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Steve Webb: The hon. Gentleman is absolutely right—I do not demur from what he has just said. However, can he help me to understand something that is puzzling me about the motion? The combined contribution, including the deficit contribution to which he refers, is 28.7 per cent., but the Government Actuary says that, per year, 8.5 per cent. is the cost of servicing the deficit—that is the figure in the most recent review. So, 28.7 minus 8.5 is 20.2. The Government are trying to cap at 20 per cent. Does he understand why the Government have made proposals that do not achieve the 20 per cent. cap but bring it to 20.2 per cent.? I do not understand it, and wonder whether he can explain it to me.
Sir John Butterfill: I think I do. May I come to that in due course? I shall try to be helpful to the hon. Gentleman, and if he does not understand when I explain it then, I shall have to apologise to him at that time.
A very substantial Government contribution was necessary to bring a deficit back in line with where it should have been. It arose from the failure to contribute the correct amount, as originally advised by the Government Actuary. The Government Actuary, to be fair to the Government, said, “Well, things are going rather well. The stock market is looking pretty good, so you can probably tolerate not paying in.” That is one of the problems with the way in which pensions have been funded in the past, and I want to expand on that point a little further, if I may.
If, at the previous valuation, the Government had been making the correct contributions, the Members’ scheme would have been about £5 million in surplus rather than nearly £50 million in deficit. That, I think, is worth bearing in mind as background. Today, the Government Actuary is saying, “Now we have to take into account longevity. We have reviewed the problems of longevity and we have found that we probably have not made enough allowance for the improvement in people’s lives over many years. We need to adjust for the fact that people are likely to live longer.” The impact of that is to reverse the situation. We now need to raise, probably, another £50 million or thereabouts. There will have to be increased contributions to cover that element. That problem would not be there if we had dealt with it earlier.
My view is that the present system of valuing pensions, whether in the public sector or the private sector, is stark raving bonkers. We ask actuaries, every three years, to value each scheme and to try to see where the pitfalls or benefits might lie. When times are really good and stock markets are going up, they say that we should not bother to put any money in because we will come through with a surplus. When times get bad, they say, “Gosh, you’ve got to put a shedload of money in. Times are terrible, and you have to put more money in.” That is at a time when most schemes—certainly those in the private sector—have not got any money, because times are bad.
That has to be a crazy way of dealing with final salary pension schemes. It seems to me that the actuarial profession should, over many years, have been taking a long-term view. Pensions do not go from year to year—they cover 30 or 40 years at a time. We should therefore establish what the appropriate contribution should be from the scheme sponsor—and, indeed, from the scheme members if they also contribute, as we do—over a period of 30 years or more.
Those figures are available. Quite a few analyses have been performed over the past 30 or 40 years that make it clear what has been going on, despite all the huge ups and downs in the markets. They show that schemes that have invested in shares have gone up by about 8 per cent. per annum, while those that have invested in property have gone up by about 7 per cent. and those in Government bonds have risen by about 6.5 per cent.
That is what has happened over a 30 or 40-year horizon. There have been wild variations within that, but the people who run pension schemes should fund for long-term liabilities. At the moment, people in both the public and private sectors are paying the price for tolerating wild valuations that are merely snapshots in time and bear no relation to what is likely to happen over a long period.
The adverse effect of longevity means that schemes must be adjusted for the increase in people’s lifetimes. That can achieved in only one logical way, and that is by increasing retirement ages in line with the increase in longevity so that people who live a long time fund the cost of receiving their pension provision over a longer time than was originally anticipated. They will have to wait a little longer before they draw their pensions and if they choose, for whatever reason, to take their pensions early they will suffer a diminution in what they get. Obviously, people who are seriously ill can take sickness retirement, which can be covered through insurance.
That is how schemes should be structured. Our scheme is not so structured, however, and neither are most private sector schemes.
Last year, the Government said that costs were rising and might rise still further. Without taking into account what they were having to pay to make up the deficits that had been allowed to accrue, they sought to cap the Government contribution at 20 per cent. The House debated that proposal, and accepted that there would have to be some capping of the Government contribution to protect the taxpayer. We then had to look at what we might do thereafter.
More than a year ago the Government said that they would instruct the Senior Salaries Review Body to look at the issue, and to make recommendations to the Government and the House about how the scheme might be amended for the future. If they had issued that instruction, we might have had the SSRB report before us today, as we debate what is almost a crisis adjustment. Sadly, for reasons that I can only begin to guess at, the Government did not in fact instruct the SSRB until earlier this year.
The Government’s proposal before the House today has an air of crisis about it, in that it says that, if something is not done, they will go over the 20 per cent. limit, backdated to 1 April. The amendment takes a further step backwards, and adopts the approach that we would have had were we looking at the matter a year ago. It will not solve the problem that I have identified, for which the Government will have to come up with something after the end of the debate today.
