I beg to move, That the Bill be now read a Second time.
The Public Service Pensions Bill represents the final building block of the Government’s commitment to reforming public service pensions. It is an important measure that will affect the pensions of millions of public service workers for decades to come. It is the culmination of a process that started more than two years ago when the coalition Government invited the former Labour Secretary of State for Work and Pensions, Lord Hutton of Furness, to undertake a fundamental review of public service pensions. Lord Hutton’s independent public service pensions commission undertook its responsibilities with thoroughness. It consulted and met a wide range of interests and considered a wealth of expertise and viewpoints, and more than 3,000 pages of evidence were submitted in response to it by more than 250 bodies.
I shall deal with the good reasons why further reform is needed later in my speech.
Lord Hutton’s conclusions of March 2011 set out a clear and compelling case for further reform. He found that the status quo was not tenable, that there had been an unfair sharing of costs between the employer, the employee and the taxpayer, and that previous reforms had not fully addressed the underlying issues of sustainability and fairness. His recommendations were equally compelling, and those for the future design of schemes fall into three broad categories, the first of which is safeguards to ensure that the long-term costs of pensions are sustainable. That is achieved through a link between the state pension age and normal pension ages in the majority of schemes, and a cost-cap mechanism to protect the taxpayer in the event of other unforeseen costs.
I did not mention Lord Hutton’s interim report, but I am happy to do so now for the benefit of the House. The right hon. Gentleman will know that Lord Hutton produced an interim report in October 2010 that said that there was a case for rebalancing member contributions. We followed that advice and came forward with our proposals as part of the general programme to repair the public finances and clear up the mess that the Labour party left.
The hon. Gentleman makes a good point. I will deal with this subject in detail later in my speech, but I shall turn to it briefly. In respect of the pension schemes that are devolved to the Scottish Government, the Northern Ireland Government—their Finance Minister, the hon. Member for East Antrim (Sammy Wilson), is in the Chamber—and the Welsh Government, those Administrations are free to negotiate within the parameters in the Bill and the cost ceiling that has been set out. I understand that such negotiations are ongoing. Should Scottish, Welsh or Northern Irish Ministers wish to offer more financially generous terms, they are entirely within their rights to do so, but the additional costs will have to be met from their budgets. They have complete freedom to do that and I know that they will want to consider it.
The Chief Secretary said that there was a fairness imbalance between employers, employees and the taxpayer. What was fair about a public body such as Royal Mail taking a 13-year pension contribution holiday when the members of the scheme had to carry on paying?
Let me respond to one intervention before I take another. I know that the hon. Gentleman is keen for me to clarify one of my points—I am sure that I will be able to do so—but let me respond to the important matter raised by the hon. Member for Blaydon (Mr Anderson). As part of our measures to support Royal Mail, we recently took its pension scheme on to the Government’s balance sheet. Many schemes took holidays during the previous Government’s time in office—
Indeed. Perhaps schemes took holidays even under the Government before that one. In many cases, members regretted such action in retrospect. The Bill is about public service pension schemes—by and large unfunded, with the exception of the local government scheme—that desperately need reform.
In response to my hon. Friend the Member for Central Ayrshire (Mr Donohoe), the Minister made it clear that the devolved Administrations would need to fund anything different that they wished to do. However, will he clarify the situation fully? We know that the devolved Administrations must fund those differences, but will there be an additional financial penalty through the block grant allocation?
No, there will not. Let me describe how this works. The negotiations that my ministerial colleagues and I conducted in UK Government Departments allow considerable flexibility within the parameters of the Bill—for example, the link between the state pension age and normal pension age, and the move away from final salary—and within the so-called cost envelope set up around the schemes. For example, the hon. Gentleman will note that the teachers pension scheme has agreed a different balance between accrual rates and revaluation factors for its new scheme from that for the health workers pension scheme. There is great flexibility in the provisions, provided things stay within the cost envelope. Under the Bill, the devolved Administrations are free to make more generous provision, as happened with the offer for prison officers. The Ministry of Justice agreed to fund an additional element of the proposed scheme to enable prison officers to have enhanced early retirement factors beyond those that were affordable within the cost envelope. The Ministry had offered to put additional resources on the table from its own departmental expenditure limits, and that was part of the offer that prison officers sadly rejected. Should the devolved Administrations wish to do something similar, they will be within their rights to do so, at their own expense.
One of the options open to the devolved Administrations was for their pension schemes to be included in the Bill. In Northern Ireland, the Executive decided not to take that option, which could mean that, simply because of the timing of the legislation, the new scheme will be in place here, but not in Northern Ireland, even if Northern Ireland decides to follow suit. Will there be a penalty if there is a time gap between the implementation of the legislation in the rest of the United Kingdom and any delayed implementation in Northern Ireland?
I am not aware of any technical reason why a time gap should occur, but I know that officials in the Northern Ireland Department of Finance and Personnel discuss this regularly with my officials in the Treasury. If there is any evidence of such an occurrence, I will be happy to consider it in the normal way. There have been regular discussions on these matters, not least in our Finance Ministers quadrilateral. We will meet again in a couple of weeks in Edinburgh, when this subject will be on the agenda, so we can discuss it then.
The Chief Secretary will be aware that several of the Bill’s provisions will affect Scottish pension schemes for the first time. There is a debate in Scotland about whether a legislative consent order is required, so will he address that point in detail in his speech?
I certainly will, when I come to it.
Lord Hutton’s first set of recommendations consisted of safeguards to ensure that the long-term cost of pensions was sustainable through a link between state pension age and normal pension age, and included a cost-cap mechanism to protect the taxpayer in the event that other unforeseen costs arose. He recommended that the new schemes should be fairer by smoothing the current disparities between high and low-income earners and ensuring that benefits are distributed more equally, which was why he recommended a move from final salary provision to career average revalued earnings—CARE—schemes. Finally, he recommended stronger governance provisions for the new schemes so that scheme members and the public could understand how the schemes were run and what they cost.
We accepted all 27 of Lord Hutton’s recommendations as the basis for discussion with trade unions and scheme member representatives across the public service, and designed our blueprint reference scheme in a way that reflected the recommendations of the Hutton report without any cherry-picking. Our aim was to strike a deal that would last, unchanged, for 25 years. Talks with the unions took place on all elements of that deal. I should stress that the Government did not do all the talking in those meetings—we listened carefully, too. Agreeing the design of these pensions has taken a considerable cross-Government effort over the past 18 months. The Minister for the Cabinet Office, the Home Secretary, the Lord Chancellor, the Education Secretary, the Defence Secretary, the Communities and Local Government Secretary and the former Health Secretary worked hard to understand the concerns of the trade unions and member representatives in their sectors.
The Chief Secretary talks about a deal on pensions that will last over the long term. Lord Hutton specifically ruled out moving from defined benefit to defined contribution schemes. We currently do not account for the cost of public sector pensions within our public debt numbers. Would it not have been wiser to have looked for a system that included the long-term costs for public sector pension schemes if the Government wanted to achieve such long-term sustainability?
The hon. Gentleman will know that Lord Hutton addressed that issue. The costs of such a transition would have been enormous and very disruptive, and I think that the recommendation on the career average revalued earnings scheme is preferable from that point of view. He will also know that the new whole of Government accounts presentation of the public finances takes detailed account of the unfunded liabilities in public service pension schemes. That means that the public and the House have precisely the information that he wants transparently available, so I hope that he regards that as progress.
On the issue of fairness, does the Chief Secretary agree that private sector workers can only look at guaranteed retirement benefits with envy, especially because most of them would have to pay more than one third of their income to achieve equivalent benefits?
Yes, I agree. We need better pension provision across the work force. That is why I think the national employment savings trust scheme is an important step forward. That basic pension scheme, which is available to the 12 million or so members of the country’s work force who do not have any pension provision, was recently launched by the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), and had its origins under the previous Government. It is a good thing all round that we have agreed a reform to public service pensions that makes significant cost savings and ensures that public servants continue to have access to among the best pension schemes available.
We all wanted to find a solution that was sustainable, affordable and fair, as did the vast majority of trade unions and negotiators for the non-unionised work force. Thanks to both sides’ commitment to constructive talks, I am pleased to say that the final proposed designs have been issued for all major public service schemes. I thank Brendan Barber and his TUC negotiating team for the mature and constructive way in which they approached these talks. It has taken many hours of discussion to get where we are today, and I am grateful that the majority of trade unions brought sensible, workable solutions to the negotiating table, rather than grandstanding. The final scheme designs reflect that hard work.
The trade unions took those scheme designs to their memberships as the best that could be achieved through discussion, and the majority of the unions have accepted the proposed agreements. The turnout in the ballots held by the unions that rejected reform was low—less than 30% in most cases—which is hardly a compelling mandate for an ongoing dispute. The Public and Commercial Services Union decided to reject the offer before it was finalised, without first seeking the views of its membership, which was not a reasonable way to approach a set of reforms affecting more than six million public servants.
There is no point in further dispute or threats of strikes regarding public service pensions. We have set out a good and fair deal that protects those rights already earned and puts fairness at the heart of future pension provisions.
The comparison between private sector and public sector pension schemes is variable, as not all public sector schemes are good. However, what discussions has the right hon. Gentleman had about the various provisions in the Bill affecting employees? More importantly, if the Bill is passed, what method of consultation will he allow on changes to the various schemes?
We have taken great care to work with the TUC. We have taken it through the text of the Bill, listened to its concerns and made adjustments where necessary. This has not just been done through the scheme negotiations; we have also been open by sharing the Bill with trade union colleagues. Given the long-term nature of the reform and the fact that it affects so many people, it was important to engage properly. My departmental colleagues have engaged closely with representatives of the relevant work forces to ensure that that has happened.
The Bill sets out a framework for the schemes, with some restrictions, and in due course we will have to produce regulations to set out the design of each scheme. There are well-established processes within Departments for working with employers and employees on such details. My experience is that those processes work pretty well, and there is a pretty good co-operative spirit among the pensions experts around the table. I therefore do not foresee any problems but, of course, if the hon. Member for Coventry South (Mr Cunningham) does, I would be delighted for him to bring them to my attention so that I can try to resolve them.
I will make some progress and give way to the hon. Lady later.
I return to Lord Hutton’s four key tests for the future design of public service pensions: affordability, fairness to public service workers, fairness to the taxpayer and transparency. Those objectives have prevailed throughout the process and remain the cornerstones of the Bill. First, on affordability, it is clear from Lord Hutton’s report that the new scheme should be affordable and sustainable. The Bill represents a significant proportion of the total of more than £430 billion of savings that our reforms of public service pensions are estimated to save over the next 50 years.
Those of us on the Government Benches are quite often accused of reminding those on the Opposition Benches that they left us with a massive deficit and unsustainable debt, but in fairness is it not true that these reforms would have had to happen even without the awful economic legacy we were left?
I agree with that, and I would add that, frankly, these reforms could have been made in the 1980s or 1990s, as well as the 2000s. In fact, we have to go back quite a few decades to find the root of the problems we are having to tackle in this Bill, which I think we are doing very effectively.
The remainder of the £430 billion of savings are generated by the Government’s decisions to change their policy on the indexation of pensions and payments from the retail prices index to the consumer prices index, and, as has been mentioned, to increase the contributions that public servants pay towards their pensions, rebalancing the costs more fairly between them and other taxpayers. The combined effect of those changes will help to restore the health of the British economy, reduce the size of our deficit and correct the unsustainable 40% increase in costs there has been over the last 50 years.
I am grateful to the Chief Secretary for giving way. Does he recognise that the Government have to be careful and approach this issue in a much more balanced manner? There is a danger that if more people opt out of occupational pensions because they find them unaffordable, that could end up costing the Treasury more in the long run through means-tested benefits.
I would say that we have handled this process in a balanced and sensitive way throughout, in recognition of the fact that the changes affect millions of public service workers. In response to the hon. Gentleman’s concern, which was raised a number of times in the talks, I would say that none of us wants to see increased opt-outs from pensions, for the reasons that have been mentioned on both sides of the House. We have put in place a process for reviewing the next stage of the contribution increase in the light of opt-out data from the first year. I am sure he will be pleased to hear that there is no evidence of increased opting out in response to this year’s increase in contributions. However, we will review the matter again next year before proceeding with the third phase of the increases, so he makes a serious and important point.
The reforms treat not only the symptoms of delayed reform but the underlying problem. Therefore, they are forecast to reduce the cost of providing public service pensions by around 40% over the next 50 years, returning costs to their historic long-term average. Clause 9 deals with the principal risk that needs to be managed if pensions are to be affordable and sustainable: longevity. Longevity has improved significantly over recent decades, which is a very good thing. As a result, the state pension age has increased. The Government are therefore asking public service workers in due course also to retire later. In a society where we are all living longer and where fellow citizens in the private sector are expected to retire later, it is both fair and right that the public sector retirement age should rise with the state pension age. As Lord Hutton says, improvements have continuously been underestimated in the past, which has led to the cost of providing pensions rising significantly over recent decades. As such, clause 9 provides that in future the normal retirement age in the public schemes will be set at the state pension age. As Lord Hutton identified, this change will move the proportion of adult life in retirement for public service pension scheme members back to where it was in the 1980s. More important, by linking the scheme retirement age to the state retirement age, we will ensure that further improvements in longevity are tracked. That is the main way in which the Bill will ensure that the cost of public service pensions cannot again spiral out of control, but will remain affordable and sustainable long into the future.
We will conduct a regular review, as Lord Hutton suggested, which will enable issues such as those the hon. Gentleman has raised to be taken into account. They were raised and discussed in the scheme talks. In the end, employee and employer representatives both agreed that the modelling we are using—which is similar to that used in the deal struck under his Government—is the right, fair and balanced way to take such matters forward across the whole work force.
The Chief Secretary will be aware that there is a working longer review in the NHS that is looking into the question of working longer in particular disciplines in the health service. Will the provisions in the Bill allow flexibility in the link between the normal pension age and the state pension age, depending on the conclusions of that review?
I will go on with my speech, if I may. I hope that I will be able to answer the hon. Gentleman’s question as I do so. I will not take interventions at the moment, as this is an important subject. I will perhaps take some at the end of this section.
We have all heard the cries “68 is too late”, along with similar slogans, but it is crucial that people understand the facts behind the proposals in the Bill. The pension age is a calculation point, not a fixed date up to which people must work in order to receive their pension. Public service workers will still be free to choose when to retire, either earlier or later than the state retirement age. When a person retires at a different age, their pension benefits will be adjusted, to take account fairly of the fact that they are taking them earlier or later than the date against which they have been costed. People will still have the freedom to choose when to retire, however. The Bill does not deprive public servants of that choice.
Lord Hutton said that the Government should ensure that the link between the public service schemes and the state pension age should be reviewed to ensure that it continued appropriately to track longevity. We will do that. The Bill does not provide for such a review, however, and nor should it. We have already committed to come forward with details of how the review of the state pension age will be conducted. We will review the normal pension age of the schemes, to consider whether the state pension age appropriately tracks longevity in the public service schemes. The process will be determined once the detail of the state pension age review system is settled. That is the right way to proceed, and it would be inappropriate for the Bill to attempt to second-guess that.
The Chief Secretary is emphasising the importance of clause 9 in facilitating future adjustments in relation to pension ages. Why, then, does he also seek to justify the Henry VIII provision in clause 3, which will allow the Government radically and retrospectively to alter pension terms at any time, or times, in the future?
The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born, and it has been used by a number of Governments to make adjustments to public service pensions. We have set out in the Bill certain elements of the scheme, particularly the pension age link, and the fact that the schemes need to be CARE schemes and certainly cannot be final salary schemes in future. The provisions to which the hon. Gentleman refers are in fact more limited than those in the 1972 Act. It is appropriate that we continue in broadly the same way, because that has stood the test of time. I hope that, by setting out the Government’s intentions here and in Committee and by undertaking detailed negotiations with work forces, we will have ensured that people know precisely how we intend to use these powers. I think it is clause 23—I might have got that number wrong—that refers directly to the 25-year guarantee that I mentioned earlier. I hope that that will give people some assurance that our scheme designs will stand the test of time.
With respect, intentions are one thing but the terms of the legislation are another. Is my reading of it wrong? As I understand it, the provisions will not allow flexibility for some groups of NHS workers in the link between the normal pension age and the state pension age. Clause 9(3) states:
“The deferred pension age of a person under a scheme under section 1”—
including NHS workers—
“must be…the same as the person’s state pension age”.
That suggests that there will be no flexibility. Am I right or wrong?
The right hon. Gentleman is absolutely right to say that the link between the state pension age and the normal pension age is fixed in the legislation. That is a matter that was discussed in the negotiations, including the detailed negotiations with health service unions. The point I was seeking to make was that, as Lord Hutton recommended, we have agreed to review how that link operates at each stage at which the state pension age is increased, to enable those issues to be debated.
In that case, we followed the recommendations of Lord Hutton—and, indeed, previous practice. The point I made just a moment ago—I am sure the hon. Lady was listening carefully—is that the provision does not stipulate the date to which people must work. Clearly, if people wish to retire earlier, they can do so and take an actuarially reduced pension or, indeed, retire later and take an actuarially enhanced pension.
I am going to make some progress, if I may.
The second and third tests of Lord Hutton were fairness to public servants and fairness to taxpayers. The Government have worked hard to ensure that the reformed pensions are fair and continue to provide a generous level of retirement income for public servants as a fair reward for a career spent serving the public. The Government made a commitment that these schemes would be at least as generous at retirement for those on low and middle-income earnings. We have delivered that commitment in a number of ways.
First, clause 16 allows transitional protection to be provided for those who have already had a long career in public service and are approaching retirement. I said in November last year that the offer provided that those within 10 years of their normal pension age on 1 April this year would not see any changes to their pension, nor the date at which they can draw it. The Bill ensures that the current final salary schemes will remain open to people who are covered by the transitional protection criteria in those schemes. Most of the proposed final scheme designs include the transitional offer as we set it out; however, the local government scheme in England and Wales has chosen alternative arrangements as sought by their trade unions and employers.
Secondly, we have honoured our commitment to retain the final salary link for people who have already built up some service in final salary schemes, as the provisions in schedule 7 make clear. Although these people will move on to CARE schemes by 6 April 2015 at the latest, their accrued years of final salary benefits will be calculated and paid at their final retirement salary—not their 2015 salary.
Most importantly for low and middle-income earners, we are putting the fairness back into public service pensions. Clause 7 provides that the new default for public schemes will be based on career average earnings, rather than on final salary. Final salary schemes are unfair to the majority of the work force as they disproportionately reward those who progress to senior roles compared with the majority of staff who have more consistent career paths. These outmoded schemes provide lower effective benefit rates to the people that carry out the core front-line work in our public services—the nurses, police officers and our armed forces whose work is so valuable to everyone here.
Career average schemes are fairer to the members and to taxpayers alike. Under final salary schemes, it is the taxpayer that picks up the cost of those high flyers who attain high salaries by the time they leave public service. Such members can receive twice as much in benefits per £1 of contributions that they have paid towards their pension. This is clearly unfair, which is why this Bill will not allow final salary schemes to continue after 2015. For members, pension benefits will be based on the amount that they earn over their career. That means their pension benefits will directly reflect the contributions that they and their employer make over their career.
The Bill ensures that these pensions remain among the very best available—and rightly so, if we are to continue to be able to recruit and retain the right people to undertake these crucially important roles. A key objective of the reforms is to ensure a fair balance of risks between scheme members and the taxpayer. To achieve this, Lord Hutton recommended that the Government establish a mechanism to control the future costs of pensions.
Clauses 10 and 11 establish an employer cost cap in the public service schemes. This will provide backstop protection to the taxpayer to ensure that any unexpected risks associated with pension provision are shared between employers and scheme members. With foreseeable longevity risk controlled through the pension age link, this really is a backstop, which under normal circumstances should not need to be used. Everyone in a public service pension scheme will see their pensions reformed along the same lines. I do not believe in special cases at a time when we are reforming the pension arrangements of those who provide essential services to the public.
I promise not to intervene on the Chief Secretary again, but I want to ask about the employer cost cap in clause 11. On the front of the Bill, the Chancellor has signed a declaration that the provisions of the Bill
“are compatible with the Convention”.
It is clear from clause 11(7), however, that the Bill allows schemes to provide for reduction of accrued benefits as part of the employer cost cap. This would be a fundamental breach of scheme members’ rights under article 1 of protocol 1 of the convention, so how can the Chancellor’s statement on the front of the Bill be true?
I do not think that the right hon. Gentleman is right in this instance. In fact, had the “cap and share” arrangements introduced by the last Government been allowed to operate, they could have manifested themselves—[Interruption.] No, the right hon. Gentleman is wrong. They could have manifested themselves in both a reduction in benefits and an increase in costs to members. The right hon. Gentleman is free to explore the matter in Committee, and I am sure that he will.
I should add that I have some further information relating to the right hon. Gentleman’s earlier intervention. The working longer review is acknowledged in the proposed final agreement on the NHS pension scheme, which specifically states that early retirement factors allowing retirement before the state pension may be considered should the review suggest that that is necessary.
