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26 Jul 2000 : Column 238WH

Council Pension Benefits

12.30 pm

Ms Julia Drown (South Swindon): This may seem to many to be a boring subject, but the impact of the Government's policy on council pension deficits has potentially serious consequences for my constituents, who rely on borough council services. In Swindon there is a £14 million deficit in the pension fund, and that has a twofold impact on the council's revenue funds. The council is obliged to restore the £14 million deficit over a number of years and must also make up for the reduced investment income resulting from it. Both those shortfalls must be covered by revenue funds. That will cost Swindon residents £4.3 million next year. That sum will not be available to provide much-needed services.

The council has done everything to balance budgets and to ensure that reliance on one-off moneys is limited and reserves are reasonable. It has embraced the Government's best value regime and rightly wants to provide the best service possible for the residents of Swindon. However, it is in an increasingly difficult position. It is pushed by central Government into passporting the annual financial settlement into specific services, such as education, without regard to the pressures on it. Those pressures are, principally, the deficit in the pension fund and increasing demands for service from an expanding population, but there are also increasing needs, for example in the fire service. Those are not allowed for fully in the council's standard spending assessment.

Dealing with the pressures that I have outlined is particularly frustrating for a borough council such as Swindon, whose own resources contain the potential to improve things. Government approval is needed for that to happen. To emphasise the importance of what I am explaining, I shall briefly outline the state of affairs in Swindon. The annual financial settlement from central Government continues to underestimate--although by less than the Tories did, so there have been some improvements under a Labour Government--the levels of demand for community care packages for the elderly. There are also pressures from the people of Swindon for developments such as new libraries and concert facilities, which would entail associated revenue costs. Although the Labour Government have given more funds to Swindon than any Tory Government did, that has not saved any of the council's departments from the necessity of making difficult decisions.

Of particular concern to my constituents have been decisions to close, for economic reasons, schools that were much valued by their local communities and provided unique facilities and support for students; the closure of elderly people's day centres; the threatened closure of centres for people with disabilities; and possible changes affecting transport tokens for elderly people. From my surgeries I can identify ways in which more council spending would greatly expand services and opportunities for my constituents. I should like, for example, more education opportunities, an expanded home help service and more services for those with disabilities. For the environment, I should like greater opportunities to tackle graffiti, more recycling and a larger budget for road safety maintenance. The Government have undoubtedly done more than previous Governments in all those respects, but some

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needs are still unmet. Unless the problem of the pension fund deficit can be solved, the borough council will continue to be frustrated in its aim of achieving the best that it can with its resources.

The council is keen to meet the demand for service improvements and has the resources to tackle at least some of the needs that I have identified, but is restrained from doing so by the Department of the Environment, Transport and the Regions rules. Those rules do not apply to the Government. "Prudent for a purpose" is my right hon. Friend the Chancellor's expression, and that is right. The Government use money to reduce deficits, to release further money for public services. I ask the Department to allow Swindon borough council to be prudent for a purpose, too.

I know that Ministers are used to Members of Parliament placing special emphasis on the needs in their areas and on the need for more Government support for local government finance. I am asking for the council to be allowed to solve the problem using its own resources. It has rightly reviewed its assets and sold those that are surplus to requirements, and those capital receipts could be used to pay off the deficit on the pension fund and release much-needed revenue funds for the services that my constituents desire and deserve.

That would exactly follow the policy adopted by my right hon. Friend the Chancellor in dealing with the deficit left by years of economic mismanagement by the Tories. I know that Ministers are wary about creating a precedent that will threaten their public spending figures, but Ipswich city council has been allowed to tackle its pension deficit in this way, and Swindon's case is equally strong.

The Department of the Environment, Transport and the Regions does not normally allow capital resources to be used to pay off deficits on its pension funds, but in 1997, the Department published on its website guidance notes for requests for capitalisation to allow part of pension deficits to be written off, which stated:

The request for capitalisation undoubtedly meets the criterion of being substantial in relation to the authority's revenue budget. The council's expenditure towards the pension fund deficit is £3.5 million this year, compared with a net revenue budget of £143.5 million. There is an expectation of a further £800,000 increase in contributions as part of next year's budget, making a total of £4.3 million.

If the council had had £3.5 million in 2000-01, those funds could have provided an additional £120 for every primary and secondary school pupil in the town. That

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would have enabled Swindon to use its own resources to spend at the level of the average unitary authority--although we would still have had one of the 40 worst funded education authorities. Alternatively, the money could have provided 9,000 hours of much-needed home help services and allowed 300 patients to be discharged from the local Princess Margaret hospital and given more appropriate care, at the same time allowing more people to be treated at the hospital. Those are high priorities for the town.

