Public Service Pensions and Judicial Offices Bill [HL]

Lord Davies of Brixton Excerpts

2nd reading
Tuesday 7th September 2021 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, first, I need to mention my entry in the register of interests. I have had an actuarial career, largely advising a range of trade unions about their members’ pension schemes, including most public service schemes covered by the Bill, but I am no longer actively engaged in such work.

I very much welcome the Minister’s careful and lucid explanation of what he rightly says is a complicated subject; it was a fine introduction to the work that faces us over the next few months. I also very much welcome the fact that I have a pensions Bill to get my teeth into, and I will be a committed and active member of the Committee when it considers the Bill. I look forward to interesting and detailed discussions.

I ask the Minister to say something about the expected timetable for passing the legislation. Much detailed work is being undertaken at the moment in parallel with the Bill going through Parliament. The government departments and scheme advisory boards are busy implementing the measures in the Bill, and it would be good to have some idea of exactly how that process will work because, clearly, they need certainty about the legislation’s outcome before they can reach final decisions.

My major issues with the Bill arise from Chapter 1, about public service schemes. The problem is that we have here only part of the story. It deals with the consequences of the decisions in McCloud and Sargeant, which, as the Minister explained, ruled against transitional protection. In its place, we have this remedy to sort out what is undoubtedly a significant mess, but the difficulty is that this is only part of the story of what is happening to public service pensions at the moment. These measures can be fully understood only in the context of the other things occurring at the same time, which the Minister did not mention—they are not in the Bill—but I think we need to understand the context in which this particular part of the picture is being considered.

There is a range of matters. The most significant is getting the 2016 valuation concluded. The 2016 valuation—the results of which should have been implemented some years ago—is ongoing and must still be resolved. At the same time, the Government are reviewing the cost-control mechanism. As explained by the Minister, this is highly contentious, because the Government are attempting to make changes which the unions consider go against the spirit of the Government’s agreement made 10 years ago. At the same time, the Government are reviewing the SCAPE discount rate mechanism—a particular element in the cost-control mechanism.

What is the effect of all those changes on the 2020 valuation? You might think that in 2021 the 2020 valuation would be done and dusted but, as I explained, we have not finished the 2016 valuation yet, so there is a certain amount of slippage here. It is difficult to understand. A sequence of events needs to be taken into account and, unless we have some picture of how this will affect the 2020 valuation, it is difficult fully to assess this legislation without putting it in the context of the other things happening.

One significant additional issue which must be resolved is whether the cost of the remedy this Act sets out is to be met by the members. This is taken for granted by the Government; the members contest it. It is currently the subject of a legal process but it is crucially important. When considering the legislation, we must consider the effect of that issue. So, while this Bill is presented to us as a set of standalone measures, it is difficult to be confident that the solution, the remedy proposed here, is just and workable when all these other factors are still in play.

I have gone over the allotted time; I apologise. I will quickly mention some other issues that I will seek to raise in Committee. We must carefully consider the use of Treasury directions. It raises constitutional issues that must at least be clarified. Concern has been expressed by various groups of employees, most notably the police service and firefighters, that the specific way in which the remedy is being implemented has an adverse effect because of their particular past pension structures.

I am heavily outnumbered here by the lawyers, but finally, I will stray into Chapter 2. Clearly, there is a strong case for the special tax treatment being afforded to the judicial pension scheme, but it raises the possibility of circumstances in which other groups of employees deserve special tax treatment as well. These are all issues that we will have to resolve, or at least discuss, in Committee.

Public Service Pensions and Judicial Offices Bill

Lord Davies of Brixton Excerpts

Committee stage
Monday 11th October 2021 Grand Committee

Moved by

[Lord Davies of Brixton]

4: Clause 18, page 15, line 31, leave out “may” and insert “must”
Member’s explanatory statement
This amendment would require, rather than enable, scheme regulations to make provision about cases where a member has paid voluntary contributions.

[Lord Davies of Brixton (Lab)]

My Lords, effectively these issues have been presented by my noble friend Lord Ponsonby and I have the great advantage, of course, of having the Minister’s reply to the questions that I have not yet asked. In a sense, I am happy to take them as read.

I do not have an interest to declare but it would be helpful to the Committee if I declared a non-interest: I did have a declarable interest up to the end of August, in that I was a paid adviser to various trade unions on this very issue. Clearly, there would have been a conflict, but I ceased to hold that role at the end of August. The declaration will appear in the register of interests for a year but is no longer valid. I think that covers me for the whole of the Committee stage and that I do not need to say that again.

It might be helpful for the Committee if I say a little more than that, in that I have been a close observer and participant in the process of the reform of public service pensions, it seems, for the whole of the 21st century so far. Although we had the report of the noble Lord, Lord Hutton, in 2011, the process actually started earlier than that in 2005 with what was known as the Warwick accord between the then Labour Government and public service unions. I was involved at that stage, and in the discussions before and after the presentation of the Hutton report. Indeed, if I had to nominate my specialist subject in “Mastermind”, a strong possibility would be public service pensions reform in the 21st century.

These are not exactly random thoughts, but I thought that it might be helpful if I just set out three relevant and little-known facts about public service pension reform. As I mentioned, it did not start with the Hutton report but with the Warwick accord, going back to 2005 and the subsequent public service forum agreement of that year. Major changes took place in public service pensions at that time.

Just to clarify, the reforms were carried out in accordance with the heads of agreement of 15 December 2011 with the then coalition Government. Although it is described as a heads of agreement, it was not a total agreement but, effectively, a decision by the Government that was accepted by some, but not all, trades unions. A background point but an important one is that the new schemes were not worse for everybody. A non-trivial proportion of the public service workforce will gain from the reformed schemes, so the situation is not as simple as it is sometimes presented.

Turning to Amendments 10, 11 and 12, the issue here is that if people had had what they were entitled to following the Supreme Court decision, they might have made different decisions from those which they made at the time. Clause 19 refers to transfers. If you were in the old scheme you decided to make a transfer, but had you been in the new scheme, you might have decided not to, and vice versa. These issues are therefore important. To be honest, I do not envy the job of administering this process, but it is there and the Government are obliged to pursue it.