As we have established, public body pension schemes and public service schemes operated by the devolved Administrations are required to make equivalent changes to their schemes as swiftly as possible. In the case of public body schemes, it has not been possible in all cases to complete the reform process according to the same timetable. As I said in a written ministerial statement on 16 July, reform is definitely on the cards for these organisations, and the Government aim to complete the work by 2018.
Speaking of special cases, the House should note that the Bill will also close the generous and outdated “great offices of state” pension schemes. They have outlived their usefulness in the modern world. I am glad that the Bill will close them to new office holders and will ensure that people in such roles are given the same pensions as Ministers. As I am sure Members are aware, the Prime Minister waived his entitlement to such a pension when he took office. The current Lord Chancellor is making arrangements to do likewise, as did his predecessor. Mr Speaker announced on the day that we published this Bill that he would retain the pension, but would take it only when he reached the age of 65 rather than drawing it as soon as he left office.
Lord Hutton’s fourth key test related to governance and transparency. The reformed schemes should be widely understood, both by scheme members and by taxpayers. People understand what is in their pay packet each month, and it should be just as easy to understand how their pension works. Under the Bill, the schemes will have robust and transparent management arrangements.
Clause 5 provides for each scheme to have a pension board which will work to ensure that the scheme is administered effectively and efficiently. There will be local pension boards in the case of the locally administered police, fire and local authority schemes. The boards will consist of member representatives, employer representatives and officials. They will operate in a similar way to boards of trustees, holding scheme administrators to account and providing scheme members and the public with more information about the pensions. The board members will be identified publicly, and their duties will be made clear to scheme members. I welcome the greater transparency that the Bill will bring to this area of public pension administration.
Clause 15 and schedule 4 provide for an extension of the role of the pensions regulator, who will improve and police the management and administration of all the new schemes. The regulator is independent of Government, and will be able to utilise its full range of powers to ensure that the public schemes are managed properly and to consistently high standards. Clauses 12 and 13 will ensure that all schemes collate and publish information to improve transparency and enable comparisons to be made between them.
Since the Bill was published, I have received a number of questions about its design. It establishes a common framework of delegated powers which enable schemes to be made in respect of the public service work forces. The common framework constrains the use of those powers on core parts of pension scheme design, such as the link between state pension age and normal pension age, the career average pension structure, and the abolition of the final salary link. Those core elements are fixed in this legislation in order to create fairness and an even degree of cost control across the work forces.
At the same time, the Bill allows flexibility when that is appropriate, enabling the secondary detail of the pension schemes to be adjusted in recognition of the differences between different areas of public service work. Members will know that the final scheme designs agreed vary significantly from work force to work force, properly reflecting differing priorities and concerns within the cost ceilings that I established. The approach builds on that taken in the Superannuation Act 1972, which set out a framework of delegated powers some 40 years ago.
There are some technical areas in which that may be necessary, but in practice the adjustments that we are making in the clause to which the hon. Gentleman has referred—and also in clause 11(7), which was mentioned earlier—allow the design of future benefits to change to ensure that costs are controlled, but do not allow changes to accrued benefits. The Bill, however, takes a more balanced approach than the Superannuation Act. The core elements for all public pensions are set out in the Bill. This serves as an important constraint on the delegated powers, to ensure our main objectives for reform are met.
I have also heard representations from Members of the devolved Administrations, but I think we have addressed that matter through earlier interventions. The Bill contains some minor areas that touch on devolved matters in Scotland and Wales, and I have written to all the devolved Finance Ministers to request that they seek legislative consent motions for the appropriate provisions. The Bill covers Northern Ireland, and the Minister of Finance and Personnel there—the hon. Member for East Antrim—has indicated that the Executive are considering a legislative consent motion to that effect. As to the progress of reform discussions in Scotland and Wales, the Government have made it clear that these Administrations have exactly the same flexibility in discussions with their trade unions as Whitehall Ministers have had, and within those parameters there is a great deal of flexibility.
Members who have followed this issue closely will know that the path to these reforms has been a long one, but it has also been a collaborative journey. The public debate on these pensions has been happening ever since this Government came to power more than two years ago. Some 18 months have passed since the Independent Public Service Pensions Commission published its final report, and discussions with trade unions and negotiators have taken place continuously since then. It is now time to take the final step by codifying the key elements of these reforms in legislation.
The framework set out in the Bill provides Parliament, public service employees and taxpayers with an assurance that the new schemes will be consistent, transparent and effectively managed. More than that, it requires new schemes to have common retirement ages, to provide benefits on a fairer basis and to include cost control mechanisms to protect members and other taxpayers from unforeseen changes in the cost of providing pensions.
The Government have set out a settlement that represents a good deal for public sector employees and a good deal for the taxpayer. It recognises the enormously valuable contribution that public sector workers make to our society and ensures a fair balance of contributions between public sector workers and other taxpayers. Taken together, these reforms will ensure that these pensions are sustainable for a generation. That is why the Bill proposes to create a high barrier for future changes to these elements of pension scheme designs. That means that any Government wishing to adjust them within the next 25 years would be required to jump a very high hurdle to do so.
In the UK’s long-term interests, we are facing up to tough decisions that Labour failed to address during its time in office, and we have done so while engaging with the unions every step of the way. We have made huge savings that were long overdue while protecting the entitlement of public service workers to a very good pension in retirement, giving public servants the confidence that future Governments will not need to make further reforms, and giving taxpayers confidence that never again will these costs be allowed to balloon out of control. These reforms therefore also help to repair the mess that Labour made of our public finances.
Fair, affordable, sustainable, good pensions that last: this is a new pension settlement for a generation, and I commend this Bill to the House.
With advances in medical science meaning people are living longer and a pressing need to ensure that our public finances are on a sustainable path, it is right that we put in place the long-term reforms we need to manage the cost of public service pensions. That is why when in government we took important steps to ensure public service pensions were sustainable, and it is why we regret that this Government have behaved in a way that has made reform harder and that has undermined confidence in occupational pensions for teachers, nurses, police officers and others who work in the public sector.
We remain of the view that the Government’s imposition of steep contribution increases across the board and a permanent switch in the uprating of pensions to a lower measure of inflation were unfair and unnecessarily provocative. However, we support in principle the Bill’s main measures.
We have said that we support the shift from the retail prices index to the consumer prices index for the period of this Parliament to reduce the deficit, but we do not support a permanent shift from RPI to CPI that will continue long after the deficit has been eliminated. I will discuss shortly some evidence from the Pensions Policy Institute and the Royal Statistical Society on the appropriate measure of inflation for uprating pensions.
My hon. Friend realises that the vast majority of public sector workers do not have massive gold-plated pensions. Instead they have very modest pensions, and they are concerned about their employment prospects as well as their contributions. Does my hon. Friend agree that those are the kinds of concerns that people out in the real world we speak to are talking about?
My hon. Friend is entirely right. The average public sector pension in payment is under £6,000 a year, and it is considerably less for women who work in the public sector, so we are not talking about huge pensions in the vast majority of cases. Instead, we are talking about modest pensions to which people have contributed throughout their working lives.
We support in principle the main measures in the Bill, however, so we will not oppose it on Second Reading, but we will work in Committee to improve it, in order to ensure that it underpins, rather than undermines, the progress made in negotiations. We will seek to ensure it facilitates a smooth and stable transition to new scheme designs, entrenching good standards of governance, transparency, administration and consultation, thereby allowing those who give their working lives to serving the public to save for their retirement with confidence, while establishing a workable system for managing change and controlling costs to the taxpayer.
The Government and public service employees do need to find ways of adjusting to the welcome fact that people are living longer. In government, Labour had agreed and established a framework for negotiating reform and the “cap and share” mechanism to manage long-term costs, and it was always clear that this would mean increases in contributions and, as the population lives longer, a rise in retirement ages.
We have always said that the Hutton report provided a useful starting point for negotiations. Lord Hutton was right to suggest that career average schemes could be fairer than final salary schemes, and we think his proposal that public service pension ages should rise with the state pension age is right in principle. Lord Hutton also stressed the need to approach these issues in a careful and balanced way, however, with particular care for the affordability of any additional contributions for lower paid public service workers, and for avoiding fuelling a race to the bottom on pension provision. Reform needs to be fair to taxpayers and public service employees, as well as being genuinely sustainable for the long term, and that would be endangered by a search for quick cash savings or the playing of political games.
The vast majority of public service workers retire on very modest pensions. The average public service pension in payment is less than £6,000 a year, and even less for women. Tearing up decent public service pension schemes, or imposing punitive and unaffordable contribution increases, would be entirely counter-productive if that resulted in lower saving and inadequate retirement incomes.
Does the hon. Lady not accept that the Government have made great strides in protecting low-paid public sector workers in response to Lord Hutton’s report, so that anyone earning £15,000 or less will not have to make any increased contribution at all, and for those earning less than £21,000 the increase will be capped at 1.5%? Surely that is the evidence she requires?
That is simply not true. There are 800,000 part-time public service workers earning less than £15,000 a year, 90% of them women, and their pension contributions will rise by, in some cases, 50% or more because their full-time equivalent salary takes them above the minimum salary threshold.
Instead of building on our reforms, the Government have ripped them up. They have made it much harder to make progress by seeking to impose, prior to any negotiations, a steep 3% rise in contributions and a permanent switch in the indexation of future pension income from RPI to CPI. The “cap and share” arrangements agreed and established by the last Labour Government provided the mechanism for delivering the adjustments as needed, but the current Government chose to undermine that agreement and instead announced a 3% increase in contributions in the October spending review without any discussion or negotiation with employers or employees.
As the hon. Lady is discussing the previous Labour Government’s reforms, will she say whether she accepts any responsibility on behalf of the Labour party for the decimation of private sector defined-benefit pensions as a consequence of the disastrous decision in the 1997 Budget of the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) to end the repayment of dividend tax credits?
If that was such a disastrous thing, why have this Government not reversed it or made any efforts to do something about it? They have no intention of doing so.
The contribution increases in this Bill were based on no assessment of the future funding needs of public sector pensions and were simply a tax on public service workers who were already facing a pay freeze and redundancy risks. The increases came long before Lord Hutton had published his final report. He warned that excessive increases could hit lower-paid workers hard and result in a counter-productive increase in opt-out rates. He has said that although it is for Ministers to decide by how much contributions should rise,
“there must also be a careful examination of the implications of any possible increase in opt out rates in these schemes as well.”
But the Government chose to plough on, not mindful of the increase in opt-out rates and with little regard for the consequences.
The Government promised that lower-paid workers would be protected from excessive and unaffordable increases, but the reality is that as many as 800,000 part- time workers earning less than £15,000 a year are already paying higher contributions. As I said, for many of them the contributions are 50% higher, because their full-time equivalent salary takes them over the minimum threshold. That approach had nothing to do with long-term reform and everything to do with a cash grab by the Treasury, which made it much harder to deliver progress on the real reform we needed, because the Government acted arbitrarily before Lord Hutton reported and lost the trust of public service workers.
In addition to imposing that hike in contributions, the Government used their June 2010 Budget unilaterally to change the indexation of pensions from RPI to CPI. On average and over time, public service workers will be 11% worse off in retirement as a result. According to analysis published last week by the Pensions Policy Institute, this is a bigger hit than the extra contributions, the raised retirement age and all the other changes to pensions put together. Independent experts, such as the Royal Statistical Society, have emphasised that CPI fails to reflect the spending patterns of pensioners and the rising costs they face. As pensioners worry about the hikes in energy bills this winter and expected steep increases in food prices, we should be particularly mindful of the challenges that retired people face in meeting ever-rising costs.
Again, those changes were imposed on public service workers without any negotiation or discussion. Lord Hutton stated:
“If these reforms have any chance of succeeding then people need to know that they are being treated fairly. We have seen…the anger that has been triggered on the state pension when older women feel the finishing line is being put back at the last minute with very little time to adjust. So there should be full and proper consultation and discussion with the trades unions. That is how we do things in Britain—the public would take a very dim view of any government that fails to honour this basic requirement. We must try and avoid the confrontation and division that marked previous decades and must not turn the clock back.”
I regret to say that the Government did not follow that advice. Sometimes it seems that they are turning the clock back to the conflicts and divisions of the 1980s, and perhaps that was exactly their objective. Their aggressive and provocative approach to these serious and sensitive issues resulted in months of stalemated negotiations and several days of strike action, which resulted in closed schools, cancelled operations, and disrupted lives for families and businesses across the country.
There are times when the hon. Lady seems to be making a coherent argument and then she goes back to using rhetoric. She said that the change from RPI to CPI is the most significant one. If she seeks to make amendments on that issue and she does not want to make savings on the basis of a change from RPI to CPI, will she set out where she would make the savings in order to make the overall numbers add up as they are at the moment?
I am sure that the hon. Gentleman has read the Bill. The RPI to CPI change was imposed before it, so it is not contained in the Bill and we will not be able to make any amendments in terms of RPI and CPI when discussing it. The point is that the Government acted arbitrarily before Lord Hutton reported, thus making it harder to deliver the long-term reform to public service pensions that we need.
Labour Members think that those strikes could and should have been avoided last year, and that it is a matter of deep regret that this Government have lost the trust and damaged the morale of millions of public service workers, whose engagement and commitment is vital at a time when they are being asked to accept prolonged pay restraint while delivering continued improvement in the quality and efficiency of public services with fewer resources.
Let me turn from the Government’s mishandling of the issue to the specific provisions in this Bill. The Bill is designed to put the new schemes on a clear and consistent legal footing, with clear lines of accountability to scheme members, public service employers and taxpayers. That, in itself, is a worthwhile objective. I have already emphasised that our big disagreements with the Government’s approach to public service pensions lie elsewhere, so we will not oppose the Bill on Second Reading.
However, we have a number of concerns about the Bill that we hope to address in Committee. It is an ill-prepared and poorly drafted Bill containing a number of mistakes, including giving the wrong dates for the transitions to new schemes. The Bill fails to deliver on the commitments and assurances given by this Government to underpin the provision of decent pension schemes that allow public service workers to save for their retirement with confidence. In short, as we have come to expect from this Government, it is a shambles of a Bill that has not been properly thought through, risks creating more problems than it solves and fails to deliver on the promises that Ministers have made.
First, we think it is right that pension ages rise in line with longevity, but it is essential that that is done carefully and fairly, with due notice given to people whose retirement plans may need to change and due consideration given to the impact of working longer on people in front-line or particularly strenuous occupations.
My hon. Friend makes an important point. Many of my constituents contact me about the impact on pensioners of the wholesale changes that the Government are proposing and have made in respect of this notice period and the fact that people are having to change their plans. That has caused great distress and worry to many of my constituents. I am pleased that she is addressing the point, because the Government seem to be ignoring it.
I thank my hon. Friend for his intervention. We argued exactly the same point when the Government arbitrarily increased the state pension age for women in their late 50s with just six years’ notice given. When Lord Turner carried out the review of state pensions for the previous Government, he recommended a 15-year notice period be given, and the Pensions Policy Institute recommends a 10-year notice period. Such notice needs to be given and it is not enshrined in this Bill.
Does my hon. Friend recognise that one of the reasons why that notice period is required is that as the retirement age rises careers may also have to change to ensure that employees are not forced into ill health and are not forced to do work that is unsuitable for their age?
I thank my hon. Friend for that intervention. We also believe that this Bill should not pre-empt or cut across ongoing discussions—this builds on the point that he raised, as did my right hon. Friend the Member for Rother Valley (Mr Barron)—between the Department of Health, NHS employers and NHS workers about the implications of working longer for some staff groups, especially those, such as paramedics, in physically demanding roles.
We think that the Bill should reflect Lord Hutton’s recommendations that the link between public service pension ages and the state pension age should be kept under review and that this should be conducted by a properly independent body, with public service employees and employers represented and consulted. The Chief Secretary to the Treasury said in his speech that that will happen, but it is not guaranteed in the Bill—indeed, it is unclear whether it is even compatible with the Bill. These are all issues that we will be raising in Committee to get the commitments that public service workers deserve and thought they had been given during the negotiations behind the Bill. These are also issues that we will have in mind as we look to any future increases in the state pension age itself.
For our finances to be sustainable, and for decent pensions to be affordable, it is right that retirement ages rise with longevity. However, as Malcolm Wicks, the late Member for Croydon North reminded us in some of his most recent work, many people doing manual jobs started work at 16 or 18, with some doing so even earlier, and find it harder to continue work into their late 60s. We should be mindful of people’s capacity to work later and later, especially if support is not in place for them in the workplace.
Secondly, there are real worries that the Bill fails to take due account of the special characteristics of the local government pension scheme. Members will know that it is a fully funded scheme administered by local authorities and we should welcome the hard work of local councils and trade unions, who have made very valuable progress in negotiations on a mutually agreeable agenda for reform. The Bill threatens to unravel the agreements that have been reached and destabilise financially the local government pension funds by forcing a disruptive and potentially disastrous closure of existing schemes instead of facilitating a smooth transition to the new scheme design. That extension of Treasury interference into aspects of scheme valuation and design could prevent local authorities from delivering on the deal they have agreed with their work force. Indeed, the view of the pensions manager at the Chartered Institute of Public Finance and Accountancy is that the relevant provisions in the Bill represent
“a major shift in the governance of local authority pensions and”
“questions about future local democratic accountability for those pension funds.”
Again, we expect those concerns to be addressed in Committee.
Thirdly, on the question of good governance, the Bill must underpin and not undermine high standards of scheme governance. As Lord Hutton stated in his final report,
“there is a powerful case for…much stronger governance of all the public service pension schemes. This should keep government, taxpayers and scheme members better informed about the financial health of these schemes. There should be minimum standards set for scheme administration. There is also a proper and legitimate role for representatives of the workforce to be formally involved in these new governance arrangements.”
The Bill fails to include key recommendations from Lord Hutton’s report, such as the inclusion of member-nominated and independent members on pension boards; the establishment of pension policy groups to consider major changes to scheme rules; the need to ensure that pension boards are responsible for the oversight of financial management and, in the case of funded schemes such as the local government pension scheme, for investment management; and the commissioning of a review into how standards of administration in public service pension schemes can be improved. Those measures would improve the efficiency and cost-effectiveness of scheme administration and would ensure that public service pension schemes matched best practice in the private sector.
Finally, we must ensure that the Bill adequately reflects and reinforces the progress made in negotiations. We should give public service workers a system they can trust and pensions that they can save towards with confidence, ensuring protection against retrospective or arbitrary detrimental changes. We also have concerns in this regard, which some hon. Members have already mentioned, and we will seek to address them in Committee. For one thing, the Bill subjects many aspects of public service pension provision to unilateral Treasury control. Although it is right that mechanisms should be in place to ensure that costs to taxpayers are contained, public service employees also have a right to know that critical changes will be consulted on and that their pension savings will not be vulnerable to arbitrary interference and opportunistic cash raids.
Furthermore, Lord Hutton has stated that
“there must…be full protection of accrued rights”,
but the Bill does not rule out retrospective changes that reduce benefits already accrued, going against the fundamental principle that pension benefits accrued are pay deferred and must therefore be honoured. The Government have reiterated their commitment to maintaining defined benefits in the public sector, and the Chief Secretary reaffirmed that to the House last year. He said, as he has on a number of other occasions, that his commitment was that
“public sector schemes will remain as defined benefit schemes, with a guaranteed amount provided in retirement”.—[Official Report, 2 November 2011; Vol. 534, c. 927.]
Clause 7, however, provides for the creation of new schemes that are
“defined benefits…defined contributions…or…a scheme of any other description.”
That should not be a means to drive a coach and horses through the commitments the Government have given and allow another round in the race to the bottom on pension provision.
In addition, the Government have made much of their promise of
“no more reform for 25 years”.
In his foreword to the Treasury’s document on new scheme designs, published last December, the Chief Secretary wrote that
“we need a long term solution that will last a generation”.
Clause 20 specifies “protected elements” of scheme design that cannot be altered for the next 25 years without clearing a “high hurdle” of comprehensive consultation and a report to parliament.
We think it is right that public service workers should be given an assurance that their pension savings will not be vulnerable to further arbitrary and unfair changes without adequate scrutiny and debate, but the Bill seems to be riddled with loopholes, excluding a number of important scheme features from the list of “protected elements” and stating that the “high hurdle” can be bypassed in order to meet a cost cap that is in turn set by the Treasury with no such requirement for consultation and report. Furthermore, it was a critical part of the agreements reached with employee representatives that protection should be provided to staff transferred to alternative providers as a result of public service outsourcing —the so-called fair deal policy. The Chief Secretary told the House last year that
“we have agreed to retain the fair deal provision and extend access for transferring staff. The new pensions will be substantially more affordable to alternative providers, and it is right that we offer workers continued access to them.”—[Official Report, 20 December 2011; Vol. 537, c. 1203.]
Yet there is no guarantee in the Bill that public service workers transferred to new employers will be able to keep their public service pensions. We will seek to address all those issues in Committee to improve the Bill and the protections granted to public service workers.
