Draft Public Service Pensions Revaluation (Prices) Order 2016

Debate between Greg Hands and David Winnick

Wednesday 2nd March 2016 General Committees

[The Chief Secretary to the Treasury (Greg Hands)]

I beg to move,

That the Committee has considered the draft Public Service Pensions Revaluation (Prices) Order 2016.

It is a great pleasure to serve under your chairmanship today, Mr Bailey—for the first time, I believe. Allow me to go through the background and the purpose of the order, which I will do in a little detail, if I may beg your forbearance.

In the previous Parliament, the coalition Government took the Public Service Pensions Act 2013 through the House. That was a very important Bill that provided the necessary legislative framework to implement Lord Hutton’s recommendations following his independent review of public service pensions.

Lord Hutton’s report set out recommendations for public service employees to continue to have access to good quality, sustainable and fairer defined benefit pension schemes. One of his key recommendations was that the Government should replace the existing final salary pension schemes with a new career-average scheme and then, when everything was ready, move existing members to the new scheme for future accruals.

The Government accepted Lord Hutton’s recommendations as a basis for discussion with trade unions and employers. Following those discussions, the Government entered into proposed final agreements with the unions, all of which required the introduction of new career-average pension schemes. With the exception of the new career-average section of the local government pension scheme, which had been introduced a year earlier—an important detail I will come to—those new schemes were introduced in April 2015, with most members moving from the final salary schemes to the career-average schemes.

Although I am sure members of the Committee are well aware of the differences between final salary and career average, I will briefly explain them for the record. Under a final salary scheme, a member is paid a pension that reflects their salary towards the end of their career and their length of service. Under the new career-average schemes, a member of the scheme is paid a pension that reflects their earnings over their whole career.

Each year, members earn a pension amount calculated as a proportion of their salary. The rate at which that builds up annually is driven by the accrual rate. The better the accrual rate, the higher the proportion of their salary that builds up each month. Those new pension amounts are added to those built up in earlier years and all are then revalued to ensure that the total of those pension pots maintains a value relative to a particular metric.

The particular rate of revaluation in each scheme is carried out in line with the revaluation metric set out in the scheme design and delivered in scheme regulations. Those metrics were finalised in the published agreements, reached following discussion between schemes and the relevant trade unions. It is the metric of prices revaluation that we are here to discuss today.

Some schemes have regulations that require the accrued pension pots to be revalued in line with earnings, such as the schemes for the armed forces and firefighters. With the rest, their regulations requires them to be revalued in line with prices, or prices plus some percentage.

It is worth setting out some of the background to explain why there are such differences. The Government’s starting offer for the scheme design, called the reference scheme, was an accrual rate of one sixtieth, with earnings revaluation. The uniformed services received better starting accrual rates, to reflect the younger normal pension age of their schemes.

The Government agreed, with the TUC, to enter into scheme-specific discussions with the unions representing the respective workforces, to ensure that the final designs reflected the unique nature of those workforces. However, to maintain control of costs and to protect taxpayers, the Treasury set out a cost ceiling process, whereby a scheme improvement in one area of design would result in a compensatory reduction in value of another area of scheme design; in other words, they are all designed to balance out the different considerations to arrive at something that would be within the cost ceiling.

Almost all schemes, with the exception of those for the armed forces and for firefighters, agreed to move away from the Government’s preferred revaluation metric of earnings and towards a prices metric. Some schemes went for plain prices, others went for prices plus a constant—prices plus x%. At that time, the Government’s preferred prices metric—this is what we are debating—for welfare and public service pensions uprating was the September consumer prices index, as it is today. In exchange for a lower value revaluation metric linked to prices, those schemes gained a faster, or better, accrual rate. This means that schemes, in discussion with the unions, agreed to have less annual uprating of pension pots in exchange for earning more pension each year. I will come back to the practical impacts of this shortly.

For the avoidance of doubt, pensions that are in payment and that are not subject to the revaluation orders we are debating today will continue to be indexed in line with the September CPI figure, although that will mean that those pensions in payment will be frozen this year. What is the purpose of today’s debate? The Public Service Pensions Act 2013 requires the Treasury to choose prices and earnings figures on an annual basis. On 2 February the Government announced that those public service schemes that rely on the measure of prices will continue to use September’s consumer prices index as the measure of prices revaluation. This means that a figure of minus 0.1% is to be used for the prices element of revaluation. At the same time the Government announced that the earnings measure would be the annual change in whole-economy average weekly earnings, non-seasonally adjusted and including bonuses and arrears, up to September 2015. This means that a figure of 2.0% is to be used for the earnings element of revaluation.

Where a negative figure is to be used for revaluation, as is the case here, the Public Service Pensions Act 2013 requires the order to be subject to the affirmative regulation procedure. As the prices order is negative, it is therefore the purpose of today’s debate to agree this draft order so that it can come into effect from 1 April 2016. In many ways, I view this debate as being about not whether the prices figure should be negative or positive, and whether that change is minus 0.1% or, indeed, some positive figure, but whether the Government have chosen the right prices metric for revaluation.

