“The spreadsheet contained certain assumptions that looked odd to our economic modellers, so we went back to the department and pointed it out”?
Again, why did Ministers not act on that warning? Can the Secretary of State tell the House who the senior responsible owner for this project was in his Department?
Secondly, on the cost to taxpayers, the Secretary of State doggedly sticks to his figure of £40 million, yet we know that that is just the cost of compensating the four west coast bidders. It does not include the cost of re-running the competition twice, of compensating bidders for the other stalled franchises or of preparing Directly Operated Railways to step in. So what assessment has he been given of the final cost of this Cabinet ministerial failure? How accurate are reports of a final figure of well over £100 million?
Thirdly, on his Department’s external advice, the Secretary of State has admitted in parliamentary answers that his Department paid £491,000 to Eversheds and £439,000 to WS Atkins for advice during the west coast tender process. Can he confirm whether those are the total amounts paid? What steps is he taking to secure a refund for taxpayers for any mistakes that may have contributed to this fiasco?
Fourthly, on the legal advice that the Secretary of State has received, what is his Department’s liability if the participants in any of these cancelled or stalled franchises take action against the Government? What advice did he receive on procurement and EU competition law before deciding to extend Virgin’s contract? What will be the cost of Virgin’s interim operation of the west coast main line until he can get to the first of the next two competitions?
Finally, on the review itself, does the Secretary of State not think it is extraordinary for his Minister of State to insist, in a parliamentary answer, that the Department for Transport board has no responsibility for this fiasco because it was delegated to one of its sub-committees? Surely the board is responsible for its own sub-committee. It is precisely this wriggling that makes people suspicious about the nature of this review. Will the Secretary of State, even at this late stage, think again and allow a genuinely independent review that can look at the role of the Department for Transport board and of Ministers?
The Secretary of State’s attempt to bury his franchise policy at midnight failed to cover up this nightmare on Marsham street that has rapidly become a nightmare for Downing street. Does the Secretary of State agree that
“Ministers must take responsibility for serious or systematic performance failures...flawed policy and poor design...Ministers must not be allowed to shuffle off responsibility”?
Those are not my words, but those of the Prime Minister. This is not just a faulty process; it is a faulty Government. It is time that the Prime Minister listened to his own words, followed his own advice and insisted on his Cabinet finally taking some responsibility for this franchise fiasco.
29 Oct 2012 : Column 43
Mr McLoughlin: For the hon. Lady’s information, the Department is based in Horseferry road, not Marsham street.
Let me draw the hon. Lady’s attention to the final line of Mr Laidlaw’s letter to me today, which states:
“Firm judgments should not be made based upon what are provisional findings or wider conclusions drawn at this stage.”
I have been very open with the House about the problems we have encountered. She accuses the Government of wasting money, but she should perhaps look back at the previous Government’s record, particularly the decision by the then Deputy Prime Minister that wasted some £469 million on the flawed procurement of regional fire stations. I see that the shadow Minister, the hon. Member for Poplar and Limehouse (Jim Fitzpatrick), is rather amused by that, because he was directly involved.
I have come to the House and I have been open with the House. As far as the money is concerned, I talked about the £40 million that related to the bidding process and there will be some other costs. When I have those costs, I will inform the House. I will not judge them or estimate them; I will give the House the information when I have it.
The last time I gave a statement, the hon. Lady attacked us for not getting external advice. As the answers given by my right hon. Friend the Minister of State show, we did get external financial advice where necessary. Yes, some changes were made to the Department but they were well under way and being planned for before May 2010.
On the question of Virgin’s position, I made it perfectly clear the last time I made a statement that I intend to enter into an interim contract with Virgin until we can do a longer franchise. That first franchise will last up to 13 months. I did check it out, and have obviously had discussions with, the commission.
Mrs Cheryl Gillan (Chesham and Amersham) (Con): May I congratulate my right hon. Friend on coming to the House and being so transparent and open about what is obviously a very painful part of the Department’s dealings? Will he now translate that openness and transparency across all the modelling that is being used either by the Department for Transport or its subsidiary, HS2 Ltd, for HS2? Will he now put his words into action and publish the Major Projects Authority’s report on HS2, showing that he really is a transparent Secretary of State?
Mr McLoughlin: As I think I said to my right hon. Friend the last time we discussed this matter, a lot of work is being done on the planning of HS2 and there will be a number of opportunities for wide-ranging debates when we discuss that Bill, but today I am dealing with the west coast main line and franchising.
Mr Alistair Darling (Edinburgh South West) (Lab):
Will the Secretary of State tell us whether Mr Laidlaw considered the implications of the decision to make this a 15-year franchise? He will know that when I had his job I reduced the franchises to seven years, because after that time trying to speculate on the state of the economy, and therefore on what fair revenue is, becomes increasingly difficult, if not impossible. The problem is that the further out we go, the greater the probability is that the risk will fall back on the Government. Does not
29 Oct 2012 : Column 44
that policy decision, taken, I think, by some of his predecessors, need to be reconsidered if we are not to repeat some of the procedural problems that he has outlined today?
Mr McLoughlin: I am grateful to the right hon. Gentleman for that question. He has a distinguished record of being one of the longest-serving Secretaries of State for Transport, so I listen to him with the care and attention he rightly deserves. He raises a couple of points. He might not be aware that at the tail end of the previous Government they also talked about extending the franchises up to 20 years, which was seen to be a way of getting a better return overall for the huge investment from the taxpayer that goes into the railways. He makes an interesting point. As I said in my initial statement, I have asked for two reviews and I think that that is something that Richard Brown, the chairman of Eurostar, will be considering in his report, which I expect to see before the end of the year.
Mr John Redwood (Wokingham) (Con): In the appraisals of the new competition being held for the west coast franchise, what will the role of Ministers be in setting the terms of the competition, supervising the arithmetic and making sure that a fair assessment is made?
Mr McLoughlin: I hope Ministers set out the policy. I am not sure that we are there to check every line of every spreadsheet. That is something that we should rightly expect officials to do for us at the request of Ministers, to ensure that we get the best value for the taxpayer out of what has been a huge amount of investment on this railway line, which has been made on behalf of the British public. It is one of the most important lines that serves the United Kingdom so I will certainly bear in mind what my right hon. Friend says, but part of the point of going for longer franchises was to try to deliver better services to the passenger.
Mrs Louise Ellman (Liverpool, Riverside) (Lab/Co-op): The Secretary of State will be aware that the Transport Committee may have a few questions to ask him on Wednesday. Perhaps he could tell the House today why, if it is important that the outcome of the review should not be prejudged, he suspended three civil servants.
Mr McLoughlin: I am sure the Transport Committee will have a number of questions for me on Wednesday. I think I am looking forward to coming. The decision on suspensions of staff is not made by a Secretary of State; it is made by the permanent secretary. I have had no involvement with that process and it would not be right for me to do so.
Mr John Leech (Manchester, Withington) (LD): Does the Secretary of State agree that one of the lessons that should be learned in relation to future franchising is the need to ensure that good performance as well as poor performance by an operator can be taken into consideration as part of the franchising process, notwithstanding the need for fair competition?
Mr McLoughlin: I entirely agree. That should certainly be taken into account, but so should the return to the taxpayer. The taxpayer has invested a huge amount of money in the line, which must be borne in mind as well.
29 Oct 2012 : Column 45
Mr Jack Straw (Blackburn) (Lab): Successive reports this year from the Transport Committee and a National Audit Office report last week have indicated that the Department is running a huge underspend on its capital programme. The NAO report last week talks about addressing
“£1.7 billion unexpected funds for infrastructure”.
I realise that the Secretary of State has been in office for only a few weeks, but can he say to what extent the slimming down of the Department and its preoccupation with the issue of rail franchising has meant that it lacked the capacity to ensure that funds properly allocated to it—for example, for road repairs and desperately needed regional rail infrastructure improvements—are spent, and what he is doing to address that?
Mr McLoughlin: The right hon. Gentleman’s question goes slightly wider than my statement this afternoon, but I point out that I made an announcement just a few weeks ago about a pinch-point plan to relieve certain areas of road congestion, which will cost £170 million. Wherever money is spent, I am determined to ensure that good value is obtained and that we do not waste public money. That is more important to a Minister than making sure he spends the money, come what may.
John Stevenson (Carlisle) (Con): I congratulate the Secretary of State on the speed of the work that he is doing and his approach to this very difficult issue. My concern, however, is the potential loss of investment and innovation in the rail service in the short term. Will the Secretary of State assure me that everything will be done by his Department to ensure that no investment opportunity is lost and that any improvement to the service will go ahead if at all possible?
Mr McLoughlin: My hon. Friend make a good point, because the line is very important for his constituency. I know that he has already had a meeting with my right hon. Friend the Minister of State about rail investment in his constituency. I am keen to make sure that the benefits that people will get from the franchise are realised as soon as possible. There has been a necessary delay and I very much regret that.
Mr George Howarth (Knowsley) (Lab): In his statement the Secretary of State referred to discussions that he is holding with Virgin about extending its involvement for a short period of 14 months. Can he give some reassurance to travellers and also to the staff who work on the west coast main line that if it becomes necessary to extend that 14-month period, there is no in-principle reason why that should not happen?
Mr McLoughlin: Over the next eight months, which we are talking about as the extension to the franchise, and the following five-month changeover period, if that is necessary, we will obviously be talking with Virgin and other companies interested in running the interim two-year contract, but I think that the jobs of the people who operate the trains will remain the same under any operator.
Christopher Pincher (Tamworth) (Con):
Commuters in Tamworth will be relieved to hear that at least my right hon. Friend knows where his Department is. Will
29 Oct 2012 : Column 46
he make clear the steps he can take to ensure that the next round of franchises are not unduly delayed? In particular, can original requests for proposals made by bidders who choose to tender again be requested again so that that the review process is expedited?
Mr McLoughlin: I can assure my hon. Friend that I am very keen to get on with franchising, but he would expect me to wait for the recommendations of the Brown report and the Government to respond to it in a measured and appropriate way. I can give him the assurance he seeks: I am very keen to get on with franchising.
Sir Gerald Kaufman (Manchester, Gorton) (Lab): I join those Members who have complimented the right hon. Gentleman on his openness in coming to the House and his readiness to come here frequently. Is he aware that, as is shown in the book “How to be a Minister”, the incompetence, errors and blunders he listed in his statement should end up in the lap of his predecessor and that the Government should admit that? Will he also accept that those of us who travel twice a week on the west coast main line have seen the cloud that has hung over the train crews during this period lifted? It is up to him to ensure that the cloud does not return.
Mr McLoughlin: I am not sure who wrote “How to be a Minister”, but the right hon. Gentleman might like to inform me privately afterwards. I refer him to Sam Laidlaw’s letter, which I mentioned earlier. The fact is that this is an interim report and nowhere does it criticise Ministers.
Mr Brian Binley (Northampton South) (Con): I welcome the Secretary of State’s willingness to update us on the continuity of service on the west coast main line once the current franchise expires on 9 December. Has he noted recent reports suggesting that capacity could be reached well before 2026, undermining continuity of service? Consequently, will he bring forward plans for HS2, even though he said he would not talk about them today?
Mr McLoughlin: I am interested in the representation my hon. Friend has made, but perhaps we could leave it at that.
Mr Frank Field (Birkenhead) (Lab): Why does the Secretary of State think that he will ever be best placed to decide competition between these companies? Does he not realise that we, the consumers and travellers, would like to decide competition between the companies ourselves? When will he realise that we are in a better position to decide which trains we would like to travel on, that those who are bidding for the contracts have huge skills in fixing them and that no amount of skill from the Secretary of State can overcome them fixing the market in the way they have succeeded in doing up to now?