In conclusion, we think public service workers with understandable fears for their financial futures deserve better than being treated as pawns in this Government’s political games, with the consequence that it has been harder to reach agreement on reasonable reforms that control costs to the taxpayer. Indeed, perhaps the best case for the Bill is that it should ensure that never again can an opportunistic Government create unnecessary conflict and disruption by imposing unfair and arbitrary changes without adequate consultation, scrutiny and accountability. Let us ensure that it fulfils that objective.
Finally, let us remember that the real pensions crisis is not in the public sector but in the private sector. It is right that we should ensure public service pensions are sustainable and affordable for the taxpayer, but we should not allow that to distract us from the unacceptable inadequacy of pension provision in the private sector. Too often, it has sounded as though the Government’s answer to disparities in pension provision across the public and private sectors is to level down, not level up. Indeed, we have seen more than a million lower paid workers excluded from automatic enrolment when we should be ensuring that the National Employment Savings Trust can deliver low-cost, high-quality pensions to all who could benefit.
Does the hon. Lady accept that in the 10 years since the previous Prime Minister decided to get rid of advance corporation tax relief on pensions, that decision has destroyed £100 billion of private sector pension savings? Does she accept that that was the fault of her Government?
It could be reversed so that dividends were not treated in such a way in the future, but the Government have no intention of doing that. I do not think the hon. Lady understands the real crisis: some people are not saving at all for their pensions and have no occupational pension to save into, and the 20% of people who earn less than a living wage do not feel that they can put money aside every month. That is the real crisis we face and the Government excluded 1 million people from automatic enrolment and have done nothing to tackle the excessive fees and charges automatic enrolment schemes can charge. The Government should be focusing on that challenge to bring up the quality of pension provision for everybody so that nobody risks retiring into poverty and having to rely on means-tested benefits.
Improving governance and reducing costs across private pension schemes while cracking down on the excessive fees and charges that erode pension income should be the Government’s priority, but it is not. Instead, to address disparities they want to level down the pensions enjoyed by those who work in the public sector.
Automatic enrolment could bring into saving for retirement 10 million people who are currently not saving. They would not just be contributing their own money, but getting a contribution from their employer that they have never had before. That scheme started in October this year and by October 2017 it will be fully rolled out.
The pensions Minister is now in his place. It is disappointing that people on low pay and in part-time work are excluded from that scheme, and that the waiting period was increased to three months, which means that some people who could have benefited from it, particularly those who change jobs regularly, will be excluded. The Government need to do more to bring people into saving for occupational pension schemes through automatic enrolment, and they need to ensure that excessive fees and charges do not erode that pension income. We urged the Government to amend the Pensions Act 2011 to cap those fees and charges, but the Minister did not take those proposals on board.
Lord Hutton argued that public service pensions should remain a gold standard, so let us make sure that the Bill delivers on that objective and then seek to spread that standard across the wider economy so that everyone can benefit from good quality pension schemes. Instead of this Government’s divisive political games, pitting public sector against private sector, union member against taxpayer, we need to work together—Government, businesses, employees and civil society—reforming our economic institutions to give everyone a stake and a fair share in prosperity, building the one-nation economy that our nation needs to succeed.
I am pleased to follow the hon. Member for Leeds West (Rachel Reeves). She would have been better to avoid the issue of private sector pension schemes because of the enormous damage that was done by the Labour Government in those early years, in the July 1997 Budget. As my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said, they took £100 billion out of private sector pension funds, which at that time had an asset value of £650 billion. It was the envy of the world, and £100 billion was a very large proportion of that sum.
I welcome the hon. Lady’s acceptance of this very important Bill and the fact that the Labour Opposition will support it in the Lobby. Despite her assertion, my view is that the negotiations were handled extremely well by the Treasury, the Cabinet Office and the individual Departments involved. There was engagement and a willingness to compromise, but there was also a firm approach to ensure fairness between the taxpayer and the public sector employee.
I support the Bill not just because of its importance in tackling this country’s historically high budget deficit, but because of its vital importance to ensuring that we have high-quality, well-rewarded public sector employees, in the teaching profession in particular. We need a well-rewarded profession that continues to enjoy a defined benefit pension scheme on a sustainable basis when such schemes are increasingly rare in other sectors of the economy. As my hon. Friend the Member for Rochford and Southend East (James Duddridge) said, even without the budget deficit, these reforms are necessary to tackle increased costs and life expectancy.
The Government’s education reforms are built on trusting the teaching profession, ensuring that we have the best people coming into teaching, and raising the status of the profession. Indeed, the schools White Paper was called “The Importance of Teaching”. In the opening chapters it made the point:
“The evidence from around the world shows us that the most important factor in determining the effectiveness of a school system is the quality of its teachers. The best education systems draw their teachers from the most academically able”.
Countries around the world that have the best education systems, such as Singapore and Finland, recruit their teachers from the top third of their graduates, and South Korea recruits from the top 5%, but Singapore and South Korea pay their teachers more than any other country in the world relative to average earnings in their own country. Finland pays its teachers at about the OECD average.
In its 2007 report, “How the world’s best-performing school systems come out on top”, McKinsey made the important point that the quality of an education system cannot exceed the quality of its teachers. Its 2010 report, “Closing the talent gap: attracting and retaining top third graduates to a career in teaching”, looked at precisely how Singapore, Finland and South Korea manage to recruit graduates from the top third. It concluded that the key to recruiting the best graduates is attractive starting salaries and attractive top salaries.
A report that examined the US education system concluded that a starting salary of $65,000 and a top salary of $150,000 were needed. In this country starting salaries outside London are about £21,600 and £27,000 in London. Top salaries for teachers are about £105,000 outside London and £112,000 in London. Although the McKinsey report was about the United States and looked at the US employment market, it is nevertheless fair to draw the conclusion that compensation packages are an important element in determining the calibre of graduates recruited into teaching, and pensions are an important part of that remuneration package. Defined benefit schemes are particularly attractive, and in my view they are an important part of that package, which is why the Bill is so important.
In his final report Lord Hutton stated:
“Given the current design of public service pension schemes, the general public cannot be sure that schemes will remain sustainable in the future.”
The issue of sustainability is therefore critical. Is a scheme sustainable in terms of its costs, given increased life expectancy? As Lord Hutton pointed out,
“In 1841, someone who reached the age of 60 might expect to live a further 14 years on average, but most people did not live to this age. By the early 1970s…the life expectancy of a 60 year old had increased to about 18 years and this has now risen to around 28 years. In addition, many more people can now expect to reach 60.”
Public service pension costs have been rising significantly over recent years—by a third in the past decade to £32 billion. Expenditure on teachers’ pensions is projected to double from £5 billion in 2005-06 to almost £10 billion in 2015-16. As Hutton pointed out,
“between 1999-2000 and 2009-10 the amount of benefits paid from the five largest public service pension schemes increased by 32 per cent. This increase in costs was mainly driven by an increase in the number of pensioners, a result of the expansion of the public service workforce over the last four decades, longer life expectancy and the extension of pension rights for early leavers and women.”
Hutton also said that it was important to look at the pension position as a whole, comparing the situation in the public and private sectors. One of the over-arching principles was to achieve fairness between taxpayers and public sector employees. The divergence, he said, between the public and private sectors is of concern. That does not mean, as the hon. Member for Leeds West asserted, that public service pensions should follow the trend in the private sector. Hutton said:
“This downward drift in pension provision in the private sector does not however provide sufficient support or justification in my view for the argument that pensions in the public sector must therefore automatically follow the same course. I regard this as a counsel of despair. In making clear I believe there is a case for further reform I have therefore rejected a race to the bottom as the only answer, and hope that reformed public service pensions can be seen as once again providing a benchmark for the private sector to aim towards.”
It is worth pausing a moment to look at how extensive this downward drift in private sector pension provision was, and its causes. According to the 2010 occupational pension scheme survey by the Office for National Statistics, the peak provision of occupational pensions was in the mid-1960s, when there more than 12 million active members, of whom 8 million were in the private sector and 4 million were in the state sector. By the mid-1990s active membership had fallen to about 11 million, but 90% of that 11 million continued to have defined benefit schemes. This means that more than 5.5 million private sector employees of that time were in some form of final salary or defined benefit scheme. By 2010 membership had fallen to 2.1 million and, as Hutton points out, only about 1 million of those members were in schemes that were still open to new members and an increasing number of schemes were closing to new accruals for existing members.
The fall in membership was due in part to the private sector making a realistic assessment of the costs of increased life expectancy. There had been a modest trend away from defined benefit schemes and towards defined contribution schemes in recent years, but that accelerated after 1997, in my view because of the decision taken by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) in his first Budget to end the repayment of dividend tax credits to pension funds and other tax-free funds, which took about £3.5 billion a year from pension funds. At the time, Britain’s private sector pensions were the envy of the world, with assets of more than £650 billion.
Many people, including in the pensions industry, said that that policy would have a very damaging effect on pension provision. Treasury civil servants shared those misgivings. In 2007 the Treasury was forced to release a number of internal papers from 1997 assessing the likely impact of the policy to end the repayment of dividend tax credits. A Treasury paper, dated 15 May 1997 and headed “Paper Four: Pension Schemes and Insurers”, pointed out that 90% of employees in occupational pension schemes had defined benefits but warned:
“In recent years we have seen a small but steady shift towards defined contribution schemes.”
The Treasury paper alerted Ministers to the risks arising from ending the repayment of dividend tax credits, stating:
“The present shift towards defined contribution schemes might accelerate…One of the claimed merits of defined contributions schemes is that they give employers more control over costs since the investment risk is transferred away from employers and onto employees. This factor would become ever more relevant with the proposed tax credit change.”
Despite that clear warning, the right hon. Gentleman pressed ahead with the policy, and the predictions made by his civil servants have come to fruition. That is why we have the problems we face today and why we are debating the Bill.
The hon. Gentleman mentioned the 1997 Budget. First, what does he think was the impact of the then Chancellor’s decision to cut corporation tax by 2p in the pound with the aim of encouraging more long-term investment in pension funds? Secondly, what impact does he think the long payment holidays for employers have had on defined contribution and defined benefit schemes?
The whole basis of the decision was the argument that the stock market was rising and so the tax cut would lead to more profits, more dividends and further rises in the stock market. Unfortunately, after 2000 the stock market started to fall and the whole basis of the argument fell apart, and therein lies the problem. Those pension holidays were temporary because of the over-exuberant stock market. Indeed, the Treasury papers from 1997, released under duress in 2007, made the point to Ministers that there was a danger that the stock market was overvalued.
As a consequence, the public sector faced a situation in which the private sector was moving away wholesale from final salary and defined benefit schemes while it was increasingly becoming the exclusive preserve of such schemes. The issue of fairness thus became paramount, particularly as the cost of those schemes was rising so quickly. Although Hutton rejected the notion that public sector pensions were gold-plated, he did conclude that longer-term structural reform was needed because
“current schemes had proved unable to respond flexibly to changes in working lives and longevity.”
Therefore, the only way to ensure that teachers and other public sector employees continued to enjoy high-quality defined benefit pensions was to engage in structural reform.
The final arrangements represent a very good deal. They now link the normal pension age to the state pension age in order to deal with longevity issues. No one within 10 years of retirement age will be affected by the changes and there is a tapering arrangement for those within 13 years of retirement. Although final salary schemes will be replaced by career average schemes from April 2015, all the accrued rights to that date will be maintained and the final salary will be the final salary on retirement, not the final salary in April 2015, as my right hon. Friend the Chief Secretary confirmed again today. Career average is still a defined benefit scheme, and it is fairer. Its generosity, of course, depends on the actual accrual rate. Currently the teachers’ pension final salary accrual rate is one 60th, and that will become more generous under the new scheme, with an accrual rate of one 57th. The salary that determines the career average will be indexed by CPI plus 1.6%, as far as teachers are concerned, although that varies in the different schemes.
These arrangements have been accepted by the Association of School and College Leaders, the Association of Teachers and Lecturers union and the National Association of Head Teachers, which have said that they are planning no further action over pension reform. These arrangements, and the Bill that will implement them, will ensure that public sector employees, including teachers, can continue to benefit from a defined benefit pension scheme that is sustainable in the long term and that will be supported by the public. That, along with other education reforms, will help to ensure the teachers are well rewarded and that we will have a teaching profession that continues to see its status rise and, with it, standards in our state schools. I fully support the Bill and, if there is a Division tonight, look forward to voting for its Second Reading.
The Bill and, perhaps more significantly, the delegated legislation that will follow it, will undoubtedly have far-reaching consequences for all those who receive public sector pensions in this country, as the debate has clearly highlighted. Analysis from the Pensions Policy Institute suggests that the proposed changes to the NHS, local government, teachers and civil service pension schemes will reduce the average value of the benefit offered across all schemes by more than a third compared with the value of the schemes in place before the coalition Government came forward with these proposals and the other steps they have taken since coming to power. The Minister has already spoken about a 40% cut in costs over time, so I assume that he will accept that figure.
We find it shocking that while there have been pay cuts of 40% in Greece as its austerity programme has been implemented, pensions in the UK are facing equivalent cuts yet most people are unaware that that is happening, perhaps in part because many people find pensions complex and difficult to understand. Of course, pensions are as much a part of our employment package as other benefits, such as pay. Indeed, many argue that pensions are in fact deferred pay, so in effect we are discussing significant cuts in the terms and conditions of all public sector workers in this country, which will, of course, have all sorts of ramifications for the private sector.
According to the Pensions Policy Institute’s analysis, following the coalition’s proposed changes, the scheme value across the four largest public sector pension schemes will reduce on average from 23% of a scheme member’s salary to 15% of their salary, with the net effect that the pension will form a much smaller part of an employment package. I argue that we should not support that. I have listened with interest to the debate on private sector pensions—I hope that we have can have a much fuller debate about it on another occasion—but I think that the message that should be coming from the House is that we want the pension to form a much bigger part of a person’s employment package. We should put in place a framework whereby the individual is required to save, as is the employer, and the Government have a role to play by ensuring that the policy framework is in place to enable that to happen.
My hon. Friend the shadow Minister said that the change in the indexation for public sector pensions from RPI to CPI is wiping 11% off the value of pensions in the public sector. In effect, that means that the pension of each public sector worker will be 11% lower in each year of their retirement. We have already heard about the implications of people opting out if these proposals are implemented, but we must also consider the implications for the public purse if people have lower incomes in retirement and therefore need to look to the state for support through welfare benefits. Half of all women workers who have a pension of less than £4,000 will be worse off, and the TUC estimates that 60% of all public sector part-time workers earning less than £15,000 a year will have to pay higher contributions. We need to look at the wider implications of the proposal.
In previous debates in the Chamber on public sector pensions, many figures have been cited to show the low salaries that most people who receive such pensions receive. As we know, public sector pensions are far from gold-plated. The Hutton report said that the average pension paid to scheme members was about £7,800 per year, with the median payment being £5,600 per year, while half of all women public sector pensioners get less than £4,000 per year. In reality, however, many people in receipt of public sector pensions receive smaller sums. The proposals suggest that those people should be required to pay greater pension contributions, to work longer, and to receive a worse pension at the end of the process.
Tribute has already been paid in this debate to the former right hon. Member for Croydon North, Malcolm Wicks. It is incredibly sad that he is not here to explain, in his most articulate way, why it is not the case that everyone should be expected to work longer, especially those who have worked in heavy manual jobs from an early age. Perhaps such people should have a lower retirement age, with the retirement system and their pension schemes taking that into account. I remember chairing a sitting of the Committee that considered the Bill that became the Pensions Act 2011 during which Malcolm Wicks entertainingly and powerfully highlighted his passion for this issue as he strongly led a rebel Labour effort to make the case that we need to look seriously at how we deal with those who carry out manual tasks.
Does the hon. Lady share my particular concern about firefighters whose retirement age will be extended? It is argued that fire prevention roles requiring less manual work will be made available to them, but does she agree that that will probably not prove to be the case for the vast majority of firefighters as they reach their later retirement age?
I am grateful to the hon. Gentleman for that intervention. I referred earlier to clause 9(2), which clearly states that firefighters will be required to work until the age of 60 before receiving their pension, whereas at the moment they have to work only until they are 55. My understanding of the fire service is that jobs requiring lesser physical skills would not be available, so I asked the Minister what he expected people to do. Labour Members fear that they would retire early, but would then have to get other employment, such as a part-time job in Tesco, or to sign on. That is not an adequate way to deal with people who do such jobs over a lengthy period.
Of course, it is not only firefighters who will be affected. Many people in the public sector work in very physical jobs, whether they are the paramedics in our ambulances or nurses—particularly grade A nurses. Those who carry out manually demanding tasks would not be able to work until they were 68, but other jobs might not be available to them. We need to think this through very carefully. Having listened to the Minister, I am worried that the Bill has very little flexibility. We need to be able to think far more flexibly about working ages. We must recognise that while it may be appropriate for some people to work for longer—indeed, many people might want to work until they are much older than has traditionally been the case—for others that is simply not appropriate.
The Bill will have significant implications for the various public sector schemes in Scotland, where there has been considerable debate about its impact. Of course, the civil service schemes are a matter for this Parliament, but the local government, national health service and police pension schemes, as well as those of teachers and firefighters, are devolved. When Westminster legislates on matters that are devolved to Scotland, it usually needs to obtain a legislative consent motion from the Scottish Parliament. I appreciate that the Scottish National party spokesperson, the hon. Member for Banff and Buchan (Dr Whiteford), is in the Chamber, so she might address this later, but I am told that Scottish officials have advised Ministers in the Scottish Government that such a motion is not required, although the view of the trade unions in Scotland, on the basis of legal advice that they have obtained, is that a motion would be necessary. I was interested to hear what the Minister said about that, because there are very significant implications for Scotland. The negotiations that have taken place there are not identical to those that have been held with Ministers down here. I hope that the Scottish Government will wish to ensure that they are able to enact measures on the basis of whatever agreements are made with the unions in Scotland.
I believe that this is a devastating Bill, not only for pensioners in the public sector, but for those in the private sector. It sends all the wrong messages about what we should be seeking for pensions. We need to put in place frameworks through which we collectively save far more than we have in the past to ensure that we have provision in retirement. That does mean that individuals who can afford to should be paying more into their pension schemes, but it also means that the employer should be paying more and that the state should be playing a greater role in ensuring that that happens. In 2007 and 2008, the then Labour Government implemented reforms to the four largest public sector schemes that took account of the changing demographics that we faced. My view, which is shared by most people who have looked seriously at this, is that those schemes are viable and that sufficient funds are available to ensure that pensions are paid out.
My understanding is that there will be a review of the scheme. Having spoken to some of those who are directly involved in the negotiations on the scheme, I am firmly of the view that we need to look carefully at those figures. On the basis of the financial information that we have, which is, of course, dated, because there has not been an up-to-date review, the reality is that the scheme is viable and there is no reason to believe that that will change.
May I advise my hon. Friend of a successful local government pension scheme, namely the Greater Manchester pension scheme, which is administered by my own local authority—Tameside metropolitan borough council—and is fully funded? Is it not the case that best practice therefore exists, and should not other local government pension schemes utilise it?
It is worth putting on record that under the deal negotiated by the Labour Government, if there were increased costs with regards to longevity, there would be a cap on the employer’s contribution and the additional cost would be borne by the contributors—the scheme’s participants. The issue of longevity was therefore dealt with by agreement with the unions.
I listened carefully to the hon. Member for Finchley and Golders Green (Mike Freer) and I can say to him that while there needs to be a review of the local government scheme, I understand that the current position is that it is perfectly viable. This proposal has been made because Government Members take the view that public sector schemes are too generous and form too large a part of the employment package in the public sector. We actually need to use the public sector schemes as a model to ensure that pensions are a much greater part of everybody’s employment package. If we do not do so, we will simply end up paying in other ways, whether that is because people opt out, or because people will rely on the state as they are living in such poor circumstances. We should have a debate about how we can move towards a situation whereby, collectively, we save more for retirement, so that people have decent pensions that they can afford to live on and do not need to rely on the state in other ways.
I do not agree with the conclusions of the hon. Member for North Ayrshire and Arran (Katy Clark) about the Bill, or with some of the details of her speech, but I am sure that every Member of the House will agree with her warm remarks about the late right hon. Member for Croydon North, Malcolm Wicks. I knew Malcolm as a fellow London politician for many years. Indeed, I knew his late father, who was a former chairman of the Greater London council. I think that everyone would agree that it is a tragedy that Malcolm is not here, because his expertise in this field was recognised throughout the Chamber.
During my time in government I had a measure of responsibility for two of the schemes under discussion, namely the local government scheme and the firefighters scheme. I very much agree with my hon. Friend the Member for Bognor Regis and Littlehampton (Mr Gibb) in his analysis of the Bill, the overall pressures that need to be redressed and the need for reform of public sector pensions. I wholly endorse his analysis of how the negotiations—to which he, I and the Chief Secretary to the Treasury were, in varying measure, party—proceeded. There was greater realism and sophistication to be found in my dealings and negotiations with various public sector unions than in the analysis provided by Members on the Opposition Front Bench. That is a sad commentary.
I want to deal initially with the local government scheme. It has been observed, rightly, that this is the most significant of all the schemes in financial terms. It is hugely important and involves 81 funds. It is the biggest pension fund in the United Kingdom and the fourth largest in the world. We are talking about £145 billion in investments and assets, so getting the local government scheme right is critical for its members, many of whom I have worked with for years, going back to the day on which I was first elected as a councillor at the age of 21, about which all I can say is that I was keen.