As I said, the metric we have chosen is the September consumer prices index. September CPI, as we all know, is the Government’s preferred measure of prices and is used for the indexation of public service pensions in payment, for the uprating of benefits and for the additional state pension. The September CPI figure was the measure used to revalue the career-average local government pension scheme last year when it was introduced a year earlier than the other schemes, setting an important precedent. Members may ask whether we could have chosen another measure, because CPI in September was negative this past year. It is true that we could have chosen another month’s CPI figure. We could, for instance, have chosen June’s or August’s CPI, which would have meant that the revaluation figure was 0%. However, that would create significant uncertainty for members, for schemes and for taxpayers. I will explain this in a bit more detail.

I shall talk first about creating certainty for members. Choosing September’s annual CPI figure is in line with the provisions that were agreed on behalf of members by their unions. It provides certainty for members by continuing to choose the Government’s preferred measure of prices, rather than picking and choosing a different month based on the view of the Government of the day. Although I cannot commit future Governments to a decision, our decision sets a clear precedent that September CPI will be the figure used for prices revaluation, whether that figure is high, low or negative.

[Mr David Winnick (Walsall North) (Lab)]

Would it be right to come to the conclusion that the people who are adversely affected by what is being proposed are low paid and, therefore, on very small incomes?

[Greg Hands]

That is not uniformly the case. I will go on to explain the three schemes that are affected: the local government pension scheme, many of whose members have been high earners in their careers; the civil service pension scheme; and the judiciary pension scheme. Although there are low-paid workers in some of those schemes, I do not accept that they are uniformly lower-paid workers; indeed, there will be some fairly high-paid workers in those schemes.

Returning to my point, scheme members want to be treated fairly and consistently, and the order we are debating today delivers that. There should also be certainty for schemes themselves. Not choosing September’s CPI figure would create uncertainty for schemes. If a consistent measure of CPI was not used, schemes would find it difficult to determine what the correct measure of prices revaluation should be, both when assessing the cost of the scheme and when setting employer contribution rates.

It would not be unusual for a scheme actuary to place an uncertainty figure in the valuation if we decided not to use the standard September figure, particularly if it was considered that there was doubt about whether a consistent prices metric would be used. That would have the potential to put upward pressure on employer contribution rates, and affect the amount of money that employers have available to employ staff.

Furthermore, choosing a correct and stable measure of prices ensures fairness across schemes. That is a crucial detail. It would be unfair for those schemes that chose faster revaluation, instead of a better revaluation rate, to benefit from both fast accrual and a more generous revaluation metric than the one that they decided upon. That goes back to my point about the balance in each of the schemes that was arrived at after consultation and negotiations with the relevant trade unions.

--- Later in debate ---

[Greg Hands]

It is clear that today’s debate allows for parliamentary scrutiny, but the hon. Lady asks about an impact assessment. The impact will be fairly clear, and I will give some more examples.

To illustrate the amounts that we are talking about, let us compare workers in two different schemes, the local government scheme and the NHS scheme, both earning £26,000 a year. The local government worker will have earned about £40 more in their annual pension than the NHS worker, because of the trade-off between the revaluation and accrual rates. Because the revaluation rate will lead to a less favourable calculation for the local government worker but a more favourable one for the NHS worker, the local government worker’s pot will be reduced by 50p next year, whereas the NHS worker will get £7 more. Someone in the teachers’ scheme who is on £26,000 will also get about £7 per annum based on the revaluation. On the question of pensions in payment, there is a statutory link, so public sector pensions in payment will be frozen for the year without the need for new legislation or a further order.

The hon. Lady asked about the three months of negative CPI. I come back to the five main reasons why we have chosen to use the September CPI figure. First, we should set a precedent of using the CPI month that is most frequently used across Government. Secondly, in terms of the risk sharing, not only should scheme members benefit from the upside risk of revaluation but they should not be shielded from the downside risk. The third reason is consistency. Choosing a figure that is different from the September CPI figure would introduce the idea of significant policy discretion, going back to the point raised by my hon. Friend the Member for Beverley and Holderness, which would open up scope for lobbying and negotiations in an area where one wants a long-term degree of certainty. I think that would be a very unhelpful and unfavourable development.

The fourth reason is that this figure honours the pension settlement. Many of the schemes reached agreement through negotiations with the unions on the basis of CPI-linked revaluation. Choosing the correct CPI figure helps to deliver on that settlement. The final point is about fairness across the schemes. Schemes that choose faster revaluation instead of a better revaluation rate should not be able to benefit from both fast accrual and a more generous revaluation.

[Mr Winnick]

The Minister has been telling us that it does not make that much difference and that the impact will be minimal. He said in an aside that ministerial pensions would also be affected. As he said, we will not be in great tears about that. Is it not a fact that in practice the CPI does not take into account housing costs, while RPI, which was used previously, did? Although the Minister minimises the impact through the figures he has given, the fact is that those on low income will undoubtedly find their income that much less, taking into account housing costs and the rest. I am not satisfied by any means that this measure is neutral and that it does not matter at all to the people to whom I have referred.

[Greg Hands]

Let me seek to answer that point. The Government announced in June 2010 that CPI would be used as the most appropriate measure of general level of prices for most benefits and the indexation of public service pensions. There was a legal challenge to that and the decisions of both the High Court and Court of Appeal ruled in the Government’s favour, finding that CPI was appropriate for both benefits and pensions uprating.

The third point I would make—

[Mr Winnick]

rose—

[Greg Hands]

Let me answer the first question. The hon. Gentleman will have a longer memory than I have, but RPI has also gone negative in the past. It is not impossible that exactly same phenomenon could happen with RPI, his preferred measure of inflation.