Public Service Pensions Bill

Lord Flight Excerpts

Tuesday 15th January 2013 Lords Chamber

I am arguing not just about the way in which we rerate liabilities but about all the bases on which we value schemes. This point was made in the debate on the Queen’s Speech by the noble Lord, Lord MacGregor of Pulham Market. He blamed it all on quantitative easing and, in a sense, he was right. He claimed that the two tranches of quantitative easing effectively knocked £300 million or so—at a stroke—off the value of private and public pension schemes. Actually, nothing had gone wrong with those schemes: the liabilities had not increased, the potential beneficiaries were not going to live any longer and the investment strategies of the schemes’ trustees were not actually performing any worse than they previously were, although other factors might have reduced the value of the assets at the same time. Actually, the notional way in which they discounted had hugely increased the liabilities and had therefore made the scheme appear unviable.

[Lord Flight]

I thank the noble Lord for giving way. Perhaps I might suggest that the real cause of the trouble is the IFRS accounting standards that require companies to disclose pension liabilities discounted at government gilt yields. That, in turn, has made companies pay contributions to cover the resulting alleged deficits. As the noble Lord points out, that has led companies to close their final salary schemes and to the false rate of interest resulting from QE. However, the real problem has been the uncritical acceptance by Governments of both persuasions of what I believe to be profoundly wrong IFRS accounting standards.

[Lord Whitty]

I thank the noble Lord for that intervention. I had not expected to agree with him this afternoon, particularly on subsequent amendments, but I agree with him on that issue. It is important to recognise that the acceptance of those accountancy standards is causing the problem. That is why the noble Lord, Lord MacGregor, in the speech to which I referred, suggested that the Bank of England, government actuaries and the accounting profession sat down and looked at those assumptions. Slightly more tangentially, the Treasury Select Committee in another place has also touched on this point.

I am suggesting that the Government take the initiative whereby, once the Bill is passed by this House in whatever form, they set up a review looking at whether the present conventions and the way in which these public service pensions are assessed are correct—although there is a wider application—and whether we are getting a seriously misleading impression that has a detrimental effect. As the noble Lord said, there has been a devastating effect on large numbers of private sector providers.

The amendment would have no effect on the rest of the Bill but would give the Government a lever to look at the issue again and provide for expert assessment, which, given that the newly formed schemes are not coming in until 2014, could come into place before the first revaluation of those schemes. I hope that the Government will take this matter seriously and have a look at it. I certainly hope that the House and anyone involved in looking at public and private pension schemes will recognise that this is a serious problem. I beg to move.

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Moved by

[Lord Flight]

67A: Clause 11, page 7, line 24, at end insert “, in accordance with guidelines to be provided by HM Treasury”

[Lord Flight]

My Lords, my five amendments to Clause 11 and one to Clause 20 are about fleshing out how the cost-control mechanism will work. I should like to make the point up front that I well understand the sense of the Government endeavouring to achieve broad agreements with the public sector trade unions in a territory which is thus long term. I pay tribute to the honest broker work done by the noble Lord, Lord Hutton, in examining the territory in such detail.

There is a third party in addition to public sector employees and the Government, which is self-evidently the taxpayer. With pay-as-you-go pensions, the theoretical actuarial deficit or surplus is essentially irrelevant—no doubt, the wrong rate of interest is used anyway in discounting the liabilities—as is, in a way, the percentage of GDP as a cost. As long as we have a pay-as-you-go system, what matters is the cash-flow deficit which other taxpayers have to cover. As I pointed out last week, it was quite surprising to see the OBR forecasting a cash deficit of £15.4 billion by 2016-17. Subsequent to that calculation, the OBR, in its report of 12 December, pointed out that expected longevity is six years longer than the assumptions made when the figures I have just quoted were produced. That implies at least an additional £7 billion of cash-flow shortage. As things stand, from 2016-17 onwards there will be a cash deficit of some £22 billion or £23 billion per annum to be financed by other taxpayers. That is not satisfactory and it certainly follows that there needs to be a cost cap that functions and can deal with all possible options if costs get further out of kilter.

As it stands, the Bill does not cover costs effectively. Most of the key points will be in subsequent regulations. Clause 11 provides a legal framework for the system of cost controls but with virtually no details. It appears to give the Treasury greater future flexibility and control if, for example, there is a change in the inflation index. It is unclear what will happen if no agreement is reached in the areas that are set out in Clause 11 to achieve agreement.

The details of the cost-cap mechanism are yet to be agreed. The Treasury has published a more detailed document, which establishes an employer cost cap in public service pension schemes. In a way it is that document that we should be discussing as it has more detail in it. The Treasury has also published an actuarial valuation of public service pension schemes. The actuarial valuation is of less fundamental importance. However, it is that which drives the cost-cap mechanism, so it is important in that context.

The Bill specifies that all schemes must set a cap expressed as a fixed percentage of pensionable pay but it does not define what the percentage might be. It is difficult for the legislation to be costed at present and it is somewhat inadequate to be reviewing the Bill without knowing the percentage caps that will be recommended. There are no details as to what will happen if there is no agreement to any required cost adjustments and there is no specific regard to the cash- flow deficit that is being achieved. The HM Treasury paper establishes an employer cost cap in principle. It sets out the mismatch between the contribution rate which employees pay and the rate controlled by the cap, but that, too, has not been addressed. The Treasury paper provides that the cap mechanism deals only with cost changes relating directly to active members and not to deferred or pensioner members or to cost increases arising from other forms of charge.

