Public Service Pensions Bill

Memorandum submitted by The British Medical Association ( BMA ) (PSP 01)

The British Medical Association (BMA) is an independent trade union and voluntary professional association which represents doctors from all branches of medicine all over the UK. It has a total membership of over 150,000.

Executive summary

· The BMA has grave concerns about the UK Government’s approach to public sector pension reform, and particularly the unfair way in which the NHS Pension Scheme is being treated. These concerns have been deepened by publication of the Public Service Pensions Bill. The BMA seeks urgent changes to the Bill to avoid the legislation entrenching disparities across and within the different public sector schemes .

· Amendments to the Bill are necessary to curtail new sweeping powers that would allow successive UK Governments to make unilateral and retrospective changes to accrued benefits in public sector pension schemes, utterly undermining the ‘settlement for a generation.’ [1]

· The UK Government must give assurances that the arrangements for schemes will be robust and that the proposed arrangements will meet the requirements for effective governance of the NHS Pension Scheme with continued input from staff representatives.

· The UK Government must provide a firm commitment that pensions in payment will not be reduced and that the method of revaluation should be consulted on and subject to the affirmative procedure.

· The Treasury’s control over valuations and over the employer cost cap must be tempered with requirements to consult.

· The UK Government should commit to adopting a fairer approach in the new Career Average Revalued Earnings (CARE) scheme system by ensuring that subsequent regulations prescribe a much flatter structure for the NHS scheme contribution.

· Amendments to the Bill are needed to allow the Working Longer Review to report before there is a final legislative change to tie the normal pension age to the state pension age.

Introduction

1. The BMA has been deeply concerned about the UK Government’s approach to public sector pension reform from the outset, and particularly the unfair way in which the NHS Pension Scheme is being treated. [2] These concerns have been deepened by publication of the Public Service Pensions Bill, which grant s wide and retrospective powers to the UK Government for further radical reform, despite its promise that the latest changes would be guaranteed for 25 years . [3]

2. While we believe the aim of creating a common legislative framework for all public sector pensions is sensible [4] , this Bill actually goes much further. It also serves to highlight the disparities across and within the different schemes and to some extent, embed them for the future. [5]

3. The BMA accepts that the NHS Pension Scheme must offer a fair deal for taxpayers as well as to staff. At a time when many NHS employees are in the third year of a pay freeze and dealing with the combined effects of major funding pressures and structural reforms, t he BMA strongly believes that there is no justification for the scale of the planned changes to public sector pensions or the speed at which they are to be implemented.

Inappropriate delegation of legislative powers

4. The BMA has received expert advice from Leading Counsel and law firm Manches LLP on the constitutional impact of the proposed ‘Henry VIII’ clause in the Bill (Clause 3). This clause grants breathtakingly wide and retrospective powers to the UK Government for further radical public sector pension changes adversely affecting public sector employees’ pensions. This undermines the Government’s claim that this would be a ‘settlement for a generation’. [6] It is generally accepted that public sector pensions represent an element of deferred public sector pay.

5. The BMA is calling for the removal of the Henry VIII clause – this is an extreme example of a Henry VIII clause that gives successive UK Governments the power to make unilateral and retrospective changes to accrued benefits in public sector pension schemes, changing retirement ages etc without effective parliamentary scrutiny.

6. Henry VIII clauses have been roundly criticised by select committees in Parliament as being a ‘constitutional oddity’ [7] that should be ‘consigned to the dustbin of history’ [8] and that such powers must be ‘clearly limited, exercisable only for specific purposes, and subject to adequate parliamentary scrutiny. [9]

7. The proposed safeguards in Clause 21 are insufficient. Although there is a provision for any regulations to go through the affirmative procedure, this is wholly inadequate. While any regulation would be debated, and could, theoretically, be rejected, they could not be amended. The last time that a piece of secondary legislation was rejected was in 1969. This ‘safeguard’ is well known to be little more than a rubber-stamping exercise.

8. The Henry VIII clause runs directly contrary to the UK Government’s pensions guarantee for ‘no more reform for at least 25 years [10] i.e. safeguarding the current generation of public sector workers and that ‘the Bill protects the benefits already earned by members of existing public service pension schemes’. [11] Instead of protecting accrued rights and making a once in a working lifetime change to public service pensions, the Bill allows for those very rights to be undermined, throwing public service workers into uncertainty surrounding their future financial security, even those who will shortly reach retirement age.

