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Watson Wyatt has not made any allowance for the phasing out of the early retirement provisions. The press and the general public, who are informed by the
press, do not remember that on 4 November 2004 we voted to end our generous early retirement arrangements; they were to be phased out from 2009. The Government were asking civil servants and all those in the public sector to go down a similar route, although they proposed that the date for those groups be 2013. Faced with the threat of strikes across the country, the Government backed down. We made that gesture, thinking that we were leading the way and showing that we were not frightened of making the change. We thought that we would get some credit for that, but we did notnot with the public, and not with Messrs. Watson Wyatt.
Mr. David Anderson (Blaydon) (Lab): Did not the Government put that proposal to employees across the public sector in 2004 because of the same problem that the hon. Gentleman said affected uscontribution holidays had been taken by public and private sector employers over a number of years?
Mr. John Gummer (Suffolk, Coastal) (Con): If all the mistakes are so obvious why, when Watson Wyatt completed its first draft, did it not go through the facts with the one set of people who ought to know themmy hon. Friend and his team in the House of Commons? Why were the factual details not discussed with him?
Sir John Butterfill: I share my right hon. Friends puzzlement. I can only hope that if Messrs. Watson Wyatt or some other distinguished firm of actuaries was asked to perform a similar operation in future, there would be such discussions. Then we could avoid difficulties. The effect of not allowing for the fact that we have no early retirement provisions is to overstate the pension cost by approximately another 1 per cent. The percentage points are really starting to add up.
Watson Wyatt assumes in its calculations that MPs salaries will increase by an average of 4.5 per cent. per annum. I wonder where that assumption came from, given that, since 2002, MPs salaries have increased by about half thatby about 2.25 per cent. a year on average, and by well below inflation. I do not entirely understandor understand at allwhy Messrs. Watson Wyatt should assume an annual increase of 4.5 per cent. when making their valuations.
On that basis, one must look with a fair degree of scepticism at the recommendations and assumptions that Watson Wyatt have made. They have also made wild errors in relation to the costs of schemes for our comparators. With reference to public sector comparators, Watson Wyatt say that the cost of the police scheme is 11 per cent. The police current employer contribution is 24.6 per cent. and police throughout the country are complaining that it is not enough, and that because of the high cost of their pension scheme, they will have to get huge subsidies from their local authorities to be able to maintain their present activity.
That demonstrates once again that the methodology and basic assumptions of Watson Wyatt are critical in this. They seem to have based their costs on a similar 1/60th accrual, on the same basis as in the calculation
for an MP with the nine years potential service. However, a chief superintendent is likely to have a career of more than 20 years. That would result in an accrual rate of 1/30th for each year of service between 20 and 30 years. When Watson Wyatt look at our comparators, they seem to get it seriously wrong. Some of the other examples are not quite so badly wrong, but it does not give one a huge degree of confidence in the recommendations that they subsequently draw from the assumptions that they have made.
It is important to get it on the record that the parliamentary contributory pension fundPCPFis rather a good scheme. It is similar to a number of others in the public sector, but despite what frequently appears in the press, the cash benefits that are provided under the PCPF are not a kings ransom. The average pension in payment to former Members in the last Government Actuary Departments valuation in 2005, excluding what was being paid to widows, was £15,700 per annum, yet if one looks at what is published in the papers, they give the impression that MPs have to do only one or two terms here to be on £25,000 a year. The average pension in payment is £15,700 for Members who have done many more years than that.
The GAD estimates that the average pension currently in payment is around £17,000. That takes account of the pension increases in the past two years and the level of pension of Members who will have retired following the election. The average pension built up to date by serving Members is £20,100. All these figures, which are comfortablemuch more so than the pensions of many of our constituentsare nothing like the allegations of gold-plated pensions that appear in the national press.
The last triennial valuation of the scheme costs by the Government Actuarys Department increased the Exchequer contribution to 26.8 per cent. of Members salaries. It is being put about that that is the cost of the scheme, but it is not. It is the cost of the scheme, including the amount that the Government now have to put in to make up for the 15 years under successive Governments of contributions holidays that were taken, which created the current deficit of about £49 million.
