Public Service Pensions Bill

Memorandum submitted by GMB (PSP 04)

GMB WRITTEN EVIDENCE TO PUBLIC SERVICE PENSIONS BILL COMMITTEE

APPENDICES

Appendix 1 – The ‘December Principles’ agreed between unions and employers in Local Government and ratified by government in December 2011

Appendix 2 – Letter from DCLG Secretary of State approving the December Principles December 2011

Appendix 3 – Summary of the proposals for the new LGPS 2014 agreed by members August 2012

Appendix 4 – Letter from DCLG Minister endorsing Union/Employer negotiated reforms to LGPS scheme benefits 30th May 2012

Appendix 5 – Joint LGA/Union letter to DCLG Minister outlining agreed governance and cost sharing mechanism 27th July 2012

Appendix 6 – The draft Terms of Reference for the ‘Working Longer Review’ in the NHS October 2012

Appendix 7 – Short guide to the Local Government Pension Scheme

Appendix 8 – LGPS Joint Statement on Negotiations 1st November 2012

INTRODUCTION

1. GMB is a UK trade union representing 620,000 members including 320,000 working in areas covered by the Local Government Pension Scheme (LGPS), NHS Pension Scheme, Principal Civil Service Pension Schemes, UKAEA Pension Scheme and the analogous schemes in the devolved administrations.

2. GMB was directly involved in detailed negotiations with government (and employers in local government) centrally and in those schemes where negotiations have taken place. GMB recommended and members voted in favour of the agreements developed for local government and civil service workers. GMB members voted against the offer for the new NHS pension scheme which we believe will price many out of pension saving and we are seeking further discussion of outstanding issues in that scheme outside this process. There have been no formal discussions regarding changes to the UKAEA pension scheme so far.

3. GMB understands that the Public Service Pensions Bill is designed to be an enabling Bill, allowing individual public sector pension schemes to issue Regulations outlining the detail of future pension provision to public service employees. GMB believes the Bill goes further than necessary to meet its enabling objective. GMB further believes there are a number of issues with the practicality of the legislation as drafted and its compatibility with the agreements reached in two schemes (Local Government and Civil Service) that government has committed to honouring; to put this in the clearest terms – the bill fails to meet its enabling objective.

4. GMB is committed to ensuring the agreements our members have voted to accept are implemented in full. This will require amendments to the Bill as introduced to the House. If the Bill as drafted is not amended then the agreements are likely to break down and the viability of the LGPS in particular could be jeopardised.

EVIDENCE

5. This submission centres only on the main issues that GMB urges Committee to examine.

6. GMB’s submission is based on evidence gained from active participation in the negotiation process in the central negotiating group and the scheme specific negotiations in the LGPS, NHS and Civil Service. We were similarly involved in the last substantial set of public service pension scheme reforms in 2005-7.

7. At this stage GMB also commends to the Committee the written evidence submitted by the LGA and TUC.

SUMMARY

8. There are three key omissions from the Bill:

I. Provision for an independent review of the SPA link

II. Maintenance of membership in public service schemes for transferred workers

III. Provision for a National board for the LGPS to assist the responsible authority

9. In addition there are a number of areas where changes to the current drafting of the Bill is required in order to operate successfully and to allow the implementation of the agreements reached with employers and scheme members:

I. The introduction of the right for Treasury to reduce accrued benefits (make retrospective changes) in breach of the European Convention on Human Rights;

II. Provision for ‘negative revaluation’ of CARE schemes in contrast with the existing practice that had been the basis of discussions;

III. The announcement of the closure of all schemes triggering problems for all sectors but most notably the LGPS where, as a funded scheme, investment strategies and employer contribution rates are predicated on the continuity of the scheme;

IV. The Chief Secretary’s ‘25 Year Guarantee’ where the Bill provides a lower hurdle to scheme design changes than currently exists by repealing relevant sections of the Superannuation Act 1972 and replacing them with a limited right to consultation;

V. The introduction of a clause that allows employers to bypass public service pension schemes altogether;

VI. Treasury control over all elements of schemes from valuations (including in the funded LGPS) to all scheme regulations without any requirements for proper consultation and very little Parliamentary scrutiny;

VII. The incompatibility of Bill provisions and agreed reforms of LGPS governance and cost management.

BILL OMISSIONS

Review of the link between NPA/DPA and SPA

10. In his extensively cited report, Lord Hutton stated (Recommendation 11 [1] ) that the link between receipt of unreduced benefits on retirement and State Pension Age should be regularly and independently reviewed to ensure the link is appropriately tracking changes in longevity (Final Report 4.20 [2] ). This provision also forms part of the agreement reached on Civil Service Pension Scheme changes [3] .