Anyone who has been associated with local government will know that 3 per cent. of the borough's revenue budgets represents a substantial sum. Using those revenue funds for the pension deficit is having a serious impact on other services.

The next question concerns whether the scale of the problem that we have in Swindon was foreseeable. Clearly, it was not. The problem did not arise because of any lack of planning or poor management by the council, but was entirely due to factors beyond the council's control. The deficit was far greater than anticipated when Swindon borough council became a unitary authority. The actual deficit was calculated by outside actuaries over whom the council, quite properly, had no control. In its shadow unitary form, the council based all its assumptions on the 1995 valuation, which was the most recent valuation at the time. That carried the expectation that contribution rates would peak at 1998-99 levels before declining.

However, the figures arising from the subsequent 1998 revaluation, after the council had become a unitary authority, were alarmingly worse, and were not formally notified to the council until January 1999. By that time, the budget planning process for 1999-2000 was largely settled. The borough council had no choice but to make reductions in its plans for service budgets. Those included lower expenditure on schools than the council would have wished. Although more was spent on social services, due to an expanding population and increasing needs, there had to be a tightening of the eligibility criteria for community care packages, a reduction in home care support and the closure of residential beds. It is thus clear that the deficit was not foreseen.

One might ask why the deficit was so large. There were several reasons for the worsening contribution rate. When the borough council came into being as a unitary authority, the split of total liabilities on the fund for the former county services, such as social services and libraries, meant that Swindon's share of Wiltshire's deficit rose from £18 million in 1995 to £40 million in 1998. That would have been impossible for the council to predict before the 1998 actuarial revaluation and those massive numbers show the problem that this is creating for Swindon.

Had Swindon remained a district council, the pension fund would have needed to cover fewer staff, and the deficit would have been smaller and--although still a great problem--easier for the council to manage within its own resources. The council also had to deal with the unforeseen abolition of advance corporation tax credits in the 1997 budget. Although I understand the importance of that for the wider economy, I know that the Government recognise that the abolition has an impact on pension funds. However, it is of particular relevance here that the abolition causes additional pressure for those councils struggling from a deficit

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position. The final reason why the deficit was unforeseeable was that the level of early retirements triggered by the local government reorganisation in 1997 was higher than expected.

There were, therefore, many reasons why the level of contributions was not foreseeable: previous actuarial valuations were over-optimistic; new revaluations were not notified until late in the budget cycle; the unforeseen split of liabilities on former county services was way in excess of the council's best estimates at the preparatory stage; advance corporation tax credits were abolished; and the levels of early retirement were higher than expected.

Although the Government might argue that better estimates might have solved one or two of the problems, that cannot be said for them all. Many compelling, compounding factors have produced a convincing case that the contributions were not foreseeable by the borough council. I have made it clear that the deficit cannot be met from revenue budgets or reserves alone, without further revenue account savings in future years. The demands are increasing.

It seems entirely reasonable that the council should be allowed to sort out this problem using its own resources. It seems unreasonable that my constituents will be prevented from having access to home helps, better education and adaptations to their homes--for those with disabilities--because the Government refuse to help Swindon in this way. This situation was unforeseen, and it is about local people tackling local problems using their own resources. I ask the Government to reconsider the issue and to help my constituents in this way.

I believe that there is a clear case for the whole £40 million problem to be solved with a capitalisation direction. However, if that is impossible, let no one say that the borough council and I are not prepared to discuss the situation to see whether we can reach a compromise. If the Government really believe that using £40 million of Swindon borough's own funds in this way will challenge public expenditure targets or create too great a precedent, I am willing to take to the council a proposal to phase the capitalisation direction over two or three years. Indeed, the indications are that the council and the director of finance would positively welcome that sort of approach.

Assistance should be provided to help Swindon to help itself. Short of handing over a few million pounds to Swindon borough council every year, this is the biggest contribution that the Government could make to improving local services in Swindon, and I hope that the Minister will tell us today that she is willing to help my constituents in this way.

12.43 pm

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes ): I am grateful to my hon. Friend the Member for South Swindon (Ms Drown) for raising the subject of local government pension funds. I agree with her that it is an important subject, and well worth discussing. This debate will give me the opportunity to explain some of the important issues involved--some of which she may not have mentioned in her speech--and to set the record straight on some of her other contentions. It may be helpful if I begin by explaining how the local

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government pension scheme works, and the Government's role. I shall then deal with the specific problem of Swindon and its possible solution.

