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Pensions: Public Sector

Volume 707: debated on Monday 9 February 2009


Asked By

My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In so doing, I declare an interest as a recipient of a small public sector pension from the City of London Corporation.

My Lords, the Government have introduced a wide range of reforms to modernise schemes and meet the rising costs associated with longevity. Recent reforms such as cost-sharing, cost-capping and changes to pensionable age are designed to help with financial sustainability and are currently being implemented. The Government will continue to monitor public service pensions and the benefits they provide to overall remuneration packages.

My Lords, I thank the Minister for that reply but I suggest that it will be received with a slightly jaundiced view by those who have been in final salary schemes who are now threatened with having those schemes curtailed mid-service. Have the Labour Party and the trade unions come to any formal or informal agreement, such as Warwick 2, about the postponement of public sector pension reform?

My Lords, there is no agreement of which I am aware about the postponement of public sector pension reform. Indeed, this continues to move ahead. The savings that have already been introduced have an estimated value of £1.25 billion to £1.5 billion per annum. That is arising as a result of negotiations relating to pensions paid to the National Health Service, teachers and the Civil Service. With others, which fall under the general heading of public sector pensions, negotiations continue. The introduction of capping, cost-sharing and revised rules around early retirement due to ill health are leading to significant savings. However, I share the concerns of the noble Baroness, Lady O’Cathain, about the termination of pension fund benefits and I am sure those working in the public sector would have been alarmed by the comments attributed to Mr David Cameron when he spoke to the Manchester Chamber of Commerce in November and said he proposed to phase out public sector defined benefit pension plans.

My Lords, I declare an interest as a pension fund investment manager. Why is an independent review of public sector pension costs the only one of the recommendations of the noble Lord, Lord Turner, that the Government are not prepared to accept?

My Lords, I am not familiar with all of the recommendations made by the noble Lord, Lord Turner, in his review, but the key ones are being implemented—in particular, those relating to personal accounts which will, importantly, bring pension fund benefits to those in the private sector on moderate and low incomes who have previously been denied access to final salary pension schemes. This is a very significant step forward in terms of pension provision for a wide sector of the population which has previously been neglected.

My Lords, has the Minister seen the recent estimates published by the Institute of Economic Affairs that suggest that public sector pension liabilities are now close to £1,000 billion and increasing at a rate of over £100 billion a year? Does the Minister accept that if that were applied across the whole of the economy, it would mean that something like 30 per cent of our GDP was being spent on pension contributions? Is that affordable and are the measures he has suggested going to substantially reduce that?

My Lords, as the noble Lord will fully appreciate from his service on the board of a major pension fund management and insurance company, estimates of pensions liabilities depend critically on assumptions, small changes in which can lead to very large numbers. The most important factor to recognise is that the total cost of public sector pension provision is currently of the order of 1.5 per cent of public expenditure per annum and is not projected to rise above 2 per cent in the next 50 years.

My Lords, I think that we all agree that we want to protect and maintain final salary pensions while seeking to contain some of their cost. When my noble friend talks about cost-sharing, could he tell the House whether he has in mind the option of career-average pension contributions, which would fully protect the pensions of the lower paid but ensure that those who have very sharp increases in pay at the end of their working life do not then receive a pension that is disproportionate to the contributions they have made and put in?

My Lords, I thank my noble friend for her question. She again evidences her great understanding of issues relating to pensions. Career-averaging or averaging of final years of service are among the approaches which can be adopted to smooth or share the cost of pension fund contribution. This would be a matter for individual negotiation between the unions and representatives of employers. I am sure that it is on the menu of factors to be considered.

My Lords, the public sector workforce is around 20 per cent of the total, yet there are more than 5 million public sector employees with defined benefit pension arrangements, but fewer than 1 million in private schemes that are still open to new entrants. Does the Minister seriously believe that taxpayers bearing this burden will be sustainable in the long run?

My Lords, I have already explained that the so-called burden, when expressed as a percentage of total public expenditure, is much lower than most people believe. I believe that the core issue in the question of the noble Baroness, Lady Noakes, should be seen from other perspective: it is the deplorably small number of people in the private sector, particularly those on low and moderate incomes, who have any pension provision at all. That is the figure on which we should focus and why we hope that the Conservatives will continue to support our proposals in the Pensions Act 2008, including the proposals for personal pensions and personal accounts.