Local Government Pension Scheme (Amendment) Regulations 2002

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Chris Grayling: I want to say a few words on some of the practicalities and the potential consequences of the regulations, and the consequences of the general direction being taken by the public sector, as highlighted by the hon. Member for Bath. I refer particularly to regulations 10 and 3, which set out the way forward for the creation of new admission bodies.

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Regulation 10 refers specifically to housing management companies, which are increasingly becoming used by local authorities as a vehicle for their housing stock. The implications for pensions are significant. I think particularly of an example in my constituency. Reigate and Banstead borough council has set up a housing management company, and it has just completed the transfer of its housing stock to that company. Under regulation 10, the employees who have been transferred will be entitled to continue to be members of the local government pension scheme, but what will happen then? The company has not been set up to stand in aspic—it will seek to expand and develop its portfolio, to play a broader role in housing across the area.

What happens if the company wants to take over housing run by another local authority? There is a practical way in which that might happen. One estate is partly controlled by the new company and partly by the London borough of Merton. Others and I would like to see the London borough of Merton stock transferred into the control of the new company, placing that estate under single management. However, if that happens, there may be a transfer of some staff from Merton's housing unit to the new company.

Likewise, the company may decide to push its horizons further and consider taking over some or all of the housing stock of the London borough of Sutton or Mole Valley district council, which are neighbouring authorities. Staff could be transferred from those authorities to the new company. Will all of those staff become members of the Reigate and Banstead borough council pension scheme, or will they be members, in a fragmented way, of a number of different schemes as the company grows?

If those other employees were to become members of the Reigate and Banstead borough scheme, given what the Minister said about the underfunding of some local authority schemes—he cited the case in Sussex, where a scheme was only 88 per cent. funded—how would the council take on the financial burden of providing pension support and theoretically meeting the employees' pension gap? It would be doing so simply because its housing management company had decided to be ambitious and expand beyond its original borders.

There are complications and implications behind the changes in the public sector. The same applies to the schools companies to which I referred in my intervention on the Minister. Those companies could become accepted admission bodies—a number of Surrey schools could get together and set up a joint grounds management company to look after their own grounds and to offer services to neighbouring schools and potentially to neighbouring local authorities. As those companies grew and developed, with their staffing based across an increasingly broad geographic area, would it still be the responsibility of the original local authority pension scheme to provide a pension for all the new staff?

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This is fundamentally important because there is a financial liability. Local authority pension funds are already under considerable financial pressure, as we heard earlier. I hope that the Minister will be able to reassure us that the Government are mindful of the potential implications of the trends.

Mr. Foster: I am grateful to the hon. Gentleman for giving way. He rightly points to the potential confusion of different staff having different pension schemes. I would like him to pursue my earlier point, and give the Committee his views on it. Is he aware that, in the example that he has given, some members of staff would be statutorily entitled to membership of a local authority pension scheme—I understand his wider point about which scheme—whereas new members of staff would not have that statutory right? There will be only an unenforceable code to give them the opportunity to join that scheme, so there could be a huge range of different pension schemes for that company, despite the Government's clear promise to tackle the problem of a two-tier work force.

Chris Grayling: The hon. Gentleman is right to highlight the potential disparities. The Minister gave us a clear indication that the regulations would apply to new staff. However, as the new organisations grow and develop, new staff could become a very broad concept. It is not simply a matter of the organisations' current staff. The organisations may look very different in three to five years' time.

Have the Government given full consideration to the consequences of the regulations for pension provision in those organisations? I would be intrigued to hear the Minister's comments. If the Government cannot provide a reassurance, there will be anxiety among local authority treasurers as they look to the future and identify potential further financial pressure that may come to bear on their pension schemes if their current strategies continue. There is every expectation that they will—housing companies will grow and develop, schools will set up companies that will provide services and there will be other offshoots of the public sector delivering different services in different ways and competing on a much broader basis than in the past. I hope that the Minister can clarify those points.

5.39 pm

Dr. Whitehead: We have had a substantial debate about points arising from the statutory instrument and about a number of other points unrelated to it. Hon. Members asked several questions about the scheme, to which I shall endeavour to respond.