The local government pension scheme in England and Wales is a single pension scheme providing the same benefit structure for all local government employees, no matter where they work. It is open to anyone employed in local government, and recent changes allow access to the scheme for contractors who win bids to provide outsourced services. That has been a great benefit, and is an important factor in maintaining the stability of a pension scheme. It can help to prevent premature maturing of the scheme, whereby a small number of employees supports a growing number of pensioners. In turn, that can lead to higher employer costs, which is perhaps a significant issue.

The scheme is divided into 89 separate funds that are administered by county councils, London boroughs or, in those parts of the country that were reorganised in the 1980s and 1990s, a lead district council. The funds vary in size from £180 million to £6.5 billion. In total, they are worth about £75 billion and account for about 10 per cent. of all funds held by occupational schemes in the UK, so it is clear that this is a big issue for local government and potential pensioners.

Importantly, administration and management are handled locally, and due regard is given to the requirements in the Local Government Pension Scheme Regulations 1997 and the 1998 regulations on investment and management of funds. The Secretary of State's role respects the right and capacity of local government to manage its finances prudently and securely. The regulations do not prescribe but create a framework whereby, for investment purposes, risk must be spread and properly managed, without reducing the ability to maximise investment returns.

In setting employer contribution rates for councils such as Swindon, there is some flexibility, subject to due regard for long-term reasonableness and the cost implications of decisions. Rates should be set so that wild fluctuations are avoided and what is affordable is contributed. By and large, and despite criticisms from elsewhere, local government has demonstrated proper regard for the cost implications of meeting pension liabilities.

Because it is recognised that the nature of local government is entirely different from private sector companies that run their own occupational pension schemes, the local government pension scheme was, and remains, exempted from the minimum funding requirements in the Pensions Act 1995. The statutory framework, with separate provisions to control management and investment of funds, and a requirement for three-yearly actuarial valuations at which contributions are set, has also been recognised as an important way in which to create the necessary stability. When taken together, and properly managed within the disciplined framework of local government finance regulation, the provisions ensure the on-going solvency of funds. In turn, that covers those areas that gave rise to concerns about impropriety, with which the 1995 Act deals.

In the long term, there has been a high degree of stability in employers' contribution rates, in line with the statutory requirement that, in respect of the

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desirability of maintaining as constant a rate as possible, employers contribute at a rate that secures solvency. In the long term, local government pension funds have performed as well as or better than the pension industry average. That is a success that local government should rightly be proud of, and for which it should be given due credit. By and large, it has performed very well as a pension fund manager.

The level of contributions is a key issue in explaining the situation in Swindon. The 1997 regulations that govern the scheme contain no requirement that funds should have assets covering 100 per cent. of liabilities. That recognises that liability is a constantly moving target that is affected by, among other things, current and future inflation rates, pay inflation, the age profile of the work force, retirement and so on. Similarly, the value of assets can vary. In the short term, variations can be extreme, but prudent management of pension funds with a view to long-term sustainability smoothes out those peaks and troughs.

However, we recognise that some authorities, as a result of their funding position, are none the less paying high employer contributions. In some instances, as in Swindon and elsewhere, they are paying a rate that is perhaps three times more than what we would regard as the normal, averaged-out rate. I appreciate the concerns of that small number of authorities that face the prospect of having to pay almost a fifth of their pay allocation into the pension fund.

I would like to respond to some of the points made by my hon. Friend about the local government revenue support grant. I do not accept the reasoning that she gave, in explaining the position in Swindon. I can assure her that the Government are fully committed to providing local authorities with the money that they need to fund the vital services that they provide. In the past three years, the Government have increased the grant to local authorities by almost £6.5 billion, an increase of 8.8 per cent. in real terms. In the recent spending review, we announced that, in total, local authorities would benefit from further increases up to 2003-04, the last year covered by the review. Swindon has benefited from those increases, and will continue to do so.

Ms Drown : I do not want to give the impression that we have not benefited hugely from the fact that there is now a Labour Government--much more funding has been given to Swindon than was ever given by the Tories--but there are still unmet needs in the town, and I want my hon. Friend to recognise that. As she says, there is a need, in the context of the comprehensive spending review, for more resources for Swindon. However, we could do more from our own resources, and that is what is so frustrating for the council and the town.