Yes, it was shortly after the Municipal Reform Act.
The scheme is important for its members and the council tax payers who fund it. We should also not forget—I will come back to this later—that it is important for the overall British economy, because of its investment potential. Getting it right is important. It is worth emphasising that it is different from the other schemes, because it is largely funded. The Chief Secretary to the Treasury recognised that significant factor, as, I am sure, will the Minister who responds to the debate. It will have consequences, once the Bill is enacted, for how we deal with regulations and secondary legislation with regard to the scheme’s governance and other related matters. There is nothing in the Bill itself—which I warmly support, because reform of all the public sector schemes is necessary—to prevent that from being achieved.
There is clear evidence that reform of the local government scheme is necessary. Reference has been made to the Audit Commission and, at the risk of taking a little longer than I had intended, it is worth quoting what it said in order to make the point. It accepted that the local government pension scheme had funds
“to cover about three-quarters of its future liabilities”
and that it had a positive cash flow. The commission then concluded that the current approach could not be continued indefinitely, the reasons for which included:
“The cost of providing pensions for local authority employees is rising in absolute terms and as a proportion of pay because of increasing life expectancy and action needed to recover funding deficits.”
It was not possible to fund the whole lot. There is no doubt that local government pension funds
“have been affected by lower than anticipated investment returns”.
At the time of the commission’s report in 2009, the value of assets was “about 15% lower” than had been anticipated in the previous revaluation in 2007. I have to say that Opposition Members cannot escape some of the responsibility that the previous Government have for the investment performance of the funds.
I certainly never took any pension contribution holidays. Indeed, I only became a member of the local government pension scheme in 2000, when I was a member of the Greater London authority, so I do not think that the hon. Gentleman’s point is realistic. The performance of the scheme is down to the investment climate in which it operates, and the investment climate is determined by the macro-economic policies of the Government. The hon. Gentleman does not accept the failure of his Government in this context. One of the by-blows of that failure was that the investment returns for the scheme were less than expected and that has added to the pressures on the scheme. It is not the sole pressure, but it has added to them.
The Audit Commission also noted that the cost of pensions affects the amount of money available for local authorities to fund services and it influences council tax decisions, so there were questions about whether the LGPS benefits were affordable in the long term. Although some of those matters have been picked up by prior reforms—I do not pretend otherwise—they were not adequate to deal with the pressures. The Audit Commission concluded that, despite the fact that the scheme had funding, unlike others, reform was needed none the less. It is not just the Audit Commission that has recognised that—so too have the professionals in the local government pensions world. In October 2009 Mike Taylor, the chief executive of the London Pensions Fund Authority—I declare an interest, having been a member of that body for a short period—said that the LGPS needed to respond to increasing longevity because it
“is not designed to pay benefits for ever increasing periods of retirement and, without change, will face extinction…Employer or taxpayer contribution rates currently take all the strain of increasing liabilities in the LGPS. This situation cannot continue and either those costs must be reduced, or employees bear a fairer share of the increasing costs.”
Will the hon. Gentleman discuss with the chief executive of the LPFA his opinion of clause 16, which will close the existing local government pension scheme and start a new one? As I understand it, closing it might trigger what are known as section 75 crystallisation of debt arrangements, and the burden could fall heavily on local authorities. Does he agree that the Economic Secretary needs to ensure that the crystallisation of costs does not fall disproportionately on local taxpayers?
I certainly agree that the impacts of crystallisation have to be considered carefully. It is worth saying, however—I was going to come to this point later, but I will deal with it now—that the reason why we are dealing with the matter in this way is in no small measure the result of an agreement between the unions and local government employers. They agreed that it was desirable to have a single reform of the system to deal with both short and long-term pressures, which was referred to as a “single event”, and that it should take place in 2014. There is a technical debate to be had about how best to achieve that while avoiding the risk of crystallisation, and I hope that my hon. Friend the Economic Secretary and his ministerial colleagues will have that debate. However, that is certainly not a reason for opposing the Bill, and I do not think for one moment that it undermines the major thrust of the Government’s reforms. The structural issues that require reform in all the public sector funds, including the LGPS, need more radical work than that.
It seems to me that there is scope to reflect the particular circumstances of the LGPS within the parameters of the Bill, and I hope that Ministers will recognise that. It is still significantly funded, and at its best it has very high standards of governance. Many of us in local government have wanted to examine the capacity of some of the smaller schemes, and I believe that there is scope for the Government to encourage greater collaboration between some of them, or perhaps even mergers. The large and well run ones such as those in Greater Manchester, London and elsewhere have good governance arrangements, and I concede the point that was made about the Greater Manchester scheme. There is no reason why we cannot ensure that those arrangements are reflected in the secondary legislation that flows from the Bill. That will be a desirable outcome.
I hope that there will be democratic local accountability through elected members serving on the boards of schemes. I do not think it is necessary to impose a one-size-fits-all approach on the governance of schemes in order to achieve the important financial and structural reforms that are needed, which I support the Government in taking forward. We can reflect the particular circumstances of the local government scheme within the parameters that the Government have rightly set. That also applies to certain aspects of the scheme’s design, because there were constructive negotiations on the LGPS on the basis that the key point was to achieve the required cost envelope, which, as I recall, was 19.5% of salaries. Particular parts of the scheme enable us to do that while reflecting the particular nature of the local government work force and the scheme’s governance arrangements. I hope Ministers will ensure that the commitment to do so is maintained, and I have no doubt that they will.
I referred earlier to the investment potential of the local government scheme. It is already a significant player in many investment markets, but it could do more. I support the Government proposal to lift the cap on the amount that local government schemes can invest in local infrastructure schemes, which is currently an arbitrary 15%. When I was a Minister, I believed passionately in ensuring not only that local authorities had more resources of their own to put towards local investment but that they made the best use of their current assets, so it does not seem unreasonable that we should remove that cap. The professionals in the field have suggested that something like 30% would be a more realistic cap, and I am open-minded about the exact amount.
I recognise that Brian Strutton, from one of the public sector unions, has some concerns about that idea. If I may say so, I regarded him as a responsible interlocutor in my dealings with the trade unions. He rightly recognises that it might be possible to achieve our objectives either through changing the cap, which I think the unions are wary of, or through the creation of a new asset class for infrastructure. I hope that my hon. Friend the Economic Secretary will consider how we can achieve the important objective of giving local schemes a greater ability to invest in local infrastructure. We should not miss that important opportunity.
I turn now to the firefighters scheme. Again, I accept that it has differences from other schemes. A particularly important issue in all my negotiations with the Fire Brigades Union was the retirement age. The final agreement that was achieved, on which I reported to the House shortly before the summer recess, provided us with adequate and proper flexibility to take on board the concerns of our firefighters, whom I greatly respect. Two matters were put forward in that agreement. The first was that there would be a review of contribution levels from 2013-14 onwards, taking into account the impact of opt-outs, to which the hon. Member for North Ayrshire and Arran referred. I am sure the Economic Secretary will confirm that that remains the position.
Secondly, it will be recalled that I commissioned Dr Tony Williams to examine the evidence base for the case that was made about the physical impact of a firefighter’s job and its relation to the retirement age. The new firefighters scheme has had a normal pension age of 60 for new entrants since 2006, so the situation will not change for many firefighters. In addition, the retirement age of 55, or 50 after 25 years’ service, has been protected for entrants from before 2006. There are significant protections built in for long-serving firefighters. Dr Williams is extremely reputable in this field. He is the medical director of Working Fit and has 15 years’ experience as an occupational physician in the NHS as well as experience of firefighting. I hope that my hon. Friend the Economic Secretary will be able to confirm that the Government will look very closely at the outcome of his review.
The hon. Gentleman is absolutely correct in saying that there is some element of protection for firefighters, but we need to look forward, because that is what pensions are about. The new retirement age will keep firefighters working to 60 years of age in future. Are we about to breed supermen and superwomen who will be able to withstand such work at the age of 60?
We need to look with care at the evidence, but that does not mean that we should keep the current generous—I use that word with care—retirement age. Firefighters work very hard, but the nature of jobs changes, and there is a case to be made—I put it no stronger than that—that the job of a firefighter is less physical than it was in some respects, because of the amount of technology and kit that they happily have to assist them. There is also a case to be made that increasing health levels in the population should not be taken out of account.
Equally, although I take on board the point raised by the hon. Member for North Ayrshire and Arran, it is realistic to accept that there are generally fewer “light duty” jobs in the fire service than in the police service. That is because fire authorities generally operate within a lean and flat structure, and there are fewer civilian-style jobs to which people can be moved. We must take all those important considerations on board, which is why the report was commissioned.
My hon. Friend speaks with considerable authority on the firefighters’ situation, but is he as surprised as I was to hear that increases in longevity have meant that the average policewoman now spends more of her life drawing her pension than she did earning it, which is surely unsustainable? That situation will pertain to male police officers in a few years’ time if nothing is done about the retirement age.
I take on board my hon. Friend’s point, and we must be realistic in all areas of this discussion. Longevity creates a pressure on the scheme, as well as providing greater life opportunities for people who have retired. It is, in part, a result of greater fitness and better health among the population, which can—among other things—enable people to work for longer. That applies in pretty much every other kind of activity, and we cannot regard any scheme as exempt. I accept, however, that there are particular pressures on firefighters, although I suggest to the House that the Government’s proposals recognise that and provide a sensible and evidence-based mechanism for dealing with it.
I am grateful for the informed contribution from a former Minister. Does he acknowledge that, besides the pressures of longevity, there are risks in increasing contributions for employees? For the firefighters fund, 7% is the magic figure in terms of opt-out. I understand that a poll by YouGov, commissioned by the Fire Brigades Union, indicates that a larger number—12% —of people are very likely to opt out, and that 25% are likely to opt out when the new contributions come into effect.
When I was a Minister, it was precisely for that reason that I included in the agreement a provision for a review of opt-outs in the firefighters scheme before decisions were taken on increases in years 2 and 3. That was in accordance with the proposals set out by the Chief Secretary to the Treasury. We have built in a mechanism to review that risk, but I hope we will find that it does not materialise. I come back to my point that we must probably move away from our slightly entrenched positions on this issue, and be prepared to look sensibly at how to strike an appropriate balance based on the evidence.
We all want the strongest possible pension schemes for those in our public services. I have referred to the two sectors with which I have been most closely associated, and to which I feel the strongest personal commitment, but one could say similar things about many other sectors. If there is a Division tonight, I would not support the Bill without hesitation if I did not believe that we had put in place a framework that will enable us to deliver on our obligations. There are technical matters to address, but I am confident that we will be able to do so as the legislation proceeds. The Bill deals with an important and necessary reform, and I commend it to the House.
Order. May I gently inform the House that no time limit for speeches has been imposed in this debate as yet, but contributions are going up in length, not down? We started with speeches of 15 minutes, and we have just had one of more than 20 minutes. If Members cannot ensure that their speeches are a little shorter—I put it no stronger than that at the moment—it will be necessary to impose a time limit to ensure that every Member gets into the debate.
I will try to keep my remarks to the point, Madam Deputy Speaker, and enable other Members to get in.
We have heard a lot about some of the changes that have already started to take effect, but one aspect of the Bill that is undoubtedly causing most concern, and proving a sticking point in negotiations with the public sector work force, concerns the equalisation of the normal pension age with the state pension age, and the implications of that for those who may have to work until they are 68.
Although I welcome the exemptions that have been conceded for some of the more obviously physically demanding public sector occupations—police officers, firefighters, members of the armed forces—that is by no means an exhaustive list of public sector jobs that can be extremely physically challenging. Most people would struggle to do many of those jobs into their mid and late-60s, and I hope the Government will listen carefully to employee representatives, and look again at the proposal and at what it might mean for nurses, paramedics, auxiliaries, prison officers and teachers, and others who do stressful and physically demanding jobs. That was one of the principal issues raised across the spectrum of trade unions and other employee representative groups, and the Bill does not currently seem to contain any flexibility to look at the issue in the context of overall negotiations, which is a particular issue in the devolved context.
We need to look at the normal pension age and its alignment with the state pension age in a slightly wider contextual framework, and inject a bit more practical realism into our actuarial spreadsheets. It was a pleasure to follow the hon. Member for Bromley and Chislehurst (Robert Neill), and the issue of life expectancy that he mentioned is important. We all acknowledge that life expectancy is increasing, but that top line trajectory masks great and very marked divergences on a range of demographic and geographic indicators. At this point, may I add my tribute to those of other hon. Members who have mentioned the late right hon. Member for Croydon North, (Malcolm Wicks)? It was he who raised some of these important points during previous debates.
People who have worked in heavy industry, for example, tend to die younger than those who have worked in professional occupations. People in deprived neighbourhoods live shorter lives than those in affluent areas, and on average women tend to live several years longer than men. One aspect of that divergence that does not receive nearly enough attention yet is pertinent to the debate is healthy life expectancy—the number of years in which we can expect to enjoy good health. Healthy life expectancy is rising, but it is not rising as quickly as life expectancy.
In Scotland we have one of the lowest life expectancies in Europe, and men and women can expect to live almost two years less than the UK average, at just over 76 years for men, and just over 80 years for women. The key point, however, is that healthy life expectancy is only 61.9 years for women and 59.5 years for men. The health of many men has already been seriously compromised several years before they reach the current retirement age. Those figures come from the Registrar General for Scotland; they are official Government figures.
Last month, the TUC published research indicating that in the UK as a whole, only 54% of men aged between 60 and 64 are actually in work, which, on the face of it, seems fairly consistent with official figures on healthy life expectancy. Women can obviously claim their state pension at an earlier age so they fare a bit better, but even then only 62% of women between 56 and 60 are in work. We as legislators must be a lot more realistic about how long we can expect people to be fit for work. Furthermore, those figures do not include people who have moved into part-time work because of their health, or taken on unpaid caring responsibilities for a spouse whose health has been compromised. Many people also leave the workplace to look after grandchildren.
I am sure all Members know people who work into their 70s and beyond with robust health and enviable levels of energy, and thanks to equality legislation fewer barriers are now in the way of older people who want—or need—to continue working beyond the state pension age and are able to do so. However, we cannot just cross our fingers and hope that older people will be able to continue in their jobs until they are 68. All the evidence tells us that most people will have developed some serious health problems by that stage in their lives, which may well affect their ability to work. That is not just in heavy occupations, but across the board.
Even if we allow for continued improvement in health outcomes, which I am sure everyone aspires to, and if life expectancy continues to rise, we need to factor in the realistic likelihood that a significant proportion of people will not be fit for work in physically demanding jobs by the time they reach 68. My worry is that those who are forced to leave their jobs early because of ill health face having to live on actuarially reduced pensions. That might well save the public pension schemes money, but it will significantly reduce their standard of living and quality of life in old age. It might even force some to rely on state benefits. The hon. Member for North Ayrshire and Arran (Katy Clark) alluded to that. We currently spend about £13 billion a year in means-tested benefits for older people, most of whom have worked hard all their lives, often in low-paid jobs or in unpaid caring, and do not have occupational pensions. Supporting those people through means-tested benefits is probably the least efficient way we could ensure they have a dignified old age.
As other hon. Members have said, today is not the day to debate the chronic problems with, and abysmal state of, private sector pensions and the reasons for them, but the warning is there: we should not pull the public sector down to the base level—the absolutely inadequate level—of private and voluntary sector pension schemes. That would be a recipe for spending a lot more on means-tested benefits in the long term.
I was struck by the briefing from the Prison Officers Association, not least because the proposed reforms will affect hundreds of prison officers in my constituency who work at Peterhead prison. The POA points out that, although the average age of prison officers in the UK is rising, prisoners are getting younger, and, in its words, “more dangerous”. It is concerned that many prison officers in their 60s might struggle to pass the physical fitness test that all prison officers undertake to ensure they have the physical strength, stamina and stability to, for example, use control and restraint techniques in the course of their duties. Prison officers make the case that there is a direct parallel between their job and that of police officers, and cannot understand why the recognition that police officers might not be able to do their job effectively beyond 60 has not been extended to them. Will the Minister offer some clarification on the Government’s thinking? Is there scope to reconsider the situation for prison officers? Prison officers point out that, if people are forced to leave their job early through ill health, they could put greater financial strain on the system. For example, it could cost a great deal more if they retire on work-related medical grounds than if they retire normally at a sensible age.
Nurses are another group who do heavy work, so the pension age has potentially significant implications for them. The Royal College of Nursing has formally rejected part of the Government’s proposal, but it makes the point that the Government need to keep the link between the normal pension age and the state retirement age under review, as recommended by Lord Hutton. It has asked that that commitment is made explicit in the Bill, and that the review process is conducted independently. I hope Ministers take that on board.
The RCN has also asked the Government to postpone making a decision on the equalisation of the normal pension age and state pension age until the working longer review in England has reported and the Government have had time to consider its recommendations. In the light of what I have said, I hope the Government take that point seriously, because it would be a sensible approach—the review will help to inform good decision making in the longer term.
Another major concern of trade unions and employee representatives—hon. Members have made points on this, so I will not repeat them—is that the retrospective powers in the Bill allow the Government to amend it with limited consultation. Trade unions and employee representatives are legitimately concerned about instability and uncertainty for scheme members. The consequences of people losing confidence in the pension system and dropping out of it are much bigger—that has happened in other sectors when pensions have become unsustainable. I hope the Government consider that in Committee.
The hon. Member for North Ayrshire and Arran raised specific aspects of devolved pensions regulation. I am by no means a spokesperson for the Scottish Government—I urge hon. Members to direct their questions to the Ministers responsible—but I hope I can shed some light on certain parts of the Chief Secretary to the Treasury’s opening remarks. I also want to ask questions for clarification from him and the Minister who will wind up the debate. My understanding is that occupational pensions policy is largely reserved, although Scottish Ministers have Executive responsibilities for the NHS, teachers, firefighters, police and local government pensions schemes, subject to a number of constraints. The major constraint is budgetary—the Treasury controls the purse strings, and Barnett consequentials have a knock-on impact on a Government who are working on a fixed budget and have no borrowing powers.
Will the Minister confirm that formal approval is needed from the Treasury for any legislative changes to the NHS and teachers schemes? What is the Government’s thinking on the Treasury approval required in relation to the firefighters and police schemes? My understanding is that the Government are trying to introduce a Treasury approval requirement for those schemes. Will Ministers confirm what they are doing? Are they seeking a memorandum of understanding to claw back powers from the Scottish Government on police and firefighters’ pensions? Scottish Ministers have had discretion to determine the design of the police and firefighters schemes, although the settlements have always mirrored agreements in other parts of the UK. So far, the benefits of consistency have been thought to outweigh any benefits of divergence. I am not sure whether that balance of opportunity will be seen in the same light if the proposals are implemented.
I believe Scottish Ministers have responsibilities in relation to the local government scheme, provided the powers are exercised within primary legislation. In practice, that scheme, too, has mirrored that of the rest of the UK. To return to points made earlier, I understand that the local government scheme has been reformed, and that “cap and share” arrangements are in place. It is funded differently from other public sector schemes, and decisions on it are made in Scotland by those who manage it. It is worth pointing out that, in Scotland, the public sector local government scheme does not seem to have any financial problems. There is no immediate shortfall—in fact, it is currently running a surplus—and neither the Convention of Scottish Local Authorities nor trade unions are of the view that there is any need for reform. The Government could helpfully clarify why they believe that scheme needs to be reformed. Is this the right time to do so? Public sector workers are in tight financial situations. Most have seen their contributions increase dramatically, and many had their incomes squeezed.
I cannot with any confidence answer the question put to me by the hon. Member for North Ayrshire and Arran on the legislative consent motion. My understanding is that there is no need for a legislative consent motion for most of the Bill, because pensions policy is largely reserved. However, I believe legislative consent would be required for some of the reforms to non-departmental public bodies and some judicial offices. I am guided by the Bill’s explanatory notes, so perhaps the Minister could explain if the situation is different. The Unison briefing asserts that further legislative consent is required with regard to the local government scheme, but I have not seen the legal arguments that back that up or substantiate it. Perhaps UK Ministers are in a position to clarify the UK Government’s understanding of the situation.
I am grateful to the hon. Lady for going through the detail as she understands it. The Bill will have massive implications for our constituents. Does she agree that, if the Unison legal advice is correct—that a legislative consent motion is necessary in relation to the local government pension scheme—everything should be done by the Scottish Government to ensure that the negotiations taking place in Scotland between them and trade unions take precedence in terms of the outcome for our constituents?
I certainly agree that it is important that we get a fair and equitable solution in the local government pension scheme. I cannot speak for the Government, but I know that some of the negotiations have been very difficult. From speaking to trade union representatives in recent weeks, it is clear that they recognise the constraints within which the Government are working—and they value the tone of some of the negotiations that have taken place so far—but Ministers in Scotland have been negotiating with one hand tied behind their backs. Greater flexibility, especially on age, would go a long way to helping to reach an equitable conclusion.
