Public Service Pensions Bill

Lord Newby Excerpts

Wednesday 19th December 2012 Lords Chamber

Moved By

[Lord Newby]

[Lord Newby]

My Lords, this Bill offers a rare opportunity to introduce primary legislation that pulls together a new common UK legal framework for public service pensions, and it is right and necessary that we do so. We must have public service pensions legislation that is fit for purpose and ensures that those who commit their careers to delivering our valued public services continue to receive guaranteed benefits in retirement that are among the very best available.

However, we also have an obligation to ensure that these generous arrangements are provided on a fair, transparent and sustainable basis. This Bill is based on the recommendations of the independent Public Service Pensions Commission, which was chaired by the noble Lord, Lord Hutton of Furness, who I am delighted will be taking part in the debate today.

In June 2010, the noble Lord accepted an invitation from the Government to conduct a fundamental structural review of public sector pension provision and to make recommendations on pension provisions that would be affordable in the long term, fair to both the public service workforce and the taxpayer and consistent with the fiscal challenges ahead, while protecting accrued rights. This Bill fulfils the Government’s commitment to bring forward fundamental changes to public service pensions based squarely on his recommendations.

I thank the noble Lord, Lord Hutton, for his significant role in bringing about these important reforms. His recommendations mark an important milestone in the history of public service pension provision, and we are extremely grateful to him for having undertaken this somewhat thankless task. I must also thank those in the other place for their work on the Bill to date.

As was made clear on Report in the Commons by my ministerial colleague the Economic Secretary there are some areas in this Bill that we are reflecting on further, following representations made in another place. For example, we are looking at the best way to reflect our commitment to member representation on scheme boards and at how personalised information is provided. As for the powers that would allow scheme managers to make retrospective changes to schemes, I am aware that this is an issue about which many feel uncomfortable and that the Delegated Powers Committee has also expressed concerns. The Government are considering their response to the Committee’s report, and we will return to that matter.

As we begin our consideration of the Bill, we must not underestimate the importance of what it is trying to achieve. We are in a world where people are living longer. While this is obviously an extremely important and welcome trend, we must face the consequence of this improvement on the costs of providing public service pensions. As well as looking at how to keep the increasing costs under control, we must also consider the fairness of the arrangements. I hope and believe that the Bill gets this important balance right.

The Bill is in one respect rather curious, in that many features of public sector pension schemes are not covered in detail. They will be set out in detailed scheme rules which will eventually come before Parliament in the form of negative resolution statutory instruments. What the Bill does is provide an overarching framework for all public service pensions schemes. This is not a new approach. The Bill before us today supersedes the Superannuation Act 1972, which followed the same principle. The reason for this is simple: detailed pension schemes are extremely complicated, will vary between different parts of the public sector and will need in some respects to change over time. They are much better suited to secondary legislation.

This inevitably means that many of the most important aspects of the schemes—for example, the accrual rates and the revaluation rates—are not in the Bill. The key principles which underpin public sector pensions and the way in which pensions schemes will be determined are, however, covered by the Bill, and I should like to turn to some of its principal provisions. However, I stress at the outset that the Government intend that public service pensions continue to set a high-quality benchmark and one to which many in the private sector could usefully aim.

The Government intend that public sector pensions should continue to be based on defined benefits. For many years, these have been based on an individual’s final salary. This has had a degree of inequity in that, per pound contributed to the scheme, those on high final salaries have received a greater return in terms of the pension that they have received. This Bill proposes that members’ benefits should be calculated on a fairer basis; namely, on an individual’s career-average earnings. By following this approach, low earners will no longer be expected to subsidise the benefits of higher earners.

The Bill links normal pension age to state pension age for most members. This will automatically track changes in longevity and protect the taxpayer from the associated cost risks. Historically, improvements in longevity have not been well managed, and the failure to do so in a timely manner has represented the single biggest risk to the future affordability of these pension schemes. The establishment of the link between public sector and the normal state pension age addresses this problem. As an exception to the link, a normal pension age is set at 60 for firefighters, police officers and members of the armed services in recognition of the unique characteristics of those public servants’ work. We want to be sure that these normal pension age provisions remain appropriate, which is why the Government intend to review the provisions as and when the state pension age changes. This will ensure that a consistent approach to pension age policy is taken across government as a whole.

