Public Service Pensions Bill

Memorandum submitted by the Association of Teachers and Lecturers (PSP 02)

Summary

ATL accepted the government’s Proposed Final Agreement on changes to the Teachers’ Pension Scheme as the best that could be achieved through negotiation.

Nevertheless, ATL has significant concerns in relation to the detailed drafting of the Bill. These are:

· that the government has included an option for the public sector pension schemes to cease to be defined benefit schemes and instead become defined contribution schemes (clause 7);

· that any future increase in the State Pension Age and Normal Pension Age will apply retrospectively to members’ past service (clause 9);

· that there is no obligation on the Treasury to order a valuation of the public sector pension schemes, nor any binding instructions on the form of such a valuation (clause 10);

· there is no compulsion on the Treasury or the Secretary of State to enter into discussions with members regarding the employer cost cap (clause 11);

· for the first time, a member’s benefits may be revalued down as well as up if inflation is negative (clause 8);

· a member with service in the existing and new pension schemes will automatically have that service calculated in line with their final salary rather than having the option of using their revalued salary at the closing of the old scheme (schedule 7); and

· the Bill is silent on Fair Deal – the mechanism by which outsourced public sector workers are able to continue to access the public sector pension schemes.

Evidence for the Bill Committee (the Committee) on the Public Service Pensions Bill 2012 (the Bill)

1. ATL, the education union, is an independent, registered trade union and professional association, representing approximately 160,000 teachers, head teachers, lecturers and support staff in maintained and independent nurseries, schools, sixth form, tertiary and further education colleges in the United Kingdom. AMiE is the trade union and professional association for leaders and managers in colleges and schools, and is a distinct section of ATL.

2. ATL is affiliated to the Trades Union Congress (TUC), Irish Congress of Trade Unions (ICTU), European Trade Union Committee for Education (ETUCE) and Education International (EI). ATL is not affiliated to any political party and seeks to work constructively with all the main political parties.

3. The Teachers’ Pension Scheme (TPS) is a contracted out, defined benefit pay-as-you-go occupational pension scheme funded by contributions from teachers and employers operated by the Department for Education and governed by statutory regulations. Membership of the scheme is voluntary and is open to members of the teaching profession in England and Wales who satisfy the membership criteria.

4. Teachers who joined the TPS prior to 1 January 2007 have a Normal Pension Age (NPA) of 60, at which point they are entitled to a pension of 1/80 of their final salary for each year of service, and a lump sum of 3/80 of their final salary. Following reforms implemented in 2007, the NPA for new entrants to the TPS was increased to 65, with an accrual rate of 1/60 of final salary for each year of service with a lump sum by commutation only.

5. ATL accepted the government’s Proposed Final Agreement on changes to the Teachers’ Pension Scheme as the best that could be achieved through negotiation.

Clause 7: Types of scheme

6. Sub-clause (1) states that pension schemes for persons in public service may be a defined benefits scheme, a defined contributions scheme or a scheme of any other description. This means that the public sector pension schemes could become defined contributions or other types of scheme in the future and directly contradicts Lord Hutton’s recommendation that "the Government should continue to provide a form of defined benefit pension as the core design [of the new schemes]". [1] Lord Hutton also considered the defined benefit design to be "an efficient design for a large employer to share risk with employees". [2]

7. ATL would like to see the government remove reference to defined contributions and other schemes in this clause as these references are unnecessary given Lord Hutton’s recommendation and the adoption of the Career Average scheme design.

Clause 9: Pension age

8. Sub-clause (1) states that the NPA of a person in a public sector pension scheme will be the same as the person’s State Pension Age (SPA) (or 65 if that is higher). Therefore, as the state pension age rises, which the government plans for it to do [3] (to 67 between 2026 and 2028) normal pension age in the public sector schemes will mirror that rise.

9. ATL’s concern relates to sub-clause (4), which states that as a person’s SPA changes, so should their NPA, and that the change to the normal pension age must apply to all benefits, including benefits already accrued in the scheme.

10. ATL has several objections to this. The first is that it reduces a member’s past benefits, i.e. benefits that have already accrued. Section 67 of the Pensions Act 1995 protects members of private pension schemes against detrimental changes to "any entitlements or accrued rights" by requiring an employer to seek the consent of the members of a pension scheme before changing it, or, in some cases, to obtain a certificate from an actuary stating that the proposed new benefits are equivalent to the existing benefits.

