Public Service Pensions Bill

Memorandum submitted by TUC (PSP 18)

 

Summary

The Public Service Pensions Bill seeks to put in place the legislative framework for reforms to public service pensions. These reforms were the subject of discussions at the central level between a TUC team drawn from the public service unions and Ministers from the Treasury and Cabinet Office. These talks began in February 2011, and detailed talks at scheme level with the relevant Government departments (and employers in local government) began in summer 2011.

 

The Bill has been presented as an enabling piece of legislation, and many details of the schemes will be set out in regulations. Key details about the future shape of the schemes were set out in Proposed Final Agreements for the schemes, published in spring 2012. Following the publication of the Proposed Final Agreements, the majority of unions balloted their members on the proposals. Unions will be providing separate evidence setting out their positions in line with the results of these ballots.

 

For an enabling piece of legislation, the Bill goes into an unnecessary level of detail on some areas, such as revaluation rates where it cuts across the packages discussed at scheme level. On the other hand, it remains virtually silent on areas of importance for all of the schemes such as the commitment to a strengthened and improved Fair Deal policy.

 

There are a number of concerns that range across the Bill, including the excessive concentration of powers with the Treasury, and the lack of recognition of the unique circumstances of the Local Government Pension Scheme (LGPS). There are also specific concerns, including the inclusion of retrospective powers, the narrow drafting of the 25 year guarantee and the potential for a shift away from defined benefit schemes.

 

In addition, there are at least two important elements missing from the Bill:

 

Fair Deal

The original Fair Deal policy provided that where public service workers were transferred out under TUPE a new employer must provide a ‘broadly comparable’ scheme and protect accrued rights.

 

On 20 December 2011 the Chief Secretary to the Treasury announced "we have agreed to retain the fair deal provision and extend access for transferring staff". This means that instead of contractors having to set up a new scheme, the requirement for ‘broadly comparable’ pensions will be met by allowing outsourced workers to stay in the public service scheme.

 

This commitment was a critical factor in the proposed final agreements and in agreements where they have been reached. The Bill should deliver on this commitment.

 

Review of SPA-NPA link

Recommendation 11 of Lord Hutton’s final report was that the link between the Normal Pension Age in the schemes and the State Pension Age should be "regularly and independently reviewed" to make sure it is still appropriate. The Bill is silent on this recommendation, and should make provision for such a review.

 

Key clauses

 

3: Scheme regulations

Clause 3, subsection 3 includes the ‘Henry VIII’ power which enables the government to amend the Act using secondary legislation. It also permits retrospective provision, which could mean future changes to accrued benefits which members thought were safe.

 

This undermines the claim by the Government that these reforms should be a settlement for a generation, meaning that further changes are possible, including to accrued benefits.

 

This has not previously been the case in the public sector: the Superannuation Act 1972 required member consent (in effect via their recognised trade unions) to any detrimental changes - direct or indirect - to accrued rights. This clause removes that protection. Nor is it the case in the private sector: section 67 of the Pensions Act 1995 says that changes in private sector pensions should not have retrospective effect (unless they are actuarially equivalent).

 

In addition the requirement for Treasury approval of all regulations is likely to increase bureaucracy, slow down policy making and reduce transparency.

 

4: Scheme manager, 5: Pension board, 6: Information

The Bill introduces governance requirements for the schemes, which are welcome. However, the TUC would like to see greater clarity and strength in these requirements, analogous to the requirements in private sector trust-based schemes.

 

In particular, the Bill should reflect Lord Hutton’s recommendation that there should be a requirement for member representation on the Pension Board. It should include a commitment to member representation via the recognised trade unions on the national Boards and in each local LGPS fund.

 

In addition, the Bill does not provide for a National Pension Board for the LGPS. The local government unions and employers support a national board as a key element of the governance arrangements for the scheme.

 

In the TUC’s submission to the Hutton review it was proposed that there should be an annual Treasury publication including key information about public service pensions in submission to Hutton. Lord Hutton’s final report included a recommendation in line with this suggestion but this is not clearly reflected in the Bill, where the only concrete requirements are on the schemes to provide information to the Treasury, but not on the Treasury to publish.

 

7: Types of scheme

By specifying that the schemes established under the Bill can be defined benefit, defined contribution or ‘a scheme of any other description’ apart from final salary, the Bill threatens to undermine a central tenet of the proposed final agreements. The Government has repeatedly said that the schemes should remain defined benefit, including in the November 2011 Good Pensions that Last paper. This commitment should be clearly reflected in the Bill in order to maintain member confidence.

 

8: Revaluation

Clause 8 concerns the revaluation of pensions during active membership (ie not in payment or deferment), which is of central importance in a CARE scheme.

 

The negotiations that took place at scheme level considered the balance between the revaluation rate and the accrual rate, and this led to differences in the revaluation rates that were chosen in each scheme. The civil service and local government schemes proposed final agreements chose CPI for revaluation, whereas the NHS scheme uses CPI+1.5% and the teachers’ scheme CPI+1.6% in exchange for a less generous accrual rate. The proposed final agreement for the firefighters’ scheme uses earnings revaluation. These differences reflect careful consideration at scheme level about the nature of the membership and the relative weight given to accrual rates as against revaluation.

 

Any change to revaluation rates would therefore represent a major change for members, yet the Bill offers the Treasury the opportunity to cut across all of the scheme-level packages by determining the rate, without consultation or scrutiny.

 

It is also unclear why the Government feels the need to set the revaluation rate out on the face of the Bill, rather than leaving it to scheme regulations as it has done with provisions for indexation of pensions in payment.

 

The second problem with clause 8 is that subsection 2 allows for negative revaluation. This would mean that if inflation was negative, members would see the value of the pension they are accruing decrease. It is important for member confidence in pension saving that they do not see the value of their pension fall in their annual benefit statement.