Mr McLoughlin: I am not sure that I completely agree with the right hon. Gentleman, but I might want to reflect a little on what his question is in the longer term. The Government, on behalf of the taxpayer, have invested a huge amount of money in the west coast main line—some £9 billion—so it is right that the people who are served by the line get a good service, and we are trying to find how best to achieve that.
29 Oct 2012 : Column 47
Mr Marcus Jones (Nuneaton) (Con): Over the past eight years, passenger numbers from Nuneaton station have increased by 77% to just under 1 million. On the basis of that growth and the huge growth in railway usage that we have seen across the country, does my right hon. Friend agree that it would be complete folly at this stage to revert to a nationalised railway, as has been alluded to by some Labour Members over the past week? May I also appeal to him to consider better off-peak fast services to Nuneaton station when he deals with the re-timetabling?
Mr McLoughlin: I am grateful to my hon. Friend. Requests for improved services often come my way whenever I appear at the Dispatch Box. That shows, to a degree, the importance of the rail industry to all our constituents and the demand that exists whereby people will use a service if it is available, so I take his representations very seriously. As for nationalisation, the railways could have been nationalised by the previous Government—they were in power for 13 years—and they decided not to do so, for very good reason.
Ann Coffey (Stockport) (Lab): I know that the Secretary of State is aware of the urgent need for improvements to Stockport station, so will he tell me whether capital projects are to be included in the interim agreement?
Mr McLoughlin: I cannot yet go into the full details of what will be in the interim two-year agreement. However, the hon. Lady has made the case for Stockport station not just today but on other occasions, and, knowing her, I have the feeling that she will continue to do so every time I appear at the Dispatch Box.
Jeremy Lefroy (Stafford) (Con): Stafford station is to receive a welcome £3 million upgrade, and my constituents are looking forward to several other improvements in fares and services, particularly—here is another bid for my right hon. Friend—later departures from London and Liverpool in the evening. Can he confirm whether these improvements will be possible under the two shorter franchises?
Mr McLoughlin: I am very pleased to hear that my hon. Friend’s station is being improved. I should like to point out that Derby station is being improved as well, but that was agreed some time before I arrived at the Department. On his request for further services to Stafford station, which I know well, I will certainly try to ensure that when the enhanced services are negotiated, Stafford also gets the benefit.
Richard Burden (Birmingham, Northfield) (Lab): The Secretary of State mentioned the Brown review on more generalised lessons for franchising. Is he aware that some urgent lessons need to be learned and acted on straight away, particularly regarding routes to and from the west coast main line? I refer, of course, to the literally hundreds of train services that have been delayed or subject to cancellation by London Midland. The Secretary of State says that his officials are in daily contact on this. What are they doing? Will the problem be resolved? How did we get to the situation whereby London Midland appears not to have forward planned its driver requirements? What penalties are available to him and his Department?
29 Oct 2012 : Column 48
Mr McLoughlin: I congratulate the hon. Gentleman; I think there were about six questions there. However, I will give him only one answer, which is that the Under-Secretary, my hon. Friend the Member for Lewes (Norman Baker), spoke directly to the managing director of that rail line. We are concerned about the deterioration of services, and I hope that measures will be put in place quickly to put them back to an acceptable level.
Andrew George (St Ives) (LD): Notwithstanding my right hon. Friend’s reply to the hon. Member for Tamworth (Christopher Pincher) about the Brown inquiry, is he prepared to go a little further in outlining the consequences for other franchises and their timetabling, particularly the First Great Western franchise, which many hon. Members are very concerned about?
Mr McLoughlin: Yes; the hon. Gentleman’s points are well taken. However, I do not want to prejudge the Brown inquiry, nor the final Laidlaw inquiry. It is better that I wait for those reports to see whether they have any read-across. I assure him that, as I have said throughout the statement, we are very keen to see good, reliable railway services across the country.
Iain Stewart (Milton Keynes South) (Con): I thank my right hon. Friend for his comments about the continuity of services on 9 December. He also said that he is in discussion with Virgin about enhancing services in December and an improved timetable. Can he give any more details about those discussions?
Mr McLoughlin: I am afraid that I cannot give those details at the moment, because we are in negotiations. I know that my hon. Friend wants a better service for Milton Keynes, because every time he talks to me he talks about exactly that. As a member of the Transport Committee, he is one of those people who keep an incredibly close eye on this issue and he will no doubt pursue me at every opportunity.
Guy Opperman (Hexham) (Con): I welcome the speed and transparency of the interim Laidlaw report and endorse the calls of other hon. Members for lengthier franchises. Today the all-party group on rail in the north looks forward to meeting the Minister of State.
The Minister of State, Department for Transport (Mr Simon Burns): I have already been there.
Guy Opperman: Yes, and I am sure that my right hon. Friend will be coming back.
Will the Secretary of State confirm that this Government’s increased investment in things such as the northern hub and the expanded service for the north will continue in the long term?
Mr McLoughlin: I am grateful to my hon. Friend for his question. My right hon. Friend the Minister has just told me that he looks forward to going back to the all-party group. My hon. Friend makes a very important point. Just before the summer recess we announced our plans for the railways from 2014 to 2019, which ought to have some very beneficial effects for all constituents. They include the largest electrification ever seen in this country—we are planning to electrify some 850 miles, which is a lot more than the previous Government achieved in 13 years.
29 Oct 2012 : Column 49
Business of the House
5.1 pm
The Leader of the House of Commons (Mr Andrew Lansley): With permission, Mr Speaker, and in the light of the statement earlier this afternoon by my right hon. Friend the Secretary of State for Health, I should like to make a short business statement. The business for tomorrow will now be:
Tuesday 30 October—Proceedings on a business of the House motion, followed by all stages of the Mental Health (Approval Functions) Bill.
The business for the rest of this week will be substantially unchanged.
Wednesday 31 October—Consideration of Lords amendments to the Local Government Finance Bill, followed by a motion to approve European documents relating to the multi-annual financial framework. The House may also be asked to consider any Lords amendments that may be received, and the Speaker shall not adjourn the House until he has reported the Royal Assent to any Act agreed on by both Houses.
Thursday 1 November—A debate on a motion relating to beer duty escalator, followed by a debate on a motion relating to air passenger duty. The subjects for these debates have been nominated by the Backbench Business Committee.
Friday 2 November—Private Members’ Bills.
I will announce, as usual, further business during the business statement on Thursday.
Mr Speaker: Order. The Leader of the House emphasised that it was a short business statement and I emphasise for the benefit of hon. and right hon. Members that it is also a narrow business statement. The normal opportunity for exchanges will occur on Thursday at business questions, but I know that hon. and right hon. Members will wish narrowly to focus their questions on the specific change to business to tomorrow, which the right hon. Gentleman has announced.
Ms Angela Eagle (Wallasey) (Lab): I thank the Leader of the House for his business statement, which was inevitable following the earlier statement by the Secretary of State for Health. Will the Leader of the House do something to reassure us about the practicalities of a sudden switch to consider all stages of a Bill that has just this minute been published? In the words of my right hon. Friend the Member for Leigh (Andy Burnham), the shadow Secretary of State, we will be legislating tomorrow on something that the Government, or certainly we in this Parliament, have only found out about today.
Will the Leader of the House explain why there is such a rush and why all the Bill’s stages have to be taken tomorrow? Will he reassure hon. Members, who would usually be given adequate time to ask parliamentary questions and to discuss or even hold hearings on aspects of the Bill? Is there anything he can do as Leader of the House to ensure that adequate help is given to those who wish to consider the Bill, which has only just been published, at such short notice? Are there any extra things that the Department of Health could
29 Oct 2012 : Column 50
do to reassure hon. Members about the reasons for this? Perhaps it could be more open than would usually be the case, given that all stages of the Bill are now due to be taken tomorrow. I would appreciate it if he could go into a little detail for those who are interested in taking part in the debates, and if he could reassure the House and those outside that the matter has been adequately examined.
I particularly wish for some reassurance about stakeholders. The explanatory memorandum to the Bill mentions stakeholder involvement, but only medical involvement, not user involvement.
Mr Lansley: I am grateful to the shadow Leader of the House for her response, and to the shadow Secretary of State for Health for how the Opposition responded to my right hon. Friend’s statement.
On the practicalities of the matter, hon. Members will of course be concerned to know that tomorrow’s business of the House motion, which I will table later, ensures that they can raise issues by tabling amendments, including before Second Reading. I hope that the motion will permit that to take place, to allow the full debate that Members will wish to have in Committee.
My colleagues, including the Secretary of State for Health, and I of course looked carefully at the requirement for the proceedings on the Bill to be conducted on such a time scale. As the hon. Lady will recall from my right hon. Friend’s responses to questions following his statement, a 72-hour period is allowed to put in place the assessment necessary to make a section under the Mental Health Acts. By extension, once it is clear that there is any procedural irregularity, there is a risk of legal proceedings being raised by the patients concerned. The legal advice makes it clear that it is desirable to achieve clarity as quickly as possible, otherwise there is a risk of large numbers of assessments having to be entered into. I know that our collective judgment will have been explained to the shadow Secretary of State.
I hope that along with the Department of Health, we will be able to take every step that we can. The Department has published the Bill and explanatory notes, which the hon. Lady will have seen. She will know that the Bill contains one substantive clause plus those on commencement, extent and short title, and I hope that today’s statement and the explanatory notes make it clear that it is focused specifically on the point in question.
As far as stakeholders are concerned, the issue that has arisen is about the approval of medical professionals. We were therefore particularly focused on the Royal College of Psychiatrists. As my right hon. Friend the Secretary of State made clear, patients’ rights and interests have not been prejudiced, and I hope that they will take reassurance from that. I have no doubt that immediately following his informing the House of the situation, my colleagues at the Department of Health will have ensured that all those in a position to represent patients’ interests have been given the necessary details and that they will have the opportunity to contact the Department and Members over the next 24 hours.
Grahame M. Morris (Easington) (Lab): Can the Leader of the House clarify what will happen to the Second Reading of the Growth and Infrastructure Bill, which was planned for tomorrow? Have I misunderstood, or will it be rescheduled?
29 Oct 2012 : Column 51
Mr Lansley: No, the hon. Gentleman has not misunderstood. As I said, I will announce further business for next week and provisional business for the week after in the business statement on Thursday.
Mr Speaker: I am grateful to the Leader of the House, the shadow Leader of the House and the hon. Member for Easington (Grahame M. Morris).
29 Oct 2012 : Column 52
Ford Assembly Plant (Swaythling)
Application for emergency debate (Standing Order No. 24)
5.9 pm
Caroline Nokes (Romsey and Southampton North) (Con): I seek leave to call for a debate on a specific and important matter that I believe should receive urgent consideration—namely the planned closure of the Ford assembly plant based in Swaythling in the Southampton part of my constituency.
Ford is the biggest single employer in my constituency. It currently employs approximately 500 people on site, and is home to the iconic Transit van. Ford began production in my constituency in 1953, and commenced building the Transit in 1972—40 years ago. The decision to close the plant will affect not only the 500 employees on site, but the significant supply chain attached to the business, which is equally at risk. Current estimates indicate that approximately 1,500 jobs are reliant on the Ford supply chain.
I call for a debate in the House because the closure affects not only my constituents but those of neighbouring right hon. and hon. colleagues. It is very much a cross-party matter, and the House will understand its importance. I am extremely concerned about the effect the plant’s closure will have on an area of my constituency that has higher unemployment statistics than other parts of Romsey and Southampton North, and I wish to seek assurances that the Government will do all they can to support those hard-working individuals.