I listened to what the Minister had to say on the issue of “may” or “must”. I should add that I did some research, along with my noble friend, and we are grateful to the Police Superintendents’ Association for having drawn these issues to our attention. We have with us a magnificent set of legal talent, and perhaps at some stage we might have a definitive view on the difference between “may” and “must”. The problem here is that from the viewpoint of the Police Superintendents’ Association and other members of public service pension schemes, there is a level of mistrust. The issue is not some semantic definition of whether “may” or “must” works; they see “may” and they think, “Maybe the Government are not going to do what they’ve promised.” Saying “We’re going to do it anyway” does not totally answer the question that is put before you by having to choose “may” or “must”, because it invites the rejoinder, “Well, if you’re going to do it anyway, let’s have ‘must’ in there, and everyone can feel comfortable.”

There is no doubt that these issues are going to have to be dealt with in the process of implementing the court judgments, and from the perspective of the scheme member, “must” seems to work. My noble friend and I heard what the Minister had to say, and we will read with interest the precise wording. I take it that the Minister will not be writing separately on the issue, but the statement as set out in Hansard will be the definitive government position and we and the scheme members will study that, come to a view and, if necessary, return to the issue on Report.

I do not know whether I should do this now, but I happily indicate my intention not to push my amendments to Clause 19.

[Viscount Younger of Leckie (Con)]

My Lords, it might be helpful—

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[Lord Davies of Brixton (Lab)]

Essentially the same background applies: this is the position in which we find ourselves following the Supreme Court judgment. It is a dog’s dinner really. We would never choose to be here but, now that we are here, we have to sort it out—but it is a mess. One of the most complicated issues which will need to be resolved is about people who paid ADCs in one scheme and would not have paid them in the other scheme or did not pay ADCs in the scheme they were in but would have done so if they had been in the other scheme. Some sort of assessment of some alternative reality has to be made, so the issue is complicated.

These amendments repeat “must” and “may” issue—and I have dealt with that—but they also deal with how the issue is resolved. There is a problem with additional voluntary contributions, which people pay voluntarily to secure additional benefits. It clearly is a decision determined by the scheme in which they will accrue benefits. If they misunderstood which scheme they were in, they may well have taken a different decision. The Bill gives the scheme administrator the decision about how that matter is resolved. Amendment 8 would place the decision about how the issue is resolved directly in the hands of the member rather than, as the Bill stands, leaving in the hands of the scheme administrator. It is an issue of the hypothetical: if a member had been in a particular scheme they would have paid contributions. As I understand it—and I would be grateful for the Minister’s clarification—the Bill as it stands deals only with how the contributions that the member has made are handled, but there is also the issue of the additional voluntary contributions that the member did not make but would have made. Finally, Amendment 9 seeks to make it clear, when a refund of contributions is decided on, the contributions that were made will be repaid with interest included in the sum. That covers the issues and I will be grateful for the Minister’s comments. I beg to move.

[Viscount Younger of Leckie (Con)]

My Lords, here we address six amendments that have been brought forward on Clause 18 by the noble Lord, Lord Davies of Brixton. I note again his declared interests that he pointed out at Second Reading and his expertise in this area, and I very much look forward to his appearance on “Mastermind” on his specialist subject.

Clause 18 provides for scheme regulations to make provision in relation to additional voluntary contributions paid during a member’s remediable service. As the noble Lord, Lord Davies, said, the first two amendments would require, rather than allow, scheme regulations to make provision about these matters. I hope that I can reassure the noble Lord that this is not necessary. I want to give a full response, although not quite as full as on the first group—but it is a full response on some of the important issues that the noble Lord has raised.

The reason this clause is enabling rather than directive is that not all additional benefits purchased during a member’s remediable service will need to be revised as a consequence of the Bill. For example, some legacy schemes provide that members may purchase additional pension by way of a lump-sum payment or periodic additional contributions, so the Government have agreed that members may complete the payment for these benefits when they have already commenced. The resulting benefits will not be changed, regardless of a member’s choice of whether to receive legacy or new scheme benefits. However, making Clause 18 directive would require schemes to vary the benefits, contrary to what schemes and members have asked for and government has agreed to.

The third amendment brought by the noble Lord would extend Clause 18 to require scheme regulations to provide members who were moved to the new schemes but did not make additional contributions with the option to purchase additional legacy scheme benefits, where they can show that they would have done so had they been able. I once again thank the noble Lord for tabling this helpful amendment. The Government will consider the principles underlying it and will take this away before returning with a thorough explanation of how the matter may be addressed in due course. The drafting of this amendment, at present, does not achieve the overall intention here, since Clause 18(1) provides that this applies only to cases where a person has paid voluntary contributions.

The fourth and fifth amendments are concerned with members who did make additional contributions to a new scheme. They would require scheme regulations to provide members with the options available under the Bill—to alternative or equivalent benefits in a legacy scheme, or to compensation for the contributions made. This provision is permissive rather than directive, because not all three options are intended to be used in every case. Alternative benefits are an approach whereby the benefits awarded in the legacy scheme are effectively recreated as though the member’s additional contributions had always been made there. Equivalent benefits are for situations where an appropriate alternative does not exist in the legacy scheme. In such circumstances, a member would instead be offered a benefit in the legacy scheme that is of directly equivalent value. So in both cases, the policy is that the member may choose instead to receive compensation for their additional voluntary contributions, where they do not wish to receive the alternative or equivalent benefit. Making this provision directive rather than permissive would not therefore work, as not all options will exist in all cases. I hope that explanation is clear and helps to answer the questions raised by the noble Lord.

The final amendment brought forward by the noble Lord relates to interest, as he mentioned, and requires that interest is paid on compensation payments. It is a fair point. The Government have committed to pay interest on these compensation payments, and provision is already made under Clause 23 accordingly. With those assurances on all the noble Lord’s amendments, I hope he is willing not to press them.

[Lord Davies of Brixton (Lab)]

I welcome the Minister’s comments, particularly on unpaid AVCs. I will look forward to his response with interest. In light of his other comments, we will read Hansard with interest and decide what to do on Report. I therefore withdraw Amendment 4.

Amendment 4 withdrawn.

