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For those of us who have been following pensions closely, the past 10 years have seen the most phenomenal changes. There have been a remarkable number of short-term changes with considerable impact, many of which were unpredicted at the time; and, of course, the speed of the changes and the volatility also strike one.
On the deficits of private sector pension defined benefit schemes, there are any number of analyses going on about exactly how they will changeand change quite quickly, with interest rates changes and things of that sort, and changes in the long-term bond yields. There is still a considerable lack of understanding of those kinds of changes among many people who follow pensions and who are affected by pensions. Indeed, I have long wonderedI have spoken on this in the House beforewhether we have the right way of assessing liabilities in looking at deficits because they can change so remarkably quickly in a short space of time, and yet the size of the deficit for an individual company can have a major impact on what that company is doing in a given year.
I was struck by how the Pensions Commission was able to bring together so much information which has been of great benefit to all of us who are interested in pensions. I do not just mean policy-makers; I think that that is so for employers and many others. We have a lot of available information from all sorts of other sourcesthe NAPF, the ABI and so onbut the advantage of an overall authoritative and well researched and well resourced analysis seems to me to be so much better.
I think that the commission is different from the Monetary Policy Committee, a matter mentioned briefly by the noble Lord, Lord Oakeshott. As I understand it, and hope, the body will gather analyses and trends and monitor all those sorts of things, which will help policy-makers to reach conclusions. It will not have, as the Monetary Policy Committee has, the independent ability to make decisions which affect us all. So I think that there is a distinction in that case.
are simply to illuminate public debate. They will not lead to any policy decisions, but there are a considerable number of analyses of the overall impact of public sector pensions on long-term costs and they vary considerably from time to time. I think that an authoritative look at this subject from time to time is terribly important. The noble Baroness must know that there is great concern among many private sector employers and pensioners about what has happened with public sector pensions and private sector pensions and the enormous changes over the past few years. An independent analysis will help proper public debate about that.
As for the latest trends in private pension savings, there seems now to be general agreement that defined benefits are on the way out, at least for new employees, and that defined contribution schemes will replace them. Four years from now, we may see unforeseen consequences of those changes. I do not know, but it is possible, and an independent analysis could help there. As for the latest trends in life expectancy, there is no doubt that what has taken so many of us by surprise is the increase in longevity by so much in recent years. Again, an authoritative independent analysis would help.
On the latest trend in private pension savings, I am a chairman of pension fund trustees. One is struck by the number of advisers that one has, often with different advice from actuaries, lawyers, investment management consultants, and the rest. Again, the Turner commission helped many of those who were first getting involved in becoming pension trustees to understand the issues. I think that an independent commission would do the same.
Finally, if the review demonstrated that average retirement ages were rising, as we all expect from various employment and social trends, I hope that that will accelerate the argument for bringing forward the dates laid down for the increase in the state pension age. Those are all issues that are left to be decided by others, but would greatly illuminate what is happening at present and help to make better decisions.
Lord Turnbull: My Lords, I regret to have to differ from the noble Baroness, Lady Turner, as I share one of the concerns that underlies the amendment: that public sector pension provision is riddled with faults and should be reviewed. The patchwork of schemes that make up public sector provision share a number of characteristics: mostly direct benefit, mostly final salary, mostly, but not exclusively, unfunded, and with longevity risk and investment risk largely borne by the employer.
Why are those arrangements, in my view, not fit for purpose? First, they are poorly adapted to a world in which we are living longer, working longer and moving jobs more often. Indeed, we are actively encouraging people to move within and across public sector boundaries. For example, final salary schemes do not cope well in a worldwhich we will see more ofin which people are happy to work beyond 60 but often in a less taxing and less well paid job than they once had at the peak of their career.
Secondly, the cost of unfunded schemes is deeply untransparent and provides poor incentives to act speedily to correct problems. Thirdly, there is no mechanism systematically to link pension age to life expectancy, so over time, those schemes become more and more expensive. When I joined the Civil Service Pension Scheme in 1970, on average, men would expect to draw the pension for 17 years. They are now expected to draw the pension for 27 years. The extra 10 years has been entirely free; contributions to that scheme have not changed over that period.