11. This review is not provided for in the Bill meaning that the viability of schemes and the efficiency of provision is put under threat through adherence to a fixed link. If longevity does not match the changes to SPA then there are substantial consequences for the cost of schemes. Regardless whether this cost volatility is borne by taxpayers or scheme members, the inadvertent impact could be devastating for the new schemes. An independent review, as recommended by Lord Hutton, could ensure that the intention of the provision (for pension age to increase as longevity improves to maintain a constant period of pension payment) is actually delivered.

12. In the NHS Pension Scheme a Working Longer Review [4] has been established looking into the impact of working longer on NHS staff. This Review is not due to report until late in 2013. It is possible that the review may conclude that working to State Pension Age is simply unrealistic for some NHS staff as GMB believes is the case for paramedics and ambulance staff. The Bill in its current form (Clause 9) would prevent any consequential steps that would allow a more appropriate Normal Pension Age to be designed for any identified groups. Discretion to allow for additional groups of protected workers could allow the necessary flexibility to respond to the outcomes of the NHS Review.

Extension of access to transferred workers

13. The Chief Secretary has committed [5] to both the retention of the current ‘Fair Deal’ provisions that provide some protection for public sector workers who are outsourced, and the agreed application of these provisions to all transferring staff. The Bill enables this to occur in the Civil Service (Schedule 9) but there is no provision requiring the extension of access to other employers. This is an issue in all schemes but particularly so in the LGPS where Fair Deal’s application was more limited [6] .

14. This commitment was an intrinsic part of the reform negotiations and balloted agreements, and therefore GMB does not believe this should be left to alternative legislation and seeks comprehensive legislative provisions in this Bill to deliver on the Chief Secretary’s commitment. As some of the relevant current legislation for the LGPS can only be amended through primary legislation, the Bill needs to make appropriate reference to this.

Provision for a National board for the LGPS

15. For a scheme that is managed both locally and centrally, it is especially appropriate for the LGPS to have a National board to assist the responsible authority in the same was the Pension boards in the unfunded schemes will assist their scheme manager/responsible authority.

16. The plans for governance and cost management in the LGPS require a National board as an integral part of the process of open, transparent and effective governance. [7] In fact, most LGPS stakeholders identify LGPS fund performance and efficiency as more important factors in managing taxpayer costs than benefit reform.

17. The National board, recommended by Lord Hutton [8] would provide coordinating and advisory assistance to the Secretary of State able to execute other reforms to transparency (including the IPSPC’s Recommendation 21 on data).

18. While the National board would not have statutory powers, GMB believes it should have a statutory existence, as is the case for Local LGPS boards in the Bill and National boards for the other schemes.

MAJOR AREAS FOR AMENDMENT

Retrospective Capacity -

The introduction of the right for Treasury to reduce accrued benefits.

19. In facilitating the ability of scheme regulations to make retrospective changes, the Bill threatens to override one of the central tenets of pension saving: that what you’ve accrued is safe. This is embodied in s67 Pension Act 1995 for private sector pension savers but protection for public service workers comes from the European Convention on Human Rights. The Explanatory Notes to this clause suggest that its purpose is to allow scheme regulations to be altered retrospectively in the interest of efficient implementation where provision couldn’t be made in a timely manner. If that is the case then clause 3 should more accurately reflect the stated intention. The wording of other clauses (in particular s20) indicates that in fact this power is deliberately broad intended to allow any change to scheme members’ past or future benefits.

20. S11(7) allows scheme regulations to provide for the reduction of accrued benefits as part of the employer cost cap. This is a fundamental breach of scheme members’ rights under Article 1 Protocol 1 of the ECHR. Pensioners in receipt of their public service pensions could also have their benefits reduced leaving them reliant on state benefits regardless of the fact that they will have paid all the employee contributions required of them while in the scheme.

21. There has been no consultation on the employer cost cap as set out in the Bill and s11(9) requires no future consultation with scheme members, employers or Parliament. As a fundamental feature of the schemes established by this Bill, this should not be subject to so little scrutiny.