I wish to emphasise the importance of Southampton’s inclusion in the next wave of city deal funding, and highlight the need for an enterprise zone to be created in the area. An enterprise zone in or around Southampton will undoubtedly create an environment in which businesses can grow, leading to a stronger local economy. I also strongly encourage BIS local, the city council and other neighbouring local authorities to join forces so that those being made redundant are given the most comprehensive help possible to find alternative opportunities.
It is imperative for this House to know whether there was anything the Government could have done to prevent the decision to close the plant. There are also questions over whether Ford has reneged on earlier promises to keep the factory open in exchange for previous Government funding, and what, if anything, the Government knew about the decision. Those issues should rightfully be debated on the Floor of the House, and not in the media.
Mr Speaker: The hon. Lady asks leave to propose a debate on a specific and important matter that should have urgent consideration, namely the closure of the Ford assembly plant in Swaythling. I have listened carefully to her application, and it is an important matter for her constituents and others who depend upon that plant. I must tell the hon. Lady, however, that I have concluded that the matter does not meet the stringent criteria for an urgent debate under Standing Order No. 24, and for that reason I do not propose to put the application to the House. I hope that the hon. Lady will succeed in finding other ways to debate this important issue soon. I hope that is of some assistance.
29 Oct 2012 : Column 53
Public Service Pensions Bill
5.12 pm
The Chief Secretary to the Treasury (Danny Alexander): I beg to move, That the Bill be now read a Second time.
The Public Service Pensions Bill represents the final building block of the Government’s commitment to reforming public service pensions. It is an important measure that will affect the pensions of millions of public service workers for decades to come. It is the culmination of a process that started more than two years ago when the coalition Government invited the former Labour Secretary of State for Work and Pensions, Lord Hutton of Furness, to undertake a fundamental review of public service pensions. Lord Hutton’s independent public service pensions commission undertook its responsibilities with thoroughness. It consulted and met a wide range of interests and considered a wealth of expertise and viewpoints, and more than 3,000 pages of evidence were submitted in response to it by more than 250 bodies.
Mr Jim Cunningham (Coventry South) (Lab): Will the right hon. Gentleman give way?
Danny Alexander: I will give way, although it is rather early in my speech. Perhaps the hon. Gentleman wants to make an urgent point about Lord Hutton.
Mr Cunningham: I appreciate that the Government commissioned the Hutton report, but surely that report would not have been needed had they honoured the previous Government’s commitment to civil servants and public service workers.
Danny Alexander: I shall deal with the good reasons why further reform is needed later in my speech.
Lord Hutton’s conclusions of March 2011 set out a clear and compelling case for further reform. He found that the status quo was not tenable, that there had been an unfair sharing of costs between the employer, the employee and the taxpayer, and that previous reforms had not fully addressed the underlying issues of sustainability and fairness. His recommendations were equally compelling, and those for the future design of schemes fall into three broad categories, the first of which is safeguards to ensure that the long-term costs of pensions are sustainable. That is achieved through a link between the state pension age and normal pension ages in the majority of schemes, and a cost-cap mechanism to protect the taxpayer in the event of other unforeseen costs.
Mr David Anderson (Blaydon) (Lab) rose—
Mr Brian H. Donohoe (Central Ayrshire) (Lab) rose—
John Healey (Wentworth and Dearne) (Lab) rose—
Danny Alexander: I give way to the former Secretary of State.
John Healey: The Chief Secretary lays great stress on the Hutton report, so why did not the Chancellor wait until Hutton reported before hitting public service workers with a 3% surcharge on their pension payments?
29 Oct 2012 : Column 54
Danny Alexander: I did not mention Lord Hutton’s interim report, but I am happy to do so now for the benefit of the House. The right hon. Gentleman will know that Lord Hutton produced an interim report in October 2010 that said that there was a case for rebalancing member contributions. We followed that advice and came forward with our proposals as part of the general programme to repair the public finances and clear up the mess that the Labour party left.
Mr Donohoe: The Chief Secretary is a Scottish Member, so I presume that he is aware of negotiations north of the border. If the Scottish Executive make different decisions, how will they fund them? Will the Treasury fund them?
Danny Alexander: The hon. Gentleman makes a good point. I will deal with this subject in detail later in my speech, but I shall turn to it briefly. In respect of the pension schemes that are devolved to the Scottish Government, the Northern Ireland Government—their Finance Minister, the hon. Member for East Antrim (Sammy Wilson), is in the Chamber—and the Welsh Government, those Administrations are free to negotiate within the parameters in the Bill and the cost ceiling that has been set out. I understand that such negotiations are ongoing. Should Scottish, Welsh or Northern Irish Ministers wish to offer more financially generous terms, they are entirely within their rights to do so, but the additional costs will have to be met from their budgets. They have complete freedom to do that and I know that they will want to consider it.
Mr Anderson: The Chief Secretary said that there was a fairness imbalance between employers, employees and the taxpayer. What was fair about a public body such as Royal Mail taking a 13-year pension contribution holiday when the members of the scheme had to carry on paying?
Danny Alexander: The hon. Gentleman will know that Royal Mail is a public corporation, and therefore not within the scope—
Mr Russell Brown (Dumfries and Galloway) (Lab) rose—
Danny Alexander: Let me respond to one intervention before I take another. I know that the hon. Gentleman is keen for me to clarify one of my points—I am sure that I will be able to do so—but let me respond to the important matter raised by the hon. Member for Blaydon (Mr Anderson). As part of our measures to support Royal Mail, we recently took its pension scheme on to the Government’s balance sheet. Many schemes took holidays during the previous Government’s time in office—
Mr Anderson: And the one before them.
Danny Alexander: Indeed. Perhaps schemes took holidays even under the Government before that one. In many cases, members regretted such action in retrospect. The Bill is about public service pension schemes—by and large unfunded, with the exception of the local government scheme—that desperately need reform.
29 Oct 2012 : Column 55
Mr Russell Brown: In response to my hon. Friend the Member for Central Ayrshire (Mr Donohoe), the Minister made it clear that the devolved Administrations would need to fund anything different that they wished to do. However, will he clarify the situation fully? We know that the devolved Administrations must fund those differences, but will there be an additional financial penalty through the block grant allocation?
Danny Alexander: No, there will not. Let me describe how this works. The negotiations that my ministerial colleagues and I conducted in UK Government Departments allow considerable flexibility within the parameters of the Bill—for example, the link between the state pension age and normal pension age, and the move away from final salary—and within the so-called cost envelope set up around the schemes. For example, the hon. Gentleman will note that the teachers pension scheme has agreed a different balance between accrual rates and revaluation factors for its new scheme from that for the health workers pension scheme. There is great flexibility in the provisions, provided things stay within the cost envelope. Under the Bill, the devolved Administrations are free to make more generous provision, as happened with the offer for prison officers. The Ministry of Justice agreed to fund an additional element of the proposed scheme to enable prison officers to have enhanced early retirement factors beyond those that were affordable within the cost envelope. The Ministry had offered to put additional resources on the table from its own departmental expenditure limits, and that was part of the offer that prison officers sadly rejected. Should the devolved Administrations wish to do something similar, they will be within their rights to do so, at their own expense.
Sammy Wilson (East Antrim) (DUP): One of the options open to the devolved Administrations was for their pension schemes to be included in the Bill. In Northern Ireland, the Executive decided not to take that option, which could mean that, simply because of the timing of the legislation, the new scheme will be in place here, but not in Northern Ireland, even if Northern Ireland decides to follow suit. Will there be a penalty if there is a time gap between the implementation of the legislation in the rest of the United Kingdom and any delayed implementation in Northern Ireland?
Danny Alexander: I am not aware of any technical reason why a time gap should occur, but I know that officials in the Northern Ireland Department of Finance and Personnel discuss this regularly with my officials in the Treasury. If there is any evidence of such an occurrence, I will be happy to consider it in the normal way. There have been regular discussions on these matters, not least in our Finance Ministers quadrilateral. We will meet again in a couple of weeks in Edinburgh, when this subject will be on the agenda, so we can discuss it then.
Katy Clark (North Ayrshire and Arran) (Lab): The Chief Secretary will be aware that several of the Bill’s provisions will affect Scottish pension schemes for the first time. There is a debate in Scotland about whether a legislative consent order is required, so will he address that point in detail in his speech?
Danny Alexander: I certainly will, when I come to it.
29 Oct 2012 : Column 56
Lord Hutton’s first set of recommendations consisted of safeguards to ensure that the long-term cost of pensions was sustainable through a link between state pension age and normal pension age, and included a cost-cap mechanism to protect the taxpayer in the event that other unforeseen costs arose. He recommended that the new schemes should be fairer by smoothing the current disparities between high and low-income earners and ensuring that benefits are distributed more equally, which was why he recommended a move from final salary provision to career average revalued earnings—CARE—schemes. Finally, he recommended stronger governance provisions for the new schemes so that scheme members and the public could understand how the schemes were run and what they cost.
We accepted all 27 of Lord Hutton’s recommendations as the basis for discussion with trade unions and scheme member representatives across the public service, and designed our blueprint reference scheme in a way that reflected the recommendations of the Hutton report without any cherry-picking. Our aim was to strike a deal that would last, unchanged, for 25 years. Talks with the unions took place on all elements of that deal. I should stress that the Government did not do all the talking in those meetings—we listened carefully, too. Agreeing the design of these pensions has taken a considerable cross-Government effort over the past 18 months. The Minister for the Cabinet Office, the Home Secretary, the Lord Chancellor, the Education Secretary, the Defence Secretary, the Communities and Local Government Secretary and the former Health Secretary worked hard to understand the concerns of the trade unions and member representatives in their sectors.
Richard Fuller (Bedford) (Con): The Chief Secretary talks about a deal on pensions that will last over the long term. Lord Hutton specifically ruled out moving from defined benefit to defined contribution schemes. We currently do not account for the cost of public sector pensions within our public debt numbers. Would it not have been wiser to have looked for a system that included the long-term costs for public sector pension schemes if the Government wanted to achieve such long-term sustainability?
Danny Alexander: The hon. Gentleman will know that Lord Hutton addressed that issue. The costs of such a transition would have been enormous and very disruptive, and I think that the recommendation on the career average revalued earnings scheme is preferable from that point of view. He will also know that the new whole of Government accounts presentation of the public finances takes detailed account of the unfunded liabilities in public service pension schemes. That means that the public and the House have precisely the information that he wants transparently available, so I hope that he regards that as progress.
Andrew Selous (South West Bedfordshire) (Con): On the issue of fairness, does the Chief Secretary agree that private sector workers can only look at guaranteed retirement benefits with envy, especially because most of them would have to pay more than one third of their income to achieve equivalent benefits?
Danny Alexander:
Yes, I agree. We need better pension provision across the work force. That is why I think the national employment savings trust scheme is an important
29 Oct 2012 : Column 57
step forward. That basic pension scheme, which is available to the 12 million or so members of the country’s work force who do not have any pension provision, was recently launched by the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), and had its origins under the previous Government. It is a good thing all round that we have agreed a reform to public service pensions that makes significant cost savings and ensures that public servants continue to have access to among the best pension schemes available.
We all wanted to find a solution that was sustainable, affordable and fair, as did the vast majority of trade unions and negotiators for the non-unionised work force. Thanks to both sides’ commitment to constructive talks, I am pleased to say that the final proposed designs have been issued for all major public service schemes. I thank Brendan Barber and his TUC negotiating team for the mature and constructive way in which they approached these talks. It has taken many hours of discussion to get where we are today, and I am grateful that the majority of trade unions brought sensible, workable solutions to the negotiating table, rather than grandstanding. The final scheme designs reflect that hard work.
The trade unions took those scheme designs to their memberships as the best that could be achieved through discussion, and the majority of the unions have accepted the proposed agreements. The turnout in the ballots held by the unions that rejected reform was low—less than 30% in most cases—which is hardly a compelling mandate for an ongoing dispute. The Public and Commercial Services Union decided to reject the offer before it was finalised, without first seeking the views of its membership, which was not a reasonable way to approach a set of reforms affecting more than six million public servants.