In a sense, my amendments are not of huge significance but they endeavour to put a few more clothes on the arrangements. Amendment 67A would provide the principle that, if no agreement was reached once a cap was exceeded, the guidelines provided by the Treasury would need to be applied. Amendment 67B would provide for the cap to include increases in pension payments if cost cuts were required. As with the private sector in many circumstances, it would introduce an element of fairness whereby pensioners would share some of the pain if the funding had reached the stage where the deficit was so great that it had to be cut back.

Amendment 69A would require an affirmative Commons procedure if reductions in pensions in payment were proposed. Given the lack of detailed prescription, Amendment 70A would provide for how the cost cap should operate. It would require the Office for Budget Responsibility to publish periodic appraisals of employer cost-cap arrangements, quadrennially for unfunded pay-as-you-go schemes and triennially for funded local government schemes. It would also require the publication of the schemes’ valuation reports. The key is requiring the reporting of the annual cash-flow shortfall for the next five years, with comparisons between the Independent Public Service Pensions Commission’s projections for benefit payments as a percentage of GDP and the actual anticipated percentage of GDP. Obviously, the point here is that if GDP growth is a lot less than expected or hoped, which is proving to be the case, that will alter that figure. The GDP figure is important as projections are based on better GDP growth reducing the overall cost of public sector pensions as a percentage of GDP.

Amendment 71A would remove any government responsibility—that is, taxpayer responsibility—for financial support for any local government pension scheme. I hope that this is not necessary but there could be a potential financial liability for trustees—the Minister has a trustee role—if a local government scheme were in trouble.

The Bill does not refer to the ongoing constitution of local government pension schemes or specific regulation thereof. The Local Government Pension Scheme’s national standards boards feature in the consultation but have not been picked up in the Bill.

Finally, Amendment 118A adds “pensions in payment” as a protected element in relation to a scheme for which proposals for retrospective change may be made by the responsible authority. I have said that I think that is a fair point if such extreme measures are needed.

The bottom line is straightforward. If the cash-flow deficit becomes an unacceptable burden on other taxpayers, there are only four ways—or a mixture of four ways—in which it can be controlled. One is obviously through an increase in employee contributions, but the sort of increase required is, I think, too large for this to be practical as a sole solution. A second is reducing the accrual of pension rights, on which Clause 11 focuses. The next is reducing pensions in payment, to which two of my amendments relate, and the fourth is increasing the pension age. Although that is addressed elsewhere in the Bill, it is not specifically addressed as one of the ways of controlling costs. The Treasury paper on the employer cost cap does not make any specific reference to reducing pensions and it excludes any impact of cost increases from other sources.

I hope that the Minister will respond that my amendments are not necessary and that empowering the Treasury to do anything covers virtually everything. However, I am quite surprised that the deal that has been done comes before both Houses with the sort of cash-flow deficit that it has at a time when it seems obvious that public spending will in due course need to be cut significantly more than it has been or the public finances will be in a complete shambles. Adding £23 billion per annum to public expenditure through the cash subsidy of public sector pensions seems to be a pretty tall order. Although I understand the position and interests of members of public sector pension schemes, I repeat that I am surprised that we have not arrived at a proposal which is, in essence, cash neutral.

[Lord Whitty]

My Lords, I am afraid that I cannot really support the noble Lord, Lord Flight, in these measures. I point out to him that they are internally inconsistent and, indeed, contradictory. On the one hand, Amendment 71A effectively removes all responsibility from the Government in relation to any potential, unlikely though it may be, default on the Local Government Pension Scheme.

[Lord Flight]

That amendment is intended to remove any financial liability, not to remove any obligation to get it dealt with.

[Lord Whitty]

Just so, my Lords, but the legitimacy of the Government being able to lay down the detailed criteria which his other amendments and indeed many of the Government’s stipulations in the Bill provide in relation to the local government scheme relies on the fact that everybody assumes that the local government scheme has the Government as its underwriter of last resort and that therefore that underwriter has the right to intervene in what is otherwise the equivalent of a private scheme between private institutions; namely, local government and private trade unions. They are not central government creatures. They have certain statutory responsibilities but they are separate entities. Therefore, the legitimacy of the Treasury in any sense making directions, stipulations and interventions, as the Bill provides and as the noble Lord’s other amendments would consolidate or take further, depends, so far as concerns the local government scheme, on that implicit underwriting. It is hoped that it would never be called upon. Nevertheless, it is there in the background. The situation in relation to the other schemes is different, but Amendment 71A relates specifically to the local government scheme and I think that it is contradictory to everything else that the noble Lord was advocating and much of what the Minister is advocating.

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[Lord Newby]

We look forward to that intellectual exercise. I think that I had just about dealt with Amendment 71A. Amendment 118A, to my mind, is grouped with Amendments 67B and 69A. They all relate to the same point about being able to constrain payments. All the considerations that apply to Amendment 67B and 69A apply to Amendment 118A as well.

[Lord Flight]

My Lords, the Minister has done a pretty effective job in removing the practicality of my amendment. I will just make the point about pensions in payment. I accept the argument that a contract is a contract, but for new people joining the public sector, a term of their employment could be that their pension right includes the possibility that, if their pension arrangements were in a mess, their pension could be reduced. In the case of an existing contract, I grant that it cannot be removed.

To the extent that it is possible, there ought to be broad similarity between what happens in the private sector and what happens in the public sector. Obviously, in the private sector, if a final salary scheme gets into a mess and the employer cannot finance the deficit, even though it goes to the Pension Protection Fund, people will not necessarily continue to get their full pensions with inflation increases and so forth. I think it is worth looking at seeking to design a scheme that is reasonably fair on both sides. I beg leave to withdraw the amendment.

Amendment 67A withdrawn.