Public Service Pensions Bill

Memorandum submitted by Prospect and FDA (PSP 06)

1. Prospect is an independent trade union representing about 120,000 professional, managerial, technical and scientific staff across the private and public sectors. In the public sector our members work in a range of jobs in a variety of different areas including in agriculture, defence, environment, heritage and scientific research. Prospect has approximately 35,000 active members in public service pension schemes.

2. The FDA is an independent trade union for the UK’s senior public servants and professionals. We have more than 19,000 members across government and the NHS; they largely work as senior managers, policy advisers, diplomats, tax professionals, economists, solicitors, prosecutors and other professionals.

3. Prospect and the FDA have worked closely together on the public sector pension reform process instituted by the Coalition Government; we are making a joint submission to the committee because our members’ views are closely aligned on this issue.

4. The Bill enables the implementation of the Governments various Proposed Final Agreement’s (PFA) on public service pension reform. Prospect and FDA members endorsed the Civil Service PFA by large margins. Prospect and the FDA are therefore not opposed to the broad thrust of the Bill but we have significant concerns about various aspects where we feel the spirit or letter of that PFA has not been adhered to or where we feel the legislation is impractical.

Background

5. Public service pension reform has been a priority of the Coalition Government since it took power after the May 2010 General Election. One of the Government’s first actions was to appoint Lord Hutton to conduct a review of public service pension provision.

6. There have been three significant changes to public service pension provision arising out of the recommendations of the Independent Public Service Pension Commission (IPSPC) and other reforms: (a) the June 2010 Budget announcement that pensions would increase in line with CPI rather than RPI (b) the November 2010 announcement, following the IPSPC’s interim report, that member contributions would increase by an average of 3.2% of pay (c) the agreements in different sectors, following the IPSC’s final report, on the long-term benefit structure for public service pension schemes to apply from April 2014 / April 2015.

7. Prospect and FDA members feel very strongly about the issue of public service pension reform. Members of both unions participated in the public sector wide day of action on this issue on 30 November 2011, the first time members of either union took civil service wide industrial action in over 30 years. However our members have always taken a reasonable approach to pensions and other industrial relations issues. On the back of progress in discussions arising from the day of action we were able to get to a position where members of both Prospect and the FDA could endorse the PFAon the long-term benefit structure for public service pension schemes by large margins.

8. The Bill before the committee enables the implementation of those agreements. It is vital for the confidence of Prospect and FDA members, as well as public servants generally, that the Bill reflects the letter and spirit of those agreements.

9. For the avoidance of doubt, the Bill only deals with one of the three major areas of public service pension provision outlined above. Prospect and FDA members remain opposed to switch in the index used to increase pension benefits already accrued and the unfair imposition of higher member contributions.

Summary

10. The main issues Prospect and the FDA have with the Bill as drafted are:

(a) Lack of accountability or Ministerial / Parliamentary oversight with many important issues left to Treasury directions.

(b) Choice of index used for revaluation and possibility of negative increases.

(c) Lack of clarity about risk-sharing and cost capping.

(d) Issues relating to the "25 year guarantee" and possibility of reductions to pension already accrued.

(e) Lack of an independent review of the SPA link.

(f) An apparent carte blanche for public sector employers to bypass the pension arrangements established by the Bill.

(g) Unilateral changes to the some pension schemes without any proper negotiation or consultation with employers or members’ representatives.

Detailed comments

11. Our comments on the areas highlighted above are:

- Treasury control

12. There is an overall tendency in the Bill to devolve significant issues to Treasury directions. This occurs in various clauses. We believe too much control is vested in Treasury with too little Ministerial involvement or Parliamentary oversight.

13. In Clause 10, the Bill specifies that Treasury directions will determine, amongst other things, the timing, methodology and assumptions of scheme valuations. This contradicts the final agreement on the civil service pension scheme [1] . Para 7 of Annex B to that agreement states that actuarial assumptions will be "determined by the Minister, with input from the Scheme Actuary, the Treasury and the Governance Group". The Bill must be adjusted to reflect the wording of the agreement.

14. The Bill contains many more references to issues being subject to Treasury directions. Some of these are addressed specifically later in this submission. Treasury does not generally consult or negotiate with scheme members or their representatives, so passing control to this department in many areas will either weaken proper scheme consultation processes or introduce an extra layer of unnecessary bureaucracy.

- Revaluation index

15. The agreements on reform of public service pension schemes involve final salary pension schemes being replaced by career average pension schemes.

16. An important element of any career average pension scheme is the "revaluation rate". This is the rate at which earnings early in a career are increased when calculating a career average salary when the pension is awarded. A small difference in the "revaluation rate" can have a significant impact on the overall level of pension.

17. Clause 8 of the Bill gives Treasury the authority to determine the change in prices or earnings in any period and for the resulting factor to set the "revaluation rate".

18. This places too much power in the hands of an unaccountable department. This clause should be amended to (a) better reflect the actual revaluation rates set out in agreements for various pension schemes (eg CPI in the civil service scheme) (b) make it clear that this important function is a Ministerial responsibility and that the Minister is accountable to Parliament in exercising this responsibility.

19. The wider context should be noted here. A recent Budget decision to switch the index for increasing pensions in payment from RPI to CPI caused the average value of public service pensions to fall by about 15% [1] . Members who endorsed agreements on public service pension schemes will expect robust protection from such an unjustified cut in the value of their pension again.

20. Clause 8 (2) specifically allows for negative inflation or earnings growth to effectively be translated into reductions in the pension accrued in these career average schemes. This is not how the main career average scheme in the public sector (the Nuvos section of the civil service pension scheme) currently operates and it is also inconsistent with the treatment of pensions in payment. We would have expected a departure from convention of this magnitude to have been raised with trade unions in negotiations or specifically mentioned in the final agreements. As neither actually happened it is important for member confidence in the process that the provision for negative factors is removed from the Bill.

