Public Service Pensions Bill

Iain Wright Excerpts

Monday 29th October 2012 Commons Chamber

[Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)]

I am pleased to follow the hon. Member for Leeds West (Rachel Reeves). She would have been better to avoid the issue of private sector pension schemes because of the enormous damage that was done by the Labour Government in those early years, in the July 1997 Budget. As my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said, they took £100 billion out of private sector pension funds, which at that time had an asset value of £650 billion. It was the envy of the world, and £100 billion was a very large proportion of that sum.

I welcome the hon. Lady’s acceptance of this very important Bill and the fact that the Labour Opposition will support it in the Lobby. Despite her assertion, my view is that the negotiations were handled extremely well by the Treasury, the Cabinet Office and the individual Departments involved. There was engagement and a willingness to compromise, but there was also a firm approach to ensure fairness between the taxpayer and the public sector employee.

I support the Bill not just because of its importance in tackling this country’s historically high budget deficit, but because of its vital importance to ensuring that we have high-quality, well-rewarded public sector employees, in the teaching profession in particular. We need a well-rewarded profession that continues to enjoy a defined benefit pension scheme on a sustainable basis when such schemes are increasingly rare in other sectors of the economy. As my hon. Friend the Member for Rochford and Southend East (James Duddridge) said, even without the budget deficit, these reforms are necessary to tackle increased costs and life expectancy.

The Government’s education reforms are built on trusting the teaching profession, ensuring that we have the best people coming into teaching, and raising the status of the profession. Indeed, the schools White Paper was called “The Importance of Teaching”. In the opening chapters it made the point:

“The evidence from around the world shows us that the most important factor in determining the effectiveness of a school system is the quality of its teachers. The best education systems draw their teachers from the most academically able”.

Countries around the world that have the best education systems, such as Singapore and Finland, recruit their teachers from the top third of their graduates, and South Korea recruits from the top 5%, but Singapore and South Korea pay their teachers more than any other country in the world relative to average earnings in their own country. Finland pays its teachers at about the OECD average.

In its 2007 report, “How the world’s best-performing school systems come out on top”, McKinsey made the important point that the quality of an education system cannot exceed the quality of its teachers. Its 2010 report, “Closing the talent gap: attracting and retaining top third graduates to a career in teaching”, looked at precisely how Singapore, Finland and South Korea manage to recruit graduates from the top third. It concluded that the key to recruiting the best graduates is attractive starting salaries and attractive top salaries.

A report that examined the US education system concluded that a starting salary of $65,000 and a top salary of $150,000 were needed. In this country starting salaries outside London are about £21,600 and £27,000 in London. Top salaries for teachers are about £105,000 outside London and £112,000 in London. Although the McKinsey report was about the United States and looked at the US employment market, it is nevertheless fair to draw the conclusion that compensation packages are an important element in determining the calibre of graduates recruited into teaching, and pensions are an important part of that remuneration package. Defined benefit schemes are particularly attractive, and in my view they are an important part of that package, which is why the Bill is so important.

In his final report Lord Hutton stated:

“Given the current design of public service pension schemes, the general public cannot be sure that schemes will remain sustainable in the future.”

The issue of sustainability is therefore critical. Is a scheme sustainable in terms of its costs, given increased life expectancy? As Lord Hutton pointed out,

“In 1841, someone who reached the age of 60 might expect to live a further 14 years on average, but most people did not live to this age. By the early 1970s…the life expectancy of a 60 year old had increased to about 18 years and this has now risen to around 28 years. In addition, many more people can now expect to reach 60.”

Public service pension costs have been rising significantly over recent years—by a third in the past decade to £32 billion. Expenditure on teachers’ pensions is projected to double from £5 billion in 2005-06 to almost £10 billion in 2015-16. As Hutton pointed out,

“between 1999-2000 and 2009-10 the amount of benefits paid from the five largest public service pension schemes increased by 32 per cent. This increase in costs was mainly driven by an increase in the number of pensioners, a result of the expansion of the public service workforce over the last four decades, longer life expectancy and the extension of pension rights for early leavers and women.”

