Public Service Pensions and Judicial Offices Bill [Lords]

John McDonnell Excerpts

2nd reading
Wednesday 5th January 2022 Commons Chamber

[John McDonnell (Hayes and Harlington) (Lab)]

I have to give it to the right hon. Member for Newark (Robert Jenrick) for his ability to describe possibly one of the most inflammatory amendments that we shall consider in this House as a modest technical amendment—but there you are. I am sure we will come back to that debate as part of a wider discussion of the issue.

I want to focus briefly on part 1 of the Bill, which addresses the McCloud judgment. I think we have to acknowledge that what we are having to deal with is an absolute mess in the management of public sector pension schemes by the Government, exposed by the McCloud judgment. It was a mess created not by the members of the public schemes themselves, who have been congratulated across the House this evening on the public service commitment that they are demonstrating at the moment, but by Government decisions. As this mess was created by Government decisions, it follows that the cost and the burden of clearing up this Government-created mess should fall not on the pension scheme members themselves, but on the Government.

Because I have received so many representations from constituents on this matter, I want to get some of the narrative clarified on the record. It is worth going back into the mists of time to fully understand the context and the genesis of this dog’s breakfast, as it was described in the other place.

I am grateful to Bryn Davies—Lord Davies of Brixton—a Member of the other place, our foremost pensions expert, formerly the TUC’s actuary and pensions adviser, and subsequently adviser to numerous trade unions and associations, for the explanatory notes that he has provided to a number of us and the issues that he has raised in the other place. Bryn Davies reminded me of the history of the pension reforms that have laid the path to this chaotic state that we are now trying to resolve.

The mechanism for managing the future funding of public sector pensions stems originally from the discussions between the Labour Government and the trade unions in 2006. It was those discussions that resulted in a broad relationship agreement—the Warwick agreement—and also agreed a series of pension reforms. The aim, quite rightly, was to stabilise for the long term the funding of pension schemes to enable decent pension schemes to be provided, and to tackle, to be frank, the fact that some people who had provided a service throughout their career were finding, contrary to what the hon. Member for Glenrothes (Peter Grant) said, and contrary to what was being reported in a number of papers, that they were being provided with a pension on which they were hardly able to survive.

In 2011, following those discussions, the coalition Government commissioned the Hutton report, which led to the Public Service Pensions Act 2013. That Act provided the basis of the existing system, including the cost control mechanism that we are addressing in this Bill. The key element of the cost control mechanism was that the cost to the employer of each of the public service schemes was fixed as a percentage of pay, which meant that if the cost of providing a scheme increased—I remember the debate and the predictions that were made—for instance due to some scheme members living longer than expected, it was agreed that either benefits would be reduced or members’ contributions would be increased. A number of us did not like it, but that was what the House agreed because it was seen by some as a fair process for the future.

If the cost of providing a scheme fell, such as if pensionable pay did not increase at the expected rate, benefits would be increased or members’ contributions would be reduced. That was the equivalence that was agreed, and it was considered fair. I remember the debate, and it was also agreed that things would stay as they were if the change was less than 2% in either direction.

It was always agreed that some types of additional costs would be the responsibility of the Government—employer costs, as defined, as opposed to member costs. In 2012 the Treasury published a report that spelled out the difference. Employer costs were exemplified by changes in actuarial methodology or changes in the discount rate. The logical argument made by the unions is that the additional costs resulting from remedying the Government’s actions in this case, as exposed by the McCloud judgment determining that the Government’s actions were unlawful, are the responsibility of the Government, and therefore fall squarely into the category of employer costs, not member costs.

This is critical because the cost of the schemes, as used for control purposes, has usually fallen, largely because pay rises have not been as high as expected or because life expectancy has not improved as was previously predicted. If we abide by the agreements that were legislated for in this House, pension scheme members should have received either improvements in benefits or reductions in contributions, or a combination of the two, because the cost of the schemes has fallen.

Instead it appears that the Government are minded to treat the remedy costs of the McCloud judgment—the costs of remedying the Government’s illegal actions—as member costs. We have heard from my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) that the cumulative cost could be £17 billion. This kicks in the cost control mechanism, as in some schemes the cost will rise by more than 2%. This would usually have resulted in cuts in benefits or increased contributions, so at least the Government have introduced a waiver to prevent that from happening.