Sir John Butterfill: I do not have the figures to hand, but it is a very small number. Only a minority of Members ever go the full distance. The average Member comes in at the age of 42 and leaves at the age of about 52. Very few Members will ever get to the full final salary, and that will not change much because of boundary changes and Members losing their seats. The media think that we backdated the fortieths, but we did not. I would still have to work in the House for 31.5 years to get a full pension. Only those Members who have come into the House most recently since we moved to the fortieths arrangement will not have to work more than 27 years.
As I was saying, the 26.8 per cent. headline figure of contributions for us is misleading, because it includes
8.7 per cent., which is the sum per annum that is allowed to make up the estimated deficit of £49.5 million, which has arisen entirely from the contribution holidays. That is not helped by the abolition of the tax relief, which the Government implemented early in their life. Our scheme has been affected by that just as much as anybody elses.
That leaves an actual Exchequer contribution for future service of about 18.1 per cent., which is broadly similar to private sector schemes and other public sector schemes, which can quite often be more. For example, the civil service scheme is costing about 19 per cent. So we are not out of line with either the private sector or the public sector.
Ours is an unusual scheme in a number of respects. First, ours is virtually the only public sector scheme that is funded by Members contributions, investment returnsbecause ours is fully investedand an Exchequer contribution. So it is unique in that. The other area in which it is unique is that it is not a final salary scheme. It is a scheme based on the salary of the lowliest Back Bencher at the time of retirement. It is true that Ministers or office holders have an additional amount of income and they pay 10 per cent. of that addition into a special account, which then effectively buys them additional yearsthat is the way it tends to operatebut that applies only for the period, often limited, when hon. Members are Ministers or office holders. They can be very brief careers indeed in some cases. The general public think that Ministers will retire on a pension that is two thirds of their ministerial salary. They do not and they will not, with the exception of the Prime Minister, Mr. Speaker, and, until recently, the Lord Chancellor, although that is now being reviewed. Everybody else retires with a pension that is based upon that of the ordinary Back Bencher. That is unique. When everyone outside says, Oh, but you are on a final salary scheme, they expect us to have a scheme that is based on our peak earnings in this place, but that is not the case.
If an MPeven those who have elected to build up at a fortieth rate, which is the newer people coming into this Housewas to serve 15 years, which is rather more than the average, they would be entitled to a pension of only £22,500 compared with the enormous figures that are estimated by the media, who are extraordinarily badly informed on these matters.
Earlier, I touched on the problem of retained benefits. Those who had pensionable careers before they came to the House are not entitled to their full parliamentary contributory pension fund pension because of the restrictions imposed, although they could go back to a 1/60th scheme, which is one of the recommendations in the SSRB report. Even as we are, MPs will have paid a higher contribution rate, at 10 per cent., than that made by almost all other employees in the private and public sectors. Indeed, executives in the private sector typically pay less than 6 per cent. for far more generous schemes than are available to us.
I turn to the reports recommendations. Recommendation 8 relates to the deficit and says that the Government contribution should be limited to 20 per cent. of the payroll. I do not disagree with that, but the Government are suggesting that if they go beyond that, we should either have a full review or any increase in costs should be shared equally between Members
and the Government. For the most part, that pattern does not exist outside the House; if there is an agreement that an increase will be jointly funded, it is normally according to the same ratiofor us, that would be 20:10, or two thirds for the Government and one third for us.
Recommendation 6 is about retained benefits, and I am happy about it because it provides for an arrangement under which reduced contributions would be payable by those who could not get a full pension. That seems fair; at the moment, people are paying quite a lot of money for something that they cannot get. The review body recommends that any additional cost should be at the Governments expense, because they have been gaining from the contributions.