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Moved by

[Lord Davies of Brixton]

13: Clause 21, page 17, line 41, leave out “may” and insert “must”
Member’s explanatory statement
This amendment would require, rather than enable, scheme managers to pay compensation in respect of compensatable losses.

[Lord Davies of Brixton (Lab)]

My Lords, I shall speak also to Amendments 14 to 19, so it is a bumper bundle. Again, we have the “may/must” issues, and I assume the same position will apply.

Amendment 14 brings us to the issue of Treasury directions, on which we will probably have a more substantive debate in a later group of amendments. There is a general argument about Treasury directions being used in this context—it will be useful to have that debate. The issue raised here is whether it is appropriate to have any directions at all; the issue elsewhere is whether we have directions or regulations. The Bill appears to say that these unknown Treasury directions will lay down how the compensation will be made and the parameters set. I think the strong view here is that it should be in the Bill rather than in directions.

Amendment 15 would add a new subsection setting out where compensation would be paid. I readily admit that it probably needs tighter wording, but it raises the three areas that are of concern to scheme members. Again, I have to mention that the lead here has been taken by the Police Superintendents’ Association.

The first circumstance is where individual scheme members would have made other decisions had they been in another scheme and, because of that, have encountered some financial loss; that is, had they known they were really in scheme B rather than thinking they were in scheme A, their decisions would have been different and, because of that, they have incurred some financial loss. I do not envy the job of working out how to assess losses in these circumstances, but they can be real and important, so the issue needs to be addressed. The example we have been given is where, because of the fall in their income, members have incurred loss in selling and buying a house; they incurred financial charges because they thought their income would be lower as a result of being in a different scheme. However, they were not in a different scheme so they did not need to incur that expenditure.

The second area set out in the amendment again affects the police service in particular and concerns where a scheme member genuinely thought that a binding commitment had been given by the Government on the nature of the scheme to which they belong, and they believe that that binding promise has been broken. This is the subject of legal action at the moment. There is no doubt that it is a real concern; it is going through a legal process. We should recognise the level of concern among members about the losses they have incurred because the Government are resiling from promises which they reasonably thought had been made.

The third area of loss is what is called the pensions trap. I will spend a bit of time talking about that because it has gained considerable traction. The first point to make is that, although the uniformed services—the fire service, firefighters and the police—have made most of the running on this issue, it affects all schemes; well, I have not checked them all, but it affects all the major schemes. It is just that, in the case of firefighters and the police, it is of much greater salience. That is why those services have raised this issue most strongly. I think we would admit that there are also areas of employment where we would be particularly concerned because of what we owe to our uniformed services.

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Moved by

[Lord Davies of Brixton]

26: Clause 80, page 56, line 3, leave out “(2) and (3)” and insert “(1A) to (3).
(1A) In subsection (3), for “directions” substitute “regulations” .(1B) In subsection (4), for “directions” substitute “regulations” and delete paragraph (c).”Member’s explanatory statement
This amendment requires the calculation of the employer cost cap to be set in accordance with Treasury regulations, rather than Treasury directions. It also removes from the calculation the effect of changes in the cost of connected schemes.

[Lord Davies of Brixton (Lab)]

Amendment 26 is a twofold amendment. Two issues that are connected, but are potentially distinct, are wrapped into one amendment. On the one hand, the amendment states that the requirements for the cost cap mechanism should be set out in regulations rather than directions; on the other, it states that the cost of remedy should be excluded from the cost cap mechanism. They work together, but they are distinct.

The use of directions as opposed to other means of establishing regulations and subsidiary legislation of any sort is an important issue that potentially needs to be discussed in principle. I shall not start discussing it in principle today. There is a debate to be had and concern that a Government could use directions to exclude important matters from parliamentary scrutiny. It is a real fear that should be taken seriously. However, that is not the case I am making today. There is a general, generic problem with directions.

The argument is related directly to these directions. It is important to understand that “directions” in this amendment are not directions in the current Bill but directions under the provisions of the principal legislation: the Public Service Pensions Act 2013. Section 12 of that Act sets out the basis on which the cost cap mechanism works. It provides in subsections (3) and (4) that the cost cap mechanism should be

“in accordance with Treasury directions.”

The Minister said, quite rightly, that when this Bill went to the Delegated Powers and Regulatory Reform Committee, it had no comment on it. I remind the Committee that it is not the directions in this Bill that I am talking about today but the directions in the principal legislation. The debate on the principal legislation took place on 5 December 2012. In the memorandum prepared by the Treasury, comments were made about these directions. The Treasury’s submission to the committee, which was accepted, was:

“The effect of the directions on the design of the scheme will be subject to parliamentary oversight when the scheme regulations are made. It is therefore considered unnecessary for the directions themselves to be subject to additional parliamentary control.”


My argument now is that the directions—which, coincidentally, were agreed last Thursday—do impinge on the design of the scheme and hence are not subject to regulations and are outside parliamentary control. The specific issue is the generic use of directions, but in this case, the Government are seeking to introduce directions—they did so last Thursday—which do subvert parliamentary control.

They do that in two important ways. The decision is made in those directions that the cost of the remedy should be included in the cost control mechanism. I believe that there is a debate to be had about that issue and the Government are avoiding it by making the decision in the directions.

I must mention again that this is currently subject to legal action—potentially; I am not sure whether or not the formal case has been submitted. A number of trade unions are in the process of challenging the inclusion of the cost of the remedy in the cost control mechanism. Obviously, we cannot interfere in the legal process but, as a matter of parliamentary sovereignty, we need to assert that a decision as important as how the cost of the remedy should be met should be subject to parliamentary oversight.

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More broadly, the use of Treasury directions in this context is in accordance with long-standing practice in public service pensions policy. I have addressed some broader points on the use of Treasury directions in relation to previous amendments, as the Committee will know. I also highlight again that the Delegated Powers and Regulatory Reform Committee has considered this Bill and the powers within it and has reported no single issue to bring to the attention of the House. I know that I have said that in the past, but I say it again in relation to this amendment. I hope this rather lengthy response provides the noble Lord, Lord Davies, in particular, with some reassurance on the purpose and use of Treasury directions and I ask him to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

I thank the Minister for his detailed response and I look forward to the opportunity for more detailed discussion at a meeting. I am not totally convinced, and I suspect that this is something we will return to on Report, but I beg leave to withdraw the amendment.