9. The powers granted to the UK Government go beyond the stated purpose as set out in the Explanatory Notes to the Bill, which is to make changes ‘where legislation is inconsistent with or requires modification as a consequence of scheme regulations’. Instead, and without justification, the Henry VIII clause allows the UK Government to make radical changes for example to:

· reduce accrued final salary rights, without the need for primary legislation and with the minimal safeguards of the affirmative procedure;

· drastically change the design of pension schemes and scheme regulations, for instance for making different provisions for different cases/descriptions of persons, without having to come back to Parliament to debate primary legislation;

· allow any person to exercise a discretion, which is not defined in the Bill; and

· breach the 25 year guarantee, with no effective means of resisting any breach.

10. The Henry VIII clause creates inconsistencies in the Bill between the detailed and specific provisions for what the scheme regulations must contain and the unfettered ability of Government to make any changes as provided by the Henry VIII clause. The power to retrospectively amend means that accrued pension rights could be affected, which will likely result in a challenge under the Human Rights Act 1998 and may well lead to a declaration of incompatibility and other legal challenges.

11. The preferred and simplest way to resolve this problem in Clause 3 would be just to delete subsections 3(3)(b) and (c) and to make amendments to subsections 3(3)(a) and (d). Otherwise, the minimum response should be an amendment to the Bill and specifically the Henry VIII clause along similar lines as the Henry VIII clauses in the Legislative and Regulatory Reform Act 2006, s.40 of the Constitutional Reform and Governance Act 2010, Public Bodies Act 2011 and the Superannuation Act 1972.

Scheme governance

12. The Bill specifies in Clauses 4 to 6 that each of the schemes must have a scheme manager and a pension board which must ensure compliance with the requirements of the Pensions Regulator for the first time.

13. The arrangements for schemes need to be robust and the UK Government must provide assurances that the proposed arrangements will meet the requirements for effective governance of the NHS Pension Scheme with continued input from staff representatives.

Method of indexation

14. The Bill specifies in Clause 8 that revaluation of accrued career average revalued earnings (CARE) benefits will be governed by the Bill but that increases to deferred pensions and pensions in payment will still be governed by the Pensions (Increase) Act 1971. The Bill grants the UK Government the power to decide the method of revaluation by secondary legislation (Clause 8(3)). This could allow whatever revaluation method chosen at the time to reduce revalued earnings if earnings or prices were negative.

15. It is essential for the UK Government to give a firm commitment that pensions in payment will not be reduced. Additionally, the method of revaluation should be consulted on and subject to the affirmative procedure to avoid a potential reduction in revalued earnings if earnings or prices were negative.

Treasury control over valuations

16. Under Clause 10, scheme valuations will be conducted through direction from the Treasury, with the Treasury determining the method, data and assumptions to be used and ultimately the contribution rate. Valuations may cover both the existing schemes and the new schemes established in the Bill.

17. The BMA believes that giving the Treasury wide powers to impose what data and assumptions are to be used in valuations and how a valuation is to be undertaken needs to be tempered with a requirement to consult.

Treasury over the employer cost cap

18. According to Clause 11, the employer cost cap will be set in accordance with direction from the Treasury. The employer cost cap will be a rate used to measure the costs of a scheme. The Treasury will have powers to specify how the cap will operate in terms of specifying margins either side of the cap and the margin of adjustment required if costs exceed those margins. Regulations will determine the process if a cost adjustment is required and a default mechanism to ensure an adjustment is made.

19. We believe that regulations on the employer cost cap must be fully consulted on and subject to the affirmative procedure.

Career Average Revalued Earnings Scheme (CARE)

20. The Bill gives powers to establish different types of schemes (including defined benefit and defined contribution schemes), with the exception of a final salary scheme which is specifically excluded. There will be a switch to a new CARE scheme for all NHS staff in 2015. For hospital doctors, this means the end of the final salary scheme, resulting in around a 30 per cent reduction in value on a like-for-like basis. [12]

21. As part of reforms to the NHS Pension Scheme in 2008, health unions agreed to the introduction of a multi-tiered employee contribution structure. This was to reflect the fact that higher earners had previously received proportionately more benefit than lower earners from final salary arrangements for every £1 of employee contributions paid. The level of tiering is now set to increase dramatically by 2014-15, with higher earners within the NHS scheme paying significantly greater proportions of their salaries for their pensions than lower earners – even though the final salary link which benefited higher earners more has been broken.