There is no point in further dispute or threats of strikes regarding public service pensions. We have set out a good and fair deal that protects those rights already earned and puts fairness at the heart of future pension provisions.
Mr Jim Cunningham: The comparison between private sector and public sector pension schemes is variable, as not all public sector schemes are good. However, what discussions has the right hon. Gentleman had about the various provisions in the Bill affecting employees? More importantly, if the Bill is passed, what method of consultation will he allow on changes to the various schemes?
Danny Alexander: We have taken great care to work with the TUC. We have taken it through the text of the Bill, listened to its concerns and made adjustments where necessary. This has not just been done through the scheme negotiations; we have also been open by sharing the Bill with trade union colleagues. Given the long-term nature of the reform and the fact that it affects so many people, it was important to engage properly. My departmental colleagues have engaged closely with representatives of the relevant work forces to ensure that that has happened.
The Bill sets out a framework for the schemes, with some restrictions, and in due course we will have to produce regulations to set out the design of each scheme.
29 Oct 2012 : Column 58
There are well-established processes within Departments for working with employers and employees on such details. My experience is that those processes work pretty well, and there is a pretty good co-operative spirit among the pensions experts around the table. I therefore do not foresee any problems but, of course, if the hon. Member for Coventry South (Mr Cunningham) does, I would be delighted for him to bring them to my attention so that I can try to resolve them.
Katy Clark: Will the right hon. Gentleman give way?
Danny Alexander: I will make some progress and give way to the hon. Lady later.
I return to Lord Hutton’s four key tests for the future design of public service pensions: affordability, fairness to public service workers, fairness to the taxpayer and transparency. Those objectives have prevailed throughout the process and remain the cornerstones of the Bill. First, on affordability, it is clear from Lord Hutton’s report that the new scheme should be affordable and sustainable. The Bill represents a significant proportion of the total of more than £430 billion of savings that our reforms of public service pensions are estimated to save over the next 50 years.
James Duddridge (Rochford and Southend East) (Con): Those of us on the Government Benches are quite often accused of reminding those on the Opposition Benches that they left us with a massive deficit and unsustainable debt, but in fairness is it not true that these reforms would have had to happen even without the awful economic legacy we were left?
Danny Alexander: I agree with that, and I would add that, frankly, these reforms could have been made in the 1980s or 1990s, as well as the 2000s. In fact, we have to go back quite a few decades to find the root of the problems we are having to tackle in this Bill, which I think we are doing very effectively.
The remainder of the £430 billion of savings are generated by the Government’s decisions to change their policy on the indexation of pensions and payments from the retail prices index to the consumer prices index, and, as has been mentioned, to increase the contributions that public servants pay towards their pensions, rebalancing the costs more fairly between them and other taxpayers. The combined effect of those changes will help to restore the health of the British economy, reduce the size of our deficit and correct the unsustainable 40% increase in costs there has been over the last 50 years.
Andrew Gwynne (Denton and Reddish) (Lab): I am grateful to the Chief Secretary for giving way. Does he recognise that the Government have to be careful and approach this issue in a much more balanced manner? There is a danger that if more people opt out of occupational pensions because they find them unaffordable, that could end up costing the Treasury more in the long run through means-tested benefits.
Danny Alexander:
I would say that we have handled this process in a balanced and sensitive way throughout, in recognition of the fact that the changes affect millions of public service workers. In response to the hon. Gentleman’s concern, which was raised a number of
29 Oct 2012 : Column 59
times in the talks, I would say that none of us wants to see increased opt-outs from pensions, for the reasons that have been mentioned on both sides of the House. We have put in place a process for reviewing the next stage of the contribution increase in the light of opt-out data from the first year. I am sure he will be pleased to hear that there is no evidence of increased opting out in response to this year’s increase in contributions. However, we will review the matter again next year before proceeding with the third phase of the increases, so he makes a serious and important point.
The reforms treat not only the symptoms of delayed reform but the underlying problem. Therefore, they are forecast to reduce the cost of providing public service pensions by around 40% over the next 50 years, returning costs to their historic long-term average. Clause 9 deals with the principal risk that needs to be managed if pensions are to be affordable and sustainable: longevity. Longevity has improved significantly over recent decades, which is a very good thing. As a result, the state pension age has increased. The Government are therefore asking public service workers in due course also to retire later. In a society where we are all living longer and where fellow citizens in the private sector are expected to retire later, it is both fair and right that the public sector retirement age should rise with the state pension age. As Lord Hutton says, improvements have continuously been underestimated in the past, which has led to the cost of providing pensions rising significantly over recent decades. As such, clause 9 provides that in future the normal retirement age in the public schemes will be set at the state pension age. As Lord Hutton identified, this change will move the proportion of adult life in retirement for public service pension scheme members back to where it was in the 1980s. More important, by linking the scheme retirement age to the state retirement age, we will ensure that further improvements in longevity are tracked. That is the main way in which the Bill will ensure that the cost of public service pensions cannot again spiral out of control, but will remain affordable and sustainable long into the future.
Mr Anderson: The Chief Secretary talks about longevity, but what does he think the proposals will mean for the longevity of a mental health nurse who is 67 and a half years old, goes to work every day and ends up literally fighting with patients?
Danny Alexander: We will conduct a regular review, as Lord Hutton suggested, which will enable issues such as those the hon. Gentleman has raised to be taken into account. They were raised and discussed in the scheme talks. In the end, employee and employer representatives both agreed that the modelling we are using—which is similar to that used in the deal struck under his Government—is the right, fair and balanced way to take such matters forward across the whole work force.
John Healey: The Chief Secretary will be aware that there is a working longer review in the NHS that is looking into the question of working longer in particular disciplines in the health service. Will the provisions in the Bill allow flexibility in the link between the normal pension age and the state pension age, depending on the conclusions of that review?
29 Oct 2012 : Column 60
Danny Alexander: If I may, I will come to that issue in a moment. The arrangements for the NHS pension scheme have been agreed, and the reforms have been taken forward on that basis. That includes the link between the normal pension age and the state pension age.
Mark Durkan (Foyle) (SDLP): Will the Chief Secretary give way?
Danny Alexander: I will go on with my speech, if I may. I hope that I will be able to answer the hon. Gentleman’s question as I do so. I will not take interventions at the moment, as this is an important subject. I will perhaps take some at the end of this section.
We have all heard the cries “68 is too late”, along with similar slogans, but it is crucial that people understand the facts behind the proposals in the Bill. The pension age is a calculation point, not a fixed date up to which people must work in order to receive their pension. Public service workers will still be free to choose when to retire, either earlier or later than the state retirement age. When a person retires at a different age, their pension benefits will be adjusted, to take account fairly of the fact that they are taking them earlier or later than the date against which they have been costed. People will still have the freedom to choose when to retire, however. The Bill does not deprive public servants of that choice.
Lord Hutton said that the Government should ensure that the link between the public service schemes and the state pension age should be reviewed to ensure that it continued appropriately to track longevity. We will do that. The Bill does not provide for such a review, however, and nor should it. We have already committed to come forward with details of how the review of the state pension age will be conducted. We will review the normal pension age of the schemes, to consider whether the state pension age appropriately tracks longevity in the public service schemes. The process will be determined once the detail of the state pension age review system is settled. That is the right way to proceed, and it would be inappropriate for the Bill to attempt to second-guess that.
Mark Durkan: The Chief Secretary is emphasising the importance of clause 9 in facilitating future adjustments in relation to pension ages. Why, then, does he also seek to justify the Henry VIII provision in clause 3, which will allow the Government radically and retrospectively to alter pension terms at any time, or times, in the future?
Danny Alexander:
The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born, and it has been used by a number of Governments to make adjustments to public service pensions. We have set out in the Bill certain elements of the scheme, particularly the pension age link, and the fact that the schemes need to be CARE schemes and certainly cannot be final salary schemes in future. The provisions to which the hon. Gentleman refers are in fact more limited than those in the 1972 Act. It is appropriate that we continue in broadly the same way, because that has stood the test of time. I hope that, by
29 Oct 2012 : Column 61
setting out the Government’s intentions here and in Committee and by undertaking detailed negotiations with work forces, we will have ensured that people know precisely how we intend to use these powers. I think it is clause 23—I might have got that number wrong—that refers directly to the 25-year guarantee that I mentioned earlier. I hope that that will give people some assurance that our scheme designs will stand the test of time.
John Healey: With respect, intentions are one thing but the terms of the legislation are another. Is my reading of it wrong? As I understand it, the provisions will not allow flexibility for some groups of NHS workers in the link between the normal pension age and the state pension age. Clause 9(3) states:
“The deferred pension age of a person under a scheme under section 1”—
“must be…the same as the person’s state pension age”.
That suggests that there will be no flexibility. Am I right or wrong?
Danny Alexander: The right hon. Gentleman is absolutely right to say that the link between the state pension age and the normal pension age is fixed in the legislation. That is a matter that was discussed in the negotiations, including the detailed negotiations with health service unions. The point I was seeking to make was that, as Lord Hutton recommended, we have agreed to review how that link operates at each stage at which the state pension age is increased, to enable those issues to be debated.
Danny Alexander: I will give way one more time, then I must make some progress. There is a lot of detail to get through.
Katy Clark: Clause 9(2) means that firefighters would not be able to retire with a pension until they were 60. Many in the industry believe this is unworkable. What would the right hon. Gentleman suggest to firefighters who cannot work until they are 60?
Danny Alexander: In that case, we followed the recommendations of Lord Hutton—and, indeed, previous practice. The point I made just a moment ago—I am sure the hon. Lady was listening carefully—is that the provision does not stipulate the date to which people must work. Clearly, if people wish to retire earlier, they can do so and take an actuarially reduced pension or, indeed, retire later and take an actuarially enhanced pension.
Danny Alexander: I am going to make some progress, if I may.
The second and third tests of Lord Hutton were fairness to public servants and fairness to taxpayers. The Government have worked hard to ensure that the reformed pensions are fair and continue to provide a generous level of retirement income for public servants as a fair reward for a career spent serving the public. The Government made a commitment that these schemes
29 Oct 2012 : Column 62
would be at least as generous at retirement for those on low and middle-income earnings. We have delivered that commitment in a number of ways.
First, clause 16 allows transitional protection to be provided for those who have already had a long career in public service and are approaching retirement. I said in November last year that the offer provided that those within 10 years of their normal pension age on 1 April this year would not see any changes to their pension, nor the date at which they can draw it. The Bill ensures that the current final salary schemes will remain open to people who are covered by the transitional protection criteria in those schemes. Most of the proposed final scheme designs include the transitional offer as we set it out; however, the local government scheme in England and Wales has chosen alternative arrangements as sought by their trade unions and employers.
Secondly, we have honoured our commitment to retain the final salary link for people who have already built up some service in final salary schemes, as the provisions in schedule 7 make clear. Although these people will move on to CARE schemes by 6 April 2015 at the latest, their accrued years of final salary benefits will be calculated and paid at their final retirement salary—not their 2015 salary.
Most importantly for low and middle-income earners, we are putting the fairness back into public service pensions. Clause 7 provides that the new default for public schemes will be based on career average earnings, rather than on final salary. Final salary schemes are unfair to the majority of the work force as they disproportionately reward those who progress to senior roles compared with the majority of staff who have more consistent career paths. These outmoded schemes provide lower effective benefit rates to the people that carry out the core front-line work in our public services—the nurses, police officers and our armed forces whose work is so valuable to everyone here.