 

The approach in the Bill is not in line with existing practice in the public sector: the nuvos CARE scheme in the civil service has a 0% floor, so that if inflation is negative, there is no increase or decrease. In addition, pension increases in deferment in the current public sector schemes ignore any periods of negative inflation, effectively using 0% inflation when determining the revaluations to be applied to deferred pensions in these circumstances. 

 

9: NPA-SPA link

Clause 9 introduces the link between the Normal Pension Age in the schemes and the State Pension Age. The TUC and individual unions have stressed the importance of including Recommendation 11 of Lord Hutton’s final report, which was that a regular and independent review should be established to examine whether the link was appropriate.

 

Secondly, the Bill should make space for the outcomes of reviews that are still underway to consider the impact of the increased NPA. In the NHS a tripartite Working Longer Review Group is only just beginning its work. The project will include detailed research and consultation and is likely to take at least a year. The Bill as drafted precludes a potential outcome of this review by listing NPA 60 occupations. There is also a review underway in the firefighters’ scheme, which is expected to report at the end of this year.

 

Third, if there is to be a link between NPA and SPA there should also be more transparency in the process of setting the SPA. The TUC supports calls for an independent commission to consider the state pension age and any changes to it. This should have clear criteria, trade union involvement and public consultation, and should include a consideration of occupational effects (eg shift working) as well as longevity, and a focus on sharing the proceeds of economic growth fairly.

 

10: Valuations

The treatment of scheme valuations in Clause 10 is another example of the concentration of power with the Treasury without appropriate scrutiny and flexibility for schemes. The clause as drafted allows the Treasury to direct the timing, data, assumptions and methodology for scheme valuations, instead of the ‘responsible authority’ (ie the relevant Secretary of State).

 

In some instances this cuts across the proposed final agreements for the schemes, such as in the civil service where the PFA says that assumptions should be determined by the Minister with input from the scheme actuary, Treasury and the scheme Governance Group.

 

This attempt to secure consistency across the schemes is artificial as it ignores significant differences in the make-up of the schemes (demographics, occupational effects and so on). It is also out of step with private sector legislation and good practice, where setting the assumptions for a scheme valuation is the trustees’ responsibility.

 

There is a danger that this concentration of power without scrutiny will undermine confidence in the integrity of the valuation and cost management process. Instead, we would like to see flexibility between the schemes including a central role for the governance bodies, and early engagement and consultation.

 

This clause is of particular concern in the case of the LGPS, where individual funds undertake their own valuations, including an assessment of the performance of the investments they hold.

 

11: cost cap

Clause 11 establishes the outline for cost management arrangements in the schemes. This is another example of a concentration of power with HMT with virtually no consultation or scrutiny. The previous arrangement (cap and share) was set in regulations and so the move to HMT directions is an unwelcome step away from public accountability.

 

Subsection 7 of this clause allows for a reduction in accrued benefits. This is likely to constitute a breach of scheme members’ rights under the European Convention on Human Rights, as the Explanatory Notes for the Bill recognise.

 

20: Consultation and report (25 year guarantee)

Clause 20 aims to put in place the ’25 year guarantee’ given by ministers that the reforms should last a generation without further significant changes. The clause as currently drafted does not deliver on this commitment. It is narrowly drafted, weak in terms of the consultation requirements, and undermined by the retrospective powers introduced by clause 3. In effect, it provides significantly weaker protection than that currently offered by the 1972 Superannuation Act.

 

Only three ‘protected elements’ are identified by the clause: the CARE nature of the scheme, the member contribution rate and the accrual rate. There are many other elements that, if changed, could represent a significant change and detriment to members. These include the pension increase rate (in deferment or payment), the revaluation rate, ill health provisions, eligibility for the scheme or the final salary link for those with transitional protection.

 

22: extension of schemes

Clause 22 would allow schemes to be opened up to members who would not previously have been eligible to join, such as those working on outsourced public service contracts in some sectors.

 

It is does not, however, make reference to the government’s commitments to strengthen and extend Fair Deal. This policy would allow members to stay in their public service schemes if they were outsourced: effectively delivering the requirement for ‘broad comparability’ by giving people the right to remain in the public sector scheme.

 

This commitment was a key element of the package across all of the schemes. It is central to confidence in the new schemes, and should be reflected on the face of the Bill.

 

23: non-scheme benefits

This clause enables scheme managers and employers to make payments to a pension arrangement other than the appropriate public service scheme. There are concerns that this could seriously undermine the commitment to the public sector schemes. It is unclear why it is necessary to include this in the Bill at all.

 


Local Government Pension Scheme issues

There are numerous ways in which the Bill as currently drafted fails to deliver – on indeed cuts directly across – the agreement reached between local government unions and employers for the LGPS. The distinctive structure and funding of the LGPS means that in many circumstances it is inappropriate to treat it in the same way as the other schemes. Discussions between the local government employers and unions have led to an agreed package of changes which will be put in place a year earlier than those for the other schemes, and a number of elements of the Bill risk undermining this progress.

 

Local government unions have provided detailed evidence on these points, but in summary the key areas are:

 

· There should be a national Board for the LGPS as well as local governing bodies for each LGPS fund.

· The valuation provisions are particularly problematic. In the LGPS individual funds hold real assets and conduct individual valuations with advice from their fund actuaries.

· The provisions on cost controls cut across the discussions that are currently at an advanced stage in the LGPS to design an appropriate method for the scheme. The LGPS proposals developed by unions and employers consider governance and cost controls together, but this is undermined by the Bill

· The provisions for scheme closure are particularly problematic for the LGPS, where they could trigger major changes in investment strategy and potentially lead to insolvency for some employers.

November 2012

 

Prepared 21st November 2012