House of Commons

Session 2006 - 07
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General Committee Debates
Pensions

Pensions Bill

The Committee consisted of the following Members:

Chairmen: † Mr. Roger Gale, David Taylor

† Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)

† Banks, Gordon (Ochil and South Perthshire) (Lab)

† Brown, Mr. Russell (Dumfries and Galloway) (Lab)

Burt, Lorely (Solihull) (LD)

† Creagh, Mary (Wakefield) (Lab)

† Heppell, Mr. John (Vice-Chamberlain of Her Majesty's Household)

† Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)

† Keeble, Ms Sally (Northampton, North) (Lab)

† Lancaster, Mr. Mark (North-East Milton Keynes) (Con)

† Laws, Mr. David (Yeovil) (LD)

† Penrose, John (Weston-super-Mare) (Con)

† Plaskitt, Mr. James (Parliamentary Under-Secretary of State for Work and Pensions)

Pritchard, Mark (The Wrekin) (Con)

† Purnell, James (Minister for Pensions Reform)

† Selous, Andrew (South-West Bedfordshire) (Con)

† Smith, Ms Angela C. (Sheffield, Hillsborough) (Lab)

† Waterson, Mr. Nigel (Eastbourne) (Con)

Alan Sandall, Committee Clerk

† attended the Committee

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Public Bill Committee

Thursday 8 February 2007

(Afternoon)

[Mr. Roger Gale in the Chair]

Pensions Bill

The Chairman: Good afternoon, gentlemen. We shall do our best to expedite business before the roads start to freeze. I note that a number of Members have the far frozen west and the far frozen midlands to go to, and I am told that England is covered from the Isle of Thanet. We will do our best to make progress without interfering with the due course of democracy.

New Clause 22

Commission on public sector pensions

“The Secretary of State shall establish an independent commission to evaluate the future terms, benefits and financing of public sector pensions.”.— [Mr. Laws.]

Motion made [this day], That the clause be read a Second time.

1.30 pm

Mr. David Laws (Yeovil) (LD): Welcome back to the Chair for the final furlong, Mr. Gale. We have just five fences to clear before we have an opportunity to get home before, as you say, Britain freezes over.

This morning we were discussing public sector pensions, and I invited members to back the recommendation of the cross-party Work and Pensions Committee. We touched on the rather limited nature of the reforms that the Government have so far made to the public sector pension architecture, and the rather different things that Ministers have said in different places about their enthusiasm for reform.

It is fair to acknowledge that a number of the public sector pension schemes have been reformed recently. Some of the reforms are still in the process of being agreed and to a small extent these will trim the cost of public sector pensions in the years ahead. Nevertheless, the figures that I gave this morning for the rising cost of public sector pensions were the costs after reform. So there is still a significant increase in the costs.

As a result of the manner in which the Government have sought to deliver many of the reforms, many injustices have arisen. For example, for a Government who claim to be very female-friendly in their pension policy, it is rather odd that it has been agreed that all existing public sector employees will be grandfathered in relation to their ability to take public sector pensions at an early age. Even individuals who had not joined the public sector when the agreements were struck with the Government will be grandfathered in that sense, or one might say pre-grandfathered.

The people who will pay the price of these reforms, therefore, are the individuals who will join the public services in the future. The reason why that may be

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unfair to women is that women are far more likely to have career breaks; they may be in the public service now but may need to take a career break and return to it in the future. As I understand it, many of those individuals will lose their entitlement to retire early at 60 and find themselves disadvantaged compared with male members of the same public services who joined at precisely the same time.

The hon. Member for Northampton, North raised this morning the important differences between many of the public sector schemes, and I think it is worth touching on them for a moment. It would be wrong to think that all of the schemes are the same in their characteristics and costs. That is one of the reasons why it would be particularly sensible to establish a commission to look into the issue so that we distinguish clearly between those public sector pension schemes that are more unaffordable and those that are more affordable.

It is worth saying that, of all the public sector pension schemes, only two to my knowledge are funded and therefore have a funding discipline. One of them is the local government pension scheme and one of them is our own, although a sense of discipline in our own is somewhat undermined by the fact that the taxpayer simply fills up the hole in the funded scheme, whatever that may be. The hole at the moment approaches a contribution of 27 per cent. of our salaries. I have managed to ask a number of parliamentary questions recently on how the employer contribution rate varies between schemes. In other words, this is the percentage of salaries that effectively are contributed by the general taxpayer. This seems a more sensible way to look at affordability and fairness issues in public sector pensions than simply looking at the issue of the unfunded liability, which does not necessarily tell us very much in terms of how sustainable and affordable public sector pension schemes are.

