Annual Pension Allowance (Transferred Workers)

Toby Perkins Excerpts

Wednesday 3rd December 2014 Commons Chamber

[Toby Perkins (Chesterfield) (Lab)]

I am pleased to have this opportunity to bring to the House’s attention a matter of significant importance to employees in my constituency who were transferred out of Royal Mail to the IT services provider Computer Sciences Corporation and, I suspect, to many other employees who were transferred out of the public sector. Changes to lump sum pension allowances introduced by the Chancellor in his 2013 Budget have had a catastrophic impact on my constituents’ pension pots and created an accidental discrimination that fits neither the principles nor the spirit of the transfer of undertakings protocol, otherwise known as TUPE.

The aim of this debate is to follow up letters I have exchanged with the Financial Secretary to the Treasury. I feel that his replies thus far have failed to grasp the full unfairness of the situation or to offer appropriate remedy. I aim to show the House that, as the mechanism currently stands, there is gross unfairness towards workers who have been transferred out of public sector pension schemes. I hope that the Minister, when she responds, can explain to my constituents why they have been hit with such a significant tax bill, often on revenues that they have not even yet received, and what further steps the Government can take to ensure that former public sector workers are not unfairly disadvantaged by an arbitrary decision they made several years ago.

Royal Mail has had a long tradition in my constituency. Back in the 1960s, as part of a move to get Government organisations out into the provinces, Royal Mail moved thousands of head office staff up to Chesterfield. It brought with it a Barbara Hepworth statue and a welcome number of high-skilled and pretty well-paid jobs. Royal Mail has been a key employer in the town ever since. The Loundsley Green housing estate was built specifically to house the influx of new workers. However, while it remains an important employer today, many staff have subsequently been transferred out and do the same or similar jobs working on the Royal Mail account on behalf of private outsourcing companies.

The workers whose case I am raising today were transferred from Royal Mail to the IT firm Computer Sciences Corporation Ltd—CSC—in 2003 as part of a contract to outsource all Royal Mail’s IT to the company and retain all the 1,713 staff under the TUPE protocol. At that time, employees had a choice either to leave pension contributions that they had already paid within the Royal Mail pension and start a new separate corporate pension with future contributions with their new employer, or to transfer all their contributions to a new CSC pension and subsequently pay into that. The only choice that appeared to face workers was whether their pension contributions would be safer in one scheme or another and where they would be most likely to get a decent return on the pension contributions to which they were entitled.

Many workers—it is not clear how many—elected to keep their pre-2003 contributions within the Royal Mail scheme and open a new CSC pension with future contributions. However, a combination of the changes to the allowance regime—which was dramatically reduced in October 2010 and further reduced in subsequent Budgets—enforcement of TUPE rights, previous changes made to the allowances on what are perceived to be temporary pensions, and Treasury guidance on what constitutes a temporary pension has led to huge costs being applied to workers made redundant from CSC in recent years.

Revelations in Computerweekly.com about the efforts that CSC has made to stem losses on its involvement with the Royal Mail account suggest that 63% of the staff who originally transferred from Royal Mail into CSC have now been cut. Although exact numbers are not known, it is believed that the majority have left the business completely. That suggests that some 1,082 employees could be affected in this case alone. Some of those will have chosen to move into the CSC pension scheme and will not be affected in the same way.

There appear to be two different ways in which workers have been disadvantaged. First, I would like to raise the case of Michael Randell. Michael had worked for Royal Mail Group for well over 25 years, during which he had saved for his retirement by contributing into the pension scheme. Mr Randell is now 53. Under the terms of his employment, had he remained a Royal Mail employee he would have been entitled to take his pension under early retirement provision if he had left the firm over the age of 50. Therefore, in order to comply with TUPE, CSC arranged to make a notional payment to source an equivalent pension value until he is 60, when he will move on to the Royal Mail pension. Mr Randell’s usual pension contributions are less than £5,000 per year, but when he is made redundant, this one-off notional payment—which would effectively buy an annuity for the next seven years to comply with TUPE regulations, from CSC’s perspective—is classed by the Treasury as a one-year contribution to a second, in this case temporary, pension. In practical terms, it is not a second pension—it is a continuation of the first pension that he has from doing the same job with two separate employers.

At a time when the Government rightly ask employees to put money aside to save for themselves in retirement and to plan ahead, this group of workers, who did precisely that, are being caused huge problems because, back in 2003, they made a decision about which pension scheme they should choose to contribute to, yet they could not possibly be expected to have had foresight as to the implications of that choice.