Ms Hughes : I shall get to the second point in a moment. On the first point, I would say that there are pressures on every local authority and on central Government. People in government, at whatever level, have to acknowledge that the job involves making choices between competing priorities, managing resources as efficiently as possible and finding new and

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better ways to meet the needs of citizens. Other authorities are doing that, and I hope that Swindon will also be able to do that, as it should, in the context of significant increases in its budget.

My hon. Friend spoke about the need for improved services and the council's responsibility to the people of Swindon. The Government have done as much as was possible in three years to improve resources for Swindon and other authorities. It is up to Swindon to apply those resources in the best possible way, to meet the needs of its citizens.

Ms Drown : The borough council is asking to be allowed to do just that and to use its resources as efficiently as possible to deliver the best for the town. That is why it is seeking a capitalisation direction.

Ms Hughes : It is no surprise that Swindon and other authorities in a similar position want to use their capital receipts to reduce their pension fund contributions. To authorities that have made substantial property sales and are in the fortunate position of having sufficient receipts in the bank, that may appear to be the obvious solution. However, authorities may not normally pay capital receipts into pension funds, for good reasons. Receipts from the disposal of capital assets are an important capital resource. They may be used to buy other capital assets, which is the most prudent and beneficial use of such receipts. Receipts may not normally be used to meet any part of an authority's revenue expenditure, including pension fund contributions. There are good macro-economic reasons for that, and other authorities that have managed their budgets well and have paid their contributions from revenue, as they should, may take a dim view if councils such as Swindon are allowed to use the capital resources that they are fortunate enough to have to offset revenue expenditure that they should have met from their revenue budget. Other authorities have done that with careful management. There is an issue concerning not only the wider aspects of public finance and the limitations on public expenditure, which is a legitimate concern of central Government, but equity with other authorities.

Turning to the criteria for allowing capitalisation, we have discretion to permit exceptions to the general rule. We do that by issuing a capitalisation direction to the individual authorities to allow them to use capital for revenue purposes when certain conditions have been met. One is serious financial pressure and, from Swindon's point of view, the size of its deficit is a serious matter. Another criterion is whether the deficit could be said to have been unforeseen. My hon. Friend argued her case carefully and gave a number of reasons why Swindon's deficit was unforeseen, but I do not share her view, because increases in pension fund contributions are generally foreseeable. Authorities may not know exact figures, but they are usually aware of the sort of sums that will be required before they set their budgets. If they act prudently, they should be able to make good estimates of what will be involved, even if they do not have hard information, and act in accordance with those judgments. I am not convinced that Swindon did so.

However, having set the record straight, I have decided that the capitalisation criteria that affect Swindon and some other authorities and were

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established some time ago should be reviewed to see whether, on a one-off basis--I emphasise that--we can respond in a systematic and defensible way to the situation faced by those authorities, bearing in mind other issues that I have outlined in terms of equity between authorities. That review is now well under way and we are working on a proposal to allow capitalisation of pension fund contributions in a wider range of circumstances than at present. It is important to establish criteria, because we are dealing with public money, and those must take account of the position in local government as a whole rather than responding to one or two difficult cases. It is important to get it right and to consult on the proposals with local government. That is the stage that we have reached.

I must emphasise that we will not allow unrestricted capitalisation of contributions to pension funds. If I change the criteria, I must have a robust model so that that cannot happen, because it would encourage a few imprudent authorities to use that route as a substitute for proper budgeting. I am not prepared to allow that, because it would put at a disadvantage the more responsible authorities that have already made tough decisions to enable them to maintain their pension contributions and to respond to service development.

The criteria must be robust and we must not allow authorities to forget the true cost of using capital resources to meet revenue expenditure. That cost is a reduction in the potential capital investment in their areas. Residents of Swindon will suffer through a direction because that capital will not be available for such uses.

I am sure that my hon. Friend understands my concern. We accept that there is a case for a modest, one-off relaxation of the rules and I hope to be able to announce that shortly after the consultation. I hope that my hon. Friend accepts my argument that we must have a robust model. I am not prepared to allow local authorities to use capital routinely for revenue purposes, even for pension fund contributions.

Ms Drown : I thank my hon. Friend. That step forward will be much appreciated by Swindon borough council. It shows that a Labour Government listen and give more money to and support local government. I look forward to a positive outcome for the borough council, and I thank my hon. Friend the Minister.

Ms Hughes : Some of my hon. Friend's earlier remarks almost made me change my mind. However, I am too far down the road, and a serious issue is involved. I hope that we shall deal with the matter satisfactorily and robustly.

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