However, this does not assist my constituents who rightly argue that they have been robbed by the Government and forced to pay over the odds in pension contributions but will receive no additional benefits. In fact, they feel they have been hit by a double whammy, having had their pay virtually frozen or cut but, as a result, still losing out on pension contribution savings. The impact for some will be the prospect of hardship in retirement as a result of not receiving the full benefits of their scheme as originally agreed. For many others, the measures will undermine the incentive to contribute to the pension schemes that are available to them. We have already seen more than 270,000 who are open to joining the scheme dropping out of it. This disincentivisation means that pensioners will be living in greater hardship and poverty and will therefore be reliant on state benefits, so there will be no saving to the Government overall. From the discussions I have had with my constituents and a range of trade union representatives and members, I know that there is a sense of betrayal among pension scheme members.

Another issue that my right hon. Friend the Member for Wolverhampton South East raised was the pensions trap, which has been highlighted by the police associations, particularly the Police Superintendents Association, and by the firefighters, in which the value of the contributions and the pension declines with additional years of service. That is a contradiction that needs to be resolved by the Government, and I hope that that will be undertaken as the Bill goes into Committee and comes back to this House.

The discussion around pensions is as sensitive as the issue of pay, if not more so at times. These are always sensitive policy issues, and people naturally have strong feelings about them. It is worrying to me that, as Bryn Davies—Lord Davies in the other place—highlighted, the key decisions on whether the remedy cost is a members’ cost or an employers’ cost, and on whether the cost of the remedy should be spread over four years as suggested by the Government, are neither on the face of the Bill nor being dealt with by delegated legislation. Instead, under section 12 of the Public Service Pensions Act 2013, these issues will be dealt with by “Treasury directions”. That means that financial obligations will be placed on scheme members without effective parliamentary decision making or scrutiny. These are not technical matters; they are matters of high policy and they affect many of our constituents. They are a matter of public concern and they have generated anger among many of our constituents at what they feel is the unjust way they are being treated. Members of this House should insist that these decisions are subject to proper parliamentary scrutiny and proper parliamentary decision making.

Much of what we are debating in part 1 of the Bill will almost inevitably be the subject of further legal challenge by a large number of trade unions and possibly, we hear, even by the British Medical Association. I fear that, rather than remedying the Government’s errors and lack of judgment, the Bill will almost wilfully compound those past errors and possibly exacerbate the strong feelings of injustice felt by many of our constituents. I say to the Minister that considerable thought needs to be given to these issues in Committee and possibly on Report, to ensure that the Government do not lay the burden of the failure of past Government policy making on the innocent shoulders of many of our constituents, who, as has rightly been said today, are providing essential services across a communities at a time when we desperately need them.

Public Service Pensions and Judicial Offices Bill [Lords]

John McDonnell Excerpts

Report stage
Tuesday 22nd February 2022 Commons Chamber

[Peter Grant]

I made the point much earlier that the amendment is not about BDS; BDS is not mentioned anywhere in it. Going back to the question of whose money it is, we can go round in constitutional or legalistic circles, but morally that money belongs to the people who rely on it for their pensions. If members of the pension scheme want to make strong representations to their trustees, saying, “I do not want to profit in my pension from investments that benefit countries that act in breach of international law”, why is it such a bad thing for pension scheme members to be allowed to make those representations to the trustees? Why is it such a bad thing for the trustees to be allowed to say, “At the request of our members, we will take a decision that might not deliver quite such a high yield for the pensioners, but the pensioners are happy to accept that, because they will be comfortable in their consciences about where the money is going and where the profits are coming from”?

We cannot support new clause 1, and we are minded to divide the House on it later. My final point is that every pension fund trustee has a duty entirely to look after the interests of their pensioners and future pensioners. I do not want to see anything being done that gets in the way of that. We will support the Bill on Third Reading, but I hope it will come to Third Reading without new clause 1 included. The fundamental point is that the £17 billion mistake was made by the Government. If we eventually pass the Bill into law to be an Act of Parliament that makes pensioners or their employing authorities pick up part of that tab, it has not done enough. I fear that by tonight we will still have a Bill that has not done enough and that the Government will not be made to take full responsibility for a mistake entirely of their making.

[John McDonnell (Hayes and Harlington) (Lab)]

I declare an interest in that I am a member of the local government pension scheme. I want to address the amendments standing in my name—new clause 10 and amendments 22 and 24—but I would also like to comment on new clause 1.