Career average schemes are fairer to the members and to taxpayers alike. Under final salary schemes, it is the taxpayer that picks up the cost of those high flyers who attain high salaries by the time they leave public service. Such members can receive twice as much in benefits per £1 of contributions that they have paid towards their pension. This is clearly unfair, which is why this Bill will not allow final salary schemes to continue after 2015. For members, pension benefits will be based on the amount that they earn over their career. That means their pension benefits will directly reflect the contributions that they and their employer make over their career.
The Bill ensures that these pensions remain among the very best available—and rightly so, if we are to continue to be able to recruit and retain the right people to undertake these crucially important roles. A key objective of the reforms is to ensure a fair balance of risks between scheme members and the taxpayer. To achieve this, Lord Hutton recommended that the Government establish a mechanism to control the future costs of pensions.
Clauses 10 and 11 establish an employer cost cap in the public service schemes. This will provide backstop protection to the taxpayer to ensure that any unexpected risks associated with pension provision are shared between employers and scheme members. With foreseeable longevity risk controlled through the pension age link, this really
29 Oct 2012 : Column 63
is a backstop, which under normal circumstances should not need to be used. Everyone in a public service pension scheme will see their pensions reformed along the same lines. I do not believe in special cases at a time when we are reforming the pension arrangements of those who provide essential services to the public.
John Healey: I promise not to intervene on the Chief Secretary again, but I want to ask about the employer cost cap in clause 11. On the front of the Bill, the Chancellor has signed a declaration that the provisions of the Bill
“are compatible with the Convention”.
It is clear from clause 11(7), however, that the Bill allows schemes to provide for reduction of accrued benefits as part of the employer cost cap. This would be a fundamental breach of scheme members’ rights under article 1 of protocol 1 of the convention, so how can the Chancellor’s statement on the front of the Bill be true?
Danny Alexander: I do not think that the right hon. Gentleman is right in this instance. In fact, had the “cap and share” arrangements introduced by the last Government been allowed to operate, they could have manifested themselves—[Interruption.] No, the right hon. Gentleman is wrong. They could have manifested themselves in both a reduction in benefits and an increase in costs to members. The right hon. Gentleman is free to explore the matter in Committee, and I am sure that he will.
I should add that I have some further information relating to the right hon. Gentleman’s earlier intervention. The working longer review is acknowledged in the proposed final agreement on the NHS pension scheme, which specifically states that early retirement factors allowing retirement before the state pension may be considered should the review suggest that that is necessary.
As we have established, public body pension schemes and public service schemes operated by the devolved Administrations are required to make equivalent changes to their schemes as swiftly as possible. In the case of public body schemes, it has not been possible in all cases to complete the reform process according to the same timetable. As I said in a written ministerial statement on 16 July, reform is definitely on the cards for these organisations, and the Government aim to complete the work by 2018.
Speaking of special cases, the House should note that the Bill will also close the generous and outdated “great offices of state” pension schemes. They have outlived their usefulness in the modern world. I am glad that the Bill will close them to new office holders and will ensure that people in such roles are given the same pensions as Ministers. As I am sure Members are aware, the Prime Minister waived his entitlement to such a pension when he took office. The current Lord Chancellor is making arrangements to do likewise, as did his predecessor. Mr Speaker announced on the day that we published this Bill that he would retain the pension, but would take it only when he reached the age of 65 rather than drawing it as soon as he left office.
Lord Hutton’s fourth key test related to governance and transparency. The reformed schemes should be widely understood, both by scheme members and by taxpayers. People understand what is in their pay packet
29 Oct 2012 : Column 64
each month, and it should be just as easy to understand how their pension works. Under the Bill, the schemes will have robust and transparent management arrangements.
Clause 5 provides for each scheme to have a pension board which will work to ensure that the scheme is administered effectively and efficiently. There will be local pension boards in the case of the locally administered police, fire and local authority schemes. The boards will consist of member representatives, employer representatives and officials. They will operate in a similar way to boards of trustees, holding scheme administrators to account and providing scheme members and the public with more information about the pensions. The board members will be identified publicly, and their duties will be made clear to scheme members. I welcome the greater transparency that the Bill will bring to this area of public pension administration.
Clause 15 and schedule 4 provide for an extension of the role of the pensions regulator, who will improve and police the management and administration of all the new schemes. The regulator is independent of Government, and will be able to utilise its full range of powers to ensure that the public schemes are managed properly and to consistently high standards. Clauses 12 and 13 will ensure that all schemes collate and publish information to improve transparency and enable comparisons to be made between them.
Since the Bill was published, I have received a number of questions about its design. It establishes a common framework of delegated powers which enable schemes to be made in respect of the public service work forces. The common framework constrains the use of those powers on core parts of pension scheme design, such as the link between state pension age and normal pension age, the career average pension structure, and the abolition of the final salary link. Those core elements are fixed in this legislation in order to create fairness and an even degree of cost control across the work forces.
At the same time, the Bill allows flexibility when that is appropriate, enabling the secondary detail of the pension schemes to be adjusted in recognition of the differences between different areas of public service work. Members will know that the final scheme designs agreed vary significantly from work force to work force, properly reflecting differing priorities and concerns within the cost ceilings that I established. The approach builds on that taken in the Superannuation Act 1972, which set out a framework of delegated powers some 40 years ago.
Mark Durkan: The Chief Secretary has just mentioned the Superannuation Act 1972 again. Does he accept that section 2(3) of that Act specifically prohibits retrospective effects, whereas clause 3 of the Bill specifically allows them?
Danny Alexander:
There are some technical areas in which that may be necessary, but in practice the adjustments that we are making in the clause to which the hon. Gentleman has referred—and also in clause 11(7), which was mentioned earlier—allow the design of future benefits to change to ensure that costs are controlled, but do not allow changes to accrued benefits. The Bill, however, takes a more balanced approach than the Superannuation Act. The core elements for all public pensions are set
29 Oct 2012 : Column 65
out in the Bill. This serves as an important constraint on the delegated powers, to ensure our main objectives for reform are met.
I have also heard representations from Members of the devolved Administrations, but I think we have addressed that matter through earlier interventions. The Bill contains some minor areas that touch on devolved matters in Scotland and Wales, and I have written to all the devolved Finance Ministers to request that they seek legislative consent motions for the appropriate provisions. The Bill covers Northern Ireland, and the Minister of Finance and Personnel there—the hon. Member for East Antrim—has indicated that the Executive are considering a legislative consent motion to that effect. As to the progress of reform discussions in Scotland and Wales, the Government have made it clear that these Administrations have exactly the same flexibility in discussions with their trade unions as Whitehall Ministers have had, and within those parameters there is a great deal of flexibility.
Members who have followed this issue closely will know that the path to these reforms has been a long one, but it has also been a collaborative journey. The public debate on these pensions has been happening ever since this Government came to power more than two years ago. Some 18 months have passed since the Independent Public Service Pensions Commission published its final report, and discussions with trade unions and negotiators have taken place continuously since then. It is now time to take the final step by codifying the key elements of these reforms in legislation.
The framework set out in the Bill provides Parliament, public service employees and taxpayers with an assurance that the new schemes will be consistent, transparent and effectively managed. More than that, it requires new schemes to have common retirement ages, to provide benefits on a fairer basis and to include cost control mechanisms to protect members and other taxpayers from unforeseen changes in the cost of providing pensions.
The Government have set out a settlement that represents a good deal for public sector employees and a good deal for the taxpayer. It recognises the enormously valuable contribution that public sector workers make to our society and ensures a fair balance of contributions between public sector workers and other taxpayers. Taken together, these reforms will ensure that these pensions are sustainable for a generation. That is why the Bill proposes to create a high barrier for future changes to these elements of pension scheme designs. That means that any Government wishing to adjust them within the next 25 years would be required to jump a very high hurdle to do so.
In the UK’s long-term interests, we are facing up to tough decisions that Labour failed to address during its time in office, and we have done so while engaging with the unions every step of the way. We have made huge savings that were long overdue while protecting the entitlement of public service workers to a very good pension in retirement, giving public servants the confidence that future Governments will not need to make further reforms, and giving taxpayers confidence that never again will these costs be allowed to balloon out of control. These reforms therefore also help to repair the mess that Labour made of our public finances.
Fair, affordable, sustainable, good pensions that last: this is a new pension settlement for a generation, and I commend this Bill to the House.
29 Oct 2012 : Column 66
5.53 pm
Rachel Reeves (Leeds West) (Lab): With advances in medical science meaning people are living longer and a pressing need to ensure that our public finances are on a sustainable path, it is right that we put in place the long-term reforms we need to manage the cost of public service pensions. That is why when in government we took important steps to ensure public service pensions were sustainable, and it is why we regret that this Government have behaved in a way that has made reform harder and that has undermined confidence in occupational pensions for teachers, nurses, police officers and others who work in the public sector.
We remain of the view that the Government’s imposition of steep contribution increases across the board and a permanent switch in the uprating of pensions to a lower measure of inflation were unfair and unnecessarily provocative. However, we support in principle the Bill’s main measures.
David T. C. Davies (Monmouth) (Con): Do the hon. Lady’s comments mean that if she were the Minister, she would reverse that Government reform?
Rachel Reeves: We have said that we support the shift from the retail prices index to the consumer prices index for the period of this Parliament to reduce the deficit, but we do not support a permanent shift from RPI to CPI that will continue long after the deficit has been eliminated. I will discuss shortly some evidence from the Pensions Policy Institute and the Royal Statistical Society on the appropriate measure of inflation for uprating pensions.
Andrew Gwynne: My hon. Friend realises that the vast majority of public sector workers do not have massive gold-plated pensions. Instead they have very modest pensions, and they are concerned about their employment prospects as well as their contributions. Does my hon. Friend agree that those are the kinds of concerns that people out in the real world we speak to are talking about?
Rachel Reeves: My hon. Friend is entirely right. The average public sector pension in payment is under £6,000 a year, and it is considerably less for women who work in the public sector, so we are not talking about huge pensions in the vast majority of cases. Instead, we are talking about modest pensions to which people have contributed throughout their working lives.
We support in principle the main measures in the Bill, however, so we will not oppose it on Second Reading, but we will work in Committee to improve it, in order to ensure that it underpins, rather than undermines, the progress made in negotiations. We will seek to ensure it facilitates a smooth and stable transition to new scheme designs, entrenching good standards of governance, transparency, administration and consultation, thereby allowing those who give their working lives to serving the public to save for their retirement with confidence, while establishing a workable system for managing change and controlling costs to the taxpayer.
The Government and public service employees do need to find ways of adjusting to the welcome fact that people are living longer. In government, Labour had agreed and established a framework for negotiating
29 Oct 2012 : Column 67
reform and the “cap and share” mechanism to manage long-term costs, and it was always clear that this would mean increases in contributions and, as the population lives longer, a rise in retirement ages.
We have always said that the Hutton report provided a useful starting point for negotiations. Lord Hutton was right to suggest that career average schemes could be fairer than final salary schemes, and we think his proposal that public service pension ages should rise with the state pension age is right in principle. Lord Hutton also stressed the need to approach these issues in a careful and balanced way, however, with particular care for the affordability of any additional contributions for lower paid public service workers, and for avoiding fuelling a race to the bottom on pension provision. Reform needs to be fair to taxpayers and public service employees, as well as being genuinely sustainable for the long term, and that would be endangered by a search for quick cash savings or the playing of political games.
The vast majority of public service workers retire on very modest pensions. The average public service pension in payment is less than £6,000 a year, and even less for women. Tearing up decent public service pension schemes, or imposing punitive and unaffordable contribution increases, would be entirely counter-productive if that resulted in lower saving and inadequate retirement incomes.