Underlying this debate is the need to maintain confidence in public sector pensions, which are really very modest. They keep people just above the poverty line, especially women who have worked in low-paid jobs most of their lives and have very modest pensions that keep them just above the level of means-tested benefits. People are not unreasonable in their expectations, but asking them to pay more, work longer and receive less is not a reasonable proposition to put to our public sector workers. I hope that the Government can and will do better.
Order. I am going to put a time limit on speeches now. It will be 12 minutes from the next speaker, after which I will review it. We may not get to all the Members who wish to speak by 9.30, when the winding-up speeches will start. If Members take a lot of interventions and go considerably in excess of 12 minutes, I will have to cut the time again.
I shall try to keep within the 12 minutes: it is my intention to make only a short contribution.
First, I wish to establish some general principles for why reform is needed. They can be grouped into two areas. The first is the general societal changes that have taken place that necessitate reform and to which the Government must respond, such as the increase in life expectancy and the changes in employment practices over recent decades. The second is the changing balance over time between the sharing of the cost of public sector pensions between the taxpayers, through the Government acting as employer, and the employees who receive the pensions.
It is important to establish that the reforms in the Bill would be needed with or without the current cost pressures that the Government face. We hope to bring public sector borrowing under control by 2017, but these reforms are intended to last for a generation. They are not driven by the short-term need to recover costs: they are driven by a long-term desire to ensure that public sector pensions survive into the future in a sustainable way.
Any reform should be done fairly and, as far as I and my Liberal Democrat colleagues are concerned, protect those in the public sector on the lowest earnings. The overriding principle should be that the public sector should continue to act as an exemplar to other employers. There should not be a race to the bottom: the public sector should set the gold standard for affordable and attractive public sector pensions that attract the very best people into the public sector, who are paid in a fair way and guaranteed a secure and attractive income into retirement.
The first principle is that of life expectancy. We all know that we would hope for ourselves and people in our families to live longer. Indeed, people retiring now at age 60 can expect to spend 40% of their adult life in retirement—so only 60% of their adult life would have been spent in work. The state pension age has been changed relatively infrequently over the 103 years of its existence. If it had been uplifted in line with life expectancies, people would now be drawing their state pensions at age 75. Several other countries, in particular Scandinavian countries, have ongoing commissions that examine life expectancy and uplift pension ages according to that evidence. That might be a good approach in the future for this country.
The biggest societal change driving the need for reform is the difference that has arisen over time between private sector and public sector remuneration. It always used to be much quoted that pay in the private sector was more attractive than in the public sector and that part of the balancing factor to make public sector employment attractive was a good pension, and perhaps other good terms and conditions. In recent decades, that maxim does not hold. Indeed, the Institute for Fiscal Studies said that in 2011 people in the public sector doing a broadly similar job to people in the private sector were likely to be paid about 8.3% more. But pension provision in the public sector continues to be much more attractive and offered on a much wider scale than to people in the private sector.
Does the hon. Gentleman regret the way in which the Government have pitted public sector pensions against private sector pensions, when in fact the average local government pension for men is £4,000 a year and for women is £2,600? There is no doubt in my mind that this is an intentional attack on public service and the public sector as a whole.
The hon. Lady’s final sentence illustrates her prejudice against the Government’s intentions. This is not an attack on the public sector. The coalition Government are trying to ensure that public sector pensions remain across the board, so that every person in the public sector is able to access a pension, which is not the case in the private sector, as I am about to say; that they are affordable to the taxpayer; and that they are offered on very good terms. Without reform, those provisions would not be in place. I would not want to be associated in any way with an attack on public sector employees who perform services that are absolutely vital to all of our constituents. I would not want to be associated with any reform predicated on that basis, and I genuinely think that that is not the basis on which the reforms are being carried out—from the perspective of both parties in the coalition.
On coverage, 100% of public sector employees are in theory eligible to join a pension scheme, because it is offered to everyone, but only 35% of employees in the private sector are able to join a scheme, and only about a third have a contribution made to their scheme by their employer. There are many schemes in the private sector in which the employer simply does not make a contribution. There may be a scheme, but it is not funded by the employer. The biggest anomaly is in the type of scheme available to people in the different sectors, between those on defined benefit, final salary or career average schemes, and those who are on defined contribution schemes. Currently, just under 80% of people in the public sector are in defined benefit final salary schemes, but only 9% of people who work in the private sector are able to access such schemes. That percentage is falling year on year, and soon nobody will be joining a final salary scheme in the private sector. Many of them will be closed and no further contributions made by current members.
There is also the cost to the public purse of maintaining public sector pensions, which puts an onus on us to look at the case for reform. Those costs have to be shared between the Government as the employer, all of us as taxpayers, and the employees themselves, who will ultimately be the beneficiaries. Between 1999 to 2009, the cost of the NHS pension scheme rose by 47%, the cost of the civil service scheme by 23% and, as we heard from the hon. Member for Bognor Regis and Littlehampton (Mr Gibb), who is not in his seat, the cost of the teachers’ pension scheme by 37%. That has necessitated a shift in the contribution rates of the employee, who is the beneficiary, and the employer, who is the Government and the taxpayer. For instance, there used to be rough parity in the teachers’ pension scheme—the employee put in 5% and the Government 5%—but employees now contribute 6.4% and the Government about 14%. That is unfair on the general mass of taxpayers who cannot access these types of schemes. So there is an imbalance between the public and private sectors, and the cost to the Exchequer of public sector pensions is now £32 billion. Those costs cannot be allowed to grow uncontrollably.
The pension reforms must be done fairly, however, so I am pleased that there will be no change to the terms and conditions and contributions of employees who earn up to £15,000—about 15% of the public sector work force. Some 750,000 people will see no change in their pension contributions and will still be able to draw the pension they expect at the moment. Those on salaries of up to £21,000 will have their increases capped at 1.5%, so a typical employee on £21,000, after 20% tax relief—everyone gets tax relief on their pension contributions—will pay just £8 extra a month to remain in a defined benefit scheme. And, of course, employees within 10 years of retirement this April will see no change in their terms and conditions and expected pensions.
It is also entirely fair that over time we move to a career average scheme. That will benefit the broad mass of people in the public sector, who have annual salary increments but whose starting salary after inflation is not drastically different from what they start with. A final salary pension scheme, on the other hand, disproportionately benefits those in the public sector who someone described as the star performers—the people on huge incomes, the senior managers, head teachers and directors. It is fair, then, that we move to a career average scheme.
Our own arrangements, which no one has mentioned thus far, are now entirely a matter for the Independent Parliamentary Standards Authority. If, however, the public sector moves to a career average scheme, Members should expect IPSA, which now sets our terms and conditions, to move us on to a career average scheme, rather than a final salary scheme, as well.
There is no doubt that reform is needed—that is shown by demographics and the change in employment practices—and it is right that the Government are doing it in a way that is fair to public sector employees as well as to taxpayers. That will ensure that public sector pension schemes are not only the best on offer in the country but are offered on terms that are sustainable.
It is a pleasure to follow the hon. Member for Bristol West (Stephen Williams), who made a very balanced speech. He is right that reform is required. That is accepted and supported by hon. Members on both sides of the House.
I start from a simple principle: pensions are pay deferred. They are part of people’s terms and conditions, often part of their contract of employment, and, in the public sector, part of the deal for public service workers who often give a lifetime’s commitment to the service in which they work. Two things follow from that: first, pensions are principally the property of the scheme members, who defer their pay and put that pay in the hands of managers and trustees; and, secondly, changes to people’s pension terms should involve those members—those whose money it is—through consultation, negotiation and agreement.
That is what the Labour party did with the far-reaching reforms we put in place in government. We agreed and established changes to reflect the increasing age of the population, to manage the changes effectively, to control the costs to taxpayers and to increase contributions overall from scheme members. We did that with the armed forces in 2005, the police, firefighters and local government workers in 2006, and teachers, the NHS and civil servants in 2007. Across all areas, we introduced increases in the pension age, changes to the contribution rates from members—especially the higher paid—and a “cap and share” arrangement that limited absolutely the liability of taxpayers to future increases in costs. As a local government Minister, I was responsible for the local government pension scheme, which we radically reformed not just for new members but for existing members. Furthermore, we did so without closing the scheme, and there is no need to accept what is provided for in clause 16 and do that this time around either.
The reforms recognised the pressures of cost, population and life expectancy. They also recognised that pensions were deferred pay, that changes to contribution rates and benefits should be consulted on and agreed, that most public sector workers were low-paid and that their pensions were far from gold-plated. The average pension for NHS workers last year was a little over £7,500, while the average for a local government worker this year is just £4,406. After our changes, in 2010 the National Audit Office concluded:
“As a result of the changes, which are on course to deliver substantial savings, long-term costs are projected to stabilise around their current levels as a proportion of GDP. The changes are also set to manage one of the most significant risks to those costs, by transferring from taxpayers to employees additional costs arising if pensioners live longer than is currently projected.”
The Government have failed to build on those reforms. They did not even wait until the Hutton review, which they commissioned, had fully reported before in October 2010 the Chancellor hit public service workers with a 3p in the pound surcharge—a public service pensions tax that had nothing to do with long-term pension reform and everything to do with a short-term cash grab to try to deal with the deficit; and this from a set of workers that, at the same time, was being squeezed by a public sector pay freeze, hit by a VAT increase, subject to rising energy bills and suffering from deep cuts in tax credits. That is where the Government lost the moral authority to claim we were all in it together and to be a one-nation party. Furthermore, changes such as the switch from the retail prices index to the consumer prices index were imposed without warning, consultation or agreement.
The Government are legislating after losing the trust of public service workers, who simply do not trust them with their pensions or with this pensions legislation. It might not be the Government’s intention to reduce benefits already accrued, to prevent the flexibility to link the normal pension age with the state pension age, or to make further sweeping and radical changes or reforms without proper scrutiny or consultation, but the legislation, as it stands, can be used in that way, whatever the intention of Ministers. That is why it is important to get this legislation right. It is even more important because this is a broad, sweeping framework Bill in which many of the detailed changes will lie in the regulations and scheme rules.
As both a former local government Minister, like the hon. Member for Bromley and Chislehurst (Robert Neill), and a former Treasury Minister, let me say that my main concern is about the local government pension scheme. The Treasury has never really recognised the difference between the local government pension scheme and other public service pension schemes. Unlike other main schemes, the local government scheme is a funded scheme. It has £150 billion in assets, it raises an annual income significantly greater than its expenditure each year and it has seen its investment income cover at least a third of its expenditure on benefits in each of the last few years. Unlike all the other main schemes, employer contributions in the local government pension scheme are set locally by 89 separate funds, each with its own investment strategies, its own member demographics and its own range of employers—in other words, the flexibility to match the responsibilities and pressures that those funds face.
Unlike in other main schemes, the governance of the local government pension scheme reflects local municipal roots, while the respective roles and responsibilities of those managing and overseeing the scheme are different from those for the national schemes. Finally, unlike in all the other main schemes, simply meeting the liabilities is not the only concern of those managers. Stability is a vital element, as is the participation rate. The reforms that we put in place—those now being negotiated—reflect those concerns. This is a broad-brush Bill, and the same centralised powers, controls and restrictions over the unfunded schemes do not fit well with the local government pension scheme. As the shadow Chief Secretary said, some significant debates and amendments are required in Committee.
There are some serious flaws in the Bill. I will offer the Minister four for starters. First, the Chief Secretary confirmed in response to interventions from me and the hon. Member for Foyle (Mark Durkan) that clauses 3 and 11 allow scheme regulations to make retrospective changes to the benefits that people have already worked for and paid for. As such, they threaten one of the central tenets of pension saving: that what one has accrued is safe and that the terms on which it was accrued will be honoured, which is as true for the private sector as it should be for the public sector. Secondly, a running theme throughout all 38 clauses is a Treasury power grab—the centralisation of control over all elements of schemes, from valuations to scheme regulations, with no requirement to consult even the scheme members, who are most directly affected.
Thirdly, there is a legislative lock in clause 9 between the normal pension age and the state pension age for all but firefighters, the police and the armed forces. Therefore, even if there is a strong case, which is now being looked at, for that link to be made flexible for some workers in the NHS, the legislation does not permit it. Fourthly, last December the Chief Secretary made an important commitment to the House on behalf of the Government on the retention of current protections for public sector workers who are outsourced and the extension of fair-deal provisions for all staff transferring employers. Schedule 9 enables that to occur in the civil service, but it does not ensure that it will occur, and it must.
Finally, let me say this to the Treasury Minister and his colleagues. There are many excellent minds among the civil servants in the Treasury, but frankly they do not know everything. They sometimes make mistakes and sometimes others know more than they do. I shall give a couple of examples. The dates for the so-called closure of the local government scheme in clause 13 are wrong, as is the date for ensuring that transitional protection, as promised, is in place. As the Minister prepares for the debates and the amendments in Committee, I hope he will take seriously the points and concerns raised tonight. I hope he will be ready to make amendments where there is a good case for doing so, because in the end that is how we get a public pensions system that is fair to taxpayers for the long term, but remains fair to those public service workers who give so much of their time—their whole lives—to support others.
I will try to keep my comments as brief as possible. I want to address some of the remarks that I have had thrown back at me as a supporter of this Bill and this coalition Government—not so much by Members, whom I have listened to carefully this evening, but in the newspapers, from the unions and from politicians in other political parties who have sought to make capital out of this issue.
Let me say clearly from the start that I—and, I believe, every single member of this coalition Government, whether from our position as Members of Parliament or from personal experience—very much support and respect the role of public sector workers across the United Kingdom. I know from personal experience about the very hard work done by the police officers in London with whom I work. I know about the paramedic who came to the aid of a member of my family recently and solved a problem for them. I also know about those who are teaching my three children the three Rs in a local state school. I know from personal experience, not just through my work, just what a good job public sector workers do, and I do not think there is anyone in this coalition Government who wants to do anything to undermine the pensions of public sector workers or undermine their role in any way whatever.
It was the hon. Member for Banff and Buchan (Dr Whiteford) who talked about the problems in the private sector. Although we should not be making comparisons, it is perfectly true to say that people in the private sector have lost out greatly, and they have done so partly as a result of the previous Government’s policies. We have heard all about the tax on dividends, but there are all sorts of other, subtle ways in which private sector pensions were undermined by the previous Government. They included, for example, demanding that financial institutions buy Government bonds and gilts, instead of allowing them to invest larger proportions of their money in stocks and shares, as well as enacting policies that kept stocks and share prices down. However, those are matters to be debated on another occasion.
What is clear is that we are not going to allow what happened in the private sector to happen in the public sector. We saw the misery that that caused for people—our constituents—and we do not wish to see it happen to other hard-working people. At the same time, however, we cannot ignore the fact that although people may well be doing physical jobs in the public sector, there are people in the private sector who also have to do physical jobs. We do not seem to have heard much about them. What about the lorry drivers? I used to do that job for four or five years, and it can be hard and physical. What about all the people who work in factories? What about builders? Why should they have to work so many extra years to pay for the pensions of people retiring years before them who may not be doing physical jobs at all? To some extent we have to make some comparisons.
I agree with the hon. Gentleman about workers in the private sector who should also have better arrangements. If he comes forward with a private Member’s Bill, will he allow me to become part of that process, so that we can legislate to ensure that those people are looked after properly, as public servants should be too?
There is of course a wider problem. When I bring forward that Bill, which the hon. Gentleman will be supporting, I will be looking carefully at the maths, because what I think is absolutely disgraceful is promising people in the public or private sector things that cannot possibly be afforded.
I have heard the argument from trade union officials that says: “Why is this happening? It’s all because of the banks.” It has not been mentioned today, but that is something that people have come out with. However, when we examine the figures, we see that the problem has absolutely nothing whatever to do with the banks. The Treasury Committee looked at the amount of money that some banks were given—on a temporary basis; most of it will be coming back—which it calculated as about £120 billion. However, the national debt today stands at £1 trillion, which is almost 10 times that figure. Most of that debt has been caused by politicians overspending. However, when we take into account public sector pensions, the figure for the national debt goes from £1 trillion to £2 trillion at the very least. Indeed, last April the Office for National Statistics issued figures suggesting that the total amount that Britain will need to cover its pension liabilities over the next few years is £7 trillion. I must admit that I do not know how many years ahead that figure covers—I assume it covers quite a few—but it is an absolutely astonishing sum of money. I did a quick calculation and worked out that if £1 million represented 1 cm on a graph, we would need a graph that was 40 miles long, stretching all the way to Reading, to show our current liabilities. We cannot ignore the current financial situation.
Thinking about what has gone on with pensions in the past few years reminds me of an analogy. I used to work in the private sector, for a small family transport business. I wonder what would have happened if, one day, the directors of the company had gone through the books and, instead of collecting money from their workers over the years and investing it for the pensioners of the future, they had simply taken their workers’ contributions and used them to pay for the pensions of the people who were retired at that time. It would have been a sort of giant pension Ponzi scheme, and it would probably be illegal if it were ever tried out.
Anyone bringing about such a situation would have two options. One would be to pretend that there was no problem, and to try to gain short-term popularity with their work force by continuing to pay generous pensions that they could not afford. One way of doing that would be to borrow a vast sum of money from the banks to employ more people whom they could not afford, and to use their contributions to pay for the pensions of the workers who had just retired. That is more or less what has been happening over the past few years.
The alternative is far more sensible, and it is what this Government have done. We have opened up the books and said that we simply cannot afford to do this. We know that a much larger work force is going to retire in the future, and that they are going to live even longer, so there is no point in making promises that we cannot possibly keep. We have only to look at the recent history of the past 30 or 40 years to see what happens when countries can no longer balance their books. That is happening in Greece at the moment, and it has happened in recent years in Russia and Argentina, and across south-east Asia in countries such as Thailand. It happens over and over again, and we must not think that, just because this is the United Kingdom, we can somehow buck the basic rule of economics.
I am proud that this is the first Government to have gone into an election saying, “We’re not going to spend more of your money. We’ll spend as much as we can, and we will spend it well, but we are not going to make promises that we cannot afford to keep.” We are going to protect public sector workers, particularly the lowest paid, but we are also going to ensure that the country is in a financial situation that will allow it to guarantee the pensions of those public sector workers who are going to retire not just in the next few years but in the decades ahead. In other words, we are going to trade short-term popularity—the easy thing to go for—for the long-term interests of public sector pensioners in this country. I hope that Opposition Members will, for once, do the responsible thing and support us in this vital work.
It is ironic that we are discussing pensions today, given that much of what we have seen in the press over the past 10 days or so has been about the comments of the Secretary of State for Work and Pensions on whether we, as taxpayers, should support unemployed families with two or more children. No thought has been given to who those children are, but they will become the next few generations of taxpayers who will be making contributions to support pensions, either through public sector pensions or by putting money into the pot to provide benefits for others. I am pleased that we have moved on from having a go at households in which no one is working to looking at a different group of people.
I want to put on record the fact that some of the poorest paid people in our country are public sector workers. As my good friend and colleague, my right hon. Friend the Member for Wentworth and Dearne (John Healey), said earlier, pensions in the public sector are actually pay deferred. That is exactly right, and when we end up with poor pay in the public sector, we also end up with poor pensions.
Much has been said about Lord Hutton’s report. The commission firmly rejected the claim that current public sector pensions were gold-plated, and we have heard that the average pension paid to public sector scheme members is about £7,800 a year, while the median payment is about £5,600. We have also heard that half of women public sector pensioners get less than £4,000 a year.
Labour Members recognise that public sector pensions need to be reformed, which is why we have consistently argued that there will need to be some kind of an increase in contributions and, as the population gets older, an increase in the retirement age. We have also been clear that any settlement or agreement should meet three tests, which are slightly different from the Government’s four tests, although there are elements on which we agree.
The first test is affordability: will the changes deliver a fair deal for taxpayers when times are tight, when taxes are rising and when spending is being cut? The second test is fairness: will the changes deliver a fair deal for public sector workers on low and middle incomes whose pensions are far from being gold-plated and who have given a great deal to the services in which they work and on which each and every one of us—in the House and throughout the country—depend? The third test is sustainability, because anything that any Government do needs to be sustainable. Will the changes deliver a workable settlement for the long term that does not undermine the sustainability of existing schemes and that can be flexible in the face of rising life expectancy?
I recently took the opportunity to meet several serving police officers in my constituency, and I have been tasked with raising their concerns in the Chamber this evening. We often talk about the good job that the police do, but I almost never hear people talking about police service pensions. For the sake of clarity, I should point out that although certain public sector pensions in Scotland are administered by the Scottish Government, the reality is that the decisions reached here in Westminster are followed—or mirrored, as the hon. Member for Banff and Buchan (Dr Whiteford) said—north of the border.
Despite the stated opposition of the Scottish Government’s Finance Secretary, John Swinney, to the increase in pension contributions, he confirmed in a statement to the Scottish Parliament on 21 September 2011 that the Scottish Government would apply the increase in employee contributions for the NHS, teachers, police and firefighters schemes in Scotland. As my right hon. Friend the Member for Wentworth and Dearne said, that represents an additional 3% tax on those workers in the public sector.
