Lord Davies of Brixton
Main Page: Lord Davies of Brixton (Labour - Life peer)Public Service Pensions and Judicial Offices Bill [HL]
Lord Davies of Brixton ExcerptsWednesday 9th March 2022
(2 years, 8 months ago)
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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.
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.
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.