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No Increase For Additional Lump Sums Arisingfrom Recalculation

Volume 165: debated on Wednesday 17 January 1990

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Question proposed, That the clause stand part of the Bill

Clause 3 removes the right to inflation proofing when a lump sum retirement benefit is reassessed to take account of a retrospective pay increase. That is a frequent occurrence in certain professions, particularly the teaching profession, as the normal retirement date is the end of August and not spread throughout the year as it is in other professions. I understand that each year about 16,000 applications for retirement are received to come into effect at the end of August. When that happens the lump sum payments are calculated before the annual pay settlement is concluded. In due course those pensioners receive an additional lump sum based on the increase in salary. That addition is increased, where appropriate, under the Pensions (Increase) Act. Under clause 3 that will no longer apply.

There seems to be only one argument in favour of clause 3 and that is that interest is not paid on salary arrears resulting from a pay rise and therefore pensioners should not be treated more favourably than employees. That argument has a familiar ring because of our discussions on clause 1, under which women are to lose their entitlement to a pension increase because men do not have the same entitlement. In clause 3 pensioners are to lose entitlement to inflation proofing of arrears because employees do not have the same entitlement. In short, the Government are saying that equality is a many?splendoured thing. They have suddenly become fanatical about being egalitarian, but only when the results of equality achieve a saving in public funds. That is a questionable devotion to the principle of equality.

Perhaps the Minister can tell us how many people would have received those increases in recent years and whether they would have been affected by clause 3. Perhaps he could give us some idea of what the average loss would have been and the total savings to be made. What consultations have taken place with the unions and other representatives of the members of the scheme? Again, clause 3 represents a small change, but a mean, penny-pinching and unnecessary one.

Clause 3 ends a provision that gives rise to extremely small one-off payments to pensioners but with a disproportionate administrative burden for the scheme managements concerned.

The problem we seek to solve is this. The Pensions (Increase) Act protects the real value of preserved lump sums awarded to "early leavers" from public service schemes. That is entirely appropriate, but, of course, it was never intended that the provisions should operate once the lump sum had been paid.

Unfortunately, they apply to lump sums that are recalculated when a retrospective pay award is made. If a scheme member retires after a retrospective pay award comes into force but before that award has been announced, his final salary for pension purposes will be increased and his pension and lump sum recalculated. An additional amount of lump sum is paid, and the Pensions (Increase) Act also requires pensions increase to be paid on that additional lump sum. However, the amount of that increase cannot be calculated and paid until the next pensions increase order is made. So the scheme management may have to make no fewer than three payments of lump sum when a scheme member retires: on the date he retires; when a retrospective pay award is announced; and when the next pensions increase order come into force.

The last payment will normally be very small, no more than a few pounds and perhaps even a few pence. Clause 3 relieves schemes of the requirement to make this third payment and of the associate administrative burden. I must stress that the entitlement under scheme rules to an additional lump sum and the recalculation of pension if a retrospective pay award is made is completely unaffected by the clause. The clause simplifies the administration of pensions increase at an insignificant cost to pensioners.

7.45 pm

It is important to establish clearly that the minor administrative simplification is made at a negligible or insignificant cost to some pensioners. It does not undermine the principle that all pension benefits are protected against inflation. Pensions increase legislation has always taken account of practical considerations and the need to avoid excessive administrative costs.

The effect on pensioners is very small. In many cases, the amount is less than £1. A hypothetical calculation based on a civil servant retiring on a salary of £25,000 after a full 40-year career might have benefited from an award six months delayed of only £11·25, or 0.03 per cent. of the total lump sum involved.

The hon. Member for Newport, West (Mr. Flynn) was right to ask one particular question. The salary arrears do not attract interest. Another anomaly is that if the scheme makes a mistake no pensions increase is paid on the extra lump sum. I hope that that goes some way towards answering the hon. Gentleman's points.

Question put and agreed to.

Clause 3 ordered to stand part of the Bill.