Amendment 26 withdrawn.

Public Service Pensions and Judicial Offices Bill [HL]

Lord Davies of Brixton Excerpts

Report stage
Monday 29th November 2021 Lords Chamber

Although it has been rather lengthy, I hope that my explanation of how the amendments in this group will work has proved helpful. I reiterate that these amendments all share the objective of ensuring that members affected by the discrimination identified by the courts are able to receive a comprehensive remedy in line with the overall approach set out in the Government’s consultation response, on a fair and equal basis. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, I do not have a current interest to declare, but it would be appropriate to mention that, until the end of August when I gave up the work, I was the paid adviser to a number of trade unions, advising them on this specific issue. It appears in the register of interests for another year, but I no longer have any direct interest.

I have three questions for the Minister. First, he foreshadowed at Second Reading that a raft of amendments was coming. I think it has been suggested that there will be further amendments; clearly not in this House, but there will be a further batch when the Bill is considered in the Commons, which will come back to us. Is this still the case?

Secondly, and more specifically, the Government have made proposals for changes to the cost control mechanism, for which primary legislation will be required. Is it envisaged that they will be made to this Bill or will a separate Bill come forward at a later stage? Before I make my third point, I first thank the Minister very much; he has been extremely open and informative. He has gone out of his way to make sure that we understand what these amendments are for, and I welcome that.

One of the amendments picks up a point I made in my Amendment 6 in Committee relating to the potential payment of remedial AVCs—a wonderful concept. My amendment was obviously very simple, and we now have a much more extensive and substantial change. It will be a complex issue and I recognise that it will be complex to administer. One of the problems we have is that there is a demand, but we have no way of telling how big it will be. The respective scheme advisory boards will have to look at and decide what proportionate and appropriate steps they need to take. I hope the Minister will indicate that they are prepared to facilitate that.

[Baroness Janke (LD)]

I too thank the Minister for his time and for the engagement he has provided throughout the Bill, particularly regarding these amendments. Considering the scale, complexity and magnitude of the Bill, together with the millions who will be affected by it, I understand that these amendments try to cover a variety of contexts and circumstances to provide a comprehensive remedy to the previous discrimination. I recognise that the whole range of contexts and circumstances means that many will require fine detail. I hope these will, in many ways, support the millions of public sector workers who have suffered discrimination as a result of earlier circumstances.

We will see later some of the specific issues we raised in Committee. I hope the Minister can assure us that these amendments have taken account of those. We will explore that later.

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Moved by

[Lord Davies of Brixton]

40: Clause 21, page 18, line 13, at end insert—
“(6A) In subsection (5), a loss “attributable to the application of any provision of, or made under, this Chapter” includes a loss incurred by a member with remediable service who—(a) is transferred to the new scheme and reaches the required number of years of pensionable service to retire with full benefits under the legacy scheme, but(b) is unable to access the full value of those benefits because they must continue to work to retire with full benefits under the new scheme.”Member’s explanatory statement
This amendment provides that certain losses arising from the interaction of the rules of the new and legacy schemes respectively will be compensated.

[Lord Davies of Brixton (Lab)]

My Lords, this amendment is about what has been termed “the pension trap”. Much concern has been expressed about this phenomenon by different groups and members of different schemes, not least the Police Superintendents’ Association and the Fire Brigades Union. It is important to be clear that this issue affects all the major public service schemes. It is more salient in the uniformed service schemes as they previously had a much lower pension age, so the impact of the pension trap is more significant, but it runs through all the schemes. When you put two schemes together that work on significantly different bases, problems can arise that perhaps we should have spotted at an earlier stage of the discussions on the scheme.

The key issue concerns where you combine schemes with different normal retirement ages in the legacy and new schemes respectively, and the impact of extending working lives in that situation. Extending working lives has been a theme of the reform of public service pensions, so we should perhaps have thought through this a little more clearly. I may have been a little to blame myself in my previous life. When the issue was first raised I was somewhat doubtful but, the more I have looked at it, the more I have come to appreciate that it is a real problem.

The underlying problem is where the combined benefits, old and new, do not reflect the benefits that the members lose by having a later retirement age. They suffer a net loss. With most private sector schemes and the new state or public service schemes, if you defer your retirement, you get some credit: you lose a year’s worth of pension because you have decided to retire a year later, but the money that you have surrendered by doing so is used to increase the subsequent pension. Whether you take the pension at 65, 60 or 67, overall, the broad value of your benefits remains the same. This contrasts with the situation in most, if not all, of the significant public service schemes, where, if you defer your retirement, you simply lose that year’s benefit and receive no credit for it. The reason for this difference between public and private schemes is lost in the mists of time.

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[Lord Davies of Brixton (Lab)]

I thank the Minister for his detailed reply. At the appropriate time, I will indicate my intention to withdraw the amendment.

First, I want to say that the purpose and intention of the amendment—I never believed that it was complete in itself—was to prod the Government into taking the issue seriously. The problem arises in any scheme where, if you do not take your pension at the scheme pension age, you do not get any credit for giving up the pension that you lose by deferring your retirement. That is the underlying problem, and it occurs across the public sector. It is currently far more acute, as we have been told in detail by the Fire Brigades Union and the Police Superintendents’ Association.

I have no doubt that the real solution to this issue lies in scheme-level discussions, but such discussions will take place only if the Government give an indication that they take this issue seriously and want the respective scheme advisory boards to discuss and address the issue and seek out practical solutions. Whether they can be funded, and the extent to which any solution would fall within the cost cap and so not incur substantial additional cost, would have to be addressed as part of those discussions. That is all I am asking for.

I am grateful to the House for the opportunity to raise this issue. On that basis, I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

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Moved by

[Lord Davies of Brixton]

114: Clause 80, page 56, line 3, leave out “(2) and (3)” and insert “(1A) to (3).
(1A) In subsection (4) omit paragraph (c).”Member’s explanatory statement
The amendment removes from the calculation of the employer cost cap the effect of changes in the cost of connected schemes, including the cost of rectifying the unlawful discrimination.

