Public Service Pensions Bill

Lord Flight Excerpts

Monday 21st January 2013 Lords Chamber

[Lord Eatwell]

My Lords, I will speak also to Amendments 118ZA, 118B, 118C and 119A in this group, which in my name and that of my noble and learned friend Lord Davidson. Clause 20(1)(b) is about consultation and reporting in the context of the responsible authority proposing,

“to make scheme regulations containing retrospective provision which appears to the responsible authority to have significant adverse effects in relation to members of the scheme”.

We are particularly concerned that “significant” is not defined and could be open to interpretation. We do not want the responsible authorities to, let us say, be let off the hook when it comes to consulting on changes that might have an adverse effect on members, especially given that the provision relates to that continuous bugbear in this Bill, retrospective changes. In particular, the protections that are present in Clause 20 do not apply to adverse retrospective changes to any of the non-protected elements of public service schemes—they only kick in if the adverse effect is deemed significant. Amendment 116A would ensure that the protections in Clause 20 apply to any proposal to make an adverse retrospective change.

There are only three protected elements in Clause 20(5): the extent to which the scheme is a career average defined benefit scheme—the main purpose of the Bill—members’ contribution rates and benefit accrual rates. However, this means some very important elements of a pension scheme are not protected, most notably the definition of pensionable earnings, early retirement rights and ill-health benefits. If a responsible authority decides to make adverse retrospective changes to something as important as ill-health retirement benefits, or indeed to the definition of pensionable earnings, which will of course knock on to the final pension provision, it is unacceptable for such adverse retrospective changes to be excluded from the protections in Clause 20.

When this issue was addressed in another place the Minister complained that the effect of the amendment would be to make any,

“adverse change to member benefits subject to the additional protections in clause 20, regardless of how minor that change might be”.

He then said that,

“we believe that almost all retrospective changes will either be minor or technical in nature, or beneficial to members”.—[Official Report, Commons, Public Service Pensions Bill Committee, 20/11/12; col.407.]

That is a welcome belief but it is not knowledge: it is merely a belief. Having members’ protections over such things as ill health and pensionable earnings hanging on a belief is entirely unsatisfactory. Given that the Minister has already made concessions or, to put it better, positive statements about the way in which he will bring forward amendments to the insidious retrospective measures in the Bill, I ask him whether the measures on retrospection will also apply to this matter.

Amendment 118ZA in my name adds to the definition of the “protected period”, as it is called, to accommodate the different closure date of the local government pension scheme. Clause 16 closes the local government pension scheme on 1 April 2014, but all other schemes are closed on 5 April 2015, one year later. However, Clause 20 defines the protected period as one of 25 years beginning on 1 April 2015. This means that there is a window of a year in which the protections under Clause 20 will not apply to the local government pension scheme. This amendment would correct what seems to be a drafting error by ensuring that there is no such peculiar window in which the protected elements of the local government pension scheme are not, in fact, protected, as the Government clearly seem to intend, by Clause 20. By aligning the protected period for the local government pension scheme with the other schemes in the Bill, they will all come to an end and all be dealt with and covered at the same time.

The Minister in the other place was sympathetic to this argument. I am therefore somewhat surprised that the Minister here is not reflecting that sympathy by tabling an appropriate amendment to this oversight in the non-alignment of the two schemes.

Amendment 118B again refers to protection. As we have said, Clause 20 lists various protected elements of the scheme. This amendment would overcome some of the deficiencies that we have already indentified by adding the definition of pensionable earnings, ill-health benefits and retirement rights to the protected list. This overcomes the problem of their being subject to the significant adverse consequences of retrospection. This would be a simpler advantage to dealing with some of the issues to which I have referred.

The Minister in another place argued that his rejection of an amendment like this rested on wishing to maintain flexibility in the arrangements. I do not think that that is a very satisfactory argument. Flexibility is often an attractive characteristic of legislation, but not when it is achieved by undermining the pension rights of members of a pension scheme. Let us remember, these are some of the less well paid members of our community who serve us through a variety of public services. Achieving flexibility by reducing their rights does not seem to me to be a very respectable activity.

Retrospection again rears its ugly head as regards Amendment 118C. The amendment seeks to leave out Clause 20(6), which provides that all the “protected elements” under Clause 20 will not be so protected if a change is required by or as a consequence of a change in the employer cost cap. When we last discussed cost caps, we saw that the definition of the cost cap was entirely in the hands of the Treasury. Therefore, it would be quite possible to place the cost cap at such a position as would lead to a consequential loss of protection under Clause 20.

Once again, the Minister has made a lot of sympathetic noises about the perhaps unfortunate consequences that the current definition and specification of changes in the cost cap bring to this Bill. I hope that his earlier commitment to doing something about the cost cap will carry through to Clause 20 and the various protections that it provides.

Finally, given that we are continuing the same theme into Clause 21, Amendment 119A again refers to the incorporation of “significant” with respect to “adverse effects”. The point is that “significant adverse effects” are designed in the Bill to trigger the use of an affirmative resolution procedure for any changes to scheme regulations. In particular, Clause 21 provides:

“Scheme regulations are subject to the affirmative procedure”,

only,

“if … they amend primary legislation, or … contain”—

and here we go again—

“retrospective provision”,

which would,

“have significant adverse effects in relation to members of the scheme”.

Given the way that retrospection runs continuously through this Bill, creating major uncertainty among members of these schemes, the very least we can expect is that any adverse effects should be subject to an affirmative procedure.

Returning to Amendment 116A about the use of “significant” in defining “adverse effects”, I beg to move.

[Lord Flight]

My Lords, I rise to speak to Amendment 117A, which—if I may put it thus—heads somewhat in the other direction from the amendment in the name of the noble Lord, Lord Eatwell. As I understand it, Clause 20 says that for 25 years you will not be able to make any changes other than as a result of consultation and agreement among the various parties. The clause refers to the changes containing a provision which,

“changed the protected elements of the scheme”—

defined as where,

“the scheme is a career average revalued earnings scheme”,

in relation to contribution rates and to “benefit accrual rates”, or where the “responsible authority” proposes to make scheme regulations containing retrospective provision which appears to the “responsible authority” to have “significant adverse effects” in relation to members of that scheme. As I said, the protected period is defined as 25 years. My understanding is that although this clause may not cover every detail, it is in effect saying that other than by agreement, no changes can be made which come under the two defined areas for 25 years.

My amendment to reduce that period to 12 years was not entirely random: it was basically part of a previous amendment suggesting a post-2006 review by the OBR of fiduciary valuations. However, the fundamental point is that whatever Government are in power, they will be obliged to make major amendments. We started off with a cash-flow deficit of £15.4 billion by 2017. However, the ONS has advised that the longevity assumption is six years shorter than it ought to be, so that adds another £7.2 billion; and now that we have the government single pension proposals, the public sector pension schemes will not get the contracted-out NI contributions, which worsens the cash flow by about another £5 billion. So, we are going to have a cash-flow deficit per annum of approaching £30 billion.

If anyone thinks that that is sustainable in the present environment of deficits which are well above maintainable levels, they are not seeing reality. I repeat: whoever is in power in the next five years will be obliged to review the whole aspect of public sector pensions if the cash-flow deficits turn out to be at the sort of levels that now look likely. Limiting the protected period to 12 years is hopeful—not being able to change any of the key elements for 25 years is just unrealistic.