11. However, public sector scheme members will enjoy no such protection. Members’ normal pension ages will be their state pension ages: an ever-shifting concept, the definition of which in the Bill is: "the pensionable age of the person as specified from time to time..." With public confidence in the provision of pensions already at an all time low [4] , such uncertainty will do little to encourage people to stay in their occupational pension scheme. Lord Hutton himself, in his 2011 report on public sector pension provision, emphasised the importance of giving members "certainty and trust" [5] in their schemes. It is our belief that linking NPA to SPA for service in the past will undermine members’ trust and confidence in their pension provision.

12. ATL also believes that the retrospective nature of this provision is open to challenge under human rights legislation. Article 1 of Protocol 1 of the European Convention on Human Rights (incorporated into the law of the United Kingdom by the Human Rights Act 1998) states:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. "

13. It has been established that a pension can form a proprietary right capable of protection under this article (Muller v Austria, Dumanovski v the former Yugoslav Republic of Macedonia). Therefore, were the Bill to pass into law as currently drafted there would be an infringement of Article 1 Protocol 1 and the European Court of Human Rights (the Court) would have to decide if that interference was "in the public interest" and whether it satisfied the requirements of proportionality (Pressos Compania Naviera S.A. and others v Belgium). In Pressos the Court found that the Belgian state had legislated with retrospective effect with the aim and consequence of depriving the applicants of their claims for compensation. Therefore, the Belgian government had violated Article 1 of Protocol and the case was sent back to the Belgian court to assess pecuniary damage.

14. Furthermore, it is fundamentally unfair that a teacher may work for ten years contributing to the TPS on the basis of a particular retirement age, only to discover at the end of that ten year period that the age at which they wish to take those benefits has moved further away, reducing the benefit of their pension to them.

15. Members of the TPS may well question why they are required to pay the same amount of contributions per month, whilst the age at which they can take their pension goes up. To help to convince these members that their pension is safe, ATL believes that there should be a valuation of the TPS triggered by any rise in SPA. If, as ATL believes, the valuation shows that such high contribution rates are no longer necessary, then the contribution rates should fall, as we would expect that the valuation would show that paying for longer for a later retirement age would mean that the contributions would go down.

16. Finally, ATL has concerns over equalities – those who are disabled will find that they have to wait until later in life to access their benefits. Recently published research has shown that by the time men and women are aged between 60 and 64 around 30% of them have a disability that limits their ability to work. [6]

17. In addition, ATL would like to see the government follow the recommendations of Lord Hutton in his Final Report on Public Sector Pensions, dated 10 March 2011 (the Report). In Chapter 4 paragraph 20 of the Report Lord Hutton states:

"However, the Commission’s recommendation is that as well as the link to SPA being put in place, NPA (Normal Pension Age) should also be regularly reviewed by an independent body, to see if the link is appropriately tracking changes in longevity. The body would then make recommendations to the Government (either for each scheme or for the public service as a whole) on whether linking the NPA for public service pension schemes to the SPA was still appropriate, and if not, what the NPA should be."

ATL notes with regret that the Bill establishes no such body and urges the government to include the Commission’s recommendation in the Bill.

18. ATL objects in the strongest possible terms to the link between NPA and SPA applying retrospectively to a member’s service. Not only does it undermine members’ trust in the scheme, but it is potentially in breach of human rights and equalities legislation.

Clause 10: Valuations

19. A formal actuarial valuation of the TPS was last completed with an effective date of 31 March 2004.

20. The Financial Reporting Manual (the technical accounting guidance for public funds) requires that, "the period between formal actuarial valuations shall be four years, with approximate assessments in intervening years." [7] Under Regulation 128(2) of the Teachers’ Pensions Regulations 2010 (the 2010 Regulations) the Secretary of State should have secured that: "(a) the next review date is no later than 31st March 2012, and (b) the review date for each subsequent report is no later than 4 years after the previous review date."

21. Therefore, a formal actuarial valuation is currently due, but has not been ordered or carried out to date (or it has, but the Government Actuary’s Department (GAD) report has not been published) because valuations have been suspended by HM Treasury. According to the most recent set of accounts of the TPS: [8]

"The primary purpose of the formal actuarial valuations is to set employer and employee contribution rates, and these are currently being determined under the new scheme design."