Fourthly, the schemes distort the total remuneration package in the public sector. Too much is going into deferred pay, where no performance conditions can be attached, and too little into current pay and bonuses. Deferred pay is not much help to you in trying to get a mortgage to buy a house in London.
Above all, these schemes are deeply unfair and arbitrary. They are unfair to millions of taxpayers who no longer have access to DB final salary employer-guaranteed schemes, but who have to pay for those who enjoy such arrangements. Two-thirds of employees are now outside such schemes.
They are unfair between long-stayers and early leavers. I confess that I am a beneficiary of that unfairness. They are also unfair between junior and senior staff, because the junior staff have a higher turnover.
They are unfair between existing and late joiners. When you add up what for two people earning the same money who have the same performance and get the same pay increase has been added to their notional pension pot, you find a difference of thousands and thousands of pounds.
They are unfair between existing and future staff. I give the example of two brothers. One has joined the Civil Service. He has a retirement age of 60. His younger brother joins in three years time. He will have a retirement age of 65. In 40 years time, they will be wondering how on earth that difference came about and how it can still be justified.
It is also unfair between those in public sector-funded schemes, such as local government, where there are pressures to keep contributions and benefits in line, and those in unfunded schemes, where the pressures are less or even non-existent.
One of my last acts as head of the Home Civil Service was to propose a move from final salary to career average, which is still within the category of defined benefit, and a rise in the pension age for new joiners and for the future service of existing staff, after a transitional period. The hope was that that would be followed by other public sector schemes. It was deeply regrettable that the now Secretary of State for Health, no doubt under instruction, swept all that under the carpet so that it did not become an election issue.
We cannot allow that to continue. The leaders of public service unions are being shortsighted in not addressing the issue. Thirty years ago, there was a groundswell of resentment about inflation-proofed
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Assigning that task to a reconstituted pensions commission would be a welcome start. It could sort out fact from fiction and begin to build consensus. The final task assigned to it concerns trends in mortality and longevity. That is not exclusively the work of actuaries. It involves a whole host of disciplines. You have to understand how society is working and how migration is working. It is not an advanced form of mathematics, so a broadly based pensions commission is a better place to locate work of that kind.
Lord Turner of Ecchinswell: My Lords, I should like to say some words in support of both amendments. The idea of an Independent Pensions Commission returning on a periodic basis or perhaps being a standing commission that reported periodically was one that the Pensions Commission supported and was in our recommendations.
We made those recommendations very wary of the idea that once a commission gets to the end, it should propose that there is another commission to replace it. Frankly, we thought that we had done a reasonable job and that our proposals made good sense in themselves. We did not necessarily believe that a whole load of extra work needed to be done immediately to take it forward. But we were very aware that things change. If they do not change dramatically in four years, they will certainly change dramatically in 10 years, and over time.
For instance, our estimates of life expectancy have been transformed dramatically over the past 10 years. When we started our work in 2003, estimates of life expectancy for a man aged 65 had changed by about four years in the previous 10 years. In 1993, the Government Actuary's Department said that in 2003, a man aged 65 had a life expectancy of 15 years, but when we looked at it, it said that it was 19 years. That figure is rising, and it could rise quite rapidly. We could get dramatic changes in medical science where we see either a slowdown in the pace of life expectancy on which we are presently planning or very major accelerations. We need a process to ensure that, quite separate from the pressures of governmentthe pressures that necessarily push Governments at any one time to suggest that things are under control and are okaysomeone is looking independently at an area where the facts could change but also where the implication of those facts lies far in the future. We in this countrythis has been a good development in the government of our countryare heading towards increasingly identifying a number of areas of public policy where there is value in having a permanent independent commission or permanent independent authority.