Is the hon. Gentleman aware that, before that decision was made, the Chief Secretary to the Treasury wrote to the Scottish Finance Secretary to say that if those contributions were not increased, £8.4 million a month would be removed from the Scottish Government’s financial settlement until such time as the Scottish Government followed the lead of other parts of the UK? I do not know what the hon. Gentleman thinks John Swinney should have done in those circumstances, but I believe that his hands were completely tied. Not only would the Scottish Government have lost that money out of the block grant, but they would have had to find it from another budget. In effect, therefore, they would have had to pay for those contributions twice.
I am pleased that the hon. Lady has come into the debate. I am not sure whether she was here when I intervened on the Chief Secretary to the Treasury to ask whether any such penalty had been suggested, but he did not answer my question in a straight manner, so I thank her for that intervention.
The serving police officers whom I have met are seriously concerned and feel that they have been let down by their representative body, the Scottish Police Federation. We all know about the technique of divide and conquer, yet with regard to the pension changes, it has become clear that we are seeing protection—understandably—for those nearing retirement age, but that that is being provided at a cost to those who joined the police service between 1992 and 2006. Those who fall into that category feel that they have been abandoned and hung out to dry.
Those people joined the police service under certain terms and conditions, one of which was that after paying their contributions into the pension fund, they could retire after 30 years and then qualify for a lump sum and a pension. One officer pointed out that he was halfway through that 30-year period. It was difficult for him to get a forecast, but the closest he could get was an indication that having worked an extra seven years, his lump sum would be about 30% of what was first anticipated, while the pension would be about 70% of what was expected. We all go through life making plans, and for some of us retirement comes that little bit sooner. When people cannot recover ground as they move towards retirement age, it leaves them in a real dilemma. As one chap pointed out, “I had looked at retiring at a specific age. My lump sum would have cleared my mortgage. I now need to rethink where I am going.”
There is a strong belief that section 2 of the Pensions Act 1995 prevents the Government from changing pensions, so I hope that the Economic Secretary will put a clarification of that point on record. The first Winsor report of many years ago stated that officers could not work beyond the age of 55, but we are now seeing a significant change. Officers will be subject to a fitness test, but what will happen if someone fails such a test? Will they be made compulsorily redundant?
We know about some of the activity on our streets today. We should not just condemn groups of people, but there are criminals out there, and I would hate to think that police officers will be trying to chase younger people on foot. If officers are between the ages of 55 and 60, there is every chance that criminals will be significantly younger than them. We will be asking the police to do a task that is beyond many people’s comprehension.
Police officers are asking the Government why there is a further review, given that the scheme was changed in 2006 and every officer who joined after that time is on the new 35-year scheme. Many who joined after 1992 are halfway through their service period and their financial future looks extremely uncertain. We all recognise that police officers are not in a position to take strike action—in all honesty, I do not think that they would—but the fact is that those who joined between 1992 and 2006 feel as if they have been singled out.
Although, according to my Front-Bench team, we will not divide the House on Second Reading, I share colleagues’ real concern about retrospection, which has been raised on several occasions. I look forward to colleagues seeking to improve the Bill in Committee and working to offer some protection to those who work —day in, day out—to deliver the services in our public sector that each and every one of us demands.
I am pleased that Labour Members have acknowledged the need for the Bill and the need to reform our public service pensions. I was struck by several good points made by the hon. Member for Dumfries and Galloway (Mr Brown) and the right hon. Member for Wentworth and Dearne (John Healey), although I found the desire to pit Government Members against public servants disappointingly partisan. I have to advise Opposition Members that Government Members equally respect the contribution of our public servants. We have retired teachers and former armed service personnel here, and we greatly value their contribution. What sits behind the Bill is the desire to make public service pensions secure and beneficial for the long term.
Given that we are all living longer, it is simply necessary to ask people to pay higher contributions. Unless we do so, we will have to find more money from all taxpayers to support the deficit and the provision of public sector pensions. That is simply not fair. The cost to the taxpayer of public service pensions has risen to £32 billion a year, which is an increase of a third over the past decade. They cost just under 1% of gross domestic product in 1970, but the figure is 2% today and, without change, it will continue to rise. The average 60-year-old now lives 10 years longer than was the case in the 1970s, so it is simply not sustainable to leave pensions as they are.
We are tackling the challenge of funding public sector pensions at the same time as we are attacking our structural deficit and the aftermath of a financial crisis. That has led some of our public servants to conclude that they are being asked to bear the consequences of the actions of the bankers, but that is simply not the case. We are where we are because our current system is not financially sustainable, and it is disappointing that Opposition Members allow people to think otherwise. Even without the deficit, and even if the financial crisis had never happened, we would have to reform our public pensions to make them affordable and to secure their long-term future. With these reforms, our public servants will be guaranteed a secure pension with terms that are as generous as those enjoyed by anyone.
The need for change is simple. We all need to make provision for our own retirement, and if we do not put more in, the taxpayer will have to. The Bill will cut the costs to taxpayers by nearly half, while continuing to ensure that the public sector receives the best pensions available. The Bill is therefore a good deal for taxpayers and a good deal for public service workers. It is frankly unfair to expect future generations to pick up the tab by paying more taxes, especially when they are already dealing with the consequences of financial irresponsibility by facing higher taxes and higher house prices. I want all people—whether they work in the private or the public sector—to be able to keep more of what they earn and to pay less in tax. All taxpayers will benefit if we can reduce the burdens on the state and make public pensions self-funding.
Even with these changes, our public pensions will continue to be among the best available. They will also be progressive. A switch to career average pensions across the board will reduce taxpayer liability while letting employees keep their defined benefits. The pensions will also be fairer to all. Final salary schemes disproportionately benefit those on the highest earnings, and many low-paid workers will get a better pension under the Bill. I am pleased that the Government have made changes to benefit the lowest earners, meaning that 15% of our public sector workers will not have to make an increased contribution. I am also pleased that benefits that have been built up will be protected and that members will continue to receive a guaranteed benefit in retirement.
I am listening to my hon. Friend’s speech with great interest. We have already heard a lot about retrospection and the importance of certainty. Is it not the case that the reforms will hopefully give long-term certainty about the affordability of public sector pensions, so that future Governments will not have to review these pensions yet again and people will be able to plan properly for their retirements?
I completely agree with my hon. Friend. It is important that we bite the bullet now and lay the foundations for future security. If we delay, we will be asking for more contributions from taxpayers and workers themselves, so it makes perfect sense to deal with the problem. We cannot postpone the inevitable, and Government Members are not prepared to do so.
I am sure that many Members will have received representations on these issues. Most of those that I have received have come from police officers who are worried about the changes. Most public sector employees have recognised that the terms under which they were paying into their pensions were not sustainable in the longer term, not least because they have seen what happened to the pension provision of their friends and family members in the private sector. People in the private sector would have to contribute more than a third of their salary each year to get an equivalent pension, so I am not surprised that only a third of public sector workers voted to strike over this issue last November.
I understand that the public schemes are generally generous in comparison with those in the private sector, but does my hon. Friend have a view on the relative generosity of the police scheme, on which we have received a lot of representations? The police clearly have quite a high pension, but they pay a large amount in. Is it fair that they have had to pay so much more than civil servants, for example, whose contribution is much smaller?
My hon. Friend makes a good point. We will benefit from an examination of the individual schemes in Committee. My hon. Friend the Member for Bromley and Chislehurst (Robert Neill) made several good points about the financial sustainability of the local government scheme compared with others. We need to look at what we expect of all our public servants in the round, and the issues raised about the police are quite persuasive. We need to look in detail at what we are proposing not just for public sector workers as a group, but for individual worker groups. We also need to remind public sector workers who are witnessing the debate that their accrued rights are protected, and that there will be protection for those who are within 10 years of retirement.
The Bill will deliver sustainable public service pensions. It will almost halve the cost to taxpayers, and it will rightly ensure that public sector workers continue to receive the best available pensions. It provides a good deal for the taxpayer and for public servants, and I am happy to support it.
Let me begin by declaring an interest. For 20 years I was a member of the mineworkers pension scheme, for 16 years I was a member of the local government pension scheme, and for the past seven years I have been a member of the parliamentary pension scheme.
This is a debate about trust, or rather about the breakdown of trust. The people who are covered by the Bill are those we trust with our most precious possessions: our children, our partners, our parents, our families and our communities. As we all know, when things are going wrong it is the public servants we turn to, and in whom we place the maximum trust.
We turn to the firefighters when our safety is compromised, our homes are at risk and our lives are in danger. We turn to the police when we are in trouble, when we face the despair caused by burglary, car crime or petty theft, when our kids go missing, and when we are being persecuted by nuisance neighbours or antisocial behaviour. We turn to the nurse when we are at our lowest ebb, when we are desperate for help, and when we need real human kindness. We turn to the doctor when we are at a loss to explain our pain, when we need their skills to put us back together again, and when we feel that there is nowhere else to turn.
We turn to the social worker when we are in despair because of our parents’ dementia, when our youngsters are hooked on drugs, and when we need real help to sort out life’s real problems. We turn to the home care worker when we cannot cope any longer with our daily lives, when we need a stranger to come into our homes and become a friend, and when only an extra pair of hands will do. We turn to the teacher to take our children on to the next stage of life’s journey, to shape our kids for the world to come, and to inspire our most precious gifts.
There are so many more: the bin man, the caretaker, the school meals lady, the gravedigger, the gardener, the midwife—and, among the hundreds of others, the so-called back office staff. They are the people who make the front line work effectively, and the people whom the Government disparage most of all. All those people are trusted by us to do the right thing when we need them to. We expect—no, we demand—that they do their jobs properly, and we trust them to do so. But trust is not a one-way street: if we expect those people to do the right thing, we should do the same.
For decades, many of those workers have been putting their trust in us as representatives of the state, and have paid into pension funds every week or every month in the belief that they will be rewarded properly for their work. Let no one in the Chamber claim that public servants somehow get a free ride when it comes to pensions. As was pointed out earlier by my right hon. Friend the Member for Wentworth and Dearne (John Healey), they have given up a percentage of their pay in order to have a decent retirement and not to have to rely solely on welfare payments in old age.
There is no free lunch for those workers, no matter how much the divisive policy of the Conservative party or the TaxPayers Alliance may try to claim it is so. The Bill clearly undermines the trust that these workers have been able to place in their pensions for decades. Just five years after the agreement to changes that were supposed to be affordable and sustainable, they are seeing the imposition of changes that will significantly weaken their potential to plan properly for their retirement.
We should hear no more about unaffordability until we in the House face up to our culpability in terms of where we find ourselves today. It was Members of Parliament who allowed public sector scheme employers to take lengthy contribution holidays while the lads and lasses at the front end had no such luxury. The classic example, which I raised earlier—and it is not the only one—is Royal Mail. Between 1998 and 2001, it made no contributions whatsoever to the pension fund. Now we are told that the service must be privatised because there is a huge black hole in the pension fund.
Actually, we did do something about it in 2001.
Just think what ordinary postmen and postwomen could have done with a 13-year contribution freeze. They could have bought a new house or a new car, or taken better holidays. But no, these were not things for the workers; they were just for the employers, and now the workers are feeling betrayed again.
The Government are using the economic mess that global capitalism got us into, and which they have entrenched, as an excuse to attack the future well-being of the people in whom we place our trust. Instead of letting sensible negotiations take place on sector-specific schemes, they are pressing ahead with a Bill that will have huge consequences for millions of dedicated public servants. Yes, Hutton means change, but it does not mean destabilisation and mistrust.
If people do not have trust in their pensions, two things will happen. First, those who are already in schemes will opt out, and secondly, new starters will not join. What will be the result? Ultimately, the schemes will fail, and that will not just be bad for scheme members who will not be able to rely on decent pensions when they retire. It will impose an enormous burden on the welfare system, and—as was pointed out by the hon. Member for Bromley and Chislehurst (Robert Neill)—there will be a huge impact on the country’s investment potential if the schemes do not flourish.
Can anything be done to prevent such an outcome? We are starting from a pretty bad place. Public servants are feeling badly bruised as they face pay freezes, cuts in living standards and job losses. Three quarters of a million will be on the dole after receiving their P45s from the Chancellor of the Exchequer. They face service cuts—people who have worked for donkeys’ years will go out of the door—and they have already been hit by increased pension contributions. They are having to work longer to receive their pensions, and when they do receive them, the payments will be smaller. Only a radical rethink in Committee will give us an opportunity to rebuild the trust that those people feel has gone. We must clarify what is being said here tonight and secure some real commitments from the Government if we are to have the slightest chance of giving them any confidence.
Clause 3 grants huge and retrospective powers to the Government to make further radical public sector changes without real consultation. That must be wrong. If the Government can include measures in the Bill that make it clear that the retrospective changes will not have an impact on pensions, that must be done.
Then there is the issue of the link between the state and normal pension ages. A number of Members have raised the worrying discrepancy affecting people who have worked from the age of 15 or 16, perhaps for more than 50 years, in very hard circumstances. The Government have shown a lack of faith by pressing ahead with these changes while a review is being undertaken jointly by unions and employers in the NHS. It is incredible that they should say that they will pay attention to the review after they have passed the legislation, as if it had no meaning whatsoever. What will we end up with? The potential for 68-year-old nurses to be working in mental health establishments, for 67-year-old home care workers to have to put older people to bed, and for prison officers aged 65, 66 or 67 to be fighting with men who are locked away. That is lunacy.
Clauses 5 and 6 deal with the establishment of a pensions board in the NHS. We need a real commitment from the Government to allow member representation on those schemes. Clause 10 empowers the Treasury to take control of valuations of pension schemes. That has never been the case before; there has always been partnership working. If the unions are cut out of the decision making on pension schemes and the schemes are seen to be determined by the Treasury, people will lose faith in the new system, as they will if the actuarial valuations are dictated by the Treasury. People do not trust the Treasury to look after them properly. The hon. Member for Bromley and Chislehurst and my right hon. Friend the Member for Wentworth and Dearne spoke about the local government pension scheme. I hope the Minister takes on board the points raised, because it is different from other schemes.
The Chief Secretary to the Treasury told us that the trade unions and the Government have come to a collaborative view. I know he is from another part of the country from me, but I think he must be from another planet. The fact that the Government have done what they want to do and the unions have faced that reality and have done what they have to do, day in and day out, to try to get the best deal for their members should not in any way be mistaken for collaboration.
It always used to be said that pensions were saving for a rainy day. Well, I have got news for the Government: “It’s raining cats and dogs, and you’ve stolen the umbrellas.”
I was rather delighted by the Bill. I think it is an unmitigated good news story, so it is rather depressing to follow the hon. Member for Blaydon (Mr Anderson) who, more than any other contributor today, is talking down an extraordinarily fair, logical and sensible settlement. I would draw to his attention the comments of his colleague the shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), who told the TUC annual congress on 11 September this year:
“We must be honest with the British people that under Labour there would have been cuts, and that on spending, pay and pensions there will be disappointments and difficult decisions from which we will not flinch. Because the question the public will ask is: who can I trust?”
It is a great shame when Opposition Members deliberately talk down a settlement that is extraordinarily fair to both the taxpayer and our public sector workers.
This is an unmitigated good news story, of course, because we in Britain have some of the best public service sector servants in the world and the best public services in the world. Is it not fantastic that we are all living longer—that we can now expect to live a good 10 years longer than in the 1970s? That is an unmitigated good, but it has enormous consequences for public policy.
One of the consequences is that people will need to work for longer. It is ridiculous for people to be retired for a third of their lives. That is not only unaffordable; it is nonsensical for those individuals. It is appalling to think of people spending 20 or 30 years fully retired with nothing to do but tend their garden and look after their grandchildren. People do not want to do that. It is completely ludicrous to suggest that people should continue to retire at the age of 60 when they are going to continue to live for another 20, 30 or even 40 years. That is completely unsustainable and illogical. The Bill makes sense of such points in a way that is completely fair to the taxpayer and the public sector workers. I congratulate the Government on producing such an extraordinarily fair Bill.
I want to disabuse the Opposition of a couple of the myths. They say that the unions claim that average local government pensions are just £3,800, and that for women they are less than £2,800, but they fail to point out that that includes people who have worked for only a very short time in the public sector. They should be talking about what people would be retiring on if they were to spend their entire career in the public sector. The fact is that many women will be far better off than is claimed. Members on both sides of the House have been very concerned about lower paid women in both the public and private sectors retiring in poverty. Under our proposals, women will be far better off because the Bill safeguards the lowest earners’ pensions. They will not face increased contributions to their pensions, and they will be better off than they previously were. That is very good news.
One misleading aspect of the pensions contribution debate is the claim that people earning under £15,000 will be protected. It is often overlooked that these figures are calculated on a full-time equivalent basis. Many women work part time, and they will find that they have to pay high pension contributions even though their salaries are very modest.
I am thinking of nurses or teachers, whose salaries would be more in the average earnings category. If they work half-time, they will find that their pensions contributions increases will be calculated on the basis of a full-time equivalent so this measure will not help women on low incomes.
That is a rather extraordinary point. Public sector pensions will be paid and calculated on the basis of a full-time equivalent salary, so our approach is entirely consistent. Moving to career average schemes will also make things much fairer for women. It will mean that high flyers who are promoted late in their career and then earn a significantly higher salary will no longer retire on an extremely generous pension. Those who have spent their career sometimes doing part-time work and sometimes doing full-time work will have a career average pension, which will be much fairer.
It is also right that we link public sector pensions to the normal state retirement age—that is a matter of fairness. If the state retirement pension kicks in at 66, it is right that, with exceptions—notably those who have armed forces, firefighter and police pensions—people start to draw their public sector pension at the same time as their state pension. That is all about fairness.
The hon. Lady will know that in the past—I believe this was in the Pensions Act 2011—people were given short notice about changes to the pension age. Does she agree that, ideally, a good 10-year notice period should be given so that people can plan ahead? If this is pegged to the state pension age, people should have sufficient opportunity to plan with enough forethought.
The hon. Gentleman will recall that the Government made great efforts to ensure that the cliff edge affecting certain women born in a certain couple of years disappeared. He will also be pleased to note that the pensions of those with less than 10 years until retirement will not be affected by this measure, which provides the ring-fencing for those with not long to go until retirement age. I would have thought that he would welcome that—again, on the basis of fairness between those workers and the taxpayer.
Of course, two thirds of private sector workers are not members of a pension scheme. We have heard hon. Members from all parts of the House say that we do not want a race to the bottom. We are proud of our public sector pension provision, and nobody would wish to see it brought down to the abysmal level of private sector pensions. However, it would be pleasing if Opposition Front Benchers were to concede their part in the destruction of private sector pensions, which has made a significant contribution to putting us into this pitiful position; private sector pensions have been decimated by the actions of the previous Prime Minister.
An important point of fairness is involved in the fact that the taxpayer contributes three times more to a civil service employee’s pension than the average private sector employer pays in. The employer contribution rate to the civil service pension scheme is 19%, whereas the average private sector employer contribution rate for a defined contribution pension scheme is only 6.4%. To get the same pension in the private sector, someone would have to contribute about a third of their salary.
There is something extraordinary in what the hon. Lady has just said, which several of her colleagues also said. They say, “We don’t want to compare with the private sector. We don’t want to have a race to the bottom.” They then say, “But” and come out with a long string of comparisons about employers not paying as much. If this has nothing to do with comparisons with the private sector, they should stop comparing.
The hon. Lady makes an extremely good point. I am not advocating that we reduce public sector pensions to the private sector level, but this does, of course, absolutely bear comparison. This Government are not reducing public sector pensions to the pitiful state the Labour Government left private sector pensions in when they left office. That is precisely the point I am trying to make. We are proud of the fact that our public sector pensions will remain among the best in the world. That is something to be very proud of, and the Opposition should be congratulating the Government on having achieved that at this extraordinarily difficult time.
Let me disabuse Members of one final myth. The Opposition like to say that private sector workers earn more, so private sector pensions make up for the shortfall in salaries. That is not the case. The Institute for Fiscal Studies calculates that on average hourly public sector wages are 7.5% higher than hourly private sector wages, even when we take into account an individual’s education, age and qualifications. That is a very important point. Public sector pensions do not subsidise lousy working rates—quite the opposite, in fact. Those in the public sector rightly have a good deal in their employment and in their pension. That is what we wanted to achieve and I commend those on the Front Bench for doing so.
The most important aspect is sustainability, because what we had was unsustainable. Over the past decade, public sector pension costs increased by a third in real terms. Between 1999-2000 and 2009-10, the amount of benefits paid from the five largest public service pension schemes increased by 32% in real terms. In five years’ time, we are set to spend £33 billion a year on public sector pensions—more than on police and transport combined and 1.8% of GDP.
On that point about overall fairness and sustainability, does my hon. Friend believe that the Government could have gone further in ensuring sustainability by looking to move towards a fully funded form of public sector pension scheme? There is still an exposure for the public purse in the future. and although the Minister is putting in some cost control, we could have gone further, could we not?
Of course, my hon. Friend is quite right: we could have gone much further. Across Europe, public sector pensions and terms are being cut with immediate effect to deal with the appalling debts that countries have run up, whereas this Government are putting in place measures that are entirely fair and sustainable both for the taxpayer and the public sector worker.