[Lord Davies of Brixton (Lab)]

My Lords, I raised this issue at Second Reading in the context of questioning the use of directions. I believe that there is a general issue here about the respective weight given to primary legislation, regulations subject to approval by one or both Houses, and directions, which are the decision of the Treasury. Clearly, there is a balance to be drawn here on the appropriate level of parliamentary scrutiny; it is a debate that we should have, but it is not one I propose to pursue any more in the context of this Bill.

However, some concerns remain about issues that are being dealt with through directions which, I believe, should be subject to parliamentary scrutiny. In the context of this Bill, there are two issues of concern. The first is the decision that the cost of the remedy—that is, the remedy required to address the issue of age discrimination—should be counted as a member cost in the cost-control mechanism. The second issue is that, in that calculation, the costs of the remedy should be spread over a period of four years.

This is beginning to verge on technical issues but, at heart, these are policy decisions, and ones that should be subject to parliamentary scrutiny. They go far beyond what have been described. This legislation amends the Public Service Pensions Act 2013, and there was a report on that legislation, looking at the directions, which said that the directions did not need parliamentary scrutiny because they were simply technical matters of actuarial practice. My argument today, on those two issues—and I am going to focus only on the issue of whether this is a “member cost”—is around whether this is a technical matter of actuarial practice or whether it is a policy decision that should be subject to parliamentary scrutiny.

There is no doubt that the decision to make this a member cost will mean that members end up paying more money or receiving lower benefits. It will directly affect the benefits that they receive. The issue was raised in Committee, and the Minister at that stage maintained the position that

“Treasury directions … exercise a particular power, rather than creating a new power”.—[Official Report, 11/10/2021; col. GC 353.]


I would argue that the decision to make this a member cost as part of the cost-control mechanism goes beyond the exercise of a particular power and creates a new power, and hence it should be considered as regulations.

This is a complicated issue, and, to understand it, you need to have a clear understanding of the purpose of the cost-control mechanism. It is not, as the Government have suggested, a mechanism for assessing the value of pensions; this is not something that directly affects the calculation of the contribution rate being paid for the scheme. It simply affects the cost-control mechanism, which is the trigger for deciding whether changes should be made to the scheme. The costs of the scheme are the costs of the scheme; whatever the benefits are, they are the costs of the scheme. This is a mechanism for deciding whether those benefits should be changed or, alternatively, whether contributions should be changed.

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—but there are also these other elements in the calculation that are employer costs, which do not impact on the cost-control mechanism. The issue has been discussed, and there have been government reports on what counts as a member cost or an employer cost, but they have never considered the issue of the cost of a remedy incurred by the Government’s own error. It was the Government’s mistake to have age discrimination in this scheme and, to address the Government’s mistake, there has to be a remedy. That remedy is the subject of this Bill. Should the cost of that remedy be a cost for the Government, who created the problem in the first place, or a member cost? The Government argue that members are receiving additional benefits and so it is clearly a member cost.

This is an important issue and what I am arguing about now is not an ultimate answer—I have made my position clear; I think it should be an employer cost—but it is not an issue that should be addressed through directions; it should come before Parliament through regulations. Because of the nature of the regulations, they would probably be financial regulations and considered only by the House of Commons. That is effectively what I am arguing, and I have put down my amendment in order to raise this issue. To a certain extent, our deliberations here are not final, because this is the subject of extensive legal action. However, that is nothing to do with the argument today. The argument is technical; it is on the relatively narrow point of whether the cost of the remedy falls to be treated as an employer cost or as a member cost.

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, I have not participated on this Bill before; indeed, I just want to pick up the point made by the noble Lord, Lord Davies, about the way that more and more government actions are taken by subordinate legislation. I chair the Secondary Legislation Scrutiny Committee, and we produced a report last week entitled Government by Diktat. My noble friend Lord Blencathra, who chairs the parallel committee, the Delegated Powers and Regulatory Reform Committee, produced another report called Democracy Denied?

We all know that secondary legislation it is not well scrutinised. It cannot be amended, and this House and indeed the other place are therefore reluctant to undertake what I call the nuclear option—we cannot amend a bit of it, so we have to reject the whole lot. The last time that happened there was a huge constitutional crisis, to which my noble friend Lord Strathclyde had to set up a committee to answer.

However, we have moved from that unsatisfactory position to one where we now have guidance. Guidance may or may not form part of the regulations; sometimes it says that the guidance “must have regard to” the regulations. What does that mean? Does it mean “I thought about it and I did not want to follow it”, or does it mean “The court will decide, and you had better have a jolly good reason for not complying with it”.

The point from the noble Lord, Lord Davies of Brixton, takes it further away from the control of this House. We have what is now tertiary legislation: directions and decisions made by bodies that are not answerable to Parliament but whose decisions and regulations are enforced and required to be obeyed by every single member of the population of this country. Whatever the rights and wrongs of the point from the noble Lord, Lord Davies—I am not in a position to judge—he raises a very important matter for the House, which needs to be debated and discussed. As we move to new ways of regulating and legislating, because our society is moving on faster than the rather stately pace of primary legislation, we need to find new and better ways of making sure that Parliament, as the legislature, is not subject to the creeping, increasing control of the Executive—the Government.

My committee and my noble friend Lord Blencathra’s committee are pretty convinced that the situation needs seriously addressing here—and of course in the other place, which must lead the way on this—if we are to make sure that the balance, which has shifted, is put back in the right place and in the right form. The speech by the noble Lord, Lord Davies of Brixton, underlines some of the dangers that we are facing by direction, which is not good enough because it does not come before your Lordships’ House or indeed the other place but will nevertheless have a very significant impact for our fellow citizens.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, an amendment has been put forward to Clause 80 by the noble Lord, Lord Davies of Brixton, which concerns the employer cost cap. The noble Lord seeks to amend this clause to prevent the increase in value of schemes associated with the McCloud remedy being accounted for in the cost-control element of the 2016 valuations. I thank the noble Lord for bringing this to the attention of the House and am grateful to him for his prior engagement on the policy.

I can confirm that the Government have received pre-action protocol letters on behalf of some trade unions which have indicated that they may issue judicial review proceedings to challenge the Government’s decision to include the costs of remedy in the cost-control mechanism at the 2016 valuations. As the House will expect, and as the noble Lord, Lord Ponsonby, acknowledged, I cannot comment on the specifics of live or threatened litigation.