The Government now suggest in the resolutions that the additional cost should be funded by other savings made by scheme trustees. It is true that we propose to make savings, as we have done beforeas we did in respect of early retirement and the abolition of the public sector transfer club. We are now considering the problem of early retirement due to ill health, and think that some of the rules on what constitutes ill health need to be tightened. The Government have suggested that the two things be linked, but I personally do not think that appropriate. The trustees started to do that under their own steam. It is likely, in fact, that the savings made will cover the cost, but I am not sure that they should then immediately be grabbed by the Government so that they can avoid complying with the SSRB recommendation.
Finally, the Government ask the trustees to consider a whole range of alternatives to the current arrangements. Those include our going to a defined-contribution scheme as opposed to a defined-benefit scheme, and going to a career-average scheme. The latter would not make much difference in our case as we are already on a flat level, linked to the salaries of Back Benchers; we do not have the steep incline that occurs elsewhere.
The Government also suggest that we should consider ways of sharing the costs. The trustees are perfectly happy to consider all those proposals and come up with ideas on how they could be implemented. However, the proposals are not without their problems. For example, have Watson Wyatt told the Government that if we closed down the current scheme to new entrants and said that they would all have to be on a money-purchase scheme, there would be substantial one-off costs related to the funding of the existing scheme, because no new money would be coming in from new Members? We will need to discuss such issues in future. We will consider them; we are always ready to do so, although it would have been nice if we had been able to, together with the Government Actuary, somewhat earlier.
Mr. David Anderson (Blaydon) (Lab):
The speech by the hon. Member for Bournemouth, West (Sir John Butterfill) showed how the debate has gone today, with people of massive experience across the House speaking very seriously about very serious issues. I do not have the experience that he has in the matters that he discussed, but I do have the experience of being involved as a trade
union activist and negotiator for the best part of four decades. Going right back to the early 1970s, I was involved in a national strike, as were some of my hon. Friends sitting in front of me. In 1972, miners were getting paid the paltry sum of £26 a week; we went on strike and ended up with the fantastic sum of £35 a week. I go from that experience to the early 2000s, when I was involved in the negotiations on the Agenda for Change, which covered 1.5 million workers in the health service, and single status in local government, which covered 1 million workers. I would therefore argue that I have, if not expertise, some experience in this area.
Throughout all those years, I have never seen a pay round so badly handled by a Government. Without a doubt, the Treasury has had its fingerprints over all the public sector pay deals this year, so that we have ended up in the situation in which we find ourselves, both as public servants and as representatives of millions of public servants outside. Nurses should have been given the pay that they were due, because they were covered by a pay review body, as were prison officers, who did not get what they were due either, and ultimately ended up going out on strike; now they are facing legal challenges in this House. Obviously, as a former miner I do not have a lot of time for the police, given the history between us, but on a point of principle they should have been given what their pay review body said that they were entitled to.
The key thing about pay review bodies is that they were not settled on by some sort of whim, but mainly to try to avert or resolve disputes, and they have been very successful in that. They should have been respected, but they have not been. The sad thing about where we are today is that our pay review body should be respected, but because of how the Treasury has handled the situation in the past nine months, we cannot legitimately say that we want our piece of the cake if our constituentsour fellow public servantsare denied their share of it. We therefore have no option other than to agree to the Governments position on the 1.9 per cent.
We need to learn a lesson from thisthat pay review bodies and deals must mean something. We must have a mechanism that works, but it must be simple, too. My blood ran cold when the right hon. Member for Penrith and The Border (David Maclean), in a very good speech, talked about job evaluation and comparators. When he said that we should look at responsibility, but not at work load or hours worked, I was taken back to 10 years of knocking my head against a brick wall trying to implement the single status agreement in local government, when the very same things were said, and where we have ended up with ordinary men and women facing court cases because they cannot get agreement on equal pay, and suchlike. We need a very simple mechanism, and it is not beyond the wit of people in this Chamber to achieve that.