21. One possible approach is to simply remove Clause 8 from the Bill in its entirety and leave the issue of revaluation to future scheme regulations.

- Lack of clarity about risk-sharing and cost-capping

22. Risk-sharing is an important element of the agreements on public service pension reform. It ensures that the schemes remain sustainable in the long-term.

23. As noted above, many important aspects of risk-sharing and cost-capping set out in Clauses 10 and 11 are set to be determined by Treasury directions. As previously stated, we believe these issues are too important to be left in the unaccountable hands of a single department with no Ministerial responsibility or Parliamentary oversight.

24. The committee needs more information on the type of risk-sharing and cost-capping arrangements that are envisaged before being able to come to a view on whether the agreements with scheme members are being honoured in full.

25. Furthermore, member representatives should also be properly consulted on any risk-sharing and cost-capping mechanisms that emerge. Members would expect this as a minimum.

- "25 year guarantee" and possibility of reduction in accruals

26. The Chief Secretary’s "25 year guarantee" that no further changes would be required beyond the current agreements was an important element of the packages of reform that members voted on.

27. The guarantee is legislated for in Clause 20 of the Bill but the provisions of this clause fall well short of what might reasonably be envisaged as a "25 year guarantee".

28. As currently drafted, the guarantee amounts to a requirement for the responsible authority to (a) consult with a view to agreement and (b) lay a report. This is simply not strong enough. Any reasonable interpretation of guarantee requires actual agreement rather than consultation with a view to reaching agreement. Members will simply not recognise the "25 year guarantee" in the Bill as currently allowed for in Clause 20.

29. It should also be noted that very significant elements of scheme design are not listed as "protected elements" under Clause 20. 20 (5) should be amended to extend the "protected elements" listed.

30. More fundamental than even the failure to legislate for the "25 year guarantee" appropriately, is the potential Clause 20 creates for basic tenets of pension law and human rights’ law to be overridden.

31. Clause 20 explicitly allows for responsible authorities to make detrimental retrospective changes to members’ pensions without agreement.

32. This is in direct contrast to legislation governing private sector pension provision (section 67 of the 1995 Pension Act) and we also consider that any provisions under this part of Clause 20 would be in contravention of the European Convention on Human Rights.

33. The explanatory notes suggest that the provision is included to allow for the efficient implementation of scheme changes. If that is the case we believe the provision should be significantly tightened to reflect this.

- Lack of review of SPA link

34. Both Lord Hutton’s final report and the agreement on civil service pensions stated that the link between normal pension age and State Pension Age would be regularly and independently reviewed.

35. Currently there is no mention of such a review in the Bill; this should be dealt with by an appropriate amendment.

- Ability for employers to bypass arrangements established by Bill

36. Clause 23 allows employers to contribute to private pension arrangements where employees do not take up membership of a scheme established under the Bill that they would otherwise be eligible for.

37. It is not clear why this provision is being made or what oversight there would be that payments to these schemes would be appropriate. The need for this Clause should be investigated by the committee.

38. There may be a danger of employers seeking to bypass the arrangements established under the Bill to make either superior or inferior provision for individuals or groups of staff. We believe that it is an important principle that all Civil Servants should be covered by the same pension arrangements and would therefore be opposed to allowing any loop holes that would allow employers to by pass the established scheme.

- Closure of pension schemes

39. Members of other pension schemes not covered by agreements including, for example, many Prospect members of the UKAEA’s pension schemes, will find their scheme closed under Clause 28 (and Schedule 10) of the Bill.

40. This measure has been undertaken without any consultation with the relevant members or their representatives and without any information on the future pension arrangements for these members being provided.

41. This is not an acceptable way to treat public servants and the committee should insist that this be redressed before the scheme closures are carried out.

- Other issues

42. Clause 16 allows for transitional protection to apply to members of various ages "immediately before 1 April 2012". However the agreement on the civil service pension scheme, for example, states that transitional protection applies to members of various ages "as of 1 April 2012". Our interpretation is the latter definition is slightly broader (by including members of the relevant age on 1 April 2012) and we feel the Bill should be amended to reflect the wording in the agreement.

43. It is not clear whether Clause 16 allows for "added years" and other AVC arrangements to continue where appropriate and clarification is needed on this point.

44. Confirmation that the pension built up in the schemes allowed for in the Bill can be drawn separately from any legacy public service pension is also necessary.

45. Lord Hutton recommended that pension policy groups be established and these are referenced in the civil service pension agreement. It wold be appropriate for these groups to be mentioned in the Bill.

46. There may be unintended consequences of the closure of certain schemes under Clause 28 (and Schedule 10) of the Bill. If members of these schemes are moved to civil service pension arrangements they may be caught by the abatement provisions of this scheme (ie they may find existing pension reduced because they are working for an employer covered by the civil service pension scheme). We seek reassurance that members will not be adversely impacted by what is otherwise simply a rationalisation of public service pension arrangements.

Summary

47. The process for reforming public service pension schemes has been long and difficult. Properly capturing many different elements of the relevant agreements in one bill is a difficult task. Prospect and the FDA do not object to the overall thrust of the Bill but we think significant amendments along the lines outlined above are necessary to make the Bill workable and to bring it into line with agreements our members endorsed.

November 2012


[1] http://resources.civilservice.gov.uk/wp-content/uploads/2012/03/ProposedFinalAgreement.pdf

[1] http://www.hm-treasury.gov.uk/d/hutton_pensionsinterim_071010.pdf

Prepared 7th November 2012