Revaluation -

Provision for ‘negative revaluation’ of CARE schemes in contrast with the existing practice that had been the basis of discussions.

22. Clause 8 heavily regulates an area of central importance to the operation of the new schemes and the honouring of agreements, where agreements have been achieved. The wording of the Bill does not reflect the discussions with unions and seeks to extend Treasury’s control far beyond that which is necessary, prudent and, in light of FDA and Others -v- The Secretary of State For Work and Pensions and Others [2012] EWCACiv 332, legal.

23. There is no need for clause 8 to be in primary legislation as it is better suited to the scheme regulations that will lay down the parameters of each distinct scheme. There is no similar clause setting the terms of the indexation of pensions in payment even though that element is actually consistent across all schemes.

24. Fundamental to the agreements reached in the Civil Service and Local Government schemes was the understanding that, as with the indexation of pensions in payment, revaluation would never be negative. This is vital to the confidence of pension saving. Just as pensions in payment should not fall from one year to the next – a principle held to by successive governments – so pensions being accrued should similarly not be reduced. This reflects the existing practice for nuvos – the current CARE scheme in the Civil Service where revaluation either involves an increase if CPI is positive or a freeze if CPI is zero or below. GMB was not informed at any stage that government intended to deviate from this approach in the new schemes and to do so now is a fundamental challenge to our members’ agreements.

Scheme Closures -

The announcement of the closure of all schemes triggering problems for all sectors but most notably the LGPS where, as a funded scheme, investment strategies and employer contribution rates are predicated on the continuity of the scheme.

25. There are a number of technical errors in the drafting of this clause relating to the dates of closure that require correction.

26. More fundamentally however, is the serious lack of clarity on how clause 16 is to operate. As the Bill is drafted, it appears that all members of existing pension schemes will become deferred members albeit with a provision for a final salary link described in Schedule 7. This would cause significant communications problems (telling members they are being thrown out of the scheme they have been saving in, potentially for decades). It also raises questions about HMRC rules on benefit crystallisation as well as concerns over the calculation of transfer values, access to accrued rights in ill health, redundancy or other early retirement and the provision of benefits to survivors in the event of a member’s death. None of these issues have been discussed or appear to be considered in the drafting of the Bill. LGPS lawyers and actuaries have said that they would interpret this clause as triggering fund closures in all 101 UK LGPS funds.

27. Government officials have put forward an alternative interpretation that instead of becoming deferred, active members of existing schemes will remain active members of those schemes but will not build up any more service and will not contribute to those schemes. They will however, also be active members of the new schemes into which their contributions will go. If this is the intended interpretation, the Bill should be amended to reflect that. However, this does not resolve many of the issues set out above, the amendment of benefit provision in secondary legislation is the only way of delivering the cessation of accrual that government seeks without these problems. This is how the LGPS has previously been changed for existing members (in 2008) and is the way LGPS stakeholders wish these changes to be made for the LGPS 2014.

28. There are particular issues for the LGPS, as neither mechanism suits the operation of a funded scheme. Previously, and the LGPS is the only scheme that has previously radically reforms active members’ benefits, the scheme was changed by amendment meaning there was no explicit need to ‘close’ the scheme. Clause 25 may enable the LGPS to continue to take this approach but s16 currently appear to preclude this. In the LGPS, closure could lead to the triggering of wind up for some employers as funds demand that deficits are paid off at the point of closure, this would undoubtedly lead to some employers (third sector providers, Academies and others) going insolvent. Closing the scheme requires funds to radically alter their investment strategies leading to major sales of equities and an equally significant demand for government gilts. The LGPS holds more than £150bn in assets, GMB does not believe it is Treasury’s intention to cause this type of cataclysmic economic event but the wording of this clause does not leave much alternative.

Chief Secretary’s Generation Guarantee -

The Bill’s articulation of the ‘25 Year Guarantee’ of scheme sustainability provides less reassurance than currently exists.

29. While the Explanatory Notes suggest that Clause 20 sets out a high hurdle consistent with the Chief Secretary’s statement to the House on 20th December 2011 [9] , the reality is that all the clause requires is consultation with a view to reaching agreement and a report in certain circumstances to be placed in the House. This is only a guarantee of consultation. It in no way precludes radical changes to schemes in the context of the employer cost cap [s11] which has a blanket exemption from even these minimal provisions [s20(6)]. In drafting the provisions in this clause relating to retrospective changes may have been inserted in order to allay the concerns discussed in Clause 3 above. However, the provisions are very weak and do not actually result in a ‘high hurdle’ for such changes. As an illustration, the provisions do not cover what could be radical changes to the schemes such as definitions of pensionable pay, eligibility or survivor benefits.

