Draft Public Service Pensions Revaluation (Prices) Order 2016

Seema Malhotra Excerpts

Wednesday 2nd March 2016 General Committees

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

It is a pleasure, Mr Bailey, to serve under your chairmanship. I thank the Chief Secretary for his opening words outlining the background and the reasons we are here today. The new public servants’ pension schemes introduced from April 2015, in the most part, under the Public Service Pensions Act 2013, provide for pension benefits based on career average revalued earnings, rather than final salary, following Lord Hutton’s report and the negotiations thereafter. A feature of CARE schemes is that an individual builds up benefits in each year of service based on a proportion of earnings and that the earning factor is revalued each year until retirement. The Minister is right that different accrual and revaluation rates were agreed as part of the negotiations for the different schemes. In the schemes for civil servants, local government and the judiciary, the earnings factor is revalued by prices. Similar is true for NHS, teachers’ and police pensions, but they feature a small uplift percentage, in line with the agreement reached, and variations in the annual accrual rate. For firefighters and the armed forces, he is right that the revaluation rate uses average earnings.

Turning to the most affected schemes, the local government pension scheme had 1.8 million active members in England and Wales in October 2015. At the end of March 2015, the UK-wide civil service pension scheme had 493,000 active scheme members. Section 9 of the 2013 Act provided for the Treasury to make orders that specify the percentage change in prices or earnings for the purposes of revaluation by reference to the general level of prices or earnings estimated in such a manner as the Treasury considers appropriate. Today’s draft order fulfils that requirement in relation to the period 1 April 2015 to end of March this year. The figure specified is indeed a decrease at minus 0.1% and this order is subject to the affirmative procedure because the value is negative.

When the 2013 Act went through Parliament, the former Member for Kilmarnock and Loudoun raised the concerns of trade unions and others that negative growth would allow for negative revaluations. The then Treasury Minister, the right hon. Member for Bromsgrove (Sajid Javid), said:

“It is important to note that the clause theoretically allows for negative revaluations. It is extremely rare for negative growth to occur. For example, CPI, the Government’s preferred measure of prices, has never been negative.”––[Official Report, Public Service Pensions Public Bill Committee, 13 November 2012; c. 308.]

The concession made was that any such order would be subject to the affirmative procedure and that Parliament would have an opportunity to debate the measure, yet such an order has been brought before the House in the first year of the scheme. Not only has it come before the House, but it comes without any proper impact assessment. The implications of the change were unclear for those who have may retired within the last year. If I understood the Minister’s opening comments correctly, the change may not apply to those receiving pensions in payment who have retired in the last year and their pensions will be frozen. It would be helpful if he could reconfirm that and confirm whether any amendment to legislation is required to make it clear for the future.

The Minister also talked about how the Government came to decide on the use of the September 2015 CPI. He is right that the Treasury has a choice in this matter and will know that the year-to-date CPI figures were negative only in April, September and October. It is also the case that pensions in payment and the additional state pension are frozen rather than subject to negative revaluation, so will he explain again why the Government preferred to allow for a negative revaluation rate for active schemes rather than a nil adjustment—a point raised by Lord Whitty and others —when most observers would say that that appears far more consistent?

If the Minister has indeed decided that the change will not apply to those who have received pensions and have retired in the last year, will there be any impact and have any of those who have retired had the option to take any form of lump sum? Would there be any tax implications as a result? Has he taken legal opinion on that point, and if so what was the outcome? Does he have an estimate of the savings that he believes Government Departments will accrue as a result of the decision to apply a negative revaluation rate?

How has the decision been communicated? Will statements be sent out to scheme members, and if so when does the Minister expect that to happen? It would be helpful to hear what impact he believes the negative rate will have on confidence in the new pension scheme arrangements, and what capacity he believes is in place for any queries that people may rightly have when they receive their statement of accrued pension benefits and see that the figure has gone down. The Minister will know that MyCSP’s administrative difficulties were recently the subject of a National Audit Office report. Will it answer any queries that may come in on this matter, and will it have the capacity to cope with them? Finally, what assessment has the Treasury made of whether applying a negative revaluation rate rather than a nil adjustment will breach the cap?

[Greg Hands]

Let me see whether I can respond to the large number of reasonable questions that the shadow Minister asked me. The first thing to say is that she is right that this matter was debated during the passage of the 2013 Act, and it was pointed out that CPI could go negative in exceptional circumstances. Negative inflation is certainly not totally without precedent. It was useful that that debate was had and that Parliament approved the Act and many of the measures, including those that are now in the order. It approved the idea that if there were to be a negative revaluation, it would have to be brought to the House under the exceptional procedure, recognising that it would be an exceptional event.

[Seema Malhotra]

The words that were used were that it would also allow for parliamentary scrutiny, but the Minister has introduced the order without any impact assessment. What extra information will he provide?

[Greg Hands]

It is clear that today’s debate allows for parliamentary scrutiny, but the hon. Lady asks about an impact assessment. The impact will be fairly clear, and I will give some more examples.

