It is a great pleasure to serve under your chairmanship, Mr Leigh, for, I think, the first time, and it is a particular pleasure, if I may say so Sir, to have the Economic Secretary as the Treasury Minister responding to the debate.
We live in a time when nation after nation is being told: “You are not as rich as you thought you were.” As a result, nation after nation is facing cuts—sometimes mild, sometimes severe—in the services their Governments can provide, the real incomes that their labour can earn and the value of their assets, calculated as the debt that can be raised against their businesses and homes. We are living in such times because for more than a decade nation after nation rapidly increased the amount of its borrowings as a proportion of its economy—its national leverage. It was not just excessive Government borrowing, but an entire national pastime undertaken by millions of households, companies and banks in many nations. That beggaring of future generations is now—sometimes harshly but ultimately correctly—being brought to an end, and it is in that context that we review a future fund, including how it may help and how it might fit with current Government policies.
So, what is a future fund? A future fund is shorthand for moving the burden of paying for public sector pensions from the current tax-as-you-go model to a proceeds-from-invested-capital, or fully funded, model. It is fair to say, and I am sure that the Economic Secretary will confirm this, that Lord Hutton’s recent review of pensions ruled out a move to a future fund. Like you, Mr Leigh, I do not have any wish to be a champion for lost causes, but I hope that I am able to make some strong points about why the Treasury should reconsider Lord Hutton’s proposal to move on and not make a transition in the way in which public sector pensions are funded. This is not about public sector pension negotiations or about changing public sector pensions; it is about the process that the Government undertake to fund the pensions.
I encourage the Economic Secretary and the Treasury to reconsider a future fund for three main reasons. The first is that it promotes intergenerational fairness, and reinforces the Government’s view about long-term thinking for the security of our economy. Secondly, it offers an opportunity to rebalance the structure of earnings, to restore emphasis on pension provision—deferred income—rather than on immediate income and, thirdly, it enables the creation of a UK sovereign wealth fund, to stimulate investment in long-term projects.
I shall take each reason in turn. First, on a future fund promoting intergenerational fairness, those of us of a certain age look back on our lives and, being part of a bulge bracket of population—some of us at the latter end of it—perhaps realise that we have taken a lot for ourselves and that, as a generation, we have been somewhat greedy on the nation’s resources. That is one reason why this Government came into office at a time of such enormous debts, which future generations will need to repay. One thing that guides me as a Member of Parliament is looking for ways in which we can use fiscal probity to unburden future generations of some of those liabilities. Let us be under no illusion: it will not be easy for our children and grandchildren to compete in the future world economy. It will be tough. We have new competitors coming up all the time, so they will need every advantage, one of which is to bequeath them lower taxation rates than they otherwise would have.
Does the hon. Gentleman consider the Norwegians to have been a great example of setting up an oil fund for future generations to ensure that their oil wealth was not squandered in one generation?
The hon. Gentleman makes an extremely fair point. I was not in Parliament in the 1970s, and I am not sure whether such points were made at that time, but clearly countries that have received the beneficence of resources—Norway is one example, and Australia another—have seen the value of looking at the long-term investment of natural resources, and have set up future funds to provide for future pension liabilities. The hon. Gentleman makes an excellent point in support of my argument. Of course, we are not as endowed with natural resources as those countries are, but the fundamental point about fairness between the generations is still solid.
Let us remind ourselves that the current level of public sector debt—the debt that we all talk about and are so worried about—is £1 trillion. The public sector pensions liability, which we do not often talk about, is £1.1 trillion. All those obligations have to be paid by future generations and, as we have so significantly ramped up this first amount of debt, should we not look for ways to reduce the unfunded part of public sector pensions for future taxpayers? A future fund would, over time, eliminate that burden from taxpayers and transfer it to the returns that would be generated from a funded pension scheme.
The Intergenerational Foundation has noted some questions about public sector pensions, and also some of the risks, and this change would reduce risk. At the moment, Lord Hutton’s proposals manage risk by way of a view of a cost ceiling on total public sector pension liabilities, which is based on projections of economic growth. The projections show the liability as a steady share of gross domestic product, falling in the long term. I am not sure that history is littered with Governments who under-predict economic growth; in fact, I think that it is often the other way around, with Governments having a rather rosy view of future growth. So, inherently, as we consider the risk that will fall on future generations, there is a likelihood that the Government, under current systems, will underestimate the liability that they are passing on. As Lord Hutton said:
“What we’ve seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of public services pensions have been shown to be too optimistic…That is going to affect the sustainability of public sector pensions in a negative way.”