Hutton also said that it was important to look at the pension position as a whole, comparing the situation in the public and private sectors. One of the over-arching principles was to achieve fairness between taxpayers and public sector employees. The divergence, he said, between the public and private sectors is of concern. That does not mean, as the hon. Member for Leeds West asserted, that public service pensions should follow the trend in the private sector. Hutton said:

“This downward drift in pension provision in the private sector does not however provide sufficient support or justification in my view for the argument that pensions in the public sector must therefore automatically follow the same course. I regard this as a counsel of despair. In making clear I believe there is a case for further reform I have therefore rejected a race to the bottom as the only answer, and hope that reformed public service pensions can be seen as once again providing a benchmark for the private sector to aim towards.”

It is worth pausing a moment to look at how extensive this downward drift in private sector pension provision was, and its causes. According to the 2010 occupational pension scheme survey by the Office for National Statistics, the peak provision of occupational pensions was in the mid-1960s, when there more than 12 million active members, of whom 8 million were in the private sector and 4 million were in the state sector. By the mid-1990s active membership had fallen to about 11 million, but 90% of that 11 million continued to have defined benefit schemes. This means that more than 5.5 million private sector employees of that time were in some form of final salary or defined benefit scheme. By 2010 membership had fallen to 2.1 million and, as Hutton points out, only about 1 million of those members were in schemes that were still open to new members and an increasing number of schemes were closing to new accruals for existing members.

The fall in membership was due in part to the private sector making a realistic assessment of the costs of increased life expectancy. There had been a modest trend away from defined benefit schemes and towards defined contribution schemes in recent years, but that accelerated after 1997, in my view because of the decision taken by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) in his first Budget to end the repayment of dividend tax credits to pension funds and other tax-free funds, which took about £3.5 billion a year from pension funds. At the time, Britain’s private sector pensions were the envy of the world, with assets of more than £650 billion.

Many people, including in the pensions industry, said that that policy would have a very damaging effect on pension provision. Treasury civil servants shared those misgivings. In 2007 the Treasury was forced to release a number of internal papers from 1997 assessing the likely impact of the policy to end the repayment of dividend tax credits. A Treasury paper, dated 15 May 1997 and headed “Paper Four: Pension Schemes and Insurers”, pointed out that 90% of employees in occupational pension schemes had defined benefits but warned:

“In recent years we have seen a small but steady shift towards defined contribution schemes.”

The Treasury paper alerted Ministers to the risks arising from ending the repayment of dividend tax credits, stating:

“The present shift towards defined contribution schemes might accelerate…One of the claimed merits of defined contributions schemes is that they give employers more control over costs since the investment risk is transferred away from employers and onto employees. This factor would become ever more relevant with the proposed tax credit change.”

Despite that clear warning, the right hon. Gentleman pressed ahead with the policy, and the predictions made by his civil servants have come to fruition. That is why we have the problems we face today and why we are debating the Bill.

[Mr Iain Wright]

The hon. Gentleman mentioned the 1997 Budget. First, what does he think was the impact of the then Chancellor’s decision to cut corporation tax by 2p in the pound with the aim of encouraging more long-term investment in pension funds? Secondly, what impact does he think the long payment holidays for employers have had on defined contribution and defined benefit schemes?

[Mr Gibb]

The whole basis of the decision was the argument that the stock market was rising and so the tax cut would lead to more profits, more dividends and further rises in the stock market. Unfortunately, after 2000 the stock market started to fall and the whole basis of the argument fell apart, and therein lies the problem. Those pension holidays were temporary because of the over-exuberant stock market. Indeed, the Treasury papers from 1997, released under duress in 2007, made the point to Ministers that there was a danger that the stock market was overvalued.

As a consequence, the public sector faced a situation in which the private sector was moving away wholesale from final salary and defined benefit schemes while it was increasingly becoming the exclusive preserve of such schemes. The issue of fairness thus became paramount, particularly as the cost of those schemes was rising so quickly. Although Hutton rejected the notion that public sector pensions were gold-plated, he did conclude that longer-term structural reform was needed because

“current schemes had proved unable to respond flexibly to changes in working lives and longevity.”

Therefore, the only way to ensure that teachers and other public sector employees continued to enjoy high-quality defined benefit pensions was to engage in structural reform.

