Lord Eatwell
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(11 years, 10 months ago)
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Lord Eatwell
“(3A) A scheme under section 1 which replaces a defined benefit scheme may only be established as a defined benefits scheme.”
Lord Eatwell
My Lords, this amendment, which is a reprise of something that we debated in Committee, derives from a peculiarity of the process through which this Bill has gone, in that many of the measures in the Bill derive from negotiation between the trades unions, other interested parties and the Government. Having reached agreement, the Government’s side seems to appear in the Bill but the assurances given to the other side in the negotiations do not. What we have instead is simply a continuous series of government assurances.
This amendment requires that a defined benefit scheme should be replaced with a defined benefit scheme. This reinforces the Government’s oft-repeated commitment to maintaining the defined benefit structure once the definition of the defined benefit has been changed, in the way that was proposed by my noble friend Lord Hutton. However, Clause 8 still provides that any scheme, once closed, can be replaced by,
“a scheme of any other description”.
Those are the exact words. As I said just now, the Government have continuously sought to give assurance that they would not replace a defined benefit scheme by anything other than a new defined benefit scheme but they have proved peculiarly reluctant to place such a condition in the Bill. This persistent reluctance is becoming quite disturbing and is significantly undermining the confidence of pension scheme members that their rights are going to be protected in the ways that have been suggested.
As I pointed out in Committee, the noble Lord, Lord Newby, further undermined the confidence of members when he said on 19 December that,
“although the Government have absolutely no intention to change the basis of the schemes, it makes sense for a piece of legislation, which we hope has a long life itself, to allow flexibility in the future if there are unforeseen changes”.—[Official Report, 19/12/12; col. 1585.]
Therefore, the Government are making a commitment: they continuously assure members that they will replace defined benefit schemes only with newly constructed defined benefit schemes—but, on the other hand, perhaps unforeseen circumstances mean that they will not.
I feel it is appropriate that the Government keep their side of the deal, which was that the defined benefit schemes would move from a final salary scheme to a salary-averaging scheme, which was a deterioration in the future pension benefits available to scheme members. They accepted that because the other side of the deal was that the Government said that they would commit not to move away from defined benefits. The Minister really has to tell us why the Government are so reluctant to keep their side of the deal. I beg to move.
Lord Newby
My Lords, this is indeed a reprise of a debate which we had in Committee. I believe that the Government have been extremely clear about their position on this issue throughout the legislative process, both here and in another place. Let me explain again why we remain unmoved. At the risk of stating the obvious, the Government have no desire or intention to replace the defined benefit schemes that have been negotiated. Officials, employers and member representatives have worked extremely hard to agree scheme designs that meet the needs of the different workforces and which are fair and affordable.
We believe that the new schemes are fit for purpose. Everyone is now working to implement these schemes from April 2015 for most workforces, but earlier than that in some cases. Draft regulations for the Civil Service scheme have been shared with the House, while the local government scheme in England and Wales has gone out to informal consultation on its own draft regulations.
While each set of regulations remains a work in progress, there can be no doubt that they would establish a defined benefit scheme of the agreed career average design. So when the Government say that we have no other intention than to create defined benefit schemes, those are not mere words—we are putting them into practice. The Government say that we have no intention of replacing defined benefit schemes with other designs, and that intention is underpinned clearly in the Bill by Clause 22.
The extent to which a scheme is a CARE scheme is explicitly one of the protected elements in the clause. That means that for a full 25 years—26 years in some schemes—the defined benefit design could not be easily changed. To do so, the responsible authority would have to consult on the proposed changes with all those affected,
“with a view to reaching agreement”.
That is a higher standard of consultation than in most other statutory consultations. The authority must do more than seek out and consider the views of interested parties; it must engage with them, with the aim of reaching agreement with them. In addition, the authorities must present a case to Parliament, or the devolved legislature, for changing the scheme design from career average, notwithstanding an explicit presumption written into the Bill that it would not be desirable to change the design before 2040.
