Public Service Pensions Bill

Robert Neill Excerpts

Monday 29th October 2012 Commons Chamber

[Robert Neill (Bromley and Chislehurst) (Con)]

I do not agree with the conclusions of the hon. Member for North Ayrshire and Arran (Katy Clark) about the Bill, or with some of the details of her speech, but I am sure that every Member of the House will agree with her warm remarks about the late right hon. Member for Croydon North, Malcolm Wicks. I knew Malcolm as a fellow London politician for many years. Indeed, I knew his late father, who was a former chairman of the Greater London council. I think that everyone would agree that it is a tragedy that Malcolm is not here, because his expertise in this field was recognised throughout the Chamber.

During my time in government I had a measure of responsibility for two of the schemes under discussion, namely the local government scheme and the firefighters scheme. I very much agree with my hon. Friend the Member for Bognor Regis and Littlehampton (Mr Gibb) in his analysis of the Bill, the overall pressures that need to be redressed and the need for reform of public sector pensions. I wholly endorse his analysis of how the negotiations—to which he, I and the Chief Secretary to the Treasury were, in varying measure, party—proceeded. There was greater realism and sophistication to be found in my dealings and negotiations with various public sector unions than in the analysis provided by Members on the Opposition Front Bench. That is a sad commentary.

I want to deal initially with the local government scheme. It has been observed, rightly, that this is the most significant of all the schemes in financial terms. It is hugely important and involves 81 funds. It is the biggest pension fund in the United Kingdom and the fourth largest in the world. We are talking about £145 billion in investments and assets, so getting the local government scheme right is critical for its members, many of whom I have worked with for years, going back to the day on which I was first elected as a councillor at the age of 21, about which all I can say is that I was keen.

[Mr Iain Wright]

In 1862?

[Robert Neill]

Yes, it was shortly after the Municipal Reform Act.

The scheme is important for its members and the council tax payers who fund it. We should also not forget—I will come back to this later—that it is important for the overall British economy, because of its investment potential. Getting it right is important. It is worth emphasising that it is different from the other schemes, because it is largely funded. The Chief Secretary to the Treasury recognised that significant factor, as, I am sure, will the Minister who responds to the debate. It will have consequences, once the Bill is enacted, for how we deal with regulations and secondary legislation with regard to the scheme’s governance and other related matters. There is nothing in the Bill itself—which I warmly support, because reform of all the public sector schemes is necessary—to prevent that from being achieved.

There is clear evidence that reform of the local government scheme is necessary. Reference has been made to the Audit Commission and, at the risk of taking a little longer than I had intended, it is worth quoting what it said in order to make the point. It accepted that the local government pension scheme had funds

“to cover about three-quarters of its future liabilities”

and that it had a positive cash flow. The commission then concluded that the current approach could not be continued indefinitely, the reasons for which included:

“The cost of providing pensions for local authority employees is rising in absolute terms and as a proportion of pay because of increasing life expectancy and action needed to recover funding deficits.”

It was not possible to fund the whole lot. There is no doubt that local government pension funds

“have been affected by lower than anticipated investment returns”.

At the time of the commission’s report in 2009, the value of assets was “about 15% lower” than had been anticipated in the previous revaluation in 2007. I have to say that Opposition Members cannot escape some of the responsibility that the previous Government have for the investment performance of the funds.

[Mr Anderson]

Given his long experience of local government, does the hon. Gentleman have any idea how many councils, including the one that he led, took pension contribution holidays?

[Robert Neill]

I certainly never took any pension contribution holidays. Indeed, I only became a member of the local government pension scheme in 2000, when I was a member of the Greater London authority, so I do not think that the hon. Gentleman’s point is realistic. The performance of the scheme is down to the investment climate in which it operates, and the investment climate is determined by the macro-economic policies of the Government. The hon. Gentleman does not accept the failure of his Government in this context. One of the by-blows of that failure was that the investment returns for the scheme were less than expected and that has added to the pressures on the scheme. It is not the sole pressure, but it has added to them.