The change in the pensions structure would considerably eliminate that risk.
I shall now talk a bit about the second point, which is the rebalancing of the structure of earnings, to restore the emphasis on pensions. Over the past few decades, the role that pensions have played in the round of the compensation offer made to potential employees has reduced considerably and, I would say, undesirably. There is much more emphasis today on the immediate levels of compensation, on “How much will I earn this year?” rather than on “How much of what I earn am I putting away for my long-term retirement needs?”.
House of Commons statistics have tracked the active membership of occupational pension schemes for private sector and public sector employees, and have compared 1995 with 2010. Over that period, the number of public sector workers in such pension schemes increased, from 4.1 million to 5.3 million, but the number of private sector workers halved, from 6.2 million to 3.1 million. That was a halving in the coverage of occupational pension schemes in a very short period—15 years—which is why I say that the change has been dramatic. Being conservative, I like to see things in the round of their consequences. We are now seeing that many people fear that they do not have enough money for their retirement, and the Government have rightly recognised the need to encourage pensions through auto-enrolment programmes. This would be another measure that would encourage people by, as I shall explain in a minute, creating a floor on public sector pensions that would enable the focus to turn back to how pensions will be provided for private sector workers.
The third point is the role of a future fund in creating a sovereign wealth fund. To create a future fund, we have to fund it—and, boy, does it take a lot of money. If we have £1 trillion of liabilities, that is a lot of money to save up, so a long period is needed. The Australian future fund set a period of 14 years before money could be taken out: the law was passed in 2006, and no disbursements can be made until 2020. For the UK, taking a 20-year period, it would require a minimum of at least £20 billion a year—probably significantly higher than that; somewhere between £20 billion and £30 billion a year—fully to fund all the Government pension schemes over those 20 years.
To put that in context, that figure is equivalent to 3% of total Government expenditure. It sounds a lot, but the Government spend a lot—it would be 3% of expenditure—and it would be only half the money that the Government are spending on the interest on their own debt. It is therefore a manageable amount of money, even though the amount is significant. In addition to looking to fund that out of annual public expenditure, it would also be possible to make asset sales into the fund. In fact, the Australian future fund started with an asset transfer, from the sale of part of the telecommunications company Telstra, for its seed investment. I have checked—with the Minister here, I wanted to be absolutely sure—and the Government’s deficit reduction targets would not be imperilled by any future sale of assets going into a future fund. Quite rightly, if I may say so, the deficit reduction targets are set absent of any funds from the proceeds of the disposal of certain assets, such as those of Royal Bank of Scotland.
Some may say that taking £20 billion out of public expenditure when we are trying to create demand is a very odd suggestion, but of course the £20 billion would not be lost from the economy. Essentially, £20 billion would be transferred from current expenditure to an investment fund for long-term investment. That money would become a fund of resources that could be used to invest in long-term projects. If we take the Ontario teachers’ pension fund—I hope you will look it up later, Mr Leigh—it involves patient capital that is invested in long-term investment projects. It is there to secure the pensions of those wonderful teachers in Ontario; they are not quite, but almost, as good as the teachers in Bedford. It is there to protect their pensions, which it does by looking for long-term investment returns. It is the fund that seeded the money for Birmingham airport. If we had our own infrastructure fund set up as a future fund for public sector pensions, we could provide resources to fund long-term investment projects.
Let me say something that I rarely say, which is that I agree with the comments made by the Secretary of State for Business, Innovation and Skills, who spoke yesterday about the need for a significant investment in housing construction. Of course, we need other construction projects, but we understand that we are under fiscal restraints because we must demonstrate that our deficit is being reduced. I ask the Treasury team to consider this very carefully: in current market conditions, particularly with the constraints of fiscal responsibility and the lenient conditions for monetary policy, a future fund would be uniquely placed to provide the long-term patient capital to fund such infrastructure investments, without there being any challenge to the probity of the Chancellor’s deficit and debt reduction policies. This environment provides an opportunity to fund and seed a future fund with the resources from the Government’s credit easing or quantitative easing programmes, and that would happen in such a way that markets would see that it was matching a reduction in the country’s long-term public liabilities for funding public sector pensions.