So there is an enormous gulf between the employer contribution rates for different schemes. When comparing the public sector and private sector pension schemes and assessing whether or not they are fair, it is sensible to compare the employer contribution rates of both. We know that, in crude terms, the private sector has a lot of defined-contribution schemes, where average contribution rates are about 7 per cent.—the Minister might have a better figure on that. The average contribution rates in private sector defined-benefit schemes are about 13, 14 or 15 per cent., whereas the lowest public sector employer contribution rates are about 13 or 14 per cent. Such rates apply to the pension schemes for local government, teachers and nurses. At the top end, the employer contribution rate to the judges’ pension scheme is slightly less than 30 per cent. of salary. The figure for the MPs’ scheme is slightly less than 27 per cent., and the scheme figures for the police and the firefighters are 24.6 and 26.5 per cent. respectively.

There is an enormous gulf between the different schemes. Some may require relatively little adjustment and reform in the future such as the local government scheme, which is funded and appears to have quite a low employer contribution rate, whereas it appears that others will need a lot more reform. In discussing reform of the larger and, apparently, more expensive public

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sector schemes, we need a debate about how long we expect people in the public sector to remain in work in the future.

Traditionally, the pension schemes for firefighters, police and the armed forces were expensive because individuals who went into the schemes in those professions had low retirement ages. Until quite recently, it was possible for a police officer who joined when they were 18 and a half to retire at 48 and a half with a full pension. That represents an interesting public policy issue for the Government. At a time when we are trying to encourage people to work longer, should we expect people in the public services who have physical and demanding jobs to be able to access a pension relatively early on in their working lives or should they be looking to make other changes and to take up other employment opportunities?

The same things apply to other areas, such as the armed forces. Understandably, people do not necessarily stay on in the SAS or in other strenuous jobs until they are 65, 66 or 67. In the previous armed forces pension scheme, it was possible to retire with a full career pension at 55. Those who had completed 16 years as an officer or 22 years in the ranks—I am not sure why an officer was able to retire six years earlier than somebody in the ranks, but those were the rules—were entitled to an immediately payable pension.

There are some big issues to address, including the costs of different schemes; how long we should expect people in the public services to work; and whether we should continue with final salary schemes, which can be very inflexible in terms of labour mobility, or whether we should move to career averaging schemes. Given that we have had such an extensive debate on pensions, it seems bizarre that we should be leaving out proper scrutiny of this particular area.

I should have thought that there was a lesson to be learned from the Pensions Commission. We brought in an independent and respected group of individuals representing a range of opinions and experiences—in this case, the unions, business and academia—to report on this area. Such a group is in a strong position to look into contentious issues and clear the confusion that often exists about the statistics and the facts. It can then make recommendations for reform that can command the sort of cross-party support that will be needed to make such contentious changes much easier in the future.

I am little surprised that the Government have been so conservative and so unwilling to move in this area. I can only think that there is nervousness about the guarantees that have been given to the public sector unions. I hope that in the near future there will be a more positive Government line on the issue and a greater willingness to open up the public sector schemes, in the cause not of devaluing them to the lowest common denominator in the private sector but of ensuring that they are affordable and sustainable in the future. They should be fair to hard-working public sector employees and to those working in the private sector who are paying increasing amounts of tax to fund the public sector while the value of their own pensions dwindles away.

John Penrose (Weston-super-Mare) (Con): I rise to support the new clause because, apart from the fact

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that it is right, I am a member of the Select Committee that proposed it and my name is on the amendment paper. It would therefore be inconsistent of me not to support it.

The hon. Member for Yeovil has given a good, lengthy overview of the arguments that we rehearsed in the Select Committee. [Interruption.]

Mr. Laws: The short version.

John Penrose: I am pleased to hear it. I will not repeat the hon. Gentleman’s excellent tour d’horizon on the matter, but I will re-emphasise one of the points he made and add some others. It is important to remember that the commission proposed by the Select Committee would not be some kind of quango to which a difficult decision could be shuffled off so that it was kicked into the long grass by the Government. We proposed something along the lines of the Turner commission, which is a heavyweight, academic and seriously well-qualified body, to clarify and improve the quality of debate on pensions.