I acknowledge and appreciate the support the noble Baroness, Lady Janke, has given in general to the changes we have made to the cost-control mechanism—but there is more I want to say. I will talk through the general background, to reassure the noble Lord, Lord Davies, of the reasons for the Government’s decision. I will start by commenting on the policy rationale, starting with amending directions.

In Grand Committee, I brought to your Lordships’ attention that the Treasury had published amending directions on 7 October 2021 that will allow schemes to complete the cost-control element of the 2016 valuation process. These amending directions confirm that the increase in value of schemes associated with the McCloud remedy will be taken into account in the completion of the cost-control element of the 2016 valuations. The Government believe this is right, given that addressing the discrimination identified in the Court of Appeal’s judgment by giving members a choice of scheme benefits for the remedy period involves increasing the value of members’ pensions.

The cost-control mechanism was designed to assess costs arising from a change in value of schemes to members. Failure to capture the value of the remedy could have meant that members’ benefits may have changed going forwards, based on an incomplete and inaccurate assessment of the value of these pension schemes. This would represent an unacceptable risk to taxpayers, contrary to the objectives of the mechanism.

Turning to some specific detail on ceiling breaches, the Government have previously announced their intention to waive any ceiling breaches that arise from the 2016 valuations, and this is implemented by the current version of Clause 80. However, any floor breaches that occur will be honoured. This means that no member will see a reduction to their benefits as a result of the 2016 valuations. This decision, and the completion of the 2016 valuations, should provide certainty to scheme members over their benefits.

I will attempt at this stage to answer the point raised by my noble friend Lord Hodgson of Astley Abbotts and the noble Lord, Lord Ponsonby, about the use of directions. The Government acknowledge the key interest of the House in the scrutiny of secondary and tertiary legislation. The DPRRC considered this Bill and chose not to bring forward any comments for the attention of the House. The Government have powers under Section 12 of the PSPA 2013 to set out in Her Majesty’s Treasury’s directions what costs must be taken into account as part of the cost-control valuations. More broadly, I acknowledge the points my noble friend made; I have no doubt that Hansard will be read and I will say simply that his points are noted.

I will now say a few words about the amendment itself. The amendment seeks to amend the Treasury’s powers, set out in Section 12 of the Public Service Pensions Act 2013, to make directions which set the employer cost cap. Section 12 grants the Treasury a wide power to specify in directions which costs should be taken into account as part of the cost-control mechanism.

The amendment put forward by the noble Lord seeks to amend subsection (4) by omitting paragraph (c). I understand that the noble Lord’s intention is to remove the Treasury’s power to specify that the costs of remedy, or any other costs associated with the legacy schemes, should be accounted for in the mechanism.

This amendment may not have what I understand to be the noble Lord’s intended effect of preventing the increased value associated with the McCloud remedy from being included in the mechanism at the 2016 valuations. Subsection (4) sets out the type of costs that Treasury directions may specify for inclusion in the cost-control mechanism, but it is not intended to be an exhaustive list; rather, it provides some illustrative examples of how the wide power in subsection (3) may be exercised. I also note that the 2021 amending directions came into effect on 8 October 2021, as I mentioned earlier, under the existing powers. The noble Lord’s amendment as drafted would have no effect on the 2021 amending directions.

I want to attempt to answer some questions that were raised by the noble Lord, Lord Davies, supported, I think, by the noble Baroness, Lady Janke. There was some debate about why members are being made to pay for, as they put it, mistakes made by the Government. When the cost-control mechanism was established, it was agreed that it would consider only costs that affect the value of a scheme to members. Addressing the discrimination identified in the McCloud and Sargeant judgments by giving members a choice of scheme benefits for the remedy period involves increasing the value of schemes to members. The costs associated with this should therefore be taken into account as part of the cost-control element of the 2016 valuations process. However, any ceiling breaches that occur will be waived, no member will see a reduction in benefits as a result of the 2016 valuations, and any floor breaches that occur will be honoured.

The noble Lord, Lord Davies, asked when we will introduce amendments to reform the cost-control mechanism. I hope I can provide some reassurance by saying that the Government published our response to the consultation on the CCM on 4 October, we are currently working through our options and we will legislate for changes to the mechanism when parliamentary time allows. While a precise date has not been set—I am sorry I cannot give that date—the aim is to implement any changes in time for the 2020 valuations. As should now be clear, the Government have no intention of tabling an amendment in the House of Lords to implement these reforms. Instead, the package of amendments being introduced in this House are technical amendments that ensure the consistent application and legal operability of measures in the Bill.

I hope that, with these explanations, I have provided the noble Lord, Lord Davies, in particular, with some helpful reassurances on the policy rationale and the powers used, and I ask him to withdraw his amendment.

[Lord Davies of Brixton (Lab)]

My Lords, at the appropriate time I will indicate that I will withdraw the amendment. I am prepared to accept the advice that it does not actually achieve what I would like to achieve, and that the retrospective factor needs to be taken into account. But I would just like to highlight an issue mentioned by my noble friend Lord Ponsonby.

What the decision to make this a member cost means is that it will impact on those members who gain no benefit from the remedy. The remedy is not arbitrary, but there are broad patterns in who benefits from the remedy, and large numbers of members do not benefit from the remedy but will be affected by the inclusion of this as a member cost in the cost-control mechanism. The Government have suggested that they chose the four-year period within the cost-control mechanism for undertaking the calculation because they did not want to impact on future members of the scheme who gain no benefit from the remedy, but exactly the same problem applies to many current members of the scheme who will be active members during the relevant four-year period. To me, that sounds like an argument that the remedy should not be treated as a member cost, because of its inequitable impact.

I am very grateful to the noble Lord, Lord Hodgson, for his remarks. This is an issue that I have perhaps said more about than I originally intended, but I very much hope it will be taken seriously. What comes to me from it is that it is not easy to say what is or is not suitable to be dealt with through particular types of legislation. The issue is the impact it has, not its precise formulation—and making it a member cost has a substantial impact and so should get the appropriate level of consideration.