22. For higher earning NHS staff, this unfairness is even more marked as the NHS scheme in general compares unfavourably to other public sector schemes for many staff. For example, many doctors will have to pay twice as much as a civil servant on a similar salary to receive a similar pension. The new tiering structure means that the cost of accruing pension benefits (even after income tax relief is taken into account) will vary for individual NHS staff members who join the NHS scheme after the CARE scheme is introduced.

23. The BMA accepts the general principle that the lowest paid staff should be encouraged by scheme design to join the pension scheme. It also accepts that tiering to recognise higher rate tax relief is appropriate within a CARE system. However, the steep tiering is completely unjustified in a CARE scheme.

24. The UK Government must provide assurances that it will adopt a fairer and equitable approach in a new CARE scheme system by ensuring that subsequent regulations prescribe a much flatter structure for the NHS scheme contribution.

Linking state and normal pension ages

25. The Bill links normal pension age for public sector pensions to state pension age, which is rising to 68 by 2046. This applies to all public sector workers except for firefighters, police and the armed forces, where the normal pension age will remain 60. The Working Longer Review of the planned increase in the normal pension age for staff in the NHS Pension Scheme to 68, is currently being undertaken jointly by the UK Government, employers and health unions.

26. The Review should be allowed to make genuinely evidence-based recommendations as to whether all or some frontline NHS staff have roles that are particularly physically, mentally and/or emotionally demanding and so should have their normal pension age capped at a lower age.

27. The Bill should be amended to allow the Review to report before there is a final legislative change to tie the normal pension age to the state pension age.

November 2012

References


[1] HM Treasury, 13 September 2012. Available at: http://www.hm-treasury.gov.uk/press_81_12.htm

[2] The BMA has always accepted that the NHS Pension Scheme must offer a fair deal to taxpayers as well as to NHS staff but the BMA believes there is no justification for the scale of the planned changes or the speed at which they are to be implemented. In 2008, NHS staff agreed to major changes to the NHS scheme to make it sustainable in the long term. This involved a large increase in employee contributions and the introduction of tiered contributions to protect lower paid workers. It also meant an increase in the pension age for new entrants (to 65). The BMA engaged very constructively with the UK Government and employers to reach agreement on these reforms, which for many senior doctors resulted in a 42% increase to pension contributions. Costs to taxpayers were reduced and controlled, with mechanisms in place to make the NHS Pension Scheme sustainable for the future, including agreement that any unforeseen increase in costs due to improved longevity would be met by members. The terms agreed for the NHS Pension Scheme were envisaged by all parties as a long-term deal, and not one that would be abandoned by the UK Government just four years later.

[3] ‘ This means that no changes to scheme design, benefits or contribution rates should be necessary for 25 years outside of the processes agreed for the cost cap. To give substance to this, the Government intends to include provisions on the face of the forthcoming Public Service Pensions Bill to ensure a high bar is set for future Governments to change the design of the schemes. The Chief Secretary to the Treasury will also give a commitment to Parliament of no more reform for 25 years.’ Department of Health, Proposed Final Agreement, Annex A, para 14, 9 March 2012. Available at: http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/@dh/@en/documents/digitalasset/dh_133003.pdf

[4] The Bill provides a common legislative framework for all public sector pension schemes following recommendation from Lord Hutton in the final report of the Independent Public Service Pensions Commission. Several public sector schemes are captured within the Bill, including the NHS Pension Scheme. Independent Public Service Pensions Commission: Final Report, 10 March 2011. Available at: http://cdn.hm-treasury.gov.uk/hutton_final_100311.pdf

[5] BMA (2012) Public sector pension reform: challenging unfairness. Available at:

[5] http://www.bma.org.uk/working-for-change/negotiating-for-the-profession/pensions-unfairness

[6] HM Treasury, 13 September 2012. Available at: http://www.hm-treasury.gov.uk/press_81_12.htm

[7] House of Lords Constitutional Committee, Sixth Report on Public Bodies Bill, dated 4th November 2010

[8] Per LCJ Judge at the Lord Mayor’s Annual dinner for Judges in July 2010

[9] House of Lords Constitutional Committee, Sixth Report on Public Bodies Bill, dated 4th November 2010

[10] Foreword to Public Service Pensions, good pensions that last , dated 2nd November 2011

[11] Paragraph 11, Explanatory Notes to the Public Service Pensions Bill

[12] GPs already have a CARE scheme but they will also see their contributions rise very significantly and will have to work to 68.

Prepared 7th November 2012