The hon. Member for Yeovil said, rightly, that too often this topic is politically controversial and the so-called debate ends up being a shuffling of people’s prejudices. The Turner commission managed to move away from that and turned the wider pensions debate into a structured, logical, evidence-based process. It was an essential part of the Government’s managing to fashion an admirable degree of political consensus on a very difficult issue which successive Governments have found impossible to solve.

Public sector pensions are no less controversial and complex than others. The hon. Member for Yeovil explained some of the differences between the schemes, and I am sure there are many that he did not mention. Constructive and careful laying of the groundwork would be an essential first step if an intelligent decision—perhaps even a consensus—were to be achieved. That is why the Select Committee suggested the new clause, and I commend it to the Committee. I hope that hon. Members on the Government Benches can bring themselves to support it and that Opposition Members will also vote for the new clause if the hon. Member for Yeovil decides to divide the Committee on it.

The Government have been admirable in establishing the wider pensions consensus—a process in which many people participated. The new clause gives them an opportunity to underpin and strengthen that consensus if they get the issue right. But if they duck it, or allow a debate on public sector pensions to be just a shuffling of people’s prejudices, there is a risk that the moral authority that has been created around the pensions issue will be eroded. The Government, as the employer of people who work in the public sector, need to be seen to be putting their own house in order.

Andrew Selous (South-West Bedfordshire) (Con): I am listening to my hon. Friend, as is the whole Committee, with great interest. He makes some valid points; we do not want to become two nations in respect of pensions. Was it a consideration of the Select Committee that a commission such as that proposed by the hon. Member for Yeovil would be very careful about retrospective legislation? Many of our constituents are rightly concerned about that matter.

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1.45 pm

John Penrose: That is clearly one of the critical issues that a commission such as that proposed in the new clause would have to deal with. My hon. Friend is absolutely right to say that all of us will have been lobbied by public sector employees of one sort or another in the past over the question of their pensions, their pay and conditions, and in particular the question of retrospectivity on their accrued pension rights to date.

To come back to the point about moral authority, if the Government, as the lead public sector employer, cannot put their own house in order, the moral authority created through the good work that has been done in constructing the pensions consensus that we have today will be eroded. It will be very difficult for any Government, be it the current Government or potentially a Conservative Government, to say credibly that a consensus on pensions is being maintained, if with one breath they are lecturing the voters as a whole—and the private sector world in particular—about the importance of adjusting retirement ages and so on to ensure that pension schemes are sustainable and sensible, and with their very next breath taking a slightly different approach to public sector pensions, or perhaps ducking an important issue in relation to them. It is essential that there is seen to be some fairness between public and private realms, and it is essential for the Government to take the lead on this, because otherwise their ability to lead the pensions debate overall will be damaged.

The hon. Member for Yeovil and my hon. Friend the Member for South-West Bedfordshire made a point that I want to emphasise as crucial above all else. Put simply, it is that we run the risk here—there are already straws in the wind of the debate—of creating a two-nations system. We run the risk of having two systems, one public and one private—the public one being, in the minds of private sector workers, overly generous, with a series of schemes that they could not possibly aspire to themselves, while public sector workers are concerned that they will end up losing out on rights that they have fought long and hard to accumulate over time. That would be extraordinarily divisive and would inevitably be an opportunity for the shuffling of prejudices that we have already described.

If, on the other hand, we have a commission that is designed to shed light on this complicated and potentially divisive issue, we shall have an opportunity to avoid that two-nations approach. By creating the analysis and providing the structured debate that we have enjoyed from the Turner commission, a commission could save this Government, or a future Conservative Government, a great deal of pain by ensuring that any proposals that it makes—to be judged by the Government on their own merits—are properly thought through, carefully balanced, and above all fair between the private and public sectors. I hope that the Committee will support the new clause.

The Parliamentary Under-Secretary of State for Work and Pensions (Mr. James Plaskitt): I, too, welcome you to our proceedings this afternoon, Mr. Gale.