Margot James (Stourbridge) (Con): Does the hon. Lady not accept that the Government have made great strides in protecting low-paid public sector workers in response to Lord Hutton’s report, so that anyone earning £15,000 or less will not have to make any increased contribution at all, and for those earning less than £21,000 the increase will be capped at 1.5%? Surely that is the evidence she requires?
Rachel Reeves: That is simply not true. There are 800,000 part-time public service workers earning less than £15,000 a year, 90% of them women, and their pension contributions will rise by, in some cases, 50% or more because their full-time equivalent salary takes them above the minimum salary threshold.
Instead of building on our reforms, the Government have ripped them up. They have made it much harder to make progress by seeking to impose, prior to any negotiations, a steep 3% rise in contributions and a permanent switch in the indexation of future pension income from RPI to CPI. The “cap and share” arrangements agreed and established by the last Labour Government provided the mechanism for delivering the adjustments as needed, but the current Government chose to undermine that agreement and instead announced a 3% increase in contributions in the October spending review without any discussion or negotiation with employers or employees.
Mr Nick Gibb (Bognor Regis and Littlehampton) (Con):
As the hon. Lady is discussing the previous Labour Government’s reforms, will she say whether she accepts any responsibility on behalf of the Labour party for the decimation of private sector defined-benefit pensions as a consequence of the disastrous decision in
29 Oct 2012 : Column 68
the 1997 Budget of the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) to end the repayment of dividend tax credits?
Rachel Reeves: If that was such a disastrous thing, why have this Government not reversed it or made any efforts to do something about it? They have no intention of doing so.
The contribution increases in this Bill were based on no assessment of the future funding needs of public sector pensions and were simply a tax on public service workers who were already facing a pay freeze and redundancy risks. The increases came long before Lord Hutton had published his final report. He warned that excessive increases could hit lower-paid workers hard and result in a counter-productive increase in opt-out rates. He has said that although it is for Ministers to decide by how much contributions should rise,
“there must also be a careful examination of the implications of any possible increase in opt out rates in these schemes as well.”
But the Government chose to plough on, not mindful of the increase in opt-out rates and with little regard for the consequences.
The Government promised that lower-paid workers would be protected from excessive and unaffordable increases, but the reality is that as many as 800,000 part- time workers earning less than £15,000 a year are already paying higher contributions. As I said, for many of them the contributions are 50% higher, because their full-time equivalent salary takes them over the minimum threshold. That approach had nothing to do with long-term reform and everything to do with a cash grab by the Treasury, which made it much harder to deliver progress on the real reform we needed, because the Government acted arbitrarily before Lord Hutton reported and lost the trust of public service workers.
In addition to imposing that hike in contributions, the Government used their June 2010 Budget unilaterally to change the indexation of pensions from RPI to CPI. On average and over time, public service workers will be 11% worse off in retirement as a result. According to analysis published last week by the Pensions Policy Institute, this is a bigger hit than the extra contributions, the raised retirement age and all the other changes to pensions put together. Independent experts, such as the Royal Statistical Society, have emphasised that CPI fails to reflect the spending patterns of pensioners and the rising costs they face. As pensioners worry about the hikes in energy bills this winter and expected steep increases in food prices, we should be particularly mindful of the challenges that retired people face in meeting ever-rising costs.
Again, those changes were imposed on public service workers without any negotiation or discussion. Lord Hutton stated:
“If these reforms have any chance of succeeding then people need to know that they are being treated fairly. We have seen…the anger that has been triggered on the state pension when older women feel the finishing line is being put back at the last minute with very little time to adjust. So there should be full and proper consultation and discussion with the trades unions. That is how we do things in Britain—the public would take a very dim view of any government that fails to honour this basic requirement. We must try and avoid the confrontation and division that marked previous decades and must not turn the clock back.”
29 Oct 2012 : Column 69
I regret to say that the Government did not follow that advice. Sometimes it seems that they are turning the clock back to the conflicts and divisions of the 1980s, and perhaps that was exactly their objective. Their aggressive and provocative approach to these serious and sensitive issues resulted in months of stalemated negotiations and several days of strike action, which resulted in closed schools, cancelled operations, and disrupted lives for families and businesses across the country.
Richard Fuller: There are times when the hon. Lady seems to be making a coherent argument and then she goes back to using rhetoric. She said that the change from RPI to CPI is the most significant one. If she seeks to make amendments on that issue and she does not want to make savings on the basis of a change from RPI to CPI, will she set out where she would make the savings in order to make the overall numbers add up as they are at the moment?
Rachel Reeves: I am sure that the hon. Gentleman has read the Bill. The RPI to CPI change was imposed before it, so it is not contained in the Bill and we will not be able to make any amendments in terms of RPI and CPI when discussing it. The point is that the Government acted arbitrarily before Lord Hutton reported, thus making it harder to deliver the long-term reform to public service pensions that we need.
Labour Members think that those strikes could and should have been avoided last year, and that it is a matter of deep regret that this Government have lost the trust and damaged the morale of millions of public service workers, whose engagement and commitment is vital at a time when they are being asked to accept prolonged pay restraint while delivering continued improvement in the quality and efficiency of public services with fewer resources.
Let me turn from the Government’s mishandling of the issue to the specific provisions in this Bill. The Bill is designed to put the new schemes on a clear and consistent legal footing, with clear lines of accountability to scheme members, public service employers and taxpayers. That, in itself, is a worthwhile objective. I have already emphasised that our big disagreements with the Government’s approach to public service pensions lie elsewhere, so we will not oppose the Bill on Second Reading.
However, we have a number of concerns about the Bill that we hope to address in Committee. It is an ill-prepared and poorly drafted Bill containing a number of mistakes, including giving the wrong dates for the transitions to new schemes. The Bill fails to deliver on the commitments and assurances given by this Government to underpin the provision of decent pension schemes that allow public service workers to save for their retirement with confidence. In short, as we have come to expect from this Government, it is a shambles of a Bill that has not been properly thought through, risks creating more problems than it solves and fails to deliver on the promises that Ministers have made.
First, we think it is right that pension ages rise in line with longevity, but it is essential that that is done carefully and fairly, with due notice given to people whose retirement plans may need to change and due consideration given to the impact of working longer on people in front-line or particularly strenuous occupations.
29 Oct 2012 : Column 70
Derek Twigg (Halton) (Lab): My hon. Friend makes an important point. Many of my constituents contact me about the impact on pensioners of the wholesale changes that the Government are proposing and have made in respect of this notice period and the fact that people are having to change their plans. That has caused great distress and worry to many of my constituents. I am pleased that she is addressing the point, because the Government seem to be ignoring it.
Rachel Reeves: I thank my hon. Friend for his intervention. We argued exactly the same point when the Government arbitrarily increased the state pension age for women in their late 50s with just six years’ notice given. When Lord Turner carried out the review of state pensions for the previous Government, he recommended a 15-year notice period be given, and the Pensions Policy Institute recommends a 10-year notice period. Such notice needs to be given and it is not enshrined in this Bill.
Andrew Gwynne: Does my hon. Friend recognise that one of the reasons why that notice period is required is that as the retirement age rises careers may also have to change to ensure that employees are not forced into ill health and are not forced to do work that is unsuitable for their age?
Rachel Reeves: I thank my hon. Friend for that intervention. We also believe that this Bill should not pre-empt or cut across ongoing discussions—this builds on the point that he raised, as did my right hon. Friend the Member for Rother Valley (Mr Barron)—between the Department of Health, NHS employers and NHS workers about the implications of working longer for some staff groups, especially those, such as paramedics, in physically demanding roles.
We think that the Bill should reflect Lord Hutton’s recommendations that the link between public service pension ages and the state pension age should be kept under review and that this should be conducted by a properly independent body, with public service employees and employers represented and consulted. The Chief Secretary to the Treasury said in his speech that that will happen, but it is not guaranteed in the Bill—indeed, it is unclear whether it is even compatible with the Bill. These are all issues that we will be raising in Committee to get the commitments that public service workers deserve and thought they had been given during the negotiations behind the Bill. These are also issues that we will have in mind as we look to any future increases in the state pension age itself.
For our finances to be sustainable, and for decent pensions to be affordable, it is right that retirement ages rise with longevity. However, as Malcolm Wicks, the late Member for Croydon North reminded us in some of his most recent work, many people doing manual jobs started work at 16 or 18, with some doing so even earlier, and find it harder to continue work into their late 60s. We should be mindful of people’s capacity to work later and later, especially if support is not in place for them in the workplace.
Secondly, there are real worries that the Bill fails to take due account of the special characteristics of the local government pension scheme. Members will know that it is a fully funded scheme administered by local
29 Oct 2012 : Column 71
authorities and we should welcome the hard work of local councils and trade unions, who have made very valuable progress in negotiations on a mutually agreeable agenda for reform. The Bill threatens to unravel the agreements that have been reached and destabilise financially the local government pension funds by forcing a disruptive and potentially disastrous closure of existing schemes instead of facilitating a smooth transition to the new scheme design. That extension of Treasury interference into aspects of scheme valuation and design could prevent local authorities from delivering on the deal they have agreed with their work force. Indeed, the view of the pensions manager at the Chartered Institute of Public Finance and Accountancy is that the relevant provisions in the Bill represent
“a major shift in the governance of local authority pensions and”
“questions about future local democratic accountability for those pension funds.”
Again, we expect those concerns to be addressed in Committee.
Thirdly, on the question of good governance, the Bill must underpin and not undermine high standards of scheme governance. As Lord Hutton stated in his final report,
“there is a powerful case for…much stronger governance of all the public service pension schemes. This should keep government, taxpayers and scheme members better informed about the financial health of these schemes. There should be minimum standards set for scheme administration. There is also a proper and legitimate role for representatives of the workforce to be formally involved in these new governance arrangements.”
The Bill fails to include key recommendations from Lord Hutton’s report, such as the inclusion of member-nominated and independent members on pension boards; the establishment of pension policy groups to consider major changes to scheme rules; the need to ensure that pension boards are responsible for the oversight of financial management and, in the case of funded schemes such as the local government pension scheme, for investment management; and the commissioning of a review into how standards of administration in public service pension schemes can be improved. Those measures would improve the efficiency and cost-effectiveness of scheme administration and would ensure that public service pension schemes matched best practice in the private sector.
Finally, we must ensure that the Bill adequately reflects and reinforces the progress made in negotiations. We should give public service workers a system they can trust and pensions that they can save towards with confidence, ensuring protection against retrospective or arbitrary detrimental changes. We also have concerns in this regard, which some hon. Members have already mentioned, and we will seek to address them in Committee. For one thing, the Bill subjects many aspects of public service pension provision to unilateral Treasury control. Although it is right that mechanisms should be in place to ensure that costs to taxpayers are contained, public service employees also have a right to know that critical changes will be consulted on and that their pension savings will not be vulnerable to arbitrary interference and opportunistic cash raids.
Furthermore, Lord Hutton has stated that
“there must…be full protection of accrued rights”,
29 Oct 2012 : Column 72
but the Bill does not rule out retrospective changes that reduce benefits already accrued, going against the fundamental principle that pension benefits accrued are pay deferred and must therefore be honoured. The Government have reiterated their commitment to maintaining defined benefits in the public sector, and the Chief Secretary reaffirmed that to the House last year. He said, as he has on a number of other occasions, that his commitment was that
“public sector schemes will remain as defined benefit schemes, with a guaranteed amount provided in retirement”.—[Official Report, 2 November 2011; Vol. 534, c. 927.]
Clause 7, however, provides for the creation of new schemes that are
“defined benefits…defined contributions…or…a scheme of any other description.”
That should not be a means to drive a coach and horses through the commitments the Government have given and allow another round in the race to the bottom on pension provision.
In addition, the Government have made much of their promise of
“no more reform for 25 years”.