Of course, normal pension age does not represent the age members must work until; rather, it is a point on which to base the calculations. Members can choose to retire earlier or later if they wish and, should they decide to do so, a fair adjustment will be applied to their benefits. The same principle applies in other pension arrangements—it is built into annuity rates, for example—and it is right that it applies to public service pension arrangements, too.

In addition to the longevity link, the Bill includes provision for an employer cost cap which will provide additional protection against unforeseen changes in the cost of public pensions. If the cost of a scheme rises, the scheme rules must set out a process for agreeing how they can be brought back under control. The cap may well in practice not be breached, but if it is, the Bill provides for a clear way of dealing with what could otherwise be an unacceptably high cost to taxpayers. In effect, the employer contribution to the scheme is being fixed within specified margins. Any change beyond those will result in benefits or member contributions being adjusted to bring costs back under control. Details have been made available in the House Library regarding the practical application of the cap and the Government’s intentions around the valuation procedures to be followed in the new schemes. These are new and important elements of the Government’s policy, and I hope that these papers provide useful clarification to the House.

As I said earlier, I emphasise that this Bill is not just about fairness to taxpayers; it is also about fairness to scheme members. This is why we propose transitional arrangements for members of most schemes who have less time than others to adjust their retirement plans. Those who were 10 years from their current normal pension age on 1 April this year may continue to accrue benefits on their existing terms; their pensions will be unaffected by the Bill—

[Lord Naseby]

I apologise for making an intervention, and I must declare an interest as a trustee of the Parliamentary Contributory Pension Fund, but I would like to tell my noble friend that in Committee I shall be moving an amendment to Clause 31, concerning the rights of the members of the PCPF and their appropriate protection in legislation. The Bill, as currently drafted, casts doubt in that it could be read as enabling IPSA, in relation to MPs’ future pension provision, to break the link between members’ accrued benefits and their final salaries. I wish to place that on the record.

My understanding is that we are going to have the Committee stage pretty soon after we come back. I hope very much that my noble friend and I can have a discussion on that amendment before we come to the Floor of the House.

[Lord Newby]

My Lords, I am very happy to have an early discussion with my noble friend and look forward to debating any amendment that he may wish to bring forward.

As I was saying, we want public pension recipients to be reassured that, as a result of the provisions set out here, the new schemes will be administered and governed as effectively as possible. The new open scheme arrangements will ensure greater accountability and transparency through a common approach, an approach that will be independently overseen by the Pensions Regulator. The Bill builds on the regulator’s existing role and powers in relation to public service schemes and, as far as is appropriate, mirrors the existing approach to other occupational pension schemes. The regulator’s new powers will help public service pension schemes deliver good standards of administration and governance, ensuring that scheme costs and risks are understood and managed effectively.

All these changes demonstrate that the end of the current benefit arrangements and the creation of these fairer, more sustainable pension schemes are the right and proper way forward. It is right that public service pensions continue to set a good-quality benchmark for the private sector, and a race to the bottom in terms of pension quality must be avoided.

A consistent approach across schemes regarding consultation processes and the application of financial directions from the Government will also mean that members see unprecedented certainty about how their pensions are handled. It will no longer be the case that a member in one scheme can look over to another public service workforce and marvel at the myriad different quirks and anomalies within the scheme rules. There is some scope for variation to suit the needs of each workforce but, as the noble Lord, Lord Hutton of Furness, recommended, this is a common framework which brings all these schemes together under one legislative umbrella.

We have said that we hope and expect that the new schemes that will be drawn up under this Bill framework will last for at least 25 years. Of course, no Parliament can bind its successors, but we have included in the Bill enhanced consultation procedures, both with those who would be affected by any significant changes and with Parliament, to ensure that there is a high hurdle to be cleared before any such changes could be made.

The approach we are following will apply across all public service pension schemes, including smaller public body arrangements. We are aiming to reform the pensions in those bodies by spring 2018, and there will be no exceptions. This is why I am pleased that the Northern Ireland Government have indicated their intention to maintain parity with the changes set out in this Bill when they bring forward their legislation. Likewise, I hope our colleagues in Scotland and Wales will follow suit for the handful of schemes where competence for pension legislation sits outside Westminster.