The noble Lord, Lord MacGregor, has pointed out that the analogy with the Monetary Policy Committee is not precise, because that committee actually pulls the policy levers rather than simply provides advice, but it is similar in that the argument for the independence of the Bank of England and its control of the pursuit of an inflation target are based on the fact that the detriment of bad inflationary control tends to lie far in the future, so that if it is left without independence and is simply under the control of the Chancellor of the Exchequer, there is a tendency, as we have known for decades, to favour the short-term benefit of low interest rates over the long-term benefit of low inflation. That is why the present Prime Minister, in a very bold and very appropriate step, moved to the independence of the Bank of England in 1997.
That is not remotely equivalent to this, because there is no intention that this independent commission pulls the levers, but it is similar in the sense that we are dealing with pension policies that have been a problem for many years because the benefits of good pension policy lie very far in the future. This is a policy matter that relates to an intergenerational equity between people today and people far in the future, and it is not easy to get the right answers entirely within the framework of adversarial party politics. The noble Lord, Lord Oakeshott, referred earlier to the fact that, when he initially took over the pensions brief, he was aware, as I am sure are most people who consider this issue, that the state pension age would have to be increased, but that he was somewhat reticent about mentioning it. That reticence was pretty much total at 11 am on 30 November 2005 when I presented the Pensions Commissions report. Not one of our three major political parties was committed to an increase in the state pension age. We said that it had better go up, and, by that evenings news, all three major political parties had said that it was a rather sensible idea. There is sometimes a role for an independent view that is completely separate from party politics.
We in this country are slowly heading towards defining areas of policy where such commissions have a role. The independence of the Bank of England is one such area. Indeed, it is a very extreme case in that it actually pulls the policy levers. Another one, to which my noble friend Lord Howarth has already referred, is a proposal in the new draft Climate Change Bill for an independent committee to hold the Government to account on the progress made towards achieving the emission reduction targets required for climate change mitigation. Again, that places a deliberate external discipline on short-term politics to ensure that the long term is given sufficient focus. That was the argument used by the Pensions Commission. We thought that pensions and the challenges of longevity fell into that category of problem and that there was an appropriate role either for a standing commission that reported periodically or for a commission that was pre-set to be reformed every four years. I have nothing against that as an alternative proposal.
Amendment No. 34 relates to issues which I said something about in Committee. I should say to the noble Baroness, Lady Turner, that one cannot simply say, This contract has been formed as part of a negotiation, therefore end of story. No one is allowed to look at its future cost. This is a very particular form of contract. It is not a contract in which someone promises to give their labour in the next six months and receive remuneration in the next six months, but one that purports to set someones retirement age 40 or 45 years in advance. We do not know its value because we do not know how long that person will live when they get to 2050, given the uncertainty about longevity, which I mentioned earlier. We are promising people who have already joined the Civil Service that they will retire at 60 in 2047 or thereabouts. That has a certain possible value; indeed, it has a very large value, given that by then someone aged 60 may well be expected to live for another 30 years. But it is quite possible that changes in medical science will mean that someone then aged 60 can expect to live for another 35 or 40 years. In that case, we have written a very large, and also blank, cheque to those people through the contract that we have proposed.
A contract of that nature makes it legitimate for society to look at it occasionally on behalf of taxpayers and to ask whether it is affordable and whether it is fair, relative to other people. After all, that is what we have done in relation to the state pension age. Some people in the workforce today may have believed that they had a categoric promise that they were going to retire on the state pension at 65, or at 60 in the case of women before the reforms that were introduced 15 or 20 years ago. We as a society have said that that promise does not make sense and is not a fair contract between the working population and the retired population, as it would place too much of a burden on future taxpayers.
Legally, one should respect rights that have already accrued for service that has already been given. However, one cannot treat future service as an agreement that, once made, can never be challenged. In the light of that and the major concerns about the structure of public sector pensions, which the noble Lord, Lord Turnbull, has very effectively expressed, it is important that we continually present the facts about public sector pensions, whether through a commission or reports or by other means, and scrutinise them with an intensity with which the state and private sector pensions have increasingly been scrutinised but which the public sector pensions have escaped.