In his foreword to the Treasury’s document on new scheme designs, published last December, the Chief Secretary wrote that
“we need a long term solution that will last a generation”.
Clause 20 specifies “protected elements” of scheme design that cannot be altered for the next 25 years without clearing a “high hurdle” of comprehensive consultation and a report to parliament.
We think it is right that public service workers should be given an assurance that their pension savings will not be vulnerable to further arbitrary and unfair changes without adequate scrutiny and debate, but the Bill seems to be riddled with loopholes, excluding a number of important scheme features from the list of “protected elements” and stating that the “high hurdle” can be bypassed in order to meet a cost cap that is in turn set by the Treasury with no such requirement for consultation and report. Furthermore, it was a critical part of the agreements reached with employee representatives that protection should be provided to staff transferred to alternative providers as a result of public service outsourcing —the so-called fair deal policy. The Chief Secretary told the House last year that
“we have agreed to retain the fair deal provision and extend access for transferring staff. The new pensions will be substantially more affordable to alternative providers, and it is right that we offer workers continued access to them.”—[Official Report, 20 December 2011; Vol. 537, c. 1203.]
Yet there is no guarantee in the Bill that public service workers transferred to new employers will be able to keep their public service pensions. We will seek to address all those issues in Committee to improve the Bill and the protections granted to public service workers.
In conclusion, we think public service workers with understandable fears for their financial futures deserve better than being treated as pawns in this Government’s political games, with the consequence that it has been harder to reach agreement on reasonable reforms that control costs to the taxpayer. Indeed, perhaps the best case for the Bill is that it should ensure that never again can an opportunistic Government create unnecessary conflict and disruption by imposing unfair and arbitrary changes without adequate consultation, scrutiny and accountability. Let us ensure that it fulfils that objective.
29 Oct 2012 : Column 73
Finally, let us remember that the real pensions crisis is not in the public sector but in the private sector. It is right that we should ensure public service pensions are sustainable and affordable for the taxpayer, but we should not allow that to distract us from the unacceptable inadequacy of pension provision in the private sector. Too often, it has sounded as though the Government’s answer to disparities in pension provision across the public and private sectors is to level down, not level up. Indeed, we have seen more than a million lower paid workers excluded from automatic enrolment when we should be ensuring that the National Employment Savings Trust can deliver low-cost, high-quality pensions to all who could benefit.
Andrea Leadsom (South Northamptonshire) (Con): Does the hon. Lady accept that in the 10 years since the previous Prime Minister decided to get rid of advance corporation tax relief on pensions, that decision has destroyed £100 billion of private sector pension savings? Does she accept that that was the fault of her Government?
Rachel Reeves: I look forward to the hon. Lady’s private Member’s Bill to restore that relief. The real crisis is that some people are not saving at all for their retirement and are not in any type of occupational scheme.
Rachel Reeves: I shall take another intervention so that we can hear about the hon. Lady’s private Member’s Bill.
Andrea Leadsom: How on earth does the hon. Lady think that anyone can put right £100 billion wiped off the value of private sector pensions? How does she expect anybody to right that wrong today? It has been done; it is too late.
Rachel Reeves: It could be reversed so that dividends were not treated in such a way in the future, but the Government have no intention of doing that. I do not think the hon. Lady understands the real crisis: some people are not saving at all for their pensions and have no occupational pension to save into, and the 20% of people who earn less than a living wage do not feel that they can put money aside every month. That is the real crisis we face and the Government excluded 1 million people from automatic enrolment and have done nothing to tackle the excessive fees and charges automatic enrolment schemes can charge. The Government should be focusing on that challenge to bring up the quality of pension provision for everybody so that nobody risks retiring into poverty and having to rely on means-tested benefits.
Improving governance and reducing costs across private pension schemes while cracking down on the excessive fees and charges that erode pension income should be the Government’s priority, but it is not. Instead, to address disparities they want to level down the pensions enjoyed by those who work in the public sector.
Kelvin Hopkins (Luton North) (Lab): My hon. Friend is right to draw attention to the pathetic performance of private sector schemes. Is not the answer a compulsory state earnings-related pension scheme for everyone in the private sector?
29 Oct 2012 : Column 74
Rachel Reeves: Automatic enrolment could bring into saving for retirement 10 million people who are currently not saving. They would not just be contributing their own money, but getting a contribution from their employer that they have never had before. That scheme started in October this year and by October 2017 it will be fully rolled out.
The pensions Minister is now in his place. It is disappointing that people on low pay and in part-time work are excluded from that scheme, and that the waiting period was increased to three months, which means that some people who could have benefited from it, particularly those who change jobs regularly, will be excluded. The Government need to do more to bring people into saving for occupational pension schemes through automatic enrolment, and they need to ensure that excessive fees and charges do not erode that pension income. We urged the Government to amend the Pensions Act 2011 to cap those fees and charges, but the Minister did not take those proposals on board.
Lord Hutton argued that public service pensions should remain a gold standard, so let us make sure that the Bill delivers on that objective and then seek to spread that standard across the wider economy so that everyone can benefit from good quality pension schemes. Instead of this Government’s divisive political games, pitting public sector against private sector, union member against taxpayer, we need to work together—Government, businesses, employees and civil society—reforming our economic institutions to give everyone a stake and a fair share in prosperity, building the one-nation economy that our nation needs to succeed.
6.21 pm
Mr Nick Gibb (Bognor Regis and Littlehampton) (Con): I am pleased to follow the hon. Member for Leeds West (Rachel Reeves). She would have been better to avoid the issue of private sector pension schemes because of the enormous damage that was done by the Labour Government in those early years, in the July 1997 Budget. As my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said, they took £100 billion out of private sector pension funds, which at that time had an asset value of £650 billion. It was the envy of the world, and £100 billion was a very large proportion of that sum.
I welcome the hon. Lady’s acceptance of this very important Bill and the fact that the Labour Opposition will support it in the Lobby. Despite her assertion, my view is that the negotiations were handled extremely well by the Treasury, the Cabinet Office and the individual Departments involved. There was engagement and a willingness to compromise, but there was also a firm approach to ensure fairness between the taxpayer and the public sector employee.
I support the Bill not just because of its importance in tackling this country’s historically high budget deficit, but because of its vital importance to ensuring that we have high-quality, well-rewarded public sector employees, in the teaching profession in particular. We need a well-rewarded profession that continues to enjoy a defined benefit pension scheme on a sustainable basis when such schemes are increasingly rare in other sectors of the economy. As my hon. Friend the Member for Rochford and Southend East (James Duddridge) said, even without the budget deficit, these reforms are necessary to tackle increased costs and life expectancy.
29 Oct 2012 : Column 75
The Government’s education reforms are built on trusting the teaching profession, ensuring that we have the best people coming into teaching, and raising the status of the profession. Indeed, the schools White Paper was called “The Importance of Teaching”. In the opening chapters it made the point:
“The evidence from around the world shows us that the most important factor in determining the effectiveness of a school system is the quality of its teachers. The best education systems draw their teachers from the most academically able”.
Countries around the world that have the best education systems, such as Singapore and Finland, recruit their teachers from the top third of their graduates, and South Korea recruits from the top 5%, but Singapore and South Korea pay their teachers more than any other country in the world relative to average earnings in their own country. Finland pays its teachers at about the OECD average.
In its 2007 report, “How the world’s best-performing school systems come out on top”, McKinsey made the important point that the quality of an education system cannot exceed the quality of its teachers. Its 2010 report, “Closing the talent gap: attracting and retaining top third graduates to a career in teaching”, looked at precisely how Singapore, Finland and South Korea manage to recruit graduates from the top third. It concluded that the key to recruiting the best graduates is attractive starting salaries and attractive top salaries.
A report that examined the US education system concluded that a starting salary of $65,000 and a top salary of $150,000 were needed. In this country starting salaries outside London are about £21,600 and £27,000 in London. Top salaries for teachers are about £105,000 outside London and £112,000 in London. Although the McKinsey report was about the United States and looked at the US employment market, it is nevertheless fair to draw the conclusion that compensation packages are an important element in determining the calibre of graduates recruited into teaching, and pensions are an important part of that remuneration package. Defined benefit schemes are particularly attractive, and in my view they are an important part of that package, which is why the Bill is so important.
In his final report Lord Hutton stated:
“Given the current design of public service pension schemes, the general public cannot be sure that schemes will remain sustainable in the future.”
The issue of sustainability is therefore critical. Is a scheme sustainable in terms of its costs, given increased life expectancy? As Lord Hutton pointed out,
“In 1841, someone who reached the age of 60 might expect to live a further 14 years on average, but most people did not live to this age. By the early 1970s…the life expectancy of a 60 year old had increased to about 18 years and this has now risen to around 28 years. In addition, many more people can now expect to reach 60.”
Public service pension costs have been rising significantly over recent years—by a third in the past decade to £32 billion. Expenditure on teachers’ pensions is projected to double from £5 billion in 2005-06 to almost £10 billion in 2015-16. As Hutton pointed out,
“between 1999-2000 and 2009-10 the amount of benefits paid from the five largest public service pension schemes increased by 32 per cent. This increase in costs was mainly driven by an increase in the number of pensioners, a result of the expansion of
29 Oct 2012 : Column 76
the public service workforce over the last four decades, longer life expectancy and the extension of pension rights for early leavers and women.”
Hutton also said that it was important to look at the pension position as a whole, comparing the situation in the public and private sectors. One of the over-arching principles was to achieve fairness between taxpayers and public sector employees. The divergence, he said, between the public and private sectors is of concern. That does not mean, as the hon. Member for Leeds West asserted, that public service pensions should follow the trend in the private sector. Hutton said:
“This downward drift in pension provision in the private sector does not however provide sufficient support or justification in my view for the argument that pensions in the public sector must therefore automatically follow the same course. I regard this as a counsel of despair. In making clear I believe there is a case for further reform I have therefore rejected a race to the bottom as the only answer, and hope that reformed public service pensions can be seen as once again providing a benchmark for the private sector to aim towards.”
It is worth pausing a moment to look at how extensive this downward drift in private sector pension provision was, and its causes. According to the 2010 occupational pension scheme survey by the Office for National Statistics, the peak provision of occupational pensions was in the mid-1960s, when there more than 12 million active members, of whom 8 million were in the private sector and 4 million were in the state sector. By the mid-1990s active membership had fallen to about 11 million, but 90% of that 11 million continued to have defined benefit schemes. This means that more than 5.5 million private sector employees of that time were in some form of final salary or defined benefit scheme. By 2010 membership had fallen to 2.1 million and, as Hutton points out, only about 1 million of those members were in schemes that were still open to new members and an increasing number of schemes were closing to new accruals for existing members.
The fall in membership was due in part to the private sector making a realistic assessment of the costs of increased life expectancy. There had been a modest trend away from defined benefit schemes and towards defined contribution schemes in recent years, but that accelerated after 1997, in my view because of the decision taken by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) in his first Budget to end the repayment of dividend tax credits to pension funds and other tax-free funds, which took about £3.5 billion a year from pension funds. At the time, Britain’s private sector pensions were the envy of the world, with assets of more than £650 billion.
Many people, including in the pensions industry, said that that policy would have a very damaging effect on pension provision. Treasury civil servants shared those misgivings. In 2007 the Treasury was forced to release a number of internal papers from 1997 assessing the likely impact of the policy to end the repayment of dividend tax credits. A Treasury paper, dated 15 May 1997 and headed “Paper Four: Pension Schemes and Insurers”, pointed out that 90% of employees in occupational pension schemes had defined benefits but warned:
“In recent years we have seen a small but steady shift towards defined contribution schemes.”