The final arrangements represent a very good deal. They now link the normal pension age to the state pension age in order to deal with longevity issues. No one within 10 years of retirement age will be affected by the changes and there is a tapering arrangement for those within 13 years of retirement. Although final salary schemes will be replaced by career average schemes from April 2015, all the accrued rights to that date will be maintained and the final salary will be the final salary on retirement, not the final salary in April 2015, as my right hon. Friend the Chief Secretary confirmed again today. Career average is still a defined benefit scheme, and it is fairer. Its generosity, of course, depends on the actual accrual rate. Currently the teachers’ pension final salary accrual rate is one 60th, and that will become more generous under the new scheme, with an accrual rate of one 57th. The salary that determines the career average will be indexed by CPI plus 1.6%, as far as teachers are concerned, although that varies in the different schemes.

These arrangements have been accepted by the Association of School and College Leaders, the Association of Teachers and Lecturers union and the National Association of Head Teachers, which have said that they are planning no further action over pension reform. These arrangements, and the Bill that will implement them, will ensure that public sector employees, including teachers, can continue to benefit from a defined benefit pension scheme that is sustainable in the long term and that will be supported by the public. That, along with other education reforms, will help to ensure the teachers are well rewarded and that we will have a teaching profession that continues to see its status rise and, with it, standards in our state schools. I fully support the Bill and, if there is a Division tonight, look forward to voting for its Second Reading.

--- Later in debate ---

[Robert Neill (Bromley and Chislehurst) (Con)]

I do not agree with the conclusions of the hon. Member for North Ayrshire and Arran (Katy Clark) about the Bill, or with some of the details of her speech, but I am sure that every Member of the House will agree with her warm remarks about the late right hon. Member for Croydon North, Malcolm Wicks. I knew Malcolm as a fellow London politician for many years. Indeed, I knew his late father, who was a former chairman of the Greater London council. I think that everyone would agree that it is a tragedy that Malcolm is not here, because his expertise in this field was recognised throughout the Chamber.

During my time in government I had a measure of responsibility for two of the schemes under discussion, namely the local government scheme and the firefighters scheme. I very much agree with my hon. Friend the Member for Bognor Regis and Littlehampton (Mr Gibb) in his analysis of the Bill, the overall pressures that need to be redressed and the need for reform of public sector pensions. I wholly endorse his analysis of how the negotiations—to which he, I and the Chief Secretary to the Treasury were, in varying measure, party—proceeded. There was greater realism and sophistication to be found in my dealings and negotiations with various public sector unions than in the analysis provided by Members on the Opposition Front Bench. That is a sad commentary.

I want to deal initially with the local government scheme. It has been observed, rightly, that this is the most significant of all the schemes in financial terms. It is hugely important and involves 81 funds. It is the biggest pension fund in the United Kingdom and the fourth largest in the world. We are talking about £145 billion in investments and assets, so getting the local government scheme right is critical for its members, many of whom I have worked with for years, going back to the day on which I was first elected as a councillor at the age of 21, about which all I can say is that I was keen.

[Mr Iain Wright]

In 1862?

[Robert Neill]

Yes, it was shortly after the Municipal Reform Act.

The scheme is important for its members and the council tax payers who fund it. We should also not forget—I will come back to this later—that it is important for the overall British economy, because of its investment potential. Getting it right is important. It is worth emphasising that it is different from the other schemes, because it is largely funded. The Chief Secretary to the Treasury recognised that significant factor, as, I am sure, will the Minister who responds to the debate. It will have consequences, once the Bill is enacted, for how we deal with regulations and secondary legislation with regard to the scheme’s governance and other related matters. There is nothing in the Bill itself—which I warmly support, because reform of all the public sector schemes is necessary—to prevent that from being achieved.

There is clear evidence that reform of the local government scheme is necessary. Reference has been made to the Audit Commission and, at the risk of taking a little longer than I had intended, it is worth quoting what it said in order to make the point. It accepted that the local government pension scheme had funds

“to cover about three-quarters of its future liabilities”

and that it had a positive cash flow. The commission then concluded that the current approach could not be continued indefinitely, the reasons for which included:

“The cost of providing pensions for local authority employees is rising in absolute terms and as a proportion of pay because of increasing life expectancy and action needed to recover funding deficits.”

It was not possible to fund the whole lot. There is no doubt that local government pension funds

“have been affected by lower than anticipated investment returns”.

At the time of the commission’s report in 2009, the value of assets was “about 15% lower” than had been anticipated in the previous revaluation in 2007. I have to say that Opposition Members cannot escape some of the responsibility that the previous Government have for the investment performance of the funds.