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Between the hon. Members for Yeovil and for Weston-super-Mare, we have just been treated to a variety of arguments in favour of the commission that the new clause advocates. I shall summarise them and then try to respond. I sense that the argument of the hon. Member for Yeovil turned largely on the call for more facts and, as he put it, overcoming confusion, whereas that of the hon. Member for Weston-super-Mare was slightly different and slightly more moderate—it was about improving debate on the issue. He spoke about shedding a bit of light on the matter, and suggested that there were, perhaps, inconsistencies between private and public sector pensions. In response, let me deal with the arguments that have been advanced for going down this road.

I remind the Committee that a number of mechanisms already exist in order to ensure the transparency of public sector pension scheme financing, and to allow scrutiny of the schemes by Members of this House and of course the wider public. Resource accounts covering the major public service unfunded pension schemes are produced annually, and are publicly available. Actuarial valuation reports for the main public service schemes are produced every three or four years and are also publicly available. These documents are prepared to the highest professional standards, and the fact that they are made public ensures transparency and provides the opportunity for detailed scrutiny.

Alongside resource accounts and scheme valuation reports, which both look at the accrued rights of scheme members, the Government annually evaluate the financial sustainability of spending on public service pensions in the long-term public finance report issued by the Treasury. The latest report, published alongside the pre-Budget report last December, makes it clear that long-term spending on these pensions is affordable and sustainable. It increases from the current figure of 1.5 per cent. of GDP in 2005-06, to an expected 2 per cent. in 2055-56, which is somewhat different from the figure given by the hon. Member for Yeovil.

John Penrose: Of course the information that the Minister is describing is available, as it was for all the other sorts of pension and the entire pensions system, which was considered by the Turner commission, which was not established simply to review that information, but to frame and analyse it and make proposals. That was the vital building block on which the current pensions consensus was constructed.

Mr. Plaskitt: Yes, but my point was that this information is available for anyone to look at and assess—indeed, they regularly do. There is also an issue about what additional information an independent commission could have to do its analysis that does not already exist. I am not sure that there is any unique insight that could be brought, because the information needed by the commission to do its assessment and consideration is already published and available, as I have explained.

John Penrose: The point that I was trying to make is that it is a question not of what information is available but of what the commission does with it. The value of the Turner commission was in what it did with the information that it received and the analysis that it created, providing the foundation stone for the consensus.

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Mr. Plaskitt: Yes, but I am afraid that I think this analogy is quite weak when subjected to intense scrutiny, in terms of what we asked the Turner commission to do, which was a very long-term piece of work on a fundamental review of policy on pensions provision. That is something quite different from crunching numbers on accounts within public sector pensions, and I am not convinced that the analogy holds up.

Given the measures that we already have in place to ensure the transparency of the public sector pension schemes, it is not clear to me what an independent commission could add.

I remind hon. Members that we have been keeping all major public service pension schemes under review since the pensions Green Paper was published in 2002. As a result of these reviews, reforms in the major public sector schemes have been proposed, and they will ensure the long-term sustainability of these public service schemes. Reforms will introduce safeguards to ensure that schemes remain affordable and sustainable into the future. The cost-sharing mechanism will ensure that any future increases in costs will be shared fairly between employers and employees. The cost-capping mechanism will impose an upper limit on the employer’s contribution and thus the potential cost to the taxpayer. Those reforms address, I think, the point made by the hon. Member for Weston-super-Mare about a potential two nations.

In summary, I hope that the hon. Member for Yeovil is persuaded that we have the necessary mechanisms in place to ensure that scrutiny of public sector schemes can and does take place. I also hope that I have assured him that we have the right reforms in place to ensure the sustainability and affordability of these schemes in the future. I therefore hope he will agree to withdraw the motion.

Mr. Laws: I am grateful to the Minister for his brief summary of the Government’s case. It was a little briefer than I was anticipating, given that we are talking about 2 per cent. of the whole of Government expenditure. He made, I think, three points, and I shall deal very briefly with each.

The Minister’s first point was that there was lots of information already hanging around out there in the resource accounts that we could all trawl through. The Work and Pensions Committee called for an

“independent commission to evaluate the future terms benefits of financing public sector pensions”,

which requires not only figures but some kind of evaluation. The hon. Member for Weston-super-Mare put it quite well when he pointed out that the Minister’s arguments on those points could have been used against establishing the Turner commission, and are presumably the automatic default of all Governments when invited to set up commissions. I hope that the Minister will not rule out for all time going down that route, given the success of the Turner model.