On the debate about whether or not this is public money, I thought, as a member of the local government pension scheme, that the Supreme Court was pretty clear that this is not public money in the sense that would enable the Government to issue guidance. However, I have to say that new clause 1 goes further than guidance; it actually includes directions as well. I work on the basis, as I did when I was employed in local government, that the money I earned and the money forgone to invest in my pension scheme was my earned income; it was not public money under the control of the Government.

I think there is a lesson for us all here in that I believe that only in extremis—only in extremis—should the state interfere in one’s own privately earned income. I say that because, in the pension scheme regimes we have at the moment, we have an element of representative democracy with the trustees often being representatives of the workforce and other experts. That reassures me that, as a member of the pension fund, I have an element of say in what those trustees do, if they are appointed, and that enables me and other members of the pension fund to exercise an element of control over decision making, but also to exercise an element of conscience.

[Andy McDonald (Middlesbrough) (Lab)]

Does my right hon. Friend agree that the clumsy way in which new clause 1 has been worded will create a chilling effect on risk-averse pension scheme managers in fulfilling their fiduciary duties and other responsibilities? Does he also agree that it will significantly incapacitate the ability of pension schemes to invest ethically, and the rights of pension scheme members and pension schemes to express and have ethical views taken into account in the investment of their own money?

[John McDonnell]

I agree with the first point, but let me take up that last point, because I just want to explain to other Members where I am coming from and get it on the record.

On moral grounds, I have argued very strongly within my own local government pension scheme—so far, I have to say, unsuccessfully—that I do not want the money I have earned, and part of my pension is my earned income, to be invested in a number of states. They include Saudi Arabia, because of its involvement in Yemen. In fact, I have organised demonstrations when there were visits from various representatives from Saudi Arabia to this country. I have argued that I do not want my pension invested in China because of the treatment of the Uyghurs. Again, I have engaged in demonstrations on that, and also on the moral ground that a number of trade union friends I have worked with over the years are currently in prison as a result of the operation undertaken by the Chinese state in Hong Kong. Yes, I have argued against investments going into Colombia because of the murder of trade unionists, and I have also argued against investments going into Israel because I do believe—according to the Amnesty human rights report, and many Jewish institutions—that it is an apartheid state in the way it treats the Palestinians.

That is my position: on moral grounds, I want to be able to influence the investments. I do not want my pension invested in armaments or fossil fuels either, and I believe that that is my right. I do not believe it is the role of the state to ride roughshod over my moral choices without extremely good reason. Given the threat of climate change and other matters, there may well be, in extremis, reasons for the state to act, but I do not think that this new clause is in that context.

[Chris Stephens (Glasgow South West) (SNP)]

If this new clause had been in legislation in the 1980s, it would have covered South Africa, and the right hon. Member will remember that local authorities drove the anti-apartheid movement, while the UK Government refused to impose sanctions.

[John McDonnell]

I was chair of finance at the Greater London Council at that time, and I would regularly turn up with my shares with regard to Barclays bank. When Mandela came here—some Members will have been there when he spoke—he and others, including the late Archbishop Tutu, commended those who argued for disinvestment from South Africa in order to bring about a change in that regime, and it worked.

The point I am making—I will finish on this element of it—is that I do not believe it is the role of the state to interfere in this way. Parliament can decide to expand the role of the state, but I think it begins to strain the limits of parliamentary democracy. I have listened to Conservative Ministers warn us in this Chamber about elective dictatorships, so I just warn hon. Members on both sides of the House that once these precedents are set, other Governments will be tempted to follow and, in some instances, go much further. I think this adds to the slow erosion of our civil liberties, freedom of choice and, indeed, human rights.

[Dr Dan Poulter (Central Suffolk and North Ipswich) (Con)]

On the right hon. Gentleman’s point about his own pension fund, I do not think there would be many countries left in which it could invest. I understand his concerns about pension funds making ethical investments, but the pension fund also has a fiduciary duty to sustain the fund, and to make investments in that respect and for future pensioners who will draw on it. How can he reconcile the two positions?

[John McDonnell]

I was once, in my callow youth, an adviser to the mineworkers pension scheme, and then I was an adviser at the TUC, working with Lord Bryn Davies, who is one of our colleagues in the Lords at the moment, and there was never a problem with our fiduciary duty of maximising the income to the pension fund itself because of the range of investment opportunities available to us. I think we found in the past that exercising such moral judgment can prove effective in the long term, because it ensures that the fund is not investing in countries that may in the longer term become unstable as a result of the actions they take. I would just say, and I am making a personal point, that I think new clause 1 flies against my ability to exercise my moral duties about investments by my pension fund.