I ask my Front-Bench colleagues to listen to what the people on the Members Estimate Committee have said and work with them, because, as was clearly shown by the hon. Member for Bournemouth, West, they have an element of expertise that the so-called experts have not shown. We are where we are, and we need to get away from it; part of that is about involving the people whom we entrust with looking after our own interests.
The Deputy Leader of the House of Commons (Helen Goodman): We have had a very good debate, in which we have seen how immensely complex the issues and systems are in connection with determining MPs pay and allowances. However, I am still not clear about what system was used by the people of Weymouth in 1463, when they decided to pay their Member of Parliament 500 mackerel.
My right hon. and learned Friend the Leader of the House began by setting out the four key principles that underpin the Governments approach: MPs should be properly paid for the valuable work that they do; they should be properly reimbursed for the costs of fulfilling their responsibilities; like others paid from the public purse, they should share the same discipline when it comes to pay rises; and in future, MPs should not vote on their own pay. Throughout the House, there has been a consensus on those four principles.
Sir Nicholas Winterton: Although I believe that this House can and should always set an example, it is wrong to suggest that we are setting an example in this year alone; we have been setting an example in our pay since 2002, because our increases in that period have fallen below average earnings, below the retail price index and below inflation. We are happy to set an example, but for how many years can we do so without making the life of MPs, given the work that they do, extremely difficult?
Helen Goodman: What the hon. Gentleman says is born of his long experience, but I would draw a distinction between the Governments proposals for the system and the upshot of a formula that everyone agrees has not worked satisfactorily in recent years.
The right hon. Member for Maidenhead (Mrs. May) made an extremely sensible speech this afternoon, and we are all grateful to her for her bravery in tackling the media coverage of this issue. She emphasised the importance of getting the timetable right, and that was also referred to by other hon. Members. I would like to restate and re-emphasise the position on the timetable for this year. As the written ministerial statement said, Sir John Baker has been charged with reporting back to the Prime Minister before the end of May. That will give us two months to consider the report, to consult and to table motions in the House, so that hon. Members can think about the process and vote on where we go from here.
Nick Harvey: Will the hon. Lady confirm whether it is possible for the system emerging from Bakers report to make a pay award for 2008-09? At the moment, only my amendment (f) provides anything for 2008-09. Will she say whether her proposal can make an award for 2008-09?
Yes. Our objective is that Baker will report, and we will then take decisions on what he proposes, which should be an appropriate independent mechanism and comparators. We will vote on those proposals. It should not, therefore, be necessary to have separate votes on numbers, as we are doing this afternoon.
The numbers for 2008-09 should come into immediate effect on the basis of the decisions about the mechanisms and the comparators; they will flow from that, and be effective for 2008 and 2009.
Mrs. May: The issue of timetabling is important. The hon. Lady said that the Baker review would be given to the Prime Minister before the end of May, and that he or the Government will then consult on that review and table motions. Who will the Government consult, and will they undertake to publish the Baker review as soon as the Prime Minister receives it, so that Members can see it in its entirety before the Government have the opportunity to do some behind-the-scenes deal?
My hon. Friend the Member for Manchester, Central (Tony Lloyd) emphasised the value of consistency and the great importance that everybody places on getting the mechanism right when we make decisions this summer.
The hon. Member for North Southwark and Bermondsey (Simon Hughes) spoke of the importance of independence and genuine openness. All hon. Members agree with that, and that is why we are setting up the review by Sir John Baker, which will consider the mechanism for determining pay. I hope that my response to the hon. Member for North Devon (Nick Harvey) about the way in which decisions on the comparators and the mechanisms will determine the numbers for 2008-09 tackled the main concerns that the hon. Member for North Southwark and Bermondsey expressed. He also mentioned the importance of there being no further delay.
We are all grateful to my right hon. Friend the Member for Warley (Mr. Spellar) for his work as chairman of the advisory panel on Members allowances. It was evident how clearly he understands the issues. He made it clear that we do not envisage a permanently sitting SSRB, and that we would move back to examining mechanisms if the comparators collapsed, as the previous one did.
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