The Minister’s second argument was that we were not talking about all that much money—it was affordable and sustainable. He talked about an increase from 1.5 to 2 per cent. of GDP, which is slightly lower than the figures that I have seen of 2.1 or 2.2 percent. Without splitting hairs over the odd 0.1 or

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0.2 percentage points, I still fail to see how he can be so casual about sticking on an extra 0.5 per cent. of GDP when every time the poor old hon. Member for Northampton, North pops up with a sensible and prudent amendment that would spend the odd half a billion pounds there is hysteria from the Front Bench. The Minister is talking about £7 billion.

Mr. Plaskitt: Does the hon. Gentleman accept that the figures I gave in relation to public sector pensions and the rise over that period are entirely consistent with overall pension spending, which will rise from 5 to 6.5 per cent. of GDP by 2050?

Mr. Laws: Well, if the Minister looks at the bottom line on state pension expenditure, as we have discussed a number of times, he will find that the share of the state pension architecture will fall from 6.2 to 6.1 per cent. over the next decade. At the same time, the share of public sector pensions will go from 1.5 to 2 per cent. according to his figures.

Mr. Plaskitt: Perhaps we can clarify this confusion once and for all—I hope so. The hon. Gentleman needs to focus on two lines of the published table. At the bottom of the table, which can be found on page 101 of the regulatory impact assessment, there is a line entitled “Total pensioner benefit” that starts with 2008 at 6.2 per cent. and ends with 2050 at 7.3 per cent. He will see that along the way there is a reduction in the figure of 6.2, as he has mentioned, to 6.1. As we have explained to him a number of times, that is the result of the equalisation process. If he moves three lines up to the line entitled “Total Pension Benefits”, which takes out of consideration issues to do with housing and council tax benefit, attendance allowance and disability living allowance, and focuses on the pension benefit element, he will see a line that begins with 5.1 per cent. of GDP in 2008 and rises to 6.5 per cent. by 2050. The dip to 5 per cent. lasts for only three years—2010 to 2012—which emphasises my point that that dip is down to the equalisation process that will take place at that time.

Mr. Laws: I cannot remember now whether that was a speech or an intervention.

James Purnell: It was Lawsesque.

Mr. Laws: A Lawsesque intervention, perhaps.

I rest my case. The Minister has acknowledged that the bottom line of page 101, which lists total pensioner benefits, reads “6.2, 6.2, 6.2” and then goes down to “6.1, 6.1, 6.1”. It does not increase above that level until after 2020, and that is my point. Over that period, while total pensioner benefits are going sideways to down, the expenditure on public sector pensions is going up, up and away. It is no use the Minister saying that we will strip out this or that—we are looking at the total pensioner benefits. Even if we go to “Total Pension Benefits” and ignore some of the other stuff, that line does not go up until after 2020 either. I do not think that that is his most powerful argument.

There is a contrast between the prudence or mean-mindedness in investing in the state pensions

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architecture, which is supposed to be there for every single one of our fellow citizens, and the totally relaxed attitude to blowing away another 0.5, 0.6 or 0.7 per cent. of GDP when it comes to the benefits for public sector workers, including us.

The third point is the one that the hon. Member for Weston-super-Mare made in his good speech, pointing out that we are in danger of having two-nation pension provision in the future. Not only will the public sector have pension schemes with much higher levels of pension benefits and contributions, but they will be relatively low-risk because they will be based on final salary. We might find that people in the private sector experience the undesirable and contrasting effect of the enormous transfer of risk from employers and the state to individuals themselves, along with much lower levels of contribution. If anything will undermine the sense of consensus on pensions, it is that grave sense of injustice, which already exists.

2 pm

Andrew Selous: It is useful to bring one other facet into the debate. In recent years, public sector pay has run slightly ahead of private sector pay. That is an important factor in the overall equation.

Mr. Laws: That is a good point. The Pensions Policy Institute has drawn attention to that. It is one of the things that the commission could look into and about which it could inform the debate properly to ensure that we compare individuals in different professions on a like-for-like basis. It is another reason to accept the new clause, which has its origins in the Select Committee report. Because the Minister has not entirely satisfied me, this will be the last new clause or amendment that I press to a Division.

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 4, Noes 10.

Division No. 10 ]