[Lloyd Russell-Moyle]

Will my right hon. Friend give way?

[John McDonnell]

Yes, but then I want to move on to my amendments.

[Lloyd Russell-Moyle]

Is there not a problem with this, in that it leaves the Secretary of State to decide what the foreign or defence policy might be in an arbitrary way, rather than requiring pension funds to set an ethical policy in which they can say that they do not want to invest in countries where there are human rights abuses? We would still have to treat all countries equally, so they could not target one country or another, but there would be an ethical framework, and this new clause does not allow an ethical framework.

[John McDonnell]

I would also come out fairly pragmatically and say that there may be some countries that, according to the Government, were not appropriate to invest in a few years ago but now are. I do not want a little red book to be thrown at me again, but I would just cite the fact that the relationship the Government have had with China has changed over the years and, I hope, is changing again at the moment with regard to the Uyghurs.

Let me move on to the new clause and amendments in my name. New clause 10 is a simple reflection of new clause 8, tabled by my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq), on the pensions trap. I want to echo what I think she said really eloquently in Committee and today about how the dialogue on this issue must continue, because there is an unfairness at the heart of the legislation we are pushing through at the moment. This affects firefighters, police superintendents and so on, who feel aggrieved, and I feel that a bit more dialogue may enable us to find a solution and restore their confidence in the pension scheme itself. That is why I support new clause 8.

My new clause 10 is simply more explicit about ensuring that there are consultations with the trade unions and other employee representative bodies, and that we seek to overcome the problem so that we have a non-discriminatory approach that does not fall foul of the law.

I turn to my amendment 24, which addresses a complex issue. It reminds me of the debate we had on the d’Hondt proportional representation system, as there were only two people who understood it: Mr d’Hondt, who died, and Jack Straw. Let me just go straight to the point on this matter. I am sorry if I go into some detail. The Chief Secretary to the Treasury said in Committee that

“it is vital that we establish now, for the avoidance of any doubt, that no member benefits will be cut and no member contribution rates will increase as a result of the 2016 valuations. Any benefit improvements due will be honoured, but no additional costs will be imposed. I reassure the hon. Lady”—

my hon. Friend the Member for Hampstead and Kilburn—

“on her important question, that the costs of our remedy genuinely sit with the Exchequer, not scheme members.”––[Official Report, Public Service Pensions and Judicial Offices Bill [Lords] Public Bill Committee, 27 January 2022; c. 10.]

This is complicated stuff. There is a confusion of two issues here. The Government did make a mistake and were challenged in the courts. I fear that that cost burden will now fall on to members of the pension fund, if it is included in the cost mechanism as an employee cost. That is the issue.

I turn to two points in that regard. First, there is the cost to the scheme of giving members the option to choose which benefits—old or new—they want to accrue during the remedy period. Some members will choose benefits that are better for them than they would have received before the McCloud and Sargeant judgments. The scheme will clearly have to meet the cost of paying those benefits—fine. We got the assurance from the Minister that the money will flow—we think it is £17 billion; that is the last estimate—and the burden will not fall on to the members themselves, but that is not what we are talking about here. The issue here is what impact the cost of the remedy should have on the cost control mechanism. I remind Members that this is the mechanism for deciding whether members’ benefits should be changed or, alternatively, whether contributions could be changed.

There is no doubt that treating the cost of the remedy as an employee cost for the purposes of the cost control mechanism leaves members worse off than they would have been had it been treated as an employer cost. I draw the Chief Secretary’s attention to the helpful report from the House of Commons Library entitled “Public service pensions: the cost control mechanism”, which tells us that if we go back to the initial results of the 2012 scheme valuations, which were reported in 2018, the Government said that

“the protections in the new cost cap mechanism mean public sector workers [would] get improved pension benefits for employment over the period April 2019 to March 2023.”

It is those improved benefits that I believe are now at risk if the cost of the remedy is included as an employee cost and not an employer cost.

What does this mean? The improved benefits were required because members had suffered a reduction in the value of their expected benefits over the period 2012 to 2016 because of lower than expected pay increases and because longevity had not increased by as much as had been expected. In other words, the changes would not make members better off; they would simply maintain the value of the benefit package at the level that had been agreed. I apologise to Members, because this is complicated stuff, but it has to go on the record if we are to get redress on this, either today or in subsequent legal actions.

