Public Sector Pensions

Chloe Smith Excerpts

Tuesday 19th June 2012 Westminster Hall

[The Economic Secretary to the Treasury (Miss Chloe Smith)]

It is a pleasure to respond the points made by my hon. Friend the Member for Bedford (Richard Fuller). A number of us have heard him make those points passionately and eloquently in the House, and in a fairly factual way, I shall lay out what the Government are able to say in response.

Before doing so, I congratulate my hon. Friend on securing this debate, because he has been able use this platform to draw attention to the importance of ensuring affordability. He has spoken in robust and wise terms of the bombs that an irresponsible Government might leave for future generations, and I particularly congratulate him on raising such themes in his well-informed and practical discussion. I suspect that he will agree that it is a great shame that no Front Bencher from Her Majesty’s Opposition is here to join us in the debate. After all, they have a sizeable charge to answer in terms of what they left for future generations in this country.

I shall describe the situation that we face. As I expect you know well, Mr Leigh, the annual cost of public service pensions paid out has risen by more than a third over the past 10 years to £32 billion. To put that in context, as my hon. Friend did for other areas of spending, that figure is more than what is spent on police, prisons and the courts combined. Put simply, costs have of course increased because people are living longer. Although improvements in longevity are very welcome, the Government are therefore paying public service pensions for much longer than was expected when the schemes were designed. The bulk of that extra cost has mainly fallen on the taxpayer.

My hon. Friend is well aware that rebalancing the costs of providing pensions more fairly between employers, employees and other taxpayers requires bringing expenditure under control. We must make far-reaching structural changes to scheme designs, and that is what the Government are doing.

My hon. Friend has teed me up to deal with the remarks of Lord Hutton, who produced a landmark report—Members are well aware of it; perhaps you even have it on your bedside table, Mr Leigh—that took an impartial and comprehensive look at public service pensions. The Government are committed to implementing that blueprint, which will give us a new public sector pensions landscape. I do not intend to examine that landscape in detail, but I will make some points about it.

I emphasise, as my hon. Friend already has done, that this is not a race to the bottom. It is important to get public service pensions on a fairer, more affordable footing, but the Government must also ensure that the hard-working public service workers continue to receive pensions that are among the very best available. That is what has encouraged us to consider the changes so carefully. They have been discussed extensively with trade unions and other scheme representatives for more than a year, and those discussions continue.

The changes will deliver the Government’s objective to ensure that most low and middle earners who work a full career will receive pension benefits that are at least as good, if not better, than they would get now. They will also deliver our commitment to protect accrued pension benefits for those closest to retirement.

I have digressed somewhat, so let me return to the key point from Lord Hutton’s report with regard to this debate: the concept of funded versus unfunded. My hon. Friend has referred extensively to the Australian Government’s future fund, but we must bear in mind that we in this country are not alone in providing unfunded public service pension schemes. It is also fair to note that all pensions, whether funded or unfunded, are claims on the output of our successor generations. The great and truly visionary questions raised by my hon. Friend relate to intergenerational fairness, which is an issue that spans both funded and unfunded schemes. The funding status does not determine the sustainability or affordability of pensions, or the size of liabilities built up over time. Unfunded pension schemes are commonly used by Governments, because they are the most cost-effective way to provide pensions benefits over the long term. The method is available to Governments, but not necessarily to the private sector.

Lord Hutton’s report—or, to give it its full name, the interim report of the Independent Public Service Pensions Commission—found that keeping schemes unfunded has many advantages. It also dealt with some areas of funded public service pension schemes in this country, but recommended no change. The report stated that keeping schemes unfunded avoids potentially significant investment management costs and the risks involved in investing, whether in the UK or overseas. The report also noted that there are risks involved in the Government—in one guise or another—controlling up to £1 trillion or more of financial assets. It also stated that, even when the funds are placed in the hands of trustees, in an emergency the Government could still be compelled to underwrite the funds, which represents a further risk.

My hon. Friend spoke of the Ontario teachers pension plan as an example in support of his cause, but I feel honour bound to put a few points on record about its current performance, which is a cause of concern. The plan has experienced recurring funding shortfalls for the past 10 years. Indeed, as of 1 January, it is projecting a $9.6 billion shortfall, because the cost of future pensions continues to grow faster than the planned assets. That is connected to how the plan’s members are living longer and to interest rates.

Ireland’s national pension reserve fund also gives us cause to reflect on what can happen with such funds. My hon. Friend may have read the same Financial Times article as I did in November 2011 that reported on how that reserve is to be tapped for €12.5 billion of the bail-out costs with regard to Ireland’s public finances. There are risks connected to some of the schemes, so I do not necessarily agree with my hon. Friend’s interpretation that all is rosy in the land of funded schemes.

[Richard Fuller]

I do not think that anyone is saying that all is rosy in one scheme or another. Equally, I am sure that the Minister would agree that all is not rosy in the current system. One of the reasons why we have an off-balance sheet is that Governments do not like to talk about the obligations that they incur when they take on additional work. Does she accept that, if we transition to a fund, rather than the current scheme, and Governments add it to the public sector payroll, they would have to justify the full obligation of those pensions to the fund?

[Miss Smith]

My hon. Friend makes a valid point. Such a scheme could be designed in that way, to entrench the principles of responsibility that have been the key note of what he has outlined today, and for which I respect his argument.

To respond to the debate and to offer the Government’s view on funded pension schemes, we support the conclusions of the Hutton report, as my hon. Friend knows. I think that he will therefore understand why I acknowledge the report’s concerns about funded schemes. I think that he will also appreciate why I want to finish by talking about the problems that can result from moving to a different scheme structure. The transitional costs are difficult to contemplate. As is often the case—perhaps in those countries that have already tried this—a move to funded schemes involves significant financial costs.

Contributions in respect of current employees would have to be diverted to the new pension funds. Pensions in payment would therefore have to be financed through extra Government borrowing or taxation. To put a figure on that for the UK economy, it would cost more than £25 billion next year alone, with costs declining only very gradually over the 21st century. It would be problematic for the UK Government to contemplate that at this time, owing, as my hon. Friend has already said, to the actions of previous Governments and to current global trends.

My hon. Friend referred to the Government’s credit easing schemes, which were announced earlier this year. He is interested in how the funds connected to those schemes could be used in relation to a future scheme, but, although the national loan guarantee scheme will provide up to £20 billion of guarantees to banks, that is not a case of guaranteeing loans to individual businesses. The full credit risk of the loans remains with the banks, so no cash is set aside for the project that could be redirected, as my hon. Friend suggested, to setting up a pension fund. I will direct his interest—I am sure that he is already, as the phrase goes, “all over it”—to the memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund that was announced in last year’s autumn statement. That might be a way to gain direct investment from pension funds into UK infrastructure assets, which I am sure my hon. Friend is interested in.

To sum up, the Government will introduce legislation in the autumn to implement the final proposals that have been reached based on Lord Hutton’s recommendations, including maintaining the current funding agreements. The Government believe that those deals should not need to be revisited in the next 25 years. We have said so publicly and deliberately, and stand by that position. That should reassure pension scheme members that they are right to remain in their schemes, which will remain among the very best available. The Government’s commitment to continue to provide guaranteed, index-linked benefits in retirement should encourage young and old people alike to take up the pensions savings baton. The reforms should achieve the objectives of sustainability, fairness and responsibility within the public finances.