22. Now, the government is consulting on revoking Regulation 128 of the 2010 Regulations, which means that there will be no obligation on the Treasury to order or publicise any actuarial valuation of the TPS. In failing to request a valuation, or at least to publish it, the Treasury has restricted the amount of information available on the TPS at the very moment that unions, employers and government are seeking to reach agreement on contribution rates in the current schemes and in the new scheme. ATL’s view is that it is inequitable and unjust for this state of affairs to continue – the Treasury must be compelled to request and to publicise formal valuations of the public sector pension schemes.

23. ATL would like to see the inclusion of a date by which the first valuation has to be carried out and to remove the Treasury as the sole arbiter on the principles of the valuation, including a requirement to consult with stakeholders and members of the scheme (or their representatives) over the scope of the valuation.

Clause 11: Employer Cost Cap

24. Under clause 11 the Treasury must make regulations which specify the margins within which the costs of the scheme must remain. According to clause 11 (6): "For cases where the cost of the scheme would otherwise go beyond the margins," regulations may provide for a procedure whereby the responsible authority, employers and members (or their representatives) can reach agreement on the steps required to achieve the target cost, as well as the procedure if there is no agreement between the parties.

25. As it is currently drafted, the Bill does not compel individual schemes to include a procedure in their regulations for remedying the employer cost cap. However, ATL believes that it should be a mandatory duty on the Secretary of State to discuss the employer cost cap with members (or their representatives) with a view to reaching agreement with them, as required by clause 20 of the Bill. Indeed, in his letter of 10 October 2012 to Brendan Barber (General Secretary of the TUC) Danny Alexander wrote:

"These arrangements for cost control and the legislative backstop will also apply to all schemes. There will always be a period of consultation before changes are made to bring costs back to the cap. If agreement cannot be reached through this consultation, then scheme regulations will provide for an adjustment (for example, to accrual rates) to take place as an automatic default."

26. Clause 20 of the Bill (‘Consultation and Report’) states that where the Secretary of State wishes to change one of the ‘protected elements’ of a scheme then he / she must not only consult with the persons affected or their representatives, "with a view to reaching agreement with them," but must also lay a report before parliament. Clause 20(6) provides that where it appears to the Secretary of State that a change to a public sector scheme is required by or consequent upon the employer cost cap then clause 20 will not be followed. If there is no parity between the procedures in clauses 11 and 20 then the Secretary of State may deem that changes are consequent on the employer cost cap in order to escape the consultation provisions in clause 20.

27. In addition, without a scheme valuation that is published to scheme members and their representatives, those groups will not necessarily have enough information in order to take part in the procedures outlined in the Bill.

28. Finally, the Chief Secretary to the Treasury has repeatedly stressed that this is a deal which will last for twenty-five years. The Committee should be aware that public sector workers and trade unions have been here before. The principles for pension reform in the Teachers’, NHS and Civil Service pension schemes were agreed by the Government and the TUC in the Public Services Forum on 18 October 2005 and put in place by an agreement in November 2006. At that time the government, employers and trade unions all agreed that the reforms delivered the necessary changes and were appropriate to the circumstances of the schemes and within the cost envelope provided. However, the Treasury decided to raise £6.3 billion over three years and the public sector pension schemes have been forced to foot the bill. Therefore, having robust procedures in place to ensure accountability and consultation and making information available sooner rather than later is of vital importance.

Clause 8: Revaluation

29. Clause 8 concerns the procedure for the revaluation of earnings of active members in the new Career Average Revalued Earnings (CARE) schemes. The revaluation of earnings on an annual basis is necessary to work out a member’s accrued annual pension, and the revaluation for the Teachers’ Pension Scheme will be CPI plus 1.6%.

30. ATL is concerned that the current wording in sub-clause (2) would allow for a decrease in revalued earnings in the event that earnings and/or prices were negative in a particular period:

"The changes in prices or earnings to be applied for the purposes of such a revaluation is to be such a percentage increase or decrease as a Treasury order may specify in relation to the period."

This would mean that the value of a member’s accrued benefit would actually fall.

31. Currently, preserved or deferred pensions or pensions in payment are increased annually by a percentage which is equal to the percentage rise in the Consumer Prices Index (CPI) in the twelve months to the preceding September, under the Pensions (Increase) Act 1971. Therefore, if the CPI is negative (a rare occurrence, but one that did happen in September 2009) then public sector pensions stay flat in cash terms – they are not allowed to fall.

32. However, the proposal in this Bill is that accrued pensions can in fact lose value. ATL believes that this would constitute an unlawful interference with property contrary to Article 1 Protocol 1 of the European Convention on Human Rights (see paragraphs 12 and 13 above) because a percentage decrease would have the effect of a shrinking the value of the accrued pension of an active member of a pension scheme.