To illustrate the amounts that we are talking about, let us compare workers in two different schemes, the local government scheme and the NHS scheme, both earning £26,000 a year. The local government worker will have earned about £40 more in their annual pension than the NHS worker, because of the trade-off between the revaluation and accrual rates. Because the revaluation rate will lead to a less favourable calculation for the local government worker but a more favourable one for the NHS worker, the local government worker’s pot will be reduced by 50p next year, whereas the NHS worker will get £7 more. Someone in the teachers’ scheme who is on £26,000 will also get about £7 per annum based on the revaluation. On the question of pensions in payment, there is a statutory link, so public sector pensions in payment will be frozen for the year without the need for new legislation or a further order.

The hon. Lady asked about the three months of negative CPI. I come back to the five main reasons why we have chosen to use the September CPI figure. First, we should set a precedent of using the CPI month that is most frequently used across Government. Secondly, in terms of the risk sharing, not only should scheme members benefit from the upside risk of revaluation but they should not be shielded from the downside risk. The third reason is consistency. Choosing a figure that is different from the September CPI figure would introduce the idea of significant policy discretion, going back to the point raised by my hon. Friend the Member for Beverley and Holderness, which would open up scope for lobbying and negotiations in an area where one wants a long-term degree of certainty. I think that would be a very unhelpful and unfavourable development.

The fourth reason is that this figure honours the pension settlement. Many of the schemes reached agreement through negotiations with the unions on the basis of CPI-linked revaluation. Choosing the correct CPI figure helps to deliver on that settlement. The final point is about fairness across the schemes. Schemes that choose faster revaluation instead of a better revaluation rate should not be able to benefit from both fast accrual and a more generous revaluation.

--- Later in debate ---

[Greg Hands]

My hon. Friend is right. For all kinds of good reasons the Government made the decision to move this whole sector of public pensions and benefits from RPI to CPI. I think he is right that at that time RPI had gone negative.

If I could answer the final couple of points from the hon. Member for Feltham and Heston—

[Seema Malhotra]

rose—

[Greg Hands]

Shall I deal with these two and come back to the hon. Lady if I have not answered satisfactorily?

[Greg Hands]

Thank you. All scheme members will receive annual benefit statements setting out the revaluation amount. I am confident that members will understand that, where the unions and Government agreed the terms of the scheme, this agreement must be upheld.

In terms of the savings accrued by Government Departments, if I understood the question correctly, no savings have been assumed, as is consistent with the scheme rules, whatever the prices are. The majority of these pensions will not come into payment, of course, for many years. This is about consistency with the proposed final agreement so that they are fair to workforces, schemes and the taxpayers. I will give way and, if I have not answered all the hon. Lady’s questions, I will come back.

[Seema Malhotra]

I want to probe the Minister further on a few points that he missed or on which I am not completely clear. I understand that pensions in payment are frozen but may I check that in the particular circumstance of those who retire in-year in any month from April onwards, they will not be subject to a reduction? The implications are clear, because that means that any pension paid to members who had retired in-year would be reduced effectively and may have resulted in an overpayment—an unauthorised payment, with tax implications. In this particular circumstance, which may be a slight anomaly, can the Minister provide an absolute guarantee that no legislative change is required and that those who have retired in-year will not be adversely affected? Have any of those who have retired taken any lump sum payments and, if so, are they potential overpayments or not subject to such overpayment under the current law? When will the Government send out statements? Will it be possible to respond to queries that will inevitably be sent to the mailboxes of Opposition Members and to the Minister and others about statements that appear to show that members’ accrued pension rights have gone down? Where will those queries be answered? Who will constituents call, and will there be capacity to respond?

[Greg Hands]

Let me try to answer those further questions. The annual benefits statements will be sent out in the usual way. I am confident that members of schemes will understand what has happened and they will be told about the September CPI figure. I am confident that such inquiries will be dealt with in the usual way. In terms of pensions in payment, I am prepared to reassure hon. Members that we will deal with this complex matter. It is a slightly anomalous matter, which may require a legislative amendment or a small change to the schemes, but I assure the Committee that members will not be adversely affected in the particular case of an in-year withdrawal from the scheme.

Detailed impact assessments were prepared for the new scheme designs and were published by each Department. They will have taken into account prices impacts. The order implements the prices elements of those schemes designs and therefore there is no need to conduct a separate impact assessment for the technical implementation of what has already been decided and laid out.

To revalue using the September CPI figure, which is the subject of the order, is a very important step for the Government to take to be consistent and to set a consistent precedent that will be easily understood. It was for the Government to choose a measure of prices for the purposes of revaluing the prices element of the new career-average public sector pension schemes. The Government have chosen the measure that was agreed with the schemes after negotiation with the unions, following the precedent set by last year’s revaluation of the local government pension scheme and also the measure used for indexation of public services pension in payment. I should also re-emphasise that it maintains the real value of these pensions, ensures that there is an appropriate sharing of risk between members and Government and, importantly, that it sets the right precedent for the future. I therefore urge the Committee to support the order.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Public Service Pensions Revaluation (Prices) Order 2016.