I am grateful to the hon. Gentleman for his intervention. I recently got the box set of “Yes Minister”, and “a visionary proposal” has echoes of “a courageous decision” in the lexicon of that show. However, he raises the important point of how we are to bring the public along with us. That can be done in a number of ways. First, it is a responsibility of our generation to show young people that we are doing everything we can to give them a better future. That is what mums and dads are doing around the country right now—cutting back on their own budgets to make sure that their kids have a few extra luxuries and are protected from some of the problems that we are going through as we try to reduce our deficit. The future fund would be another way of engaging with and doing something for younger generations, and I hope that groups such as the Intergenerational Foundation will press that message.
I am conscious that I am taking up the Minister’s time, but I want to make these points, if I may, Mr Leigh. Secondly, trade unions have been very concerned about a race to the bottom on pensions and—you know what—for many reasons, they have been fair in making that point. We do not want to have minimal or zero pension provision. It would be too attractive to take that headline number for this year’s income; it would be far better for us to have a structure in which people understand the proper role played by pensions. If we said to trade unions, during the process of reviewing public sector pensions, “That’s it—no more reviews,” that would deal with all the fears of people enlisting in pension programmes about another change somehow coming in. They have already had one change and now there is another, so they are thinking, “Well, there’ll be another one, so why should I contribute to a scheme when I don’t know where it’s going?” If we called a halt to that while investing in a public fund—the future fund—we could tell trade unions, “That’s the floor in public sector pensions. Now work with the Government on trying to encourage the private sector to start rebalancing the ways in which it looks at compensation, so that the role of pensions is restored to its rightful place.” In those ways, we can bring people along.
Of course, the person I most wish to bring along with me in relation to this opportunity is the Minister, but I am fearful that I am not in a position to do so today. However, I hope that, much like the hon. Member for South Antrim (Dr McCrea) and me, she is at least engaged to look at what the hon. Gentleman called the “visionary” idea of having a proper and fair way between the generations and of accounting for public sector pensions through a future fund.
It is a pleasure to respond the points made by my hon. Friend the Member for Bedford (Richard Fuller). A number of us have heard him make those points passionately and eloquently in the House, and in a fairly factual way, I shall lay out what the Government are able to say in response.
Before doing so, I congratulate my hon. Friend on securing this debate, because he has been able use this platform to draw attention to the importance of ensuring affordability. He has spoken in robust and wise terms of the bombs that an irresponsible Government might leave for future generations, and I particularly congratulate him on raising such themes in his well-informed and practical discussion. I suspect that he will agree that it is a great shame that no Front Bencher from Her Majesty’s Opposition is here to join us in the debate. After all, they have a sizeable charge to answer in terms of what they left for future generations in this country.
I shall describe the situation that we face. As I expect you know well, Mr Leigh, the annual cost of public service pensions paid out has risen by more than a third over the past 10 years to £32 billion. To put that in context, as my hon. Friend did for other areas of spending, that figure is more than what is spent on police, prisons and the courts combined. Put simply, costs have of course increased because people are living longer. Although improvements in longevity are very welcome, the Government are therefore paying public service pensions for much longer than was expected when the schemes were designed. The bulk of that extra cost has mainly fallen on the taxpayer.
My hon. Friend is well aware that rebalancing the costs of providing pensions more fairly between employers, employees and other taxpayers requires bringing expenditure under control. We must make far-reaching structural changes to scheme designs, and that is what the Government are doing.
My hon. Friend has teed me up to deal with the remarks of Lord Hutton, who produced a landmark report—Members are well aware of it; perhaps you even have it on your bedside table, Mr Leigh—that took an impartial and comprehensive look at public service pensions. The Government are committed to implementing that blueprint, which will give us a new public sector pensions landscape. I do not intend to examine that landscape in detail, but I will make some points about it.
I emphasise, as my hon. Friend already has done, that this is not a race to the bottom. It is important to get public service pensions on a fairer, more affordable footing, but the Government must also ensure that the hard-working public service workers continue to receive pensions that are among the very best available. That is what has encouraged us to consider the changes so carefully. They have been discussed extensively with trade unions and other scheme representatives for more than a year, and those discussions continue.
The changes will deliver the Government’s objective to ensure that most low and middle earners who work a full career will receive pension benefits that are at least as good, if not better, than they would get now. They will also deliver our commitment to protect accrued pension benefits for those closest to retirement.