Let me conclude by saying again that it is an unmitigated good thing that people are living longer, healthier lives, and that we should celebrate our public sector workers and the job they do. They do a fantastic job for us of which we are very proud and we want to ensure that they are fairly rewarded, in a way that is sustainable for the public purse for many decades to come.
I declare an interest as a member of a local government pension scheme.
Let me put it clearly on the record that the Bill does a number of simple things: it means that civil servants—teachers, firefighters, hospital workers and council workers—will work longer, pay more and get less. That is the reality. It was said that this has been agreed by the trade unions, but it has been rejected by the Public and Commercial Services Union, the National Union of Teachers, the Prison Officers Association, the Fire Brigades Union and the National Union of Rail, Maritime and Transport Workers, which represents the royal auxiliary workers. Not a single union has supported the Bill or expressed satisfaction with it, and that includes all those in negotiations, the Royal College of Nursing and the British Medical Association. Why? For me, the Bill embodies the Government’s policy and prime objective that the economic crisis will be paid for by public sector workers rather than those who caused the crisis in the first place. It typifies the Government’s approach.
One issue is the fact that the cost that will fall not during this Parliament but on future taxpayers—our children and grandchildren. Does not the Bill do something to relieve some of the burden on future taxpayers? As the Intergenerational Foundation has said, that is a fair way to proceed.
Let me quote the Treasury, which has said that the cost of the unfunded public sector schemes—I am particularly interested in the civil service one—as
“a share of GDP was 1% in 2007-08 and was projected to rise to only 1.2% in 2057.”
Only 18 months ago, the National Audit Office produced the report, “The cost of public service pensions”, and showed that
“when projections of liability are based on earnings, the total annual payments from the civil service pension scheme will be largely stable over the next 50 years.”
So no, I do not accept that analysis, and neither did the Treasury at the time.
I oppose the Bill. Members of my Front-Bench team will abstain tonight, I believe, because they hope they can amend the Bill. The Bill is unamendable to make it acceptable to me. Therefore I oppose it and I wish to have the opportunity to vote on the Bill if I can. If that means walking through the Lobby on my own, I will. I will find a teller somewhere, I hope.
The Bill is extremely damaging to the well-being and living standards of ordinary working-class people. We know that. My hon. Friend the Member for North Ayrshire and Arran (Katy Clark) quoted the definitive piece of work, an independent analysis from the Pensions Policy Institute, which is a charity funded by the Nuffield Foundation to undertake the research. It confirmed that the Bill means that pension benefits will be cut by a third. My hon. Friend the Member for Leeds West (Rachel Reeves) referred to the shift from RPI to CPI, which was a further 11% cut. What the cuts in pension benefits mean is exactly as others have said—a reduction in participation that will ultimately threaten the viability of the schemes. Perhaps that is what the Bill is about—the degradation of the schemes so that they will eventually be replaced by the private sector.
Let me deal with the issue of private sector pensions, which is dragged out on every occasion. It is a rewriting of history. Let us go back to the 1980s and 1990s. The state pension was undermined by the Thatcher Government when they broke the link between earnings and pensions. That also undermined the earnings-related element of the state pension. They encouraged people to enter private sector schemes but, as we heard, they allowed many employers to take pension holidays, not for one or two years but for long periods. Eventually that undermined the schemes and a number of them in my constituency were wound up almost overnight.
Individuals were urged to enter into their own arrangements, which they did, only to be fleeced on their endowment policies and other mechanisms. Previous Governments, particularly in the 1980s and 1990s, destroyed private sector pensions and now this Government are moving on to destroy public sector pensions in the same way.
I do not want to let this point go—the hon. Gentleman’s claim that somehow Baroness Thatcher broke the link with earnings. Between 1974 and 1979 Labour claimed to link earnings and pensions, but for much of that time wages went up by less than prices, and for five months of the highest inflation in that period they were not linked at all, giving pensioners a very bad deal.
Will the hon. Gentleman allow me to refute that? For the first two years of the Thatcher period, there was a link. The only other period in which there was purported to be a link was under the previous Labour Government. For much of the Thatcher period there was no link and wages went up by less than prices.
Let me press on with the points that I am making.
What the Government are now doing is exactly the same as they did to private pensions, but we were told by the Chief Secretary that this is a settlement for a generation—that it will restore stability and predictability to public sector pensions for the next 25 years. No, it does not. As has been said before, the Henry VIII clauses in the Bill not only have the potential to undermine future benefits but are retrospective. I urge Members to look at the BMA’s legal advice on clause 3 and the vast remit that that gives future Governments to undermine future protections. Under clauses 3 and 21 and other clauses, public sector pensions do not even get the protection afforded in the private sector. In the private sector, if an alternative benefit is proposed, it must be actuarially evaluated as a viable alternative and one that does not undermine an equivalent benefit.
I agree with my right hon. Friend the Member for Wentworth and Dearne (John Healey)—we all agree on this—that pensions are deferred earnings, something people invest in and, therefore, something they should have some say in, but the Bill will take away all participatory control by the members who contribute. As he said, the Treasury will now control the design of the schemes, the revaluations and how they are undertaken, and the cost cap and what is included within it. There is a lack of commitment in the Bill, contrary to all that Hutton said, to ensuring that any future changes or reforms are made on the basis of agreement or at least joint engagement.
I am now secretary of the Fire Brigades Union parliamentary group and wish to circulate the evidence the FBU provided to Ministers on the physical work firefighters now do. Under the new pension scheme the retirement age in the fire services has been lifted to 60. The previous Government argued that there would be preventive measures to enable firefighters who could no longer undertake the physical rigour of the job to undertake lighter duties, as the hon. Member for Bromley and Chislehurst (Robert Neill) said. This year, 16 posts in the whole the country have been offered for redeployment alone, so that is unreal. Frankly, I do not believe that a 60-year-old firefighter can cope with the rigours of the job, no matter what improvements there have been in technology.
The hon. Member for Banff and Buchan (Dr Whiteford) mentioned the briefing from the Prison Officers Association. There are five physical tests that every prison officer has to undertake in order to be able to continue doing the job. If they fail in any one, they cannot do the job. The POA therefore predicts, quite rightly, that the cost of medical retirements will outweigh any savings gained as a result of the increased pension age. The same information came from the Royal College of Nursing with regard to nurses and paramedics and from the National Union of Teachers with regard to teachers teaching at 68.
The Government said that they would set up the longer life review. Its first meeting was held in September and the results will not be out for at least another six months, yet this Bill allows no flexibility. My right hon. Friend the Member for Wentworth and Dearne was right: even if the money is there and the employer agrees with it, the Bill provides no flexibility in any of the proposed schemes. It is lunacy to bind the hands of negotiators in that way.
There is no legal requirement on the pension boards to consult or negotiate, contrary to what Hutton recommended, and we can see no representation from the work force. There should at least be some assurance in the Bill that there will be an element of representation on the boards. With regard to the closure of the existing schemes, some protections are being put forward, but there is none on ill health or redundancy. I find clause 23 almost sinister. It will enable employers to offer benefits as an alternative outside the schemes, which is another way of using private sector schemes to undermine the public sector overall.
I am worried about this Bill, which is why I want to vote against it. I think we will look back on today as the day when public sector pensions started on a downward slope, with the erosion of benefits and increasing contributions leading eventually to the undermining of the schemes and their closure. I think it will result in many people being impoverished and greater inequality being created in our society. That is why I will oppose the Bill tonight.
On a point of order, Mr. Deputy Speaker. I apologise for interrupting the flow of the debate, but I need to raise an important matter. It will be recorded in tomorrow’s Hansard that the Minister of State, Department for Environment, Food and Rural Affairs, the hon. Member for Somerton and Frome (Mr Heath), told Members that the Government’s commitment to introducing a ban on the use of wild animals in circuses was confirmed by the fact that such a commitment was made by Her Majesty in the Queen’s Speech to Parliament. You will, I know, agree that that is a powerful riposte to those of us who had dared to doubt the Government’s good faith on this issue. However, a subsequent inspection of the two most recent Queen’s Speeches of this Parliament finds no mention whatever of such a commitment. Is it in order for any Minister to pray in aid of his argument a part of Her Majesty’s Gracious Speech that turns out to be wholly fictitious? Has the Minister in question contacted you or Mr Speaker to schedule an apology to the House?
I thank the hon. Gentleman for his point of order. I have not been notified that any Minister wishes to make a statement on this matter or any other matter from the Dispatch Box this evening. As for whether the Minister was in order to give the response that he did, Ministers and, indeed, all right hon. and hon. Members are responsible for their own speeches.
Further to that point of order, Mr Deputy Speaker. On a serious matter such as this where a Minister has inadvertently misled the House, it is the norm for him to be asked to return to the House as soon as possible to correct the record and explain his position. May we now express the view on the Floor of the House that the Minister has time now to come back to the Chamber to explain the situation?
I thank the hon. Gentleman for his point of order, which I am sure those on the Treasury Bench will have heard. Should a request be made to make a statement or to raise a point of order, the Chair will be notified and I will make sure that the House is informed in the usual way.
Thank you, Mr Deputy Speaker, for calling me to speak in this long and important debate on pensions. This is a subject on which we would surely all agree that the object is to get cross-party agreement on issues that affect so many of our constituents, and that should be achievable. Indeed, the coalition Government have already achieved it across the two parties, and by seeking and taking Lord Hutton’s advice they hoped to secure agreement from Labour. In that sense, it is good news that this Second Reading will be unopposed, but it is none the less sad that we have heard so many speeches in which Labour Members were unable to rise to the challenge of reaching agreement and seeking harmony and instead sought to make a series of party political, aggressive and disagreeable contributions to the pensions debate.
Let me start with the hon. Member for Leeds West (Rachel Reeves), who led the debate for the Opposition. She said, for example, that the Opposition had accepted the need for a move from RPI to CPI as an index for pensions only as a temporary deficit reduction measure for the life of this Parliament, and she criticised its timing. However, she completely failed to mention that the Labour party itself had already changed the index for its own pension scheme for its party workers from RPI to CPI before the Government did likewise for all public sector workers. Unfortunately the hon. Lady is not in her seat, but the right hon. Member for Wentworth and Dearne (John Healey), who is here, said that the change had been imposed without warning and called it the moment at which the Government had lost their moral authority. I am sure that he will be able to explain to his own party workers quite what moral authority his party has on this issue, having made precisely the same change. The reality is that both the Labour party and this Government have had to face uncomfortable facts— above all, the consequences of the fact that so many of us are living for so much longer—and have had to tailor pensions accordingly.
The hon. Member for Leeds West rightly expressed concern for public sector workers. She may be a deferred public sector scheme worker herself, as am I and many other Government Members, and it is important for Labour Members to understand that we do not all represent purely the private sector. This is about seeking agreement for public sector and private sector workers from Members of Parliament who have themselves worked in both sectors. She rightly stood up for public sector workers but was unable to give any credit to this Bill, which has completely protected workers earning less than the full-time equivalent of £15,000 a year—some 15% of the work force—and provides considerable protection for people, many of whom live in my constituency, who earn less than the full-time equivalent of £21,000 a year.
The Bill also protects everybody who is within 10 years of retirement, which is very important for so many of our constituents who are in their 40s and early 50s. Crucially, it increases accrual rates, which is a technical point that will be appreciated by those who have worked in the sector, such as the right hon. Member for Wentworth and Dearne. Above all, and most importantly, the Bill protects the risk-free investment nature of a defined benefit scheme.
On that point, I must refer to the speech by the hon. Member for Hayes and Harlington (John McDonnell), who is in his place and whose integrity I respect. He quoted, as he would in his role as the Public and Commercial Services Union representative, the PCS briefing for this Second Reading debate and came to the same conclusion that
“members will work longer, pay more and get less pension.”
The reality, however, is that all of us will live longer, work longer and, if we are lucky enough to have one, get a pension for longer, and those who are public sector workers will have a much better pension than anyone else in the land.
My point to the hon. Gentleman and the hon. Member for Blaydon (Mr Anderson), who is not in his place, is that it is no good simply championing the status quo for today’s workers and betray tomorrow’s. In many ways, that is what happened—I am afraid that the trade unions are partly culpable for this—to private sector DB schemes, which the right hon. Member for Birkenhead (Mr Field) has often referred to as the jewel in the crown. Many of them have closed precisely because the unions could not and would not see the future and adapt before companies decided that they could no longer afford the schemes and closed them.
The point of this Bill—this should be something on which every Member of this House can unite—is that this Government are trying to work with unions and Opposition Members to keep defined-benefit schemes for the public sector, despite the fact that we will all live for so much longer than our fathers and mothers, and that, therefore, the cost of those pensions will be so much greater. To use the analogy of the hon. Member for Blaydon, it may be raining, but this Bill will make sure that the umbrella is kept for public sector workers.
The hon. Gentleman says that we should all stand together to defend ongoing defined-benefit schemes, so could he explain why the Bill does not honour that commitment? Clause 7 states that schemes created under the Bill can be defined-benefit schemes, but they can also be defined-contribution schemes or
“a scheme of any other description”.
Where is the guarantee that these will be defined-benefit schemes?
I have no idea whether the word “guarantee” is in the Bill. In life, only two things are guaranteed as far as I know: taxation and death. We are talking about not guarantees as such, but a defined-benefit scheme in which the entire risk is taken by the taxpayer and the certainty that gives people the chance to budget in their retirement is with the scheme’s beneficiary. In fact, it is even better than that. As the hon. Gentleman will know, because he has studied these things carefully, the advantage of a career average defined-benefit scheme is that it benefits precisely those workers whom I would have imagined he would be most in favour of protecting.
The Pensions Policy Institute, which the hon. Member for Hayes and Harlington referred to, says:
“The Coalition’s proposed reforms will remove the different outcomes for high-flyers and low-flyers which exist in final salary schemes.”
It goes on to estimate that, under the current scheme, a high flyer
“would have had a pension benefit of 29% of salary, compared to 11% of salary for the low-flyer.”
Under the reforms proposed by this Government, both high and low flyers will have
“the average value of the pension offered being worth 15% of salary”.
That is a significant improvement for the low flyers. I would be astonished if all Members of the House were not in favour of that reform.
The hon. Member for Leeds West recognised that something had to be done, but tellingly, she made no reference at all to three of Lord Hutton’s four tests—affordability, fairness to the taxpayer and governance and transparency. Did she not think they mattered? Should they not be at the heart of what any Government do? That was a disappointing series of omissions.
The hon. Gentleman said a moment ago that the total risk of the schemes was borne by the taxpayer. Does he not realise that he is making the same mistake as Ministers in not recognising that the local government pension scheme is a funded scheme? The income from its investments last year topped £3 billion, and there is also a strong contribution from employees alongside that of employers. That makes it a case apart from his general argument.
The right hon. Gentleman makes half a good point. I know local government pension schemes very well, as many of them are my former clients. The reality is that they have never been as separate from the public sector balance sheet as he might be implying. One of his predecessors as Economic Secretary, Ruth Kelly, tried to amalgamate the whole lot, recognising their fragility. As the National Audit Office has revealed, the schemes are significantly underfunded, and I think I am right in saying that 20% of all money paid in council tax now goes towards paying the pensions of scheme members. He is right to say that local government schemes are different from others, but they are not quite as different as he suggests.
The hon. Member for Leeds West mentioned the fear that public sector workers would opt out of schemes altogether, because they might become unaffordable, and thereby become a burden on the state in a different way. I think it is fair to say that she did not recognise that opt-out rates have not altered. There is good reason for that, because although contributions are higher than they were, the value of a defined-benefit scheme is still considerable. In case her concern becomes real and there are large numbers of opt-outs, the Government have built into the Bill a provision for regular reviews to address the situation if and when it arises.
Several Opposition Members have expressed the concern that the Government are trying to set the private sector against the public sector. I have already totally rejected that point. All Government Members are as committed as anyone to helping every worker get some form of pension as quickly as possible. The hon. Member for Oldham East and Saddleworth (Debbie Abrahams) missed the crucial point that the Government are trying not only to make defined-benefit schemes sustainable for the public sector, but to get millions of workers in the business sector to have a pension at all through the auto-enrolment scheme. It is disappointing to me, and I think to others, that she did not understand that.
Several Members have claimed that the real scandal is the lack of pension provision in the private sector, but it is a curious fact that one legacy of the previous Government is that 13.5 million workers in the private sector have no pension at all. Some Ministers in the Labour Government did good work, including the late Member for Croydon North, to whom I pay tribute for his work in the pensions sector. However, as with so many things, it has fallen to the current Government to seek an agreement and to implement reforms that will give people without pensions the chance to have something to retire on for the first time in their lives.
Today’s debate has covered many aspects of the Bill. As I said, it is a good thing that its Second Reading will not be opposed today, but I can see that there will be many arguments ahead in Committee.
Let me leave with hon. Members the points that I make to everyone in my constituency who is employed in the public sector and is in a defined-benefit scheme, whether they are teachers, nurses or other workers. First, the defined-benefit pension has fabulous benefits for all those involved, especially lower-paid workers; secondly, the increase in accrual rates means an improvement of some 8% for public sector workers; thirdly, anyone within 10 years of retirement is completely protected; and finally, I hope that the Opposition will drop their instinctively tribal approach, and recognise that the Bill tries to reform public sector pensions in a way that will, above all, be sustainable. Should our children and grandchildren work in the public sector, they will receive a career average defined-benefit pension, as will today’s workers, should the Bill go through successfully.
I have a feeling that an instruction has gone out to those speaking in support of the Government, and it appears to have been, “Be nice to the public sector.” Speaker after speaker has taken great pains not only to praise the public sector and public sector workers, but to accuse the Opposition of daring to suggest that there might be another view.
I have sat in the Chamber over the past two and a half years, and I do not think I imagined the numerous occasions on which Government Members spoke of gold-plated pensions and the overall extra cost of pensions, or indeed imagined the whole way in which the public sector has been treated. We are clearly now meant to assume we imagined that, but public sector workers have had a pay freeze and are facing job losses in many parts of the country.
On top of that, the view expressed for two and a half years that the public sector is holding back the economy formed much of the justification for many of the policies that followed. We have been told time and again that if we cut back the public sector, the country’s economy will spring to life, and that the public sector is exercising a great drag on the economy. If we put those things together, it is perhaps not surprising that Opposition Members, and many workers in the public sector, have concluded that the coalition Government do not particularly like or support the public sector, however supportive they may be of individuals or people they have come across. That is the backdrop against which the whole debate has been set, and that is why people are still sceptical and concerned about some aspects of the Bill.
If contributions had not been made, quite separately, on the restructuring of the pension schemes, and if we were not working against the general backdrop of the Government’s view of the public sector, many people, including Opposition Members and public sector unions, would perhaps not be asking: where is the guarantee? It is not good enough to say that we want to put pensions on a firm and definite footing; we must ensure that that happens. When parts of the Bill suggest to any casual reader that that may not be the case, one can understand why people have doubts.
The Bill does not rule out further changes for any number of years, let alone 25 years; nor does it rule out the possibility that some public sector schemes in future might be defined contribution schemes. We have heard lots of praise for defined benefit schemes by hon. Members on both sides of the House, but the Bill opens up the possibility—this is what people have spotted when reading it—that we could see the introduction of a defined contribution scheme.
We must be clear, therefore, on whether we are giving long-term protection. Pensions are a long-term business. The problem for pension provision in this country—whether state, public sector employee or private sector pensions—is that taking the long-term view has proved to be difficult. I will not take lectures from Conservatives, who suggest that the only reason why the private sector moved away from defined benefit schemes, or indeed from providing pensions altogether, is due to a policy of the previous Labour Government, because the Tory Government under Mrs Thatcher destroyed the state earnings-related pension scheme. They did not reform it and say, “Over the longer term this may prove to be quite expensive and we might have to look, for example, at its accrual rates,” which were generous; they destroyed it, in the name of giving people the freedom to make their own choices. I remember exactly what happened. People said, “Oh well, if I don’t have to pay in to this, I won’t pay in to anything.” Twenty or so years later, those people are no doubt approaching retirement with very little pension. That was extremely destructive legislation. In its place, people did not at that stage get defined benefit schemes. Often, they were encouraged to go to insurance companies and other such organisations to take out pensions of a defined contribution type, but those schemes have not provided them with an adequate pension in their upcoming retirements. If we are to have a cross-party consensus—I do not know whether we will—security for the future must be built in to the Bill.
Hon. Members have said warm words about why some people will not be fit to work through to normal retirement age. However, if people are not fit to work, we need flexibility in the Bill—it cannot be left until later. Ministers have criticised previous legislation on a range of issues for being too inflexible, and have argued that that makes it difficult to make changes later. We need flexibility on the pension age. If we lock the normal retirement age for public sector pensioners to the state pension age in the Bill, it will be difficult to have flexibility, even if it proves to be needed on health or other grounds. We do not want people who do not work to that later age claiming benefits and losing a lot of their assets. Nowadays, many people who claim employment and support allowance can do so on a contribution basis for only a year. If they have other income, they will not get means-tested benefits. Many people who end up leaving work early on health grounds lose a great deal of money.