There is no ambiguity here. Noble Lords and scheme managers can be fully reassured of our commitment to a defined benefit arrangement. It would be misleading and unnecessarily alarmist to imply anything to the contrary. So I say again: there is no prospect of the Government wanting to replace the defined benefit schemes that we are working so hard to develop, and I believe that that is the position of the party of the noble Lord, Lord Eatwell, also. The noble Lord may say, as he has in the past, that Governments come and go, but the status of the new defined benefit schemes will be protected by the Bill. I therefore urge the noble Lord to withdraw his amendment.
Lord Eatwell
That was an intriguing reply. The usual reply in circumstances where the Government feel that they have covered all bases is that an amendment is unnecessary, but the Minister did not feel that he could say that. It is striking that, despite his variety of assurances, a simple statement is unacceptable. However, under the circumstances, I will take this away and think about it further. For the moment, I beg leave to withdraw the amendment.
Lord Whitty
My Lords, this amendment relates to revaluation. Clause 9 appears to allow the Treasury to change yet again the basis of revaluation, this time away from the CPI to something else. We discussed this in Committee and various assurances were given in that respect, although they are not as yet reflected in the Bill. However, no reassurances were given—indeed, the Minister was less than his usual emollient self—in relation to the provision in the Bill that in effect allows for negative revaluation in the light of changes in the CPI. That means that the Treasury can on the one hand amend the index and on the other impose a decrease in the accrued pension without any consultation with those affected, and in a way that, in the case of the LGPS, seriously undermines not only long-established practice but the recent agreement between the LGA and the trade unions.
I have looked at the history of the LGPS over the past 30 years, although it has actually run for a longer period than that, and there was only one point at which the relative index, at that point the RPI, actually fell at the point at which it was evaluated, and that was from September 2009 to the 2010 increase.
There were no precedents at that time. We had to refer back to the Pensions (Increase) Act 1971, which allows for increases but does not allow for decreases. The interpretation at that time was that that Act did not permit a decrease, so the 2010 adjustment was, in effect, zero. That is one aspect.
The other aspect of having the potential for a negative adjustment in revaluation is that it is inconsistent between those who are already receiving pensions or who are entitled to deferred benefits and are therefore governed by the Pensions (Increase) Act 1971, in which case their benefits would not be reduced, and active members who are still contributing to the scheme and who would, at precisely the same time when a negative revaluation could be made under this clause, see their benefits go down. We would therefore be treating active members disfavourably compared with members who have left the scheme or are already drawing their pension.
I am grateful for the assurances on the continuation of the CPI, but the fact is that the sudden and unexpected replacement of long-established RPI by the CPI has left a legacy of distrust in the schemes. Part of that is that if the CPI, as is expected, performs, if that is the word, less substantially than the RPI, there is a greater likelihood or possibility of a negative figure. The recent agreement between the LGA and the trade unions made it clear that past practice would continue to operate, and that if there were a negative change in the index there would be a nil adjustment. The implication of this clause is that it is attempting to override that commitment and agreement, which I think the Minister, and certainly some of his predecessors, would accept got the Government out of a very difficult position on pension reform in general and the LGPS in particular. Therefore, unravelling that aspect of the agreement—there are other amendments I will come to with a similar effect—is not helpful.
Amendment 15 would stipulate precisely what is already past practice and in the agreement: namely, that if there is a negative movement in the index, there will be a nil adjustment. I think the Government should accept the amendment. I appreciate the strong words of the Minister last time that the Government are not prepared so to do, despite the anomalies and distrust it would create. There are alternative amendments on this in this group in the name of my noble friend Lord Eatwell. Perhaps the Government could at least show their good will by accepting that if there were a negative increase, it would have to be subject to the affirmative procedure as provided for in my noble friend’s amendment, which no doubt he will speak to more ably than me shortly.
If the Government do not move at all, we are in some serious difficulty. It is causing considerable upset among employers, among those who have to engage in the new cost-management process within the Local Government Pension Scheme, among the unions and among the members of that scheme. The Minister could assuage those anxieties easily tonight by accepting my amendment or, in default of that, my noble friend’s amendment. It would be wrong for the Government to reject both. We would be on some sort of collusion course, whereas in general the LGPS and the arrangements for it from 2014 are done and dusted in a way that frankly was probably beyond the Government’s dreams only a year or so ago. I think that would be most unfortunate not only for the members of and employers in the scheme but for the Government and for future relations. I genuinely hope that the Government can move on this issue tonight. I beg to move.