I note what the Minister said about the amendments to the cost-control mechanism and that he did not rule out the possibility that it would be added to this Bill during its Commons stages. I am a bit concerned about the idea of debating such significant changes in the context of the ping-pong process, so maybe he could give some sort of reassurance on that. But subject to those points, I beg leave to withdraw my amendment.

Amendment 114 withdrawn.

Public Service Pensions and Judicial Offices Bill [HL]

Lord Davies of Brixton Excerpts

3rd reading
Monday 6th December 2021 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I thank the Minister for his courtesy and helpfulness during the passage of the Bill. It was very much a learning process for me as the first Bill to which I had given such a close and involved consideration. I learned lessons, one of which is to check which group a particular amendment is in and get it right. I thank the Minister, as well as the officials. We seem to be saying farewell, but I suspect that it is au revoir and that, in one way or another, we will be returning to these issues.

[Baroness Janke (LD)]

My Lords, I too thank the Minister; I thank him for the letter I received today, which answered the question that he referred to, as well as for his leadership and his open and engaging approach. He has ensured that we have had opportunities to be fully briefed on the Bill. As others have said, it is a very complex Bill, wide-ranging in scope, and has implications for millions of citizens, particularly public sector workers.

I also thank all noble Lords for their contributions. As the noble Lord, Lord Davies, said, I am sure that we have all learned a great deal from the Bill. I certainly know a lot more about public sector pensions than I did when we started out. I express my appreciation to the Bill team, for its expert help and support and, not least, its patience in explaining some of these complexities.

Noble Lords across the House have made valuable contributions; certainly, the judicial offices part of the Bill saw a very high-quality debate, with issues arising that apply not just to judicial offices but across the board, to public services and the holding of high office. Again, I thank colleagues for their co-operation. I believe that we have worked hard and well on this Bill.

Lastly, I put on record my thanks to Sarah Pughe in the Liberal Democrat Whips’ Office, for her work on the Bill, and for the professional support that she has given me throughout its passage.

Public Service Pensions and Judicial Offices Bill [HL]

Lord Davies of Brixton Excerpts

Consideration of Commons amendments
Wednesday 9th March 2022 Lords Chamber

I will be happy to provide further information on any of these amendments should your Lordships have any questions, but I hope these small examples demonstrate just how technical these changes are. I assure the House that they all share the aim of ensuring as robust a remedy as possible. With that, I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, while I do not have a current interest to declare, it would be appropriate for me to mention that, until last August, I was a consultant to a number of trade unions, advising them in this specific area. It appears in the register of interests, but I no longer undertake that work. I thank the Minister for providing more background to the legislation. He has been extremely helpful in ensuring that the fullest information is available on the changes being made at this stage.

However, it is worth recalling that, when the Bill was introduced last July, it dealt with two main issues: first and principally, it provided the remedy for the Government’s unlawful age discrimination in the Public Service Pensions Act 2013; secondly, it established a one-of-a-kind pension scheme for judges and, as a bit of an add-on, increased their retirement age. That is how it left your Lordships’ House.

In the Commons, two significant new issues were added. In Committee, amendments were introduced that made significant changes to the cost control mechanism that applies to public service pension schemes—this is Amendment 48—and then, on Report, Amendment 54 was introduced, which will allow the Secretary of State to issue directions to the trustees of local government pension schemes about how they invest their members’ money. It must be stressed that both these issues are completely new and have no direct connection with what was in the Bill when we considered it previously. Therefore, it is entirely proper—indeed, necessary—that we should give both amendments adequate consideration. I will argue that they are both objectionable.

I will come back to local government pension schemes, but I start with Amendment 48, which provides for significant changes in the cost control mechanism. This is complicated stuff and time is limited, and I am sure that many noble Lords want to get on with subsequent business, but the Government need to rethink their approach—hence the Motions in my name. The key change to the mechanism proposed by the Government is the addition of what is described as an “economic test”. This is completely new; it constitutes a significant change to the mechanism and is clearly outside the repeatedly given guarantees that there would be a 25-year stable regime to administer public service pensions.

Whatever was decided back in 2011 was meant to remain for a generation, and repeated promises were made that there would be no surprises. It is important to understand that these promises went beyond what was ultimately included in the subsequent legislation. For example, following the negotiations that took place on the reforms, the then Chief Secretary to the Treasury, Danny Alexander, said that reform along the lines the Government had proposed could endure for 25 years:

“It will be a sustainable deal that will endure for at least 25 years”.—[Official Report, Commons, 2/11/11; col. 929.]


In the same vein, the Minister for the Cabinet Office, the then Francis Maude MP, gave a guarantee that

“outside of the scheme designs parameters”

there would be

“no further reform for the next 25 years.”—[Official Report, Commons, 20/12/11; col. 151WS.]

This proposal, the introduction of the economic test, is a clear breach of the commitment given by the Government in 2011. The agreement reached then was difficult for many unions and members to accept, as it amounted to public servants paying more, working more and getting less, but unions engaged in the negotiations in good faith and most accepted the resulting deal. The cost-control mechanism set out at that time was a key part of that arrangement.

From the hard information we have been given so far about the economic test, it gives the appearance of being designed to allow the Government to override the results of the cost-control mechanism in the event of what is termed a downward breach of the cost cap. A downward breach is when the value of members’ benefits falls by a significant amount—by a tenth or more, roughly speaking. Such a fall in the value of members’ benefits can arise from a combination of factors, but principally from a reduction in longevity compared with what was expected or from lower rates of inflation, to which benefit increases are linked.

The situation is that the value of members’ benefits might fall significantly and, consequently, they are entitled to an offsetting increase in their benefits to restore their value. But with this amendment the Government are given the power to cancel the increase on a basis that so far is ill defined. The Government and the Minister emphasised the potential for the economic check to be used to override an upward breach and stop the consequent cuts in members’ benefits, if the existing benefits are considered affordable.

To summarise, on the one hand, when growth in the economy is greater than expected, members will not have to suffer cuts in benefits. On the other hand, if economic growth is less than expected, members will not enjoy increases in benefits to which they would otherwise have been entitled. The problem is that it introduces a large degree of subjectivity and potential for political considerations to influence what should be a transparent and objective process. This need for objectivity is only increased by the mistrust generated by the Government’s response to the initial 2016 valuations of public service schemes.