Finally, we have also taken the opportunity of the Bill to reconsider whether certain generous historical entitlements remain appropriate in the modern age. The Great Offices of State pension arrangements, which apply to the Prime Minister, the Lord Chancellor and the Speaker of the House of Commons, give unusually generous pensions to these office holders. The scheme will now be closed to new office holders. Future holders of these positions will be entitled to a scheme that is the equivalent of those available to Ministers, thus ending this historical anomaly.

In conclusion, I believe that the package of measures contained in the Bill will fulfil the legitimate and worthy aim of bringing about long-term structural changes that are in the best interests of members, employers and other taxpayers. This is sound, reforming legislation, which I hope will continue to command cross-party support. We must, however, get the detail—

[Lord Whitty]

My Lords, in everything that the Minister has said, he has failed completely to make a distinction between those public sector pension schemes which are unfunded and those that are funded—principally, the local government scheme. Can he give us a guarantee that he will address that difference during Committee, since the Bill and his speech do not adequately reflect that now?

[Lord Newby]

Of course, my Lords, but at the moment I am explaining the common elements of the framework that we are putting in place. At this point, the key thing we all have to have before us is that we are putting in place a common framework, within which all the schemes will fit. The Local Government Pension Scheme is obviously very different, in that it is funded rather than unfunded. There have been many discussions on it; I have agreed to meet the LGA and hope to do so between now and the first day in Committee. The Government are very conscious of the need to ensure that the benefits of current local government arrangements are not undermined in any way by this scheme. I certainly anticipate that we will be discussing aspects of the local government pension arrangements in some detail in Committee.

Indeed, I was about to say that we are committed to getting the detail right and to giving detailed consideration to all these things in Committee. We have to take this opportunity to set in place a sustainable future public service pension landscape. I look forward to our debates on the legislation, and I commend the Bill to the House. I beg to move.

--- Later in debate ---

[Lord Newby]

My Lords, I start by thanking all noble Lords who have taken part in the debate today. It is a great pleasure to hear the noble Lord, Lord Davies of Oldham, twice. It must take him back to his time as a Minister. No doubt he is sorry that he will not be speaking twice more often in the coming months.

At the outset, I must say that while I will try to deal with as many points as I can, I almost certainly cannot deal with them all. We will have ample time in Committee to look at them all. I also declare an interest. Although it is more than 30 years since I resigned as a civil servant, if I live long enough, I will be in receipt of some pension for my time there, although I do not think that anything that the Bill does will have an impact on that. That is a good segue into talking about retrospective powers, about which much concern has been expressed.

There is a lot of suspicion about this that is misconceived. Pensions legislation has historically contained such powers, which have been seen to be necessary for the lawful and efficient operation of the scheme. They are generally used for minor and technical changes, for rectifying errors and making changes for the benefit of members. The intent of the Bill is simply to allow for these minor changes. There is no sinister intent.

There is concern about the broadness of existing powers in the Bill. I should perhaps explain that at the moment there is no set standard of protection offered across the current schemes. That is why we have not carried across the protections in retrospectivity that can be seen in the previous legislation, such as the Superannuation Act 1972. We have also been clear that taking forward the most extreme of these—member consent locks—for any retrospective changes is not the way forward and it would not be right to do that.

However, we understand that there is a considerable strength of feeling on this issue reflected not just in today’s debate but also by the Delegated Powers Committee. We will therefore further consider the provisions of the Bill to make sure we are striking the right balance between the protection of members and the efficiency of the scheme. I hope that gives some reassurance to noble Lords.

The noble Lords, Lord Davies and Lord Sharkey, and the noble Baroness, Lady Eaton, asked about the local government pension fund and the possible crystallisation of liabilities if the fund is closed. We believe these concerns are unfounded. We set out in detail in another place why Clause 16 does not have that effect. It only prevents members of the local government schemes accruing further service under current terms unless transitional protections apply. The existing funds will continue in respect of service prior to and following the reform of these schemes and the crystallisation of liabilities does not arise. I hope we are able to reassure people fully on this in Committee.

There has been an exchange of letters between the Economic Secretary to the Treasury and Chris Leslie. The letters were copied to Sir Merrick Cockell at the LGA. Subsequent correspondence with Sir Merrick should really put the matter to rest. I think it may be of benefit to noble Lords who have spoken in the debate if I circulate that correspondence. It is technical but pretty conclusive.