Given the requirement under the cost control mechanism, the respective scheme advisory board then set about agreeing the necessary changes in benefits. In other words, because the pay settlements had not been as large as predicted, and because people were not living as long as the predicted life expectancies, the cost burden on the scheme was less, which should have been reflected in benefits given back to members. The scheme advisory board started looking at what those benefits would be, and the Library report gives an example of packages of changes proposed for the civil service scheme, which included

“a reduction of member contributions; reform of the current contribution rate structure; and increased death benefits.”

The other schemes reflected similar sorts of benefits, so members would gain significantly as a result of this unfortunate situation—unfortunate because they never got enough pay settlements and never had the increase in life expectancy. Nevertheless, because those costs never fell on to the scheme, they should have been paid back to members.

In December 2018, the Court of Appeal ruled that part of the reforms amounted to unlawful discrimination. That was followed by the decision by the then Chief Secretary that the cost control element of the 2016 valuations should be put on hold. In other words, the members were to gain those benefits because of the cost control mechanism, the court decision took place, and the Government then froze the whole process. Eventually, the Government restarted the process and published the Treasury directions in October last year. The problem with the directions is that they treat the cost of remedying the Government’s mistake, as calculated for the purposes of the cost control mechanism, as a member cost, not an employer cost.

The important point to understand is that there is nothing inevitable about the remedy as a member cost. It has always been accepted that there are certain elements in the calculation involved in the cost control mechanism that are regarded as member costs that will impact on the cost control mechanism itself, but there are also other elements in the calculation that are employer costs and do not impact on the cost control mechanism. For example, the impact of changes in pay increases and mortality are obviously member costs, but changes in the discount rate and price increases are the employer costs. It is strongly argued by the trade unions, completely understandably, that mistakes made by the employer—that is, the Government—are employer costs.

What has never been discussed is how to treat the cost remedy incurred by the Government’s own error, and that is what needs to be addressed today. It was the Government’s mistake to have age discrimination in the scheme. The Minister in Committee said it was reflected in trade union representations, but as has been said by the Public Accounts Committee and others, the Government are the Government; they should have foreseen that there was the potential for discrimination. It is the Government who introduced the measures. It is the Government who are responsible for the Treasury directions and any legislation. It was a mistake by the Government. It is therefore logical that the cost of the remedy should be treated as an employer cost for the purposes of the cost control mechanism.

I apologise to hon. Members for the complexity of this, but it is important that we get on the record very explicitly that members of these pension funds should not have to pay in the long term for Government mistakes and should therefore have gained the benefit of either reduced contributions or enhanced benefits, because that is contained in what the Government agreed a number of years ago as the cost control mechanism.

--- Later in debate ---

[Mr Simon Clarke]

I thank all right hon. and hon. Members who have spoken today. I appreciate the constructive way in which all Opposition parties have handled the Bill. Today’s debate has focused on several important themes, which I will address in turn.

One central theme was the clarification requested by the hon. Member for Hampstead and Kilburn (Tulip Siddiq) and other Members about whether the estimated £17 billion cost of remedy will be included in future valuations of the cost control mechanism for unfunded schemes. The answer, definitively, is that it will not. The Government will reform the cost control mechanism to a reform scheme-only design for future valuations. I hope that that reassures the House.

[John McDonnell]

Will the Minister give way?

[Mr Clarke]

Very briefly, but I am conscious of the need to make progress.

[John McDonnell]

I just need the Minister to say that it will be an employer cost, not a member cost.

[Mr Clarke]

The cost of remedy sits with the employer, namely the Exchequer.

[John McDonnell]

Let us be absolutely explicit. With regard to the cost control mechanism, is it the case that this will be not a member cost but an employer cost? Just nod, Minister: that is all you have to do.

[Mr Clarke]

I can confirm that the liability for this rests with the Exchequer. It will be a reform scheme-only design. [Interruption.] I will write to the right hon. Gentleman with the clarification that he is requesting.

[John McDonnell]

Correspondence is not good enough. Put it on the record.

[Mr Clarke]

I will ensure that it is on the record.

My right hon. Friend the Member for Newark (Robert Jenrick) raised the important issue of guidance for the local government pension scheme which will, in effect, prevent bodies from engaging in boycotts, divestment and sanctions activities. In our manifesto, we committed ourselves to stopping public bodies running their own direct or indirect boycotts, and the wider BDS movement. I am grateful to my right hon. Friend for the all the hard work that he has done to draw the House’s attention to this important issue. I also pay tribute to Lord Pickles for his work.