The intention of the Government’s proposals was to target richer pensioners. In 2010, the hon. Member for Fareham (Mr Hoban) announced:

“It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers—80% of those will have incomes over £100,000.”

Unfortunately, as Mr Randell’s case has shown, the policy has also hit those on lower incomes with reasonable pensions. The Government have accepted the possibility that individuals on lower incomes could in exceptional circumstances face a sharp increase in the tax charged on their pension, but as I have demonstrated, such moderate language does not reflect the significant numbers that might be affected or the size of the impact on their pension planning.

The second example involves the group of CSC workers who were made redundant in 2012. That was part of a global redundancy programme in which CSC laid off 640 workers. The workers had their CSC pensions taxed as second pensions, whereas if, back in 2003, they had decided to transfer their pensions into the CSC pension scheme, it would all have been seen as the same scheme.

CSC attempted to honour its commitments to its employees by ensuring that they still received as employees of CSC what they would have been entitled to if they had remained with Royal Mail, but that led to those individuals being treated as though they had two separate pensions, although in practice they have been employed in the same job throughout that period. The issue is about how public sector workers whose employer changes, even though their job does not change, are seen as having two different jobs. Although TUPE should protect them from being worse off as a result, in practice they are not protected.

The Treasury viewed the money as having been paid all at once, even though it was received by the workers annually over many years, and the way in which workers’ pensions are taxed by the Treasury meant that people on decent but not in any sense exceptional salaries faced huge tax bills—more than £200,000 in one case that I have heard of—on income that they had not necessarily received.

It is too early to know the total number of people who will be sucked into this unfortunate state of affairs, but taking into account how many have moved from the public sector to the private sector, it might be very high. That raises important questions about the extent to which the Government fully understood the impact of the changes they made to the annual pension allowance when they made them.

The Treasury document, “Restricting pensions tax relief through existing allowances: a summary of the discussion document responses”, revealed:

“The nature of DB schemes means that some individuals on moderate incomes could exceed the AA—particularly where they are in final salary DB schemes and see spikes in pension accrual… The Government is committed to managing impacts on these individuals as far as possible.”

One of these solutions was to allow individuals

“to carry-forward unused annual allowance from up to three previous years, to offset against contributions in excess of the AA in a single year.”

However, the Government recognised that in exceptional cases such mitigation would not be sufficient. The Financial Secretary made that clear in correspondence with me. He said at the time that the Government had consulted on options to give individuals and schemes more flexibility over the payment of charges. On 3 March 2011, the Government announced that individuals with annual allowance charges of more than £2,000 would be able to elect for the full liability to be met from their pension benefit. That obviously made it easier in the short term, but in practice it still means that individuals will lose out, as they receive a lower pension than they otherwise would have done. The fact that they are still taking money out of their future earnings to pay a bill does not seem to fit with the principle of the Government’s measures.

It is ironic that this debate is taking place on the day that the House has again debated the Taxation of Pensions Bill, because the Bill was a missed opportunity to address the plight of TUPE-ed public sector workers who face the unfairness that I have highlighted. The Government have thus far fallen short of the action that is required. The measures that have been put in place are compensatory, but they do not compensate fully. They mean that the workers of CSC and probably many other former public sector workers will lose out on the pension to which they should have been entitled.

The further stages of the Taxation of Pensions Bill provide an opportunity to establish cross-party support for further analysing the effect that pension changes have had on CSC workers, and for setting out a framework in which the unfair nature of the situation can be tackled. I hope that that might happen in another place, as I suggested on Report. The Government’s approach to reforming pensions tax relief was supposed to be based on ensuring that fairness was maintained, but it appears that a loophole has developed that could, in some cases, lead to people losing thousands from their pension.

I would be grateful if the Minister recognised that the measures to alleviate the problem are sticking plasters that aim to provide compensation or to reduce the damage of the proposals, and that what is required is for people who are perceived to have had two jobs, when in reality they had one, not to have to choose to pay a tax bill, which they would not have faced if they were still in the public sector, either all at once or from their future pension income. I look forward to hearing her response on this important issue. I recognise, in bringing this matter to the House, that the Government’s intentions were positive. However, when unintended consequences arise, it is our responsibility to evaluate them and, hopefully, to work together to deliver a fairer outcome for our constituents.