The Treasury paper alerted Ministers to the risks arising from ending the repayment of dividend tax credits, stating:
29 Oct 2012 : Column 77
“The present shift towards defined contribution schemes might accelerate…One of the claimed merits of defined contributions schemes is that they give employers more control over costs since the investment risk is transferred away from employers and onto employees. This factor would become ever more relevant with the proposed tax credit change.”
Despite that clear warning, the right hon. Gentleman pressed ahead with the policy, and the predictions made by his civil servants have come to fruition. That is why we have the problems we face today and why we are debating the Bill.
Mr Iain Wright: The hon. Gentleman mentioned the 1997 Budget. First, what does he think was the impact of the then Chancellor’s decision to cut corporation tax by 2p in the pound with the aim of encouraging more long-term investment in pension funds? Secondly, what impact does he think the long payment holidays for employers have had on defined contribution and defined benefit schemes?
Mr Gibb: The whole basis of the decision was the argument that the stock market was rising and so the tax cut would lead to more profits, more dividends and further rises in the stock market. Unfortunately, after 2000 the stock market started to fall and the whole basis of the argument fell apart, and therein lies the problem. Those pension holidays were temporary because of the over-exuberant stock market. Indeed, the Treasury papers from 1997, released under duress in 2007, made the point to Ministers that there was a danger that the stock market was overvalued.
As a consequence, the public sector faced a situation in which the private sector was moving away wholesale from final salary and defined benefit schemes while it was increasingly becoming the exclusive preserve of such schemes. The issue of fairness thus became paramount, particularly as the cost of those schemes was rising so quickly. Although Hutton rejected the notion that public sector pensions were gold-plated, he did conclude that longer-term structural reform was needed because
“current schemes had proved unable to respond flexibly to changes in working lives and longevity.”
Therefore, the only way to ensure that teachers and other public sector employees continued to enjoy high-quality defined benefit pensions was to engage in structural reform.
The final arrangements represent a very good deal. They now link the normal pension age to the state pension age in order to deal with longevity issues. No one within 10 years of retirement age will be affected by the changes and there is a tapering arrangement for those within 13 years of retirement. Although final salary schemes will be replaced by career average schemes from April 2015, all the accrued rights to that date will be maintained and the final salary will be the final salary on retirement, not the final salary in April 2015, as my right hon. Friend the Chief Secretary confirmed again today. Career average is still a defined benefit scheme, and it is fairer. Its generosity, of course, depends on the actual accrual rate. Currently the teachers’ pension final salary accrual rate is one 60th, and that will become more generous under the new scheme, with an accrual rate of one 57th. The salary that determines the career average will be indexed by CPI plus 1.6%, as far as teachers are concerned, although that varies in the different schemes.
29 Oct 2012 : Column 78
These arrangements have been accepted by the Association of School and College Leaders, the Association of Teachers and Lecturers union and the National Association of Head Teachers, which have said that they are planning no further action over pension reform. These arrangements, and the Bill that will implement them, will ensure that public sector employees, including teachers, can continue to benefit from a defined benefit pension scheme that is sustainable in the long term and that will be supported by the public. That, along with other education reforms, will help to ensure the teachers are well rewarded and that we will have a teaching profession that continues to see its status rise and, with it, standards in our state schools. I fully support the Bill and, if there is a Division tonight, look forward to voting for its Second Reading.
6.36 pm
Katy Clark (North Ayrshire and Arran) (Lab): The Bill and, perhaps more significantly, the delegated legislation that will follow it, will undoubtedly have far-reaching consequences for all those who receive public sector pensions in this country, as the debate has clearly highlighted. Analysis from the Pensions Policy Institute suggests that the proposed changes to the NHS, local government, teachers and civil service pension schemes will reduce the average value of the benefit offered across all schemes by more than a third compared with the value of the schemes in place before the coalition Government came forward with these proposals and the other steps they have taken since coming to power. The Minister has already spoken about a 40% cut in costs over time, so I assume that he will accept that figure.
We find it shocking that while there have been pay cuts of 40% in Greece as its austerity programme has been implemented, pensions in the UK are facing equivalent cuts yet most people are unaware that that is happening, perhaps in part because many people find pensions complex and difficult to understand. Of course, pensions are as much a part of our employment package as other benefits, such as pay. Indeed, many argue that pensions are in fact deferred pay, so in effect we are discussing significant cuts in the terms and conditions of all public sector workers in this country, which will, of course, have all sorts of ramifications for the private sector.
According to the Pensions Policy Institute’s analysis, following the coalition’s proposed changes, the scheme value across the four largest public sector pension schemes will reduce on average from 23% of a scheme member’s salary to 15% of their salary, with the net effect that the pension will form a much smaller part of an employment package. I argue that we should not support that. I have listened with interest to the debate on private sector pensions—I hope that we have can have a much fuller debate about it on another occasion—but I think that the message that should be coming from the House is that we want the pension to form a much bigger part of a person’s employment package. We should put in place a framework whereby the individual is required to save, as is the employer, and the Government have a role to play by ensuring that the policy framework is in place to enable that to happen.
My hon. Friend the shadow Minister said that the change in the indexation for public sector pensions from RPI to CPI is wiping 11% off the value of pensions
29 Oct 2012 : Column 79
in the public sector. In effect, that means that the pension of each public sector worker will be 11% lower in each year of their retirement. We have already heard about the implications of people opting out if these proposals are implemented, but we must also consider the implications for the public purse if people have lower incomes in retirement and therefore need to look to the state for support through welfare benefits. Half of all women workers who have a pension of less than £4,000 will be worse off, and the TUC estimates that 60% of all public sector part-time workers earning less than £15,000 a year will have to pay higher contributions. We need to look at the wider implications of the proposal.
In previous debates in the Chamber on public sector pensions, many figures have been cited to show the low salaries that most people who receive such pensions receive. As we know, public sector pensions are far from gold-plated. The Hutton report said that the average pension paid to scheme members was about £7,800 per year, with the median payment being £5,600 per year, while half of all women public sector pensioners get less than £4,000 per year. In reality, however, many people in receipt of public sector pensions receive smaller sums. The proposals suggest that those people should be required to pay greater pension contributions, to work longer, and to receive a worse pension at the end of the process.
Tribute has already been paid in this debate to the former right hon. Member for Croydon North, Malcolm Wicks. It is incredibly sad that he is not here to explain, in his most articulate way, why it is not the case that everyone should be expected to work longer, especially those who have worked in heavy manual jobs from an early age. Perhaps such people should have a lower retirement age, with the retirement system and their pension schemes taking that into account. I remember chairing a sitting of the Committee that considered the Bill that became the Pensions Act 2011 during which Malcolm Wicks entertainingly and powerfully highlighted his passion for this issue as he strongly led a rebel Labour effort to make the case that we need to look seriously at how we deal with those who carry out manual tasks.
Richard Fuller: Does the hon. Lady share my particular concern about firefighters whose retirement age will be extended? It is argued that fire prevention roles requiring less manual work will be made available to them, but does she agree that that will probably not prove to be the case for the vast majority of firefighters as they reach their later retirement age?
Katy Clark: I am grateful to the hon. Gentleman for that intervention. I referred earlier to clause 9(2), which clearly states that firefighters will be required to work until the age of 60 before receiving their pension, whereas at the moment they have to work only until they are 55. My understanding of the fire service is that jobs requiring lesser physical skills would not be available, so I asked the Minister what he expected people to do. Labour Members fear that they would retire early, but would then have to get other employment, such as a part-time job in Tesco, or to sign on. That is not an adequate way to deal with people who do such jobs over a lengthy period.
29 Oct 2012 : Column 80
Of course, it is not only firefighters who will be affected. Many people in the public sector work in very physical jobs, whether they are the paramedics in our ambulances or nurses—particularly grade A nurses. Those who carry out manually demanding tasks would not be able to work until they were 68, but other jobs might not be available to them. We need to think this through very carefully. Having listened to the Minister, I am worried that the Bill has very little flexibility. We need to be able to think far more flexibly about working ages. We must recognise that while it may be appropriate for some people to work for longer—indeed, many people might want to work until they are much older than has traditionally been the case—for others that is simply not appropriate.
The Bill will have significant implications for the various public sector schemes in Scotland, where there has been considerable debate about its impact. Of course, the civil service schemes are a matter for this Parliament, but the local government, national health service and police pension schemes, as well as those of teachers and firefighters, are devolved. When Westminster legislates on matters that are devolved to Scotland, it usually needs to obtain a legislative consent motion from the Scottish Parliament. I appreciate that the Scottish National party spokesperson, the hon. Member for Banff and Buchan (Dr Whiteford), is in the Chamber, so she might address this later, but I am told that Scottish officials have advised Ministers in the Scottish Government that such a motion is not required, although the view of the trade unions in Scotland, on the basis of legal advice that they have obtained, is that a motion would be necessary. I was interested to hear what the Minister said about that, because there are very significant implications for Scotland. The negotiations that have taken place there are not identical to those that have been held with Ministers down here. I hope that the Scottish Government will wish to ensure that they are able to enact measures on the basis of whatever agreements are made with the unions in Scotland.
I believe that this is a devastating Bill, not only for pensioners in the public sector, but for those in the private sector. It sends all the wrong messages about what we should be seeking for pensions. We need to put in place frameworks through which we collectively save far more than we have in the past to ensure that we have provision in retirement. That does mean that individuals who can afford to should be paying more into their pension schemes, but it also means that the employer should be paying more and that the state should be playing a greater role in ensuring that that happens. In 2007 and 2008, the then Labour Government implemented reforms to the four largest public sector schemes that took account of the changing demographics that we faced. My view, which is shared by most people who have looked seriously at this, is that those schemes are viable and that sufficient funds are available to ensure that pensions are paid out.
Mike Freer (Finchley and Golders Green) (Con): Will the hon. Lady give way?
Katy Clark: I was about to conclude, but I am happy to take an intervention.
Mike Freer:
In actual fact, the Audit Commission report on the local government pension scheme, which
29 Oct 2012 : Column 81
is by far the largest scheme, says that it can meet only 75% of its future liabilities. Far from being sustainable, it has a shortfall.
Katy Clark: My understanding is that there will be a review of the scheme. Having spoken to some of those who are directly involved in the negotiations on the scheme, I am firmly of the view that we need to look carefully at those figures. On the basis of the financial information that we have, which is, of course, dated, because there has not been an up-to-date review, the reality is that the scheme is viable and there is no reason to believe that that will change.
Andrew Gwynne: May I advise my hon. Friend of a successful local government pension scheme, namely the Greater Manchester pension scheme, which is administered by my own local authority—Tameside metropolitan borough council—and is fully funded? Is it not the case that best practice therefore exists, and should not other local government pension schemes utilise it?
Katy Clark: I am interested in the scheme to which my hon. Friend refers, and I might get more information about it from him later.
John McDonnell (Hayes and Harlington) (Lab): It is worth putting on record that under the deal negotiated by the Labour Government, if there were increased costs with regards to longevity, there would be a cap on the employer’s contribution and the additional cost would be borne by the contributors—the scheme’s participants. The issue of longevity was therefore dealt with by agreement with the unions.
Katy Clark: I listened carefully to the hon. Member for Finchley and Golders Green (Mike Freer) and I can say to him that while there needs to be a review of the local government scheme, I understand that the current position is that it is perfectly viable. This proposal has been made because Government Members take the view that public sector schemes are too generous and form too large a part of the employment package in the public sector. We actually need to use the public sector schemes as a model to ensure that pensions are a much greater part of everybody’s employment package. If we do not do so, we will simply end up paying in other ways, whether that is because people opt out, or because people will rely on the state as they are living in such poor circumstances. We should have a debate about how we can move towards a situation whereby, collectively, we save more for retirement, so that people have decent pensions that they can afford to live on and do not need to rely on the state in other ways.