33. Finally, ATL is concerned that the Treasury is the only government department empowered to take decisions as to revaluation in each of the public sector pension schemes. Logistically, it would make sense for each ‘responsible authority’ (ie the Secretary of State) to be able to make an order under this clause as there will be scheme-specific factors to take into account in doing so.

Link to final salary

34. Schedule 7 paragraph 3 contains the provisions relating to the use of the final salary at retirement for calculating the final salary benefits under the old scheme. However, there is no flexibility here to take account of a teacher whose final salary at retirement may be lower than their (revalued) final salary when they left the old scheme. Therefore, ATL would like to see an ‘either or’ calculation allowed here, as for some members it will be better for a revalued final salary to be used rather than their final salary at retirement. An example of such a member is a teacher who wishes to reduce his/her responsibilities leading up to his / her retirement, but who is prevented from doing so because their pension from the old scheme will be linked to their final salary.

35. This inflexible approach is contrary to the recommendation of Lord Hutton who, in his report [9] , encouraged flexible retirement and suggested that members should have greater choice over when to draw their pension benefits.

Fair Deal

36. As drafted, the Bill does not include any commitment from the government to continue with Fair Deal. Fair Deal is the arrangement whereby on a transfer of public sector staff under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) the new employer has to provide a broadly comparable scheme to the relevant public sector pension scheme and offer the transferring staff the opportunity to do a bulk transfer to the new broadly comparable scheme.

37. In a written ministerial statement issued on 4th July 2012 the Chief Secretary to the Treasury [10] stated that employees transferred from the public service under TUPE (including subsequent TUPE transfers) to independent providers of public services would retain membership of their current employer’s pension arrangements. Therefore, there would be no need for the new employer to set up a broadly comparable scheme or facilitate a bulk transfer. [11]

38. As the Bill is silent on Fair Deal, and in an increasingly fragmented state education sector, ATL is concerned for the welfare of its support staff members (for example, catering staff) in the Local Government Pension Scheme (LGPS) who could be at a disadvantage if they take up work at an independent school within the state sector (such as an Academy or Free School) which has outsourced its catering work to a private contractor. It would appear that this private contractor would not necessarily have to apply to be an ‘admitted body’ of the LGPS with the consequence that employees in a publicly funded workplace do not have access to a public sector pension scheme.

39. ATL is also concerned because the government’s commitment to Fair Deal is linked to independent schoolteachers’ continued membership of the TPS. In the Heads of Agreement on Reform of the Teachers’ Pension Scheme (March 2012), to which ATL members gave their backing, the government stated that its:

"…decision on Fair Deal meant that independent schools which already have access to the TPS will continue to do so (for existing and new teachers); and new teachers and independent schools will continue to be able to join the TPS under the existing qualifying criteria."

40. ATL urges the government to stick to its undertaking and include a commitment to Fair Deal in the Bill.

November 2012


[1] Ex. 11, Recommendation 5, page 9 ‘Independent Public Service Pensions Commission: Final Report – 10 March 2011

[2] Ex. 14, page 10 ‘Independent Public Service Pensions Commission: Final Report – 10 March 2011

[3] Impact Assessment - Long term State Pension sustainability: increasing the state pension age to 67 http://www.dwp.gov. uk /docs/ia-increasing-state-pension-age-to-67.pdf

[4] National Association of Pension Funds (NAPF) survey, published June 2012. The survey showed 54% of all employees were not confident in pensions compared with other ways of saving.

[5] Paragraph 4.21, page 95 ‘Independent Public Service Pensions Commission: Final Report – 10 March 2011

[6] Pensions World Editorial, June 2012

[7] Teachers’ Pension Scheme ( England and Wales ) Annual Accounts 2011-12 (For the year ended 31 March 2012) authorised for issue on 27 June 2012.

[8] See FN 2 above.

[9] Recommendation 10, paragraph 3.I03, page 83 ‘Independent Public Service Pensions Commission: Final Report – 10 March 2011

[10] Written Ministerial Statement from the Right Honourable Danny Alexander MP Chief Secretary to the Treasury dated 4 th July 2012

[11] In any case, bulk transfer is no longer necessary as we move to CARE schemes under which there is no longer a need to preserve the link between benefits and final salary for all accrued service.

Prepared 7th November 2012