Lord Eatwell
My Lords, I fully support the arguments put forward by my noble friend Lord Whitty, particularly on the complications that would arise with respect to the Local Government Pension Scheme. The amendment in my name and that of my noble and learned friend Lord Davidson refers to the general proposition in Clause 9(3) that,
“the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate”.
The Treasury has a completely free hand to determine the change in prices or earnings to be applied to the structure of the pension scheme. It seems to us on this side that this is really a step too far, so we have proposed that it should be subject not to a negative Commons procedure but to the affirmative procedure so that there can be a truly substantive debate on any particular proposal that might be unreasonable.
In Committee the Minister said:
“Any attempt to exercise this discretion in such a way that did not produce accurate and appropriate estimates”—
I must say as an economist that there is no such thing; there are estimates, but “accurate and appropriate” is something different—
“with reference to a reasonable index of prices or earnings”—
there is no such thing as that either—
“could be challenged by scheme members. Any decision which is not reasonable”—
that is fine—
“even without this amendment … could be challenged by judicial review and struck down by the High Court”.—[Official Report, 15/1/13; col. 608.]
What a cumbersome procedure. The affirmative procedure may be seen as taking somewhat more time and requiring more effort than the negative procedure, but how much better than saying, “Well, if this goes wrong, you’ve got to take it to the High Court”? That really is truly unsatisfactory.
Introducing this very minor amendment will provide an environment for the discussion of changes in the chosen index that can be deemed to be reasonable and to have the confidence of members of the schemes. I feel that this approach, perhaps allied with that suggested by my noble friend, would provide the confidence in the process of revaluation that from time to time can be enormously important in maintaining standards of living, particularly of more elderly pensioners.
Lord Newby
My Lords, as we are debating a group that started with an amendment moved by the noble Lord, Lord Whitty, I shall take this opportunity to answer the question he asked me earlier about whether the administering authority or the employing authority would determine whether an effect is significant. I am extremely pleased that I did not try to reply at the time because the answer is neither. It will be the “responsible authority”, because that is the authority that will be making the scheme regulations. In the local authority scheme, it would be not the employer but the Secretary of State. I hope that answers that question.
We have debated the amendments in this group before, so I shall try to be relatively brief in explaining why I do not believe it would be fair to restrict the revaluation of accruals from directly tracking growth, including when it is negative. Even though negative changes in prices or earnings are exceptionally rare, the Government firmly believe that if there is no revaluation ceiling, it would be unfair to have a revaluation floor to the benefit of members.
This is the sort of unbalanced risk-sharing between members and the taxpayer that the measures in this Bill seek to remove. The report by the noble Lord, Lord Hutton, specifically criticised this “asymmetric sharing of risk”. In addition, such a revaluation floor could lead to the cost cap being breached, to the detriment of future members who simply end up paying for past members’ accruals growing faster than the scheme revaluation rate. For those reasons, I will not be able to support the amendment of the noble Lord, Lord Whitty.
I am also unable to support the amendment of the noble Lord, Lord Eatwell, which would make the annual Treasury revaluation order affirmative rather than negative. As we have said before, this would not be an efficient use of parliamentary time and would be counter to the long-standing convention with other public service pension indexation. The order will be a run of the mill piece of legislation, and it would be incongruous for it to be subject to the affirmative procedure in each and every year.
However, I hope that I can go some way to meeting noble Lords’ concerns. In the years when the values in the order are negative, there will be a strong expectation that the Government of the day should ensure that there is a full parliamentary debate on the changes, not least because they would be so rare. Perhaps we can go further than that general statement and look at whether to require the affirmative procedure when, as unlikely as these events will be, the order sets out a negative figure. It seems that this would strike the appropriate balance between parliamentary scrutiny and sensible regulation-making.