We are concerned about those in the private sector who are in that position. Even with the state pension age as it is, many people, particularly men in the 60 to 65 age group, are not working on health grounds. I therefore urge the Government to look again at that factor. If they are serious about their concern for people who might find it difficult to work in public sector jobs on health grounds, they need to make it possible to relax the rules in future.
Parts of the Bill require changing. It is important that we go ahead and make those changes, and that we do not say, as has been suggested by some Government Members, that the Bill is already perfect.
In the limited time available, I wish to highlight a particular concern. The Chief Secretary’s contribution seemed to suggest that this is a done deal, and various coalition Members suggested that this is a wonderful Bill with cross-party consensus. I agree with the grave concerns expressed by my hon. Friends the Members for Blaydon (Mr Anderson), for North Ayrshire and Arran (Katy Clark) and for Hayes and Harlington (John McDonnell), not least about the retrospective powers the Bill will give to the Secretary of State without reference to Parliament. In my view, we should have a sensible negotiation on sector-specific schemes, as alluded to by the hon. Member for Bromley and Chislehurst (Robert Neill).
The deal has not been agreed with the firefighters. The key issue for them is normal pension age, which other hon. Members have mentioned, and the proposed increases to the employees’ pension contributions. The Government’s offer published on 24 May 2012 included a commitment to review both the normal pension age for firefighters and firefighters’ contributions. That review is ongoing, and the issue of normal pension age for firefighters is key.
Clause 9 sets a normal pension age of 60 for firefighters in the proposed pension scheme. The NPA is defined in the Bill as
“the earliest age at which the person is entitled to receive benefits under the scheme (without actuarial adjustment) after leaving the service to which the scheme relates”.
This means that, in effect, the Government propose that firefighters should continue to attend house fires, factory and office fires, car accidents, explosions, civil disturbances, terrorist incidents, floods and other emergencies until they are 60 years of age.
At present, nearly 24,000 or two thirds of firefighters in a pension scheme are members of the firefighters pension scheme—the FPS. The normal pension age for those firefighters is 55, with most able to retire in their early 50s. The Fire Brigades Union believes that the proposal is unworkable for firefighters and will destroy the firefighters pension scheme.
This issue goes to the very nature of firefighting. Firefighters perform a number of activities, individually and in teams, such as running, crawling, climbing, lifting, lowering, carrying and hammering. Common activities include ladder lifting and raising, hose running and connection to water supplies, manipulating and operating portable pumps, rescue and evacuation procedures, and wearing breathing apparatus. Worst-case scenarios involve casualty evacuations, search and rescue, operating heavy search equipment, propping and shoring up buildings—as we saw in my area recently during the floods—and carrying equipment over uneven surfaces, which we saw during the dreadful train disaster on the west coast main line.
The public rightly expect the fire service to operate in inherently dangerous situations to save life and property and to render other assistance. The firefighters pension scheme reflects the nature of the job. Firefighters’ work can be
“physically demanding and require sustained effort for long periods, often in arduous conditions”.
It is a career widely recognised as among the most extreme non-military occupations in modern life. I remind the House that currently less than 1% of our firefighters work beyond the age of 55—for good reason. The national pension age of 60 proposed in Lord Hutton’s pension report is for the Government to consider—he did not recommend it as a figure carved in stone—but no evidence was provided to justify it. The Fire Brigades Union has written to him seeking his supporting evidence for it, but as yet it has received no reply.
There are several issues relating to ongoing reports into the merits of a firefighter NPA beyond 55, but the important point, which the hon. Member for Bromley and Chislehurst, the former fire service Minister, referred to is that fundamentally the role of firefighters has not changed. The introduction of IT and changing working practices have fundamentally changed how Members of Parliament and other professions operate, and perhaps have made our lives easier, but that is not the case for firefighters—at least, I can find no evidence for it.
No evidence has been produced to show how firefighters can maintain their health and fitness in order to work safely until they are 60. There are recognised aged-related declines in physical potential. We all suffer from them—well, perhaps you do not, Mr Deputy Speaker, but the rest of us do—and, because firefighting is a physically challenging profession dealing with safety-critical emergencies, such concerns are a matter of life and death for firefighters and the public. Academic papers generally conclude that only elite athletes can maintain well into their 50s the levels of fitness required by the UK fire and rescue service, and the majority of fire and rescue services already have fitness policies in place.
My hon. Friend the Member for Hayes and Harlington referred to the limited opportunities for redeploying firefighters no longer fit for active service. The FBU recently surveyed every fire and rescue brigade to determine what opportunities there were for redeploying firefighters deemed unfit for operational duty on health grounds. In England, fewer than 100 firefighters are in that position, but that is with an NPA of 55. Out of the 46 English fire and rescue services, only five confirmed that they currently had any redeployment opportunities, while the total number of opportunities currently available in the whole of England amounted to 16 posts—and that, remember, is with the normal pension age at 55, so we can imagine how much greater the demand would be if it was 60. I am concerned that such a scenario will end up damaging an essential public service and costing the public purse more.
I referred to studies that the FBU carried out through YouGov. I do not propose to rehearse those points. However, it also engaged the services of an expert actuary to carry out an assessment. It indicated that a considerable number of firefighters would no longer contribute to the scheme. The public will not thank the House or the Government for advocating a pension scheme based on an unworkable NPA and on sacking hard-working firefighters in the years before they can retire after a lifetime of public service.
Higher NPAs could be more expensive. During previous discussions on firefighters’ pensions, the Government Actuary’s Department confirmed that increasing the NPA from 55 to 60 would lead to more ill-health retirements. As I mentioned, the FBU, seeking to quantify that, engaged a specialist firm of actuarial consultants to assess the potential impact of a rise in ill-health retirement under the existing scheme. The evidence shows the substantial cash-flow problems that such contribution increases would create for the sustainability of the scheme. Indeed, the worst-case scenario is that the new pension scheme will prove unworkable and will crash. There is a danger of a significant number of firefighters opting out of the new pension scheme, thereby making it unsustainable for the rest. I believe the Department for Communities and Local Government estimated the savings from the new arrangements at £33 million a year. However, if more than 7% of firefighters opt out—the true figure may well be 12% or more—the likelihood is that those savings will be wiped out, with an even greater cost to the public purse.
Firefighter pensions are rightly seen as part of a social contract with firefighters—men and women who risk their own well-being throughout long careers to help others. I do not believe that the general public will support breaking this well-established covenant, and neither should the Government.
This has been a thorough debate, and I welcome the contributions made by Members from both sides of the Chamber.
We need reforms that enhance the sustainability of pension schemes. In an era of significant demographic change, it is right to reform the pension system to ensure affordability for both employees and employers—which in the case of the public sector is the taxpayer. The sustainability of a decent pension scheme was the focus of several tough decisions made by the previous Labour Administration. The changes made to public service provision when we were in office included raising the pension age from 60 to 65, introducing a “cap and share” approach that would protect Exchequer revenues and share costs between employees and employers, and reforming contribution levels, which rose by 0.4% for teachers and up to 2.5% for NHS staff. The Public Accounts Committee says that those changes would save the taxpayer £67 billion over a 50-year period, so considerable reform took place under the previous Administration.
However, the Government have mishandled subsequent reform. As we have heard from some of my hon. Friends, when the Government were formed in 2012 by the Conservatives with their good friends the Liberal Democrats, instead of building on the changes that we made, they decided to rip them up, thus causing major problems. Their incompetent and shambolic handling of the reform process has also made it much harder to build a consensus on some of the many sensible long-term reforms proposed in my noble Friend Lord Hutton’s report, as my hon. Friend the Member for Blaydon (Mr Anderson) said. We have to find better ways of rebuilding trust and achieving consensus on these vital matters.
The Government are compelling major changes without negotiation in a way that is both crude and unfair. In particular, by unilaterally imposing a steep 3% rise in contributions prior to any negotiations or even the completion of Lord Hutton’s review, and by making a permanent switch in the indexation of future pension income from RPI to CPI, the Government provoked strike action, at a cost to the country and the users of public services. They also provoked deep cynicism among public service workers. These changes were not recommended by Lord Hutton, but were unilaterally introduced, in an unfair and provocative way. The Government’s aggressive approach to this serious and sensitive issue resulted in months of stalemated negotiations. It is a matter of deep regret that the Government have lost the confidence and damaged the morale of hundreds of thousands of public service workers, whose engagement is vital at a time when they are being asked to accept ongoing pay restraint.
Many hon. Members have noted that Lord Hutton produced a thoughtful and comprehensive report on the way forward, using a number of the changes made by the previous Administration as a starting point for negotiations. The document was very useful. He was right to suggest that career average schemes could be fairer than final salary schemes—several hon. Members have made that point—and to say that we should be asking people to work for longer, given the increase in life expectancy. He was also right to stress the need to approach these issues in a careful, balanced way, and to avoid a race to the bottom on pension provision. It is those aspects of Lord Hutton’s report that I wish the Government had looked at more carefully and taken to heart. The Bill is only part of the story, as the unfair increases in contributions and the changes in indexation that have already been imposed do not appear in it.
The Bill contains a series of proposals that we need to consider on their merits. As it consists mainly of enabling legislation that is designed to put new schemes on a clear and equal footing, we will not oppose its Second Reading, but we will hope to address a number of serious concerns in Committee. My hon. Friend the Member for Hayes and Harlington (John McDonnell) has very strong opinions on these matters, which I respect, but I want us to try to find opportunities to improve the Bill in Committee.
All too often when Opposition amendments are tabled in Committee, we see brand new Ministers, with the advice of their officials, opening up their briefing books to find the word “resist” in block capitals, and then simply parroting the notes that have been put into their folders. However, I am sure that that will not be the case with the Economic Secretary to the Treasury, for whom I have great hopes. Let us pray that the Bill’s Committee stage will involve a genuine exchange of views, and give us the opportunity to look into the detail and dig into some of the Bill’s anomalies and, indeed, failures.
Several hon. Members referred to key aspects of the Bill that contain glaring deficiencies. For example, my hon. Friend the Member for Dumfries and Galloway (Mr Brown) and my right hon. Friend the Member for Wentworth and Dearne (John Healey) referred to the retrospectivity involved in the changes to scheme regulations. By allowing scheme regulations to make retrospective changes, the Bill gives the Government the power to reduce benefits that have already been accrued. Many hon. Members will be surprised by that, because most assume that such things are sacrosanct.
My right hon. Friend the Member for Wentworth and Dearne was right to point out that the proposal comes into conflict with the European convention on human rights. It also goes against the central tenet of pension provision, which is that what has been accrued cannot be reduced, because it has already been earned. That is an important principle, because how can public service workers have any security about their future retirement if they know that the Government can retrospectively reduce the benefits that they have already earned at any point? This should not be a partisan matter, but the contract between the employer and employee is important, so I urge the Minister to listen to the genuine concerns that have been raised in the debate.
Earlier, in response to an intervention that I made, the Chief Secretary to the Treasury tried to say that the retrospective provisions in clause 3 would be used only for technical and incidental purposes. Will my hon. Friend test the Government by tabling an amendment in Committee that would stitch that commitment into the Bill?
What a splendid idea. If that were the Minister’s purpose, I agree that there would be no reason not to specify it in the Bill. That would normally happen in the case of incidental, supplementary or consequential issues but, of course, many people suspect that that is not what is involved.
I also want to talk about the employer cost cap, which can unilaterally result in staff benefits decreasing or their contributions increasing. What is particularly pernicious is the fact that the Bill exempts such changes from even the meagre protections for consultation with staff under clause 20. That clause deals with the consultations and discussions that should be held with staff, but it explicitly excludes the arrangements for the employer cost cap. Clause 11 provides for the cost cap to be determined entirely by the Treasury with no requirement for parliamentary scrutiny, which means that the Treasury can set the cap at an unreasonable level, or use it to reduce pension benefits unchecked, thereby further undermining the security of schemes for retirement provision.
Other hon. Members raised issues under the assumption that the Government’s commitment to a new defined benefit scheme was enshrined in the Bill. It turns out that the Bill does not, in fact, honour such provision. In fact, clause 7 says that a scheme that may be created is “a defined benefits scheme”, “a defined contributions scheme” or a scheme “of any other description.” The only restriction is that a scheme cannot be a final salary scheme. In other words, the Government are enshrining in the Bill the side of the agreement that benefits the Treasury, but they have left out the corresponding promises that they made to public sector workers.
My right hon. Friend the Member for Wentworth and Dearne talked about the fair deal, as it was known, for public service workers who might be outsourced to a private provider. Following the transfer of employment, they should be entitled to accrue pension benefits that are broadly comparable to those that they would have accrued if they had remained in the public sector scheme. The Government’s promise does not extend beyond the civil service, however. We shall press for a commitment for the benefit of other public sector workers, as there is an anomaly in the Bill that such a commitment is provided only to employees of central Government and not to other public service workers.
I have further anxieties about the Bill. It will tie pension arrangements to the state pension age, but of course that can be changed, with no protection for those approaching retirement. The pegging of the Bill to the state pension age erodes security and certainty about the age at which members of various schemes might receive their pensions. In 2011, the Government gave only eight years’ notice of the state pension age changes, which caused great concern at the time. While we accept that actuarial changes to reflect demographics might need to be made from time to time, the Bill ought to prevent any changes from being made to the normal or deferred pension age for those with 10 or fewer years to go before they are due to retire. It is incredibly important to help people to plan ahead with their pension provision, and the Government should be able to offer a concession to ensure that such planning is possible.
Once upon a time, the Government talked about the Hutton report as something to welcome and take forward, but they have ignored Lord Hutton’s recommendation that the link between the state pension age and the age at which members of public service schemes receive their pensions should be regularly and independently reviewed. I am told that the Government agreed in negotiations that such reviews would take place, but that is not enshrined in the Bill. I will be more than happy to give way to the Chief Secretary so that he can clarify whether he is going to make a concession by providing for such a review in the Bill—[Interruption.] If he does not wish to clarify that, it will be for us to press that point by tabling amendments in Committee. I know that Ministers will keep an open mind on many of these points.
There are serious problems with questions of governance. Lord Hutton made a number of important recommendations about scheme governance, such as on the implementation of the pension policy group to consider major changes to scheme rules, on the inclusion of nominated members and independent members of pension boards, on ensuring that pension boards are responsible for the oversight of financial management, and on the commissioning of a review into how standards of administration in public service pension schemes can be improved. Such governance measures would improve the efficiency of schemes’ administration and would follow some of the best practice for scheme governance in the private sector, but the Government have not enshrined many of these recommendations in the Bill. Those omissions are important, so I hope that Ministers will look at them.
My hon. Friend the Member for North Ayrshire and Arran (Katy Clark) talked about the importance of local government pension schemes—they are indeed schemes apart. We welcome the fact that the LGPS is funded, but as I said in an intervention, if Ministers are closing the LGPS in 2014, albeit opening new ones going forward, they must explain what will happen to the obligations under section 75 rules relating to the crystallisation of some of those debts? Hon. Members may not realise that academies and third sector organisations such as charities are part of the local government pension scheme. Forcing them to crystallise some of those deficit arrangements at the point at which the existing schemes end and the 2014 schemes begin could be financially crippling and cause major crises. The Bill also centralises a great deal of control and makes a great many anti-localist changes. Changes to the local government pension scheme will transfer power from local authorities to Ministers.
The Bill is enabling, but it is only part of a story and it needs significant amendment. We will not oppose its Second Reading, but I hope that the Economic Secretary will genuinely engage himself in the Committee stage, will keep an open mind, and will work with us on improving protections for public service workers as well as the taxpayer.
I thank Members for the lively debate that we have had this evening. In the short time that I have spent as Economic Secretary, I have been helping the Government to try to get three Bills through Parliament, this being the third. In each case, the Opposition have backed off from calling a Division. I am becoming a little concerned: I hope that that does not become a pattern of behaviour.
The Bill represents a milestone in the history of public service pension provision, and I am not surprised that some Members feel strongly about it. Legislation that affects the pension rights of more than 6 million public servants is worthy of serious consideration and scrutiny.
I think that we should bear in mind the economic backdrop to these reforms. During its last year in government, the Labour party burdened the UK with the largest budget deficit since the second world war and the largest in the developed world. It amounted to £159 billion. Labour was borrowing £5,000 a second, which means that it would have borrowed about £90 million between the moment we started today’s debate and now. [Interruption.] The hon. Member for Leeds West (Rachel Reeves) asks how much we are borrowing. That gives me a good opportunity to remind everyone that we have cut the deficit by a quarter. That is what has brought the country economic credibility, and that is what has kept interest rates low and given us the time in which to make serious long-term adjustments to public spending costs.
I will in a moment.
Because of their long-term nature, pension reforms will not save money quickly, but they make an essential long-term contribution to the health of public finances. We have heard that today from a number of Conservative Members, including my hon. Friends the Members for Bognor Regis and Littlehampton (Mr Gibb), for Bromley and Chislehurst (Robert Neill), for Monmouth (David T. C. Davies), and for Thurrock (Jackie Doyle-Price). As the Chief Secretary has said, it has been forecast that the Bill will save UK taxpayers £65 billion over the next 50 years.
My hon. Friend talks of savings for the taxpayer. Will he admit that this was a golden opportunity for us to convert public sector pensions from a “tax as you go” model to a fully funded scheme, saving future taxpayers billions and bringing true fiscal prudence to the way in which public sector pensions are set? Why has my hon. Friend missed that golden opportunity to go further and save future taxpayers more money?
My hon. Friend raised the same issue in his speech. I think it fair to say that that would have involved an excessive fiscal cost, and would have been much more complex than the approach that we have taken. I hope my hon. Friend accepts that.
In preparing this policy, we have been careful to follow the recommendations set out by the former Labour pensions Minister Lord Hutton in his independent report. We have heard much about trade unions today. The head of the TUC, Brendan Barber, whom I met recently to discuss our reforms, has described the report as a “serious piece of work”. He has taken a very constructive approach to the problems that the Government are trying to address.
While we are on the subject of trade unions—
I will give way to the hon. Lady in a moment. If I remember correctly, she said in her speech that she was taken aback by the support for the public sector that she observed among Conservative Members. Well, she had better get used to it. My father was a bus driver. He was a proud trade union member, and he was the first person from whom I learned about the importance of our trade unions, and I will never forget that. That is why, in putting this important piece of legislation together, we have been working with trade unions to win their support, and I am pleased we have got it.
I think the hon. Member for Hayes and Harlington (John McDonnell) said that not a single trade union supported our approach. A majority of trade unions have accepted the deal. Unions representing approximately two thirds of members have accepted our proposed schemes.
I thank the Minister for giving way. I want to take him back to what he said previously. As usual, he chose to frame his comments in the context of the deficit. His Government came to power saying that they would eradicate the deficit within the term of this Parliament. Now, after two and a half years, he says that we should be grateful that he has reduced it by a quarter. His economic policies are not working.
I was expecting a lot more than that from the hon. Lady. I am proud that this Government have already cut the deficit her Government left behind by a quarter. That is a significant achievement. The shadow Chief Secretary, the hon. Member for Leeds West, said she was unable to commit to keeping the CPI change we have introduced to public sector pensions beyond the term of this Parliament. According to the Office for Budget Responsibility, that would leave a black hole in the public finances of up to £250 billion in current GDP terms over the next 50 years. I look forward to hearing how the Opposition plan to fill that black hole.
Since we received the first interim report from Lord Hutton, we have been in negotiations with trade union representatives from almost all the major trade unions. I am pleased to say that most of them have taken a very constructive approach. As I said, trade unions that represent two thirds of trade union members have accepted the schemes we have put forward.
These reforms are not easy, but they are the right thing to do for the long term because they are in everybody’s interests. We must stop the cost of these pensions spiralling out of control. I shall now turn to some of the issues raised today.
Several Members, including the hon. Members for Banff and Buchan (Dr Whiteford) and for Blaydon (Mr Anderson), mentioned the link between the normal pension age and the state pension age. The reality is that we are all living longer and enjoying healthier lives in retirement. The average 60-year-old is now expected to live 10 years longer than in the 1970s. Pension ages of 60 and 65 were set in times when people spent only a few years in retirement, but that is no longer the case. Some fortunate people spend more years drawing their pension than earning their salary. If everyone is living longer, it is only fair that people work a bit longer, too; otherwise we will be asking those in the private sector to work longer and pay more so that those in the public sector can retire earlier having paid less. We cannot ask those people to pay twice over—once for their own pensions and once for those of public servants.
Let me be clear, however: this Government are not forcing anybody to work for longer. As now, it will remain possible to retire earlier than the normal pension age and draw a reduced pension, subject to any minimum age rules that exist. Of course, any benefits from the current schemes can be assessed in full and reduced at the current pension age for those schemes.
Secondly, I must remind the House that the Government have honoured their commitment to protect the rights of those closest to retirement. The Chief Secretary has made it clear that people who were 10 years or less from their normal pension age on 1 April 2012 will see no change in their pension. The Bill delivers that in clause 16.
I take the Minister back to the point he made a moment ago. Will he concede that most people who give up work early do so not through choice but because their health has collapsed or they have developed long-term debilitating conditions that prevent them from doing their job?