The Audit Commission also noted that the cost of pensions affects the amount of money available for local authorities to fund services and it influences council tax decisions, so there were questions about whether the LGPS benefits were affordable in the long term. Although some of those matters have been picked up by prior reforms—I do not pretend otherwise—they were not adequate to deal with the pressures. The Audit Commission concluded that, despite the fact that the scheme had funding, unlike others, reform was needed none the less. It is not just the Audit Commission that has recognised that—so too have the professionals in the local government pensions world. In October 2009 Mike Taylor, the chief executive of the London Pensions Fund Authority—I declare an interest, having been a member of that body for a short period—said that the LGPS needed to respond to increasing longevity because it

“is not designed to pay benefits for ever increasing periods of retirement and, without change, will face extinction…Employer or taxpayer contribution rates currently take all the strain of increasing liabilities in the LGPS. This situation cannot continue and either those costs must be reduced, or employees bear a fairer share of the increasing costs.”

[Chris Leslie (Nottingham East) (Lab/Co-op)]

Will the hon. Gentleman discuss with the chief executive of the LPFA his opinion of clause 16, which will close the existing local government pension scheme and start a new one? As I understand it, closing it might trigger what are known as section 75 crystallisation of debt arrangements, and the burden could fall heavily on local authorities. Does he agree that the Economic Secretary needs to ensure that the crystallisation of costs does not fall disproportionately on local taxpayers?

[Robert Neill]

I certainly agree that the impacts of crystallisation have to be considered carefully. It is worth saying, however—I was going to come to this point later, but I will deal with it now—that the reason why we are dealing with the matter in this way is in no small measure the result of an agreement between the unions and local government employers. They agreed that it was desirable to have a single reform of the system to deal with both short and long-term pressures, which was referred to as a “single event”, and that it should take place in 2014. There is a technical debate to be had about how best to achieve that while avoiding the risk of crystallisation, and I hope that my hon. Friend the Economic Secretary and his ministerial colleagues will have that debate. However, that is certainly not a reason for opposing the Bill, and I do not think for one moment that it undermines the major thrust of the Government’s reforms. The structural issues that require reform in all the public sector funds, including the LGPS, need more radical work than that.

It seems to me that there is scope to reflect the particular circumstances of the LGPS within the parameters of the Bill, and I hope that Ministers will recognise that. It is still significantly funded, and at its best it has very high standards of governance. Many of us in local government have wanted to examine the capacity of some of the smaller schemes, and I believe that there is scope for the Government to encourage greater collaboration between some of them, or perhaps even mergers. The large and well run ones such as those in Greater Manchester, London and elsewhere have good governance arrangements, and I concede the point that was made about the Greater Manchester scheme. There is no reason why we cannot ensure that those arrangements are reflected in the secondary legislation that flows from the Bill. That will be a desirable outcome.

I hope that there will be democratic local accountability through elected members serving on the boards of schemes. I do not think it is necessary to impose a one-size-fits-all approach on the governance of schemes in order to achieve the important financial and structural reforms that are needed, which I support the Government in taking forward. We can reflect the particular circumstances of the local government scheme within the parameters that the Government have rightly set. That also applies to certain aspects of the scheme’s design, because there were constructive negotiations on the LGPS on the basis that the key point was to achieve the required cost envelope, which, as I recall, was 19.5% of salaries. Particular parts of the scheme enable us to do that while reflecting the particular nature of the local government work force and the scheme’s governance arrangements. I hope Ministers will ensure that the commitment to do so is maintained, and I have no doubt that they will.

I referred earlier to the investment potential of the local government scheme. It is already a significant player in many investment markets, but it could do more. I support the Government proposal to lift the cap on the amount that local government schemes can invest in local infrastructure schemes, which is currently an arbitrary 15%. When I was a Minister, I believed passionately in ensuring not only that local authorities had more resources of their own to put towards local investment but that they made the best use of their current assets, so it does not seem unreasonable that we should remove that cap. The professionals in the field have suggested that something like 30% would be a more realistic cap, and I am open-minded about the exact amount.

I recognise that Brian Strutton, from one of the public sector unions, has some concerns about that idea. If I may say so, I regarded him as a responsible interlocutor in my dealings with the trade unions. He rightly recognises that it might be possible to achieve our objectives either through changing the cap, which I think the unions are wary of, or through the creation of a new asset class for infrastructure. I hope that my hon. Friend the Economic Secretary will consider how we can achieve the important objective of giving local schemes a greater ability to invest in local infrastructure. We should not miss that important opportunity.