I would therefore be willing, if the noble Lords were able not to press their amendments, to take this away to consider it further, with a view to returning to the matter at Third Reading with an amendment that would require any annual order to come before the House for affirmative procedure if the CPI index slipped into negative territory. I therefore hope that the noble Lord, Lord Whitty, will feel able to withdraw his amendment.
Lord Kennedy of Southwark
I think the noble Lord is absolutely right that there is a difference in fitness. That is the problem. A regime could be put in place for people when they first come as recruits. By accepting my amendment, the Government could set the age in scheme regulations, whereas at the moment the age would normally be 60. I beg to move.
Lord Eatwell
My Lords, there are also in this group a pair of amendments in my name and that of my noble and learned friend Lord Davidson, both of which seek to add flexibility and that famous characteristic, future-proofing, to the Bill. It is a laudable objective of the Government to have a common movement—a standard process—that can be seen as fair and generally acceptable across the entire structure of public service pensions. However, it is an objective which will, inevitably, from time to time, run up against reality. We have already seen it run up against reality in the case of the uniformed services, which we discussed earlier. It could also run up against reality in a whole series of other circumstances where the best would be the enemy of the good. In other words, the commitment to uniformity would produce elements of unfairness and, perhaps, elements of unsatisfactory performance because individuals were staying in employment longer than they ought to in some circumstances.
We need a degree of flexibility and Amendment 19 relates flexibility to a scheme-specific capability review. These reviews are now becoming quite common within public services, as they already are in private industry. They are designed in some circumstances to relate to the capabilities of individuals with respect to age. If there were to be a thorough review which a Government at the time accepted, this amendment would give the Government the flexibility to amend the pension ages set out in Clause 10(1) and (2). This would provide a degree of flexibility and that is all it is intended to do.
I questioned the noble Lord in Committee about a number of reviews that are currently under way. He pointed out to me that those reviews were not considering issues of pension age and I accept that entirely. However, this does not mean that considering pension age relative to capability will not occur or is not likely to occur. On the contrary, it is highly likely to occur over the next 10 years or so. Amendment 19, therefore, provides the Government with the necessary flexibility to respond to scheme-specific capability reviews.
Amendment 20 would incorporate into the Bill a proposition directly taken from my noble friend Lord Hutton’s excellent report. He argued at the time that the relationship between the state pension age, which is the sort of anchor of the whole structure, and the structure of pension ages in the public sector should be reviewed from time to time. This amendment incorporates my noble friend’s proposition.
In Committee, the Minister said:
“The DWP White Paper published yesterday says that we intend to hold a review every five years, so the link will be reviewed when a review is announced”.—[Official Report, 15/1/2013; col. 621.]
He got a bit muddled there but we know what he meant. That is fine, but could he tell us what is going to happen to this DWP White Paper? Is it the forerunner of some legislation? If so, when will that legislative proposition appear? Would it not be comfortable, given the structure of this Bill, to include Amendment 20, taken from the Hutton report, to achieve the goal he declares to be the Government’s goal, as set out in that DWP document?
I entirely understand the commitment to having a standardised, clear, comprehensible system, but there will always be anomalies which have to be appropriately addressed. I believe that these two amendments provide flexibility and would ensure that the Government could do exactly that.
Lord Eatwell
“(4B) The link between the state pension age and a person’s normal or deferred pension age shall be regularly and independently reviewed to ensure that the link remains appropriate in light of scheme members’ longevity.”
Lord Eatwell
My Lords, the Minister has said that, with respect to the notion of the review, the Government will have reviews, because the DWP White Paper says so, but they are not quite sure what those reviews would be—it is all too complicated at the moment and they have not worked it out. Therefore, they cannot include it in the Bill. That is pretty unsatisfactory. On the one hand, they are prepared to make an assurance that there will be reviews but, on the other hand, they are not sure what form those reviews might take, who might be involved or what sort of procedures there might be. They are not willing to back up that assurance in the Bill. Finally, we are told that legislation does not matter very much and that it is just as good as an assurance. That is entirely unsatisfactory.
The issues that have been raised by the noble Baroness need to be considered on another occasion, and we will need to return to this issue at Third Reading.