30. The obstacles to making radical, adverse changes are actually weaker in this Bill that currently exist in the LGPS and Civil Service schemes where s2(3) and s12 of the Superannuation Act 1972 require consent from members for such detrimental changes. Government are proposing to remove those provisions and introduce lesser protections which amount to little more than an obligation to inform. GMB does not believe this is consistent with the Chief Secretary’s commitment and would ask the Committee to ensure the current Superannuation Act provisions are retained.

31. Clause 19 introduces a weak obligation on responsible authorities to consult on scheme regulations obliging them only to keep a list of those deemed appropriate to consult. Clause 20 gives better requirements on consultation but heavily restricts the occasions when these requirements would be triggered. As currently drafted, consultation fundamental to the provision of public service pensions is little more than a notification exercise.

32. GMB recognises that there will be changes to benefits in the future as part of the cost management process. Opposition to these Bill provisions does not reflect an intransigence to change but a fundamental fear of the vast extent of powers over both future and accrued benefits that Treasury are provided with under this Bill. Government has presented clause 20 as the check and balance on the powers in clause 3 (and elsewhere in the Bill), GMB sees no evidence from the wording of the Bill as currently drafted that any such assurance has credibility.

Scheme Bypass

33. Clause 23 opens the door for employers to bypass public service pension schemes completely. Simply by citing this clause any employer who would otherwise have to provide access to a s1 scheme could, it appears, decide to choose to make other provision, for example the basic auto-enrolment level defined contribution provision outlined in Pensions Act 2011. This is contrary to the Chief Secretary’s commitments on extending access and outside any of the discussions with unions on public service scheme reform.

34. There is no obvious need for this provision, if it is to address a particular anomaly, then it would seem more sensible to address those issues directly. Instead Treasury have put a blanket provision in primary legislation that could decimate public service pensions most especially the LGPS which, as a funded scheme, would not be able to cope with employers using this provision to withdraw, leaving a substantial cost to be paid by the council taxpayer and a seismic change to the investment holdings of a scheme that currently holds more than £150billion in assets.

Treasury’s Scrutiny Free Remit -

Treasury control over all elements of schemes without any requirements for consultation and very little Parliamentary scrutiny.

35. S3(4)-(6) gives Treasury (and the Department of Finance and Personnel in Northern Ireland) a greatly expanded role in the running of all public service pension schemes, including those that do not receive direct funding from Treasury. This undermines the consultation requirements set out in Clause 20. There is little point in ‘Responsible Authorities’ consulting on changes to scheme regulations if the Treasury is the department that actually determines what scheme regulations are made.

36. The provision in clause 7 enabling Treasury to issue regulations outlining any defined benefit arrangement they choose in future (though not final salary) without parliamentary scrutiny gives too much control to Treasury with too little accountability. For an issue as fundamental as the type of scheme that can be provided to public service workers, regulations should as a minimum be subject to full parliamentary scrutiny.

37. The extra layer of bureaucracy above that of the schemes’ sponsoring departments Clause 3 introduces will restrict the responsiveness of the schemes – as all amendments will have, under this clause, to receive Treasury consent. In the LGPS negotiations, the response time from Treasury to proposals has led to significant delays already, for example, after three months of government receiving the joint proposals on governance and cost management [10] no formal response had been received. If this is indicative of the operation of the process this Bill enshrines in primary legislation, the efficient management of public service pension schemes looks to be a very remote possibility.

38. Clause 10 effectively takes away the ability of the Secretaries of State responsible for schemes – the ‘responsible authorities’, to manage the valuations of their schemes. All relevant parts of a scheme valuation are to be aligned with whatever Treasury deems appropriate, irrespective of the specific sensitivities of the scheme. This is a particular problem for the LGPS where local valuations are conducted by private sector actuaries (not the Government Actuary’s Department) on the basis of actual experience data on membership, investments and contributions.

39. The agreement reached in the Civil Service scheme stipulated that it would be the Minister for the Civil Service who would determine the assumptions for the valuation in that scheme, in conjunction with the governance group of the scheme, Treasury and GAD [11] . The Bill does not allow that agreement to be honoured.