I turn now to the firefighters scheme. Again, I accept that it has differences from other schemes. A particularly important issue in all my negotiations with the Fire Brigades Union was the retirement age. The final agreement that was achieved, on which I reported to the House shortly before the summer recess, provided us with adequate and proper flexibility to take on board the concerns of our firefighters, whom I greatly respect. Two matters were put forward in that agreement. The first was that there would be a review of contribution levels from 2013-14 onwards, taking into account the impact of opt-outs, to which the hon. Member for North Ayrshire and Arran referred. I am sure the Economic Secretary will confirm that that remains the position.

Secondly, it will be recalled that I commissioned Dr Tony Williams to examine the evidence base for the case that was made about the physical impact of a firefighter’s job and its relation to the retirement age. The new firefighters scheme has had a normal pension age of 60 for new entrants since 2006, so the situation will not change for many firefighters. In addition, the retirement age of 55, or 50 after 25 years’ service, has been protected for entrants from before 2006. There are significant protections built in for long-serving firefighters. Dr Williams is extremely reputable in this field. He is the medical director of Working Fit and has 15 years’ experience as an occupational physician in the NHS as well as experience of firefighting. I hope that my hon. Friend the Economic Secretary will be able to confirm that the Government will look very closely at the outcome of his review.

[Mr Russell Brown]

The hon. Gentleman is absolutely correct in saying that there is some element of protection for firefighters, but we need to look forward, because that is what pensions are about. The new retirement age will keep firefighters working to 60 years of age in future. Are we about to breed supermen and superwomen who will be able to withstand such work at the age of 60?

[Robert Neill]

We need to look with care at the evidence, but that does not mean that we should keep the current generous—I use that word with care—retirement age. Firefighters work very hard, but the nature of jobs changes, and there is a case to be made—I put it no stronger than that—that the job of a firefighter is less physical than it was in some respects, because of the amount of technology and kit that they happily have to assist them. There is also a case to be made that increasing health levels in the population should not be taken out of account.

Equally, although I take on board the point raised by the hon. Member for North Ayrshire and Arran, it is realistic to accept that there are generally fewer “light duty” jobs in the fire service than in the police service. That is because fire authorities generally operate within a lean and flat structure, and there are fewer civilian-style jobs to which people can be moved. We must take all those important considerations on board, which is why the report was commissioned.

[Margot James]

My hon. Friend speaks with considerable authority on the firefighters’ situation, but is he as surprised as I was to hear that increases in longevity have meant that the average policewoman now spends more of her life drawing her pension than she did earning it, which is surely unsustainable? That situation will pertain to male police officers in a few years’ time if nothing is done about the retirement age.

[Robert Neill]

I take on board my hon. Friend’s point, and we must be realistic in all areas of this discussion. Longevity creates a pressure on the scheme, as well as providing greater life opportunities for people who have retired. It is, in part, a result of greater fitness and better health among the population, which can—among other things—enable people to work for longer. That applies in pretty much every other kind of activity, and we cannot regard any scheme as exempt. I accept, however, that there are particular pressures on firefighters, although I suggest to the House that the Government’s proposals recognise that and provide a sensible and evidence-based mechanism for dealing with it.

[Grahame M. Morris (Easington) (Lab)]

I am grateful for the informed contribution from a former Minister. Does he acknowledge that, besides the pressures of longevity, there are risks in increasing contributions for employees? For the firefighters fund, 7% is the magic figure in terms of opt-out. I understand that a poll by YouGov, commissioned by the Fire Brigades Union, indicates that a larger number—12% —of people are very likely to opt out, and that 25% are likely to opt out when the new contributions come into effect.

[Robert Neill]

When I was a Minister, it was precisely for that reason that I included in the agreement a provision for a review of opt-outs in the firefighters scheme before decisions were taken on increases in years 2 and 3. That was in accordance with the proposals set out by the Chief Secretary to the Treasury. We have built in a mechanism to review that risk, but I hope we will find that it does not materialise. I come back to my point that we must probably move away from our slightly entrenched positions on this issue, and be prepared to look sensibly at how to strike an appropriate balance based on the evidence.

We all want the strongest possible pension schemes for those in our public services. I have referred to the two sectors with which I have been most closely associated, and to which I feel the strongest personal commitment, but one could say similar things about many other sectors. If there is a Division tonight, I would not support the Bill without hesitation if I did not believe that we had put in place a framework that will enable us to deliver on our obligations. There are technical matters to address, but I am confident that we will be able to do so as the legislation proceeds. The Bill deals with an important and necessary reform, and I commend it to the House.

[Several hon. Members]

rose—