The Minister in the Commons said that the cost-control mechanism

“will operate in a transparent way and be linked to an objective and independent measure of expected long-term earnings and GDP growth from the Office for Budget Responsibility”.—[Official Report, Commons, Public Service Pensions and Judicial Offices Bill Committee, 27/1/22; col. 33.]

But we have no idea in any detail how this will operate. We have no idea how transparent and open to debate it will be.

The detail will be set out in Treasury directions, which never come before this House, let alone the Commons. Treasury directions are not like delegated legislation. They are made by the Government with no form of accountability, so the Government will effectively be able to tear up the cost-control mechanism that unions were promised would last 25 years. That is why I believe Treasury directions are unsuitable for something so significant that will affect the terms of employment of our public sector workers.

The Minister needs to look again at how to restore trust and confidence in public service pensions in future without resiling from the promises given 10 years ago. At the very least, will the Minister spell out for the House in more detail how the Government propose to get from the figures provided by the Office for Budget Responsibility to the ultimate decision not to proceed with increases to which members are entitled?

Having addressed the issue of Amendment 48, I will shift gear somewhat and move on to Amendment 54. I am opposed to the new clause, which was introduced in the Commons on Report—a very late stage of the Bill’s progress through the Commons. It gives the Secretary of State the power to issue guidance or directions to authorities that administer public sector pension schemes that would ban them from taking investment decisions that conflict with the UK’s foreign and defence policy. In practice, as has been explained, this affects only the Local Government Pension Scheme, as it is the only significant public sector pension scheme that has investments.

The new clause would reverse the decision of the Supreme Court in the case involving the Palestinian Solidarity Campaign. The full judgment is worth reading as it sets out the argument against ministerial involvement in trustee decisions with force and clarity. The court found that the Secretary of State was wrong to claim that the Local Government Pension Scheme administrators were part of the machinery of the state. This claim fails to recognise that the administrators have duties which, at a practical level, are similar to those of trustees and that they consider themselves as quasi-trustees who should act in members’ best interests. The court also found the Secretary of State’s claim that contributions to the scheme are ultimately funded by the taxpayer equally misleading, as the fund represents the contributing employees’ money, not state money.

The proponents of the new clause tried to make BDS the issue, but it is actually about government overreach. The Supreme Court ruled that the power of the Secretary of State to issue guidance to local authorities has to respect their primary responsibility as quasi-trustees of the fund. The Secretary of State was not entitled, therefore, to make authorities give effect to his own policies in preference to those that they themselves thought it right to adopt in fulfilment of their fiduciary duties.

I want to make it clear that I do not want to be thought of as simply wishing to dodge the issue of BDS. I would welcome a debate on BDS, but that is not what we are discussing here today. This amendment does not mention BDS and potentially goes much wider, with a potential impact on the whole environmental, social and governance agenda.

The House will be aware that there is general support for initiatives that help pension schemes with assessing ESG-related risks. Indeed, the Government have enacted legislation that requires schemes to consider ESG objectives. It is now accepted that pension funds’ fiduciary responsibilities to members, which prioritise generating investment returns, permit scope to allow the removal of investments on non-economic grounds if they do not materially harm investment fulfilments.

It should also be understood that the Local Government Pension Scheme advisory board for England and Wales has produced guidance on responsible investment and provided investment decision-makers with a range of information, case studies and tools to help them meet the challenges involved. This guidance should be sufficient, and it is not necessary, therefore, to consider further legislative intervention in the operation of their investments or changes to the long-standing law in this area.

I understand that the Pensions and Lifetime Savings Association—the body that represents workplace pension schemes, including the Local Government Pension Scheme—has written to the Treasury to urge the Government to give more time and thought to how this would work in practice before it is adopted into law. We know, as the Minister has explained, that the Government are also considering more widely what role investment funds can play, particularly in promoting local investment, as part of their levelling-up agenda.

I have three more points. First, it should be recognised that in the context of the Local Government Pension Scheme, investment decisions have a potential impact on the contributions paid by employers and members of the scheme. Decisions made to align with government policies may result in additional costs to local government employers and employees, and to the many private sector operations included in their schemes.

Secondly, there is some doubt as to whether the amendment in its current form will work in the way that is intended. It fails to resolve the potential conflict between the Secretary of State’s directions and the trustees’ continuing duties to their members. It calls into question the relationship between the power of the state over individual property rights. At the very least, there is a question about interference with rights under the European Convention on Human Rights.

--- Later in debate ---

Amendment to the Motion on Amendment 48

[Lord Davies of Brixton]

Tabled by

Leave out “agree” and insert “disagree”.

[Lord Davies of Brixton (Lab)]

My Lords, I make no apology for promoting this debate; this is an important issue that the House has an obligation to consider carefully. I listened to what the Minister said about the economic test. I still feel there is a lack of information but, particularly in light of his statement that there was no scope within the mechanism for intervention—presumably by the Government—I look forward to seeing the directions in some detail and will try to promote some discussion in this House. However, for the purposes of this debate, I will not move my amendment.

Amendment to the Motion on Amendment 48 not moved.

--- Later in debate ---

Amendment to the Motion on Amendment 54

[Lord Davies of Brixton]

Tabled by

Leave out “agree” and insert “disagree”.

[Lord Davies of Brixton (Lab)]

I have to say that I understand and respect the strength of noble Lords’ feelings on BDS, but I hold to my view that it was not the subject of today’s debate. Today’s debate was about whether the decisions about local government investments held on behalf of scheme members should be taken by the trustees, who have a fiduciary responsibility, or by the Government, who do not. It is notable that the Pensions and Lifetime Savings Association and local government as a whole consider that this amendment is unnecessary and ill thought-out, with unknown consequences.

However, I take it from the Minister’s words that, in practice, full consideration of this issue will be deferred until the Government come forward with their own legislative proposals, at which time we can give it proper consideration. I suspect that I will still oppose those proposals, but clearly we have not had the time to give this change sufficient attention. In light of what the Minister has said, I will not move my amendment.

Amendment to the Motion on Amendment 54 not moved.