The noble Lord, Lord Davies, asked why the Bill contained reference to defined contribution schemes when the Government do not intend them to replace defined benefits schemes. There are a couple of reasons for this. First, there is already a defined contribution scheme—the partnership scheme—operating within the Civil Service. It is a small scheme with only a few thousand members but it needs to be covered. Secondly, 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.

The noble Lord, Lord Davies, was concerned about limited parliamentary scrutiny on the Treasury powers. I agree that, as a general principle, a negative resolution instrument does not give you much scope for scrutiny. However, they are not like normal statutory instruments as there will have been a very considerable degree of formal negotiation outside Parliament. I think it is fair to say that Parliament has never seen its role as being to decide on the detailed components of pension schemes. In that respect we will simply continue on the same basis that we have up to now.

Noble Lords, including the noble Lord, Lord Davies, and the noble Baroness, Lady Donaghy, asked about the Scottish Government’s consultation. The overall principles in the Bill are very much based on those put forward by the noble Lord, Lord Hutton, and his recommendations were, I think, accepted by the Scottish Government. They accept the generality of our proposals; in terms of more detailed consideration, the Chief Secretary has written to Scottish Ministers inviting them to propose amendments if they feel the provisions of the Bill are not suitable for the Scottish pension scheme. So far, no such amendments have been proposed. Any regulations made by Scottish Ministers will be subject to the procedures in the Scottish Parliament,

The noble Lord, Lord Davies, asked about MoD firefighters. MoD firefighters are in the Civil Service Pension Scheme at the moment. They will have their pension age linked to the state pension age to ensure consistency within the scheme. The Bill does not move any groups from their current schemes. Indeed, these MoD firefighters have always had different terms and conditions from other firefighters. This already includes a pension age of 65 for new joiners as a result of changes implemented by the previous Administration.

I turn now to the comments made by the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight. They both drew very heavily on Michael Johnson’s paper for the CPS which looked at the cash flow implications of the proposals. The noble Lord, Lord Hutton, dealt extremely eloquently with the question of whether the Civil Service and public sector pension schemes should now, because of their cost, be moved to a newer lower level. I do not want to reiterate his points other than to say in as clear terms as I can that the Government have set their face against defined contribution schemes and are proposing a reformed version of defined benefits schemes.

It is obvious, and nobody disputes it, that the Government are topping up member contributions to fund pensions. This is extremely expensive but it is not surprising. Longevity is increasing and in recent years the size of the public sector has shrunk. I suspect this is a development that the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, probably support. However, one of the consequences is that the inflow of member contributions has fallen as numbers have fallen. We have taken steps to remedy this by rebalancing contributions—saving nearly £3 billion a year by 2014—and as the noble Lord, Lord Flight, pointed out, the total reform package is projected to save £430 billion. It may be over the next 50 years but it is a very significant sum. The employer cost cap means that we cannot have a runaway cost here without formal legal requirements to deal with it through reformed contribution levels or lower benefits.

The noble Baroness, Lady Noakes, felt that the transitional provisions were too generous. There are going to be transitional provisions of some sort. We have taken the view that they are a balanced package. Although people within that transitional phase will get the same pension that they would otherwise have got, they will be paying more for it. They are not completely unaffected.

The noble Lord, Lord Sharkey, made a number of points including retrospection, which I have covered. He asked about the local government pension scheme and, in particular, whether it was in compliance with the relevant IORP directive. The Government believe it is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits. LGPS benefits are guaranteed by statute, not the existence or levels of any funds. There is no risk to members and no means by which local government employers can access pension funds or entitlements. I suspect that that is one of the many aspects of the local government scheme that we will want to clarify in Committee.

The noble Lord, Lord Monks, brought his considerable experience to bear in his contribution. I join him in congratulating Brendan Barber on the role which he played in this scheme. Those negotiations, which led to agreement in principle along much of the framework, were crucial in getting us to where we are today. I join the noble Lord, Lord Monks, in wishing Brendan Barber well for his retirement.