One other element to which I should refer is the proposed removal of the rights of hon. Members who have been here since before 1989 and who have reached the limit of their contributions under our scheme to continue making pension contributions after they have reached the age of 65. That will have an impact, which
relates to what the hon. Member for Northavon (Steve Webb) said, in that it will produce an additional 1.2 per cent. of savings.
The trustees have considered that point, as we have considered many other proposals—largely produced by us—to reduce the cost of the scheme. It was at the initiative of the trustees that the right to retire before 65 without penalty was removed. We have also considerably tightened the rules on early retirement for ill health. We think that in the past there may have been some abuses, which were expensive, although nothing like the abuses in some other areas of the public sector. Nevertheless, the change will produce significant savings. We are still waiting for the Government to implement it and we are slightly surprised that it was not included in the motion.
There is no question but that the trustees would try to obstruct reasonable changes. I appreciate that my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) is not entirely happy with the situation, but it must be remembered that Members who wish to contribute further sums towards their retirement have other avenues for doing so, albeit on a money purchase basis.
Sir Nicholas Winterton: Will my hon. Friend be able to indicate during the debate whether it would be appropriate for somebody such as me, and other Members who are over 65 and have reached the full two thirds of pension, to discontinue from 1 April further contributions to the parliamentary contributory pension scheme? Would we lose benefits if we discontinued our payments to the scheme? Can my hon. Friend help me on that point? Clearly, we have to give the Department of Resources instructions as to whether to continue paying contributions to the pension fund.
Sir John Butterfill: It is my understanding that Members affected by the change would not be able to continue making contributions, but their rights under the scheme would continue to be safeguarded. The only change for my hon. Friend would be that if he wished to continue saving for his retirement, he would be unable to do it through the parliamentary scheme but there would be opportunities for him to do so elsewhere without losing his rights as a member of the scheme.
The saving is about 1.2 per cent. The object of the changes proposed by the Government is to save rather more than that. The figures go from 10 to 11.9 per cent. for those on one fortieth of final salary, from 6 to 7.9 per cent. for those on one fiftieth and from 5.5 to 5.9 per cent. for those on one sixtieth. That is all fairly transparent, and means that Members will be paying considerably more this year, because the change will be backdated to last April. On that basis, for those on the upper level scheme, the net cost would have been about £60 a month. If the Government accept the Liberal Democrat proposal or something similar, the amount could double and the cost would be about £120 a month to Members.
There may be other ways of dealing with the situation. My view is that the simplest way by far would be to increase the retirement age. The Government Actuary has said clearly that the entire cost of what we now seek to fund relates to increased longevity. We could thus conclude that if the change relates to longevity we must increase the retirement age to pay for it, without going
through complex shenanigans to change this or that contribution. Changing the retirement age would be a very simple solution.
There is a significant read-on to other defined benefit schemes, whether in the private or public sector. The public have to understand that increased longevity means that more will have to be paid into pension schemes. There might be an argument about who pays but, inevitably, that is what must happen. However, the same effect could be achieved by raising the date of retirement.
Let me say a few other things about the scheme because all sorts of aspects of its nature are misunderstood by not only the general public, but even apparently well-informed members of the actuarial profession. Most members of the public think that ordinary Back Benchers retire on the basis of the Back-Bench salary, but they also think that Ministers and other office holders in the House will enjoy a pension based on their increased salaries. They think that the Chancellor of the Exchequer will retire on a pension that is two thirds of his salary as Chancellor, but that is totally untrue. The Chancellor’s pension will be the same as that of the humblest Member, except that the additional 10 per cent. contributions that he pays while he is a Minister will be reflected in a modest supplement to the pension.
The only exceptions to that arrangement have been Prime Ministers, Lord Chancellors and the Speaker, although I gather that some of them have said that they will not take the extra money. That is an honourable position, but individuals must make up their own minds. The public assume that our scheme is the same as every other and that as we rise up the ladder and reach more senior positions, we get a bigger pension, but we do not. That point needs to be clearly made because it addresses the biggest misunderstanding about the parliamentary scheme. That is not to say, however, that our scheme is not better than that of many of our constituents, but it is not quite as gold-plated as the media have led the public to believe, so it is important to get that on record.
It is also important to put it on record that the level of the contributions made by Members—10 per cent. with the one fortieth scheme for which most hon. Members opt—is almost unprecedented. I think that only the police pay more, but their payments reflect the fact that they can retire at least 10 years earlier than we can.
Sir Nicholas Winterton: After 30 years.
Sir John Butterfill: My hon. Friend is right.
We face the problem that the Government have made a proposal that is neither fish nor fowl. It does not deal with the long-term problem nor correctly anticipate what might come out of the SSRB. The motion is a stop-gap that probably need not have been tabled at all. The whole thing could have been left until we received the SSRB report. It is impossible to imagine that the House will not accept the SSRB’s recommendations about our future pay, so I would have preferred us to have made the whole adjustment at that time, retrospectively if necessary.