Lord Skelmersdale: My Lords, is not that exactly the point? The facts are what we do not know and the reason why the Government set up the Turner commission; so that it could establish them and make recommendations thereon. Without the facts, we are rather lost. We pretty much know the facts to which paragraphs (b) and (c) in the noble Lords amendment relate, but we do not know the terms, benefits and affordability of public sector pensions, to which paragraph (a) refers. That is why I tabled my Amendment No. 34.
As the noble Lord, Lord Turnbull, just said, public sector pensions are facing the same problems as the private sector. They are both experiencing the same demographic effect. The Bill shows that the Government are quite capable of taking the necessary steps to address the problems, once they have established what the problems are. The pension age needs to be raised, and people need to be encouraged to save more during their working life. At the same time, painful but unavoidable changes are being forced on private sector schemes. Defined contribution schemes are now the norm, with two-thirds of final salary schemes closed to new members.
We therefore need no new ideas about how to address the public sector pension crisis. What is very necessary, however, is getting the Government to admit that there is a crisis at all. My amendment is a practical alternative to that of the noble Lord, Lord Oakeshott, andMembers all around the House expect me to say thisis a much, much cheaper way in which to achieve this. A Parliamentary Question on the liability of public sector pensions, which my honourable friend Phillip Hammond laid in another place on 15 May, was answered two weeks ago with a blind optimism that completely disregarded independent warnings on the rising costs. The figures finally given by the then Chief Secretary to the Treasury in response are also a year out of date. Exactly the same reply was given on 2 March 2006, 9 January 2006 and, more importantly, 6 December 2005. Talk about obscuration; that just about takes the biscuit.
The Government claim that the public sector pension liability as at 31 March 2005 was £530 billion. This years estimation is likely to be £110 billion more, taking the total liability to an enormous £640 billion. If the Minister thinks that that is a high projection, perhaps he would like to give the House a more up to date figure. In fact, independent actuaries think that the total liability is more than £1,000 billion. We simply do not know. The size of the liability is unsurprising. While the Prime Minister as Chancellor of the Exchequer consented to raising the state pension age to 68, as this Bill does, and is continuing his measly financial assistance scheme for private sector workers who have seen their pensions fail thanks to his mismanagement, he has continually failed to impose the same pressures on public sector pension schemes and their contributors. Public sector workers continue to enjoy defined benefit schemes, early retirement ages, generous ill health and death benefits, indexation and lump-sum allowances. There is a reason for this, and I accept exactly what the noble Baroness, Lady Turner, has said: pensions are deferred wages. But until this is pointed out properly, very few people are going to believe it. This is another reason why we should have a report.
These promises all have cast-iron guarantees via the taxpayer, of course, unlike in the private sector where 60,000 occupational pension schemes have wound up or are in the process of doing so. The same people whose pension schemes have already been raided to the tune of £5 billion a year are being forced to pay yet again. Our amendment would prevent the new Chancellor continuing to fudge the figures and bury the bad news as the old one did. It would mean that no longer
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I believe that my amendment would force the Government to face up to the problem that they have played such a large part in creating, and best of all it would happen immediately, unlike the amendment of the noble Lord, Lord Oakeshott, which by definition would take time to accomplish anything.
Lord McKenzie of Luton: My Lords, we have discussed the topics covered by these amendments before, but it has been helpful to range over them again in this debate. As I said previously, our opposition to Amendment No. 5, as with others proposing a permanent pensions commission, is not an attempt to avoid discussion of these important issues and does not reflect any reservations as to the usefulness of a commission in subjecting fundamental issues to rigorous scrutiny in establishing a consensus on the way forward. As I have made clear, we are enormously indebted to the noble Lord, Lord Turner, for the work of his commission. However, that work having been completed, we feel the priority now is to implement the solutions that we have agreed upon.
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