The noble Lord asked specifically asked about Fair Deal, as did other noble Lords. Perhaps I may deal with it because it is very important. The Government are committed to reforming the Fair Deal policy and formally announced their intentions for newly transferred staff back in July. We agreed to maintain the overall approach to Fair Deal but to deliver it by offering access to public service pension schemes for newly transferred staff, which will ensure that those transferred staff will continue to have access to good-quality pensions while helping to remove the barriers to plurality of public service provision. We recently published a formal response to the Fair Deal consultation, with further consultation questions and draft guidance. In the light of the details that emerged from the original consultation, it is appropriate to do some further policy work on contracts retendered under Fair Deal that were let under previous Fair Deal arrangements. We are currently considering how the new Fair Deal should be implemented. A start date for the arrangements will be announced in due course.

Fair Deal has always been a non-statutory policy. The new requirements will be reflected in contracts before public services are tendered, and I see no prospect of this Government moving away from their commitment to providing newly transferred staff access to public service pension schemes. However, it is important that we consider fully the views of stakeholders, including those who will be affected, through further consultation before making a final decision on the issue. It would be inappropriate to include Fair Deal in the Bill until all the policy detail is worked through.

The noble Baroness, Lady Eaton, gave us the benefit of her very considerable experience on local government issues. I do not intend to deal in detail with her points now other than to say that I hope to talk to the LGA before we reach Committee and that we will look very carefully then at all the points that she raised.

The noble Baroness, Lady Donaghy, raised a number of important points. We have one thing in common if nothing else. The noble Baroness is a former president of NALGO. As a boy, I benefited from NALGO because my father was an active member in the Yorkshire Electricity Board branch and we used to take our family holidays at NALGO conferences. I have particularly fond memories of one in Brighton where I got as a present—because he had been given it—a particularly gaudy, purple Biro, which, as a seven year-old or whatever I was, I treasured very greatly.

The noble Baroness slightly overdid it when she said that trust had been shattered as a result of these negotiations and what we are putting forward. As we have heard in the debate, there is not absolute unanimity that everything that we are doing is the best. There are many people who wish that we were being a lot less generous. We think that we are striking the right balance. The noble Baroness asked whether the bar was high enough. Again, it is a question of balance. It is quite tricky to set a very high bar because no Government can bind their successor. We are trying to make it more difficult to make changes. It is quite important to get agreement, as I believe there is, between the parties that there should be no thought at present other than that this should be a persisting scheme and that it should last for at least 25 years. Politicians come and go, but all we can do is make our position as clear as we can and do what we can in the legislation.

The noble Baroness asked whether the Government Actuary should have a more decisive, rather than advisory, role. I am advised that the Government Actuary believes that his role is advisory—that is the nature of the job—and does not want to have in essence a quasi-policy or an actual policy role because that would bring him into the area of public debate, which he believes would be inappropriate.

The noble Baroness asked about the Bill providing for the Treasury to direct how local authority pension fund valuations are to be undertaken. Clause 10 provides for the Treasury to specify how scheme-level valuations are undertaken. This is quite distinct from the valuation of local authority pension funds, which are provided for under Clause 12 instead. Local authority pension fund valuations continue to be a matter for the scheme actuaries. Treasury directions will not apply to those valuations.

The noble Baroness pointed out how under Clause 5 there appeared to be no separation of the scheme manager from the pension board. The clause allows for scheme regulations in the LGPS to establish pension boards that are entirely separate from any existing local government committees. It also provides for them to be combined if that is what is wanted. This is a matter for scheme-level discussions. We are committed to establishing a national board in the LGPS in England and Wales and will consider what is needed in the Bill to deliver that.

Until the last minute or two of the speech of the noble Lord, Lord Hutton, I thought that my only comment was going to be, “I agree with Lord Hutton”. I think that I nearly agree with him in his concerns about employee representation, accrued rights and the LGPS at Clause 16. We will come back to him. It is not in the nature of Ministers, far less Treasury Ministers, to give Christmas presents, so I shall not do that at this point, but we will come back to those points, I hope in a positive and generous spirit, in the new year.

This is, as everybody agrees, an important and much needed Bill which will put public service pensions back on a sustainable and affordable footing. Although the Bill itself does not directly implement the reformed pension schemes’ designs, it provides a sensible framework for their creation. The Bill’s measures on cost control and monitoring, and those to improve standards of governance and administration, go further than previous legislation on public service pensions. I therefore commend the Bill to the House.

Bill read a second time and committed to a Committee of the Whole House.