3.28 pm
Barry Gardiner (Brent, North) (Lab):
I am pleased to be able to follow the hon. Member for Bournemouth, West (Sir John Butterfill), who has given sterling service
to the House over many years through his chairmanship of the parliamentary pension fund. I was privileged to serve on the fund for a good six or seven years after 1997 and I saw the skilful way in which he steered the fund and coped with the problems that were faced.
The hon. Gentleman said that the average term of a Member of Parliament was now considered to be 12 years. I am sure that he recalls that one of the first things that we did after 1997 was to review the average span of time spent as a Member of Parliament, and it was eight years in those days. To draw on the remarks made by my hon. Friend the Member for Stroud (Mr. Drew), who made an excellent speech, that shows that many Members leave the House in what would otherwise be the middle of their career. They then find it difficult to resume the career that they had before entering Parliament. Often, their income, and their pension in particular, suffers as a result, because they can never return to the position they would have had if they had not entered Parliament. I take issue with my hon. Friend the Member for Stroud on one point. He talked about the pension scheme being a perk. It is always wrong to think of pension schemes as a perk. In any walk of life, a pension scheme is one thing and one thing only: it is wages deferred, and we must always regard it as such.
Mr. Drew: What I said is that the pension is perceived as a perk.
Barry Gardiner: I entirely accept my hon. Friend’s correction. He is right that the pension is often perceived as a perk, but it is wages deferred. It should always be considered as such in calculations of the whole remuneration package. That is true whether we are talking about Members of Parliament or any person in the public or private sector work force. It is absolutely right that we should contribute to the costs imposed on the fund as a result of longevity. In so far as the proposals seek to achieve that, they should be accepted by Members in all parts of the House.
I should like to reinforce the remarks of the hon. Member for Bournemouth, West. He said that actuarial calculations are a snapshot. It is particularly ridiculous for a snapshot taken at a time of global shares meltdown in 2008-09 to set the pattern for the future. Of course, the previous actuarial calculations related to 2005. He made the point very well that had the employer’s contributions been maintained over that period, the fund would, in 2005, have been in a £5 million surplus, rather than the £50 million deficit that it found itself in. It is important to recognise that actuaries looking at pension funds always seem to take account of the good times, in terms of stopping putting contributions in, but of course it is precisely at the bad times that they reassess, look at the stock market and say that the fund has a much lower valuation than they believed it would have, so extra money has to be put in. Usually, that demand falls not only on the employer’s part of the contribution, but on the employees’ part, too. That is a way in which employees—I am referring not simply to Members in this House, but to employees who contribute to any pension fund—end up being short-changed by that method of valuation.
I wish to put a specific point to my hon. Friend the Deputy Leader of the House. I am sorry if it caused her confusion and consternation when I intervened on her
earlier. I will try to make my point more clearly now. She will note that whether the accrual rate is one fortieth or one fiftieth of final salary, the increase in percentage contribution demanded is 1.9 per cent. In paragraph (1)(c) of the motion, which relates to an accrual rate of one sixtieth of final salary, the increase in percentage contribution is simply 0.4 per cent. My question does not relate simply to the disparity between those percentage rates. It is based on a calculation of the respective total percentage contributions, which are 5.9, 7.9 and 11.9 per cent.
I know that my hon. Friend wishes to write to me, and I am trying to lay out this question as clearly as I can in order to receive as full an answer as possible. On a £64,000 salary, those percentages represent respectively £3,776, £5,056 and £7,616. If she then calculates what one fortieth, one fiftieth and one sixtieth of that salary is, she will find that it equates respectively to £1,066, £1,280 and £1,600 in retirement.
Steve Webb: Will the hon. Gentleman give way?
Barry Gardiner: Not at this stage, because I want to set out the question as clearly as I can.
Mr. Phil Willis (Harrogate and Knaresborough) (LD): We have the answer.
Barry Gardiner: The hon. Gentlemen may need to the listen to the question before they provide an answer.
To achieve each sum, the respective gearing would be 3.54, 3.95 and 4.76 years in retirement. That inequity does not reflect different longevities or anything like that, and the disparities in the costs to the pot should be met from the fund that has accrued from the investment of those initial sums from now until retirement. I therefore wish to receive an explanation of the differential gearing effect of those contribution rates.
My hon. Friend the Minister passed a note to me stating that
“if Members contributions are to increase, it is fair that all Members pay the same increase”,
but that cannot be right. They should pay rateably equivalent increases for the benefits that they hope to accrue, not simply the same standard 1.9 per cent. I now give way to the hon. Member for Northavon (Steve Webb).
I also listened carefully to what the pension fund chairman, the hon. Member for Bournemouth, West, said about changing the retirement age. That is a way to introduce a sliding scale, but would one be able to take one’s pension benefits only after 65 years old, or would the benefits be reduced if they were taken at 65? If it were the former, and people were unable to access their pension benefits until they were older than 65, there might be difficulties for people who had left the House and gained employment with a pension cut-off age of 65.
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