Undermining Cost Management in LGPS

40. The provisions on governance are intended to be consistent across the public sector. However, the LGPS operates in a very different way to the other schemes, and the application of the same governance framework to both unfunded and funded schemes does not work. GMB believes consistency of cost management is not feasible across funded and unfunded schemes and Treasury risks destabilising the LGPS if it insists on this.

41. In the LGPS context, the role of the scheme manager is insufficiently clear and inadequately distinct from other levels of responsibility. There should be a clear division between the person responsible for administering and managing the scheme (s4) and the person responsible for overseeing the scheme and ensuring compliance (s5). In order to provide robust scrutiny and overall scheme management, both the scheme manager – defined as the person who administers and manages the scheme (s4) and the pension board – that is responsible for compliance must be accountable to the responsible authority and the National board responsible for assisting the responsible authority. As these bodies would be distinct in the LGPS, this approach would provide a better framework of governance and would reflect the agreement on governance and cost management developed by employers and unions [12] .

42. In the LGPS, individual employer contributions are set at a local level by the 89 funds in England and Wales, not centrally. Clause 10 gives Treasury control of the employer contribution process, seriously undermining the local involvement of funds and employers. Currently each fund has its own investment strategy, demographics and range of employers. As a result there is flexibility in the valuation process to allow funds a degree of independence in order to operate effectively. If Treasury is to set all the key parameters of the valuation, actuaries and funds will not be able to do this and the likely result is significant increases in employer costs.

43. Due to the funded, locally managed nature of the LGPS, DCLG and GAD have conducted a ‘model’ scheme wide ‘valuation’ based on certain experience and assumptions appropriate to the scheme. This is specifically arranged in order to ensure a close match to the real valuations that take place at fund level. Clause 10 makes that impossible and as a result, the cost management mechanism will be flawed as it would be based on a valuation that has no tangible connection to the actual changes in cost occurring in the scheme.

44. In addition, the process of operating the employer cost cap does not reflect the agreement reached in the LGPS. GMB believes the robust cost management process designed by the LGA and local government unions for the LGPS is preferable to the Treasury’s model not least as the latter fails to satisfy the requirement for consistency and certainty that the Local Government Association sought on behalf of employers in the agreement reached in that scheme.

45. The wording of s12(2) inadequately suits the LGPS context. Stability is a vital element of good management of a funded pension scheme and is a key consideration of funds when setting employer contribution rates. Solvency alone is inadequate to ensure the scheme continues to be viable, as demonstrated in the scheme specific approach taken to reaching agreement on a new LGPS, the future success of the scheme depends on many more elements than just meeting liabilities as they arise.

November 2012


[1] “The Government should increase the member’s Normal Pension Age (NPA) in most schemes so that it is in line with their State Pension Age ( SPA ). However, the link between the SPA and NPA should be regularly reviewed to make sure it is still appropriate, with a preference for keeping the two pension ages linked (Recommendation 11).” IPSPC Final Report March 2011 p.94

[2] “4.20 However, the Commission’s recommendation is that as well as the link to SPA being put in place, NPA 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.” Ibid. p95

[3] “As recommended by Lord Hutton, the Government will keep under review the link between Normal Pension Age in the public service schemes and State Pension Age to determine whether the link between the two continues to be appropriate.” Annex B, Para 2, Civil Service Proposed Final Agreement 9 th March 2012

[4] See Appendix 6

[5] “Because we have agreed to establish new schemes on a career average basis, I can tell the House that we have agreed to retain the fair deal provision and extend access for transferring staff.” Hansard 20 th December 2011 Column 1203

[6] See Appendix 3

[7] See Appendix 5

[8] Recommendation 17 IPSPC Final Report March 2011

[9] “ I have made the commitment that these reforms will be sustained for at least 25 years. The Government intend to include provisions on the face of the forthcoming public service pensions Bill to ensure that a high bar is set for future Governments to change the design of the schemes.” Hansard 20 th December 2011 Column 1203

[10] See Appendix 5

[11] “The start of the process will be an actuarial valuation of the Civil Service pension scheme that will determine the cost of the scheme based on actuarial assumptions determined by the Minister, with input from the Scheme Actuary, the Treasury and the Governance Group.” Annex B, Para 7, Civil Service Proposed Final Agreement 9 th March 2012

[12] See Appendix 5

Prepared 7th November 2012