I have digressed somewhat, so let me return to the key point from Lord Hutton’s report with regard to this debate: the concept of funded versus unfunded. My hon. Friend has referred extensively to the Australian Government’s future fund, but we must bear in mind that we in this country are not alone in providing unfunded public service pension schemes. It is also fair to note that all pensions, whether funded or unfunded, are claims on the output of our successor generations. The great and truly visionary questions raised by my hon. Friend relate to intergenerational fairness, which is an issue that spans both funded and unfunded schemes. The funding status does not determine the sustainability or affordability of pensions, or the size of liabilities built up over time. Unfunded pension schemes are commonly used by Governments, because they are the most cost-effective way to provide pensions benefits over the long term. The method is available to Governments, but not necessarily to the private sector.
Lord Hutton’s report—or, to give it its full name, the interim report of the Independent Public Service Pensions Commission—found that keeping schemes unfunded has many advantages. It also dealt with some areas of funded public service pension schemes in this country, but recommended no change. The report stated that keeping schemes unfunded avoids potentially significant investment management costs and the risks involved in investing, whether in the UK or overseas. The report also noted that there are risks involved in the Government—in one guise or another—controlling up to £1 trillion or more of financial assets. It also stated that, even when the funds are placed in the hands of trustees, in an emergency the Government could still be compelled to underwrite the funds, which represents a further risk.
My hon. Friend spoke of the Ontario teachers pension plan as an example in support of his cause, but I feel honour bound to put a few points on record about its current performance, which is a cause of concern. The plan has experienced recurring funding shortfalls for the past 10 years. Indeed, as of 1 January, it is projecting a $9.6 billion shortfall, because the cost of future pensions continues to grow faster than the planned assets. That is connected to how the plan’s members are living longer and to interest rates.
Ireland’s national pension reserve fund also gives us cause to reflect on what can happen with such funds. My hon. Friend may have read the same Financial Times article as I did in November 2011 that reported on how that reserve is to be tapped for €12.5 billion of the bail-out costs with regard to Ireland’s public finances. There are risks connected to some of the schemes, so I do not necessarily agree with my hon. Friend’s interpretation that all is rosy in the land of funded schemes.
I do not think that anyone is saying that all is rosy in one scheme or another. Equally, I am sure that the Minister would agree that all is not rosy in the current system. One of the reasons why we have an off-balance sheet is that Governments do not like to talk about the obligations that they incur when they take on additional work. Does she accept that, if we transition to a fund, rather than the current scheme, and Governments add it to the public sector payroll, they would have to justify the full obligation of those pensions to the fund?
My hon. Friend makes a valid point. Such a scheme could be designed in that way, to entrench the principles of responsibility that have been the key note of what he has outlined today, and for which I respect his argument.
To respond to the debate and to offer the Government’s view on funded pension schemes, we support the conclusions of the Hutton report, as my hon. Friend knows. I think that he will therefore understand why I acknowledge the report’s concerns about funded schemes. I think that he will also appreciate why I want to finish by talking about the problems that can result from moving to a different scheme structure. The transitional costs are difficult to contemplate. As is often the case—perhaps in those countries that have already tried this—a move to funded schemes involves significant financial costs.
Contributions in respect of current employees would have to be diverted to the new pension funds. Pensions in payment would therefore have to be financed through extra Government borrowing or taxation. To put a figure on that for the UK economy, it would cost more than £25 billion next year alone, with costs declining only very gradually over the 21st century. It would be problematic for the UK Government to contemplate that at this time, owing, as my hon. Friend has already said, to the actions of previous Governments and to current global trends.
My hon. Friend referred to the Government’s credit easing schemes, which were announced earlier this year. He is interested in how the funds connected to those schemes could be used in relation to a future scheme, but, although the national loan guarantee scheme will provide up to £20 billion of guarantees to banks, that is not a case of guaranteeing loans to individual businesses. The full credit risk of the loans remains with the banks, so no cash is set aside for the project that could be redirected, as my hon. Friend suggested, to setting up a pension fund. I will direct his interest—I am sure that he is already, as the phrase goes, “all over it”—to the memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund that was announced in last year’s autumn statement. That might be a way to gain direct investment from pension funds into UK infrastructure assets, which I am sure my hon. Friend is interested in.
To sum up, the Government will introduce legislation in the autumn to implement the final proposals that have been reached based on Lord Hutton’s recommendations, including maintaining the current funding agreements. The Government believe that those deals should not need to be revisited in the next 25 years. We have said so publicly and deliberately, and stand by that position. That should reassure pension scheme members that they are right to remain in their schemes, which will remain among the very best available. The Government’s commitment to continue to provide guaranteed, index-linked benefits in retirement should encourage young and old people alike to take up the pensions savings baton. The reforms should achieve the objectives of sustainability, fairness and responsibility within the public finances.