Some hon. Members said that the statutory instruments did not deal with what they claimed was the enormity of the crisis in local government pensions and the need for change. The provisions do not deal with the entire local government pension scheme, but introduce specific measures to ensure that the scheme moves forward in good health and on a flexible basis. The hon. Member for Bath may consider that these

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measures have implications, but that is what they are designed for. They do not attempt to deal with the overall future of the scheme.

The hon. Gentleman will be interested to know that my Department is undertaking a stocktaking exercise in the scheme. As was made clear in response to one or two wild press articles, it is not intended to reform the fundamental basis of the scheme or end the way in which the scheme works in its present form. It simply focuses on some issues that the scheme faces and considers, for example, the regulation of the scheme, benefit administration, future scheme members and so on.

The stocktake reflects, as our debate has reflected, the fact that local government is changing and that those who work for local government do not necessarily work for local government as they did in the past. I refer not simply to those who work for housing companies or companies that may, under regulation 3, gain access to a local government pension scheme, but to those who undertake more part-time work. There are different ways of working now, including job-sharing arrangements—people can have split careers in local government—and the pension scheme should be able to respond to that range and provide a satisfactory service.

The hon. Members for Bath and for North-East Cambridgeshire asked whether there would be added costs. However, nothing in the amendments will intrinsically add to the costs of the local government pension scheme; they are simply course corrections and are not intended to contain elements that would incur additional charges on the pension scheme. They simply make changes to reflect the changing nature of the scheme and how it is operated.

The hon. Member for Bath also asked what would happen when people were admitted from other schemes and how that would affect the funding of the scheme. I think that he implied that it would somehow add to the costs. It is important to ensure that the pension scheme is not over-mature—in other words, that enough people contribute to the scheme, maintaining the vitality of the scheme for those who are taking out of it. Should people be admitted from other schemes, they will be required to conform to the terms of the local schemes, and both the employee's and employer's contributions will be identical to that of the local government pension scheme.

Mr. Foster: Let me give the Minister one specific example to illustrate the possible concerns about the growing membership of private sector companies in the scheme. Private sector companies, unlike local governments, occasionally go bust and may not be able to meet their contributions. Those presumably would have to be met by the local councils that will not go bust.

Dr. Whitehead: Clearly, the circumstances under which an external company could be admitted to a local government pension scheme under regulation 3 would require a transfer of funds from the pension fund operated by that company—were the company to operate a fund—to the local government pension fund

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when it undertook the admission of that company to the local government pension scheme. It is a staple of the insurance world that companies occasionally go bust and arrangements are made to ensure that the pensioners of those companies, who have been in their particular schemes, are not disadvantaged. Should a company be admitted, there would be regulations, including an indemnity in case they go bust, so that they would precisely adhere to the scheme in the way that other companies have sought to do, in terms of the protection that there would be if they ceased trading.

The hon. Gentleman asked whether the Government have assessed what percentage of the local government pension fund is made up by people not directly in local government service. I think that it is less than 5 per cent. but, clearly, we will further examine that issue and how it is to go forward under the stocktake review. As I have emphasised, an increase in numbers would not necessarily damage a local pension fund. It might well add to its buoyancy and prevent its over-maturing.

The hon. Member for Epsom and Ewell mentioned companies that arise from companies that arise from companies. I can see a hypothetical possibility of that. Certainly, if a housing company takes over further companies, those companies may or may not have their own pension funds. Obviously, there is no compulsion for a company to set up a pension fund. The code that hon. Members have mentioned seeks to continue the process of open co-operation between all parties, although legislation would be considered were the code not delivering. However, companies that might subsequently fall within the ambit of a housing company would come into the local government pension scheme or not according to what I have just mentioned about other companies that may enter into the local government pension scheme according to regulation 3.

If the employees of a company that had been taken over by a housing company happened to have a separate pension scheme, it is certainly true that they might be able to continue with it. However, if sufficient funds were transferred into the local government pension scheme and the indemnity were provided in the way that I have outlined, those granddaughter or grandson companies could come into the local government pension scheme in the way that I have described.

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Prepared 16 April 2002