Noakes]

The point that the noble Lord, Lord Whitty, was making was not to dispute the basic legal position but to say if that were defaulted upon, there is an assumption underpinning these schemes that the Government stand behind them. That is why I asked the Minister to clarify his view of that.

[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.