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Public Service Pensions

Volume 733: debated on Tuesday 20 December 2011


My Lords, I will now repeat a Statement made earlier today in another place by my right honourable friend the Chief Secretary to the Treasury.

“Mr Speaker, with permission, I would like to make a Statement on the reform of public service pensions. Seven weeks ago, I reported to the House that in an effort to secure agreement, the Government were making a new offer to public service workers. Despite some unnecessary interruptions, scheme negotiators have been working hard to reach detailed heads of agreement by the end of the year deadline that we set.

It has not been an easy task, but this Government have demonstrated that they will not shy away from taking difficult long-term decisions in the nation’s long-term interest. We wish to see pensions for public service workers that are fair, sustainable, provide dignity in retirement and are affordable to both those workers and to taxpayers. That is why we committed in the coalition agreement to establishing an independent commission to bring forward proposals for reform. Lord Hutton’s magisterial report did just that. We have stuck closely to the recommendations of the former Labour Work and Pensions Secretary throughout this process.

The case for reform is self-evident. The average 60 year-old today is living longer now than they did in the 1970s. It means people are living in retirement longer—the life expectancy of a 60 year-old was 18 years in the 1970s, but has risen to 28 years today. As a result the costs of public service pensions have risen to £32 billion a year, an increase of one-third over the past 10 years. We have already made some changes that deal with short-term pressures, including changing the basis of pension uprating to CPI, and increasing member contributions by 3.2 percentage points, phased over three years.

Next year’s contribution increase is almost identical to that planned by the previous Government. The precise details of next year’s increase have been set out by departments—all are tiered by income to protect the lower-paid. The Government will review the impact of next year’s increases, including on opt-outs and equality, before taking final decisions on how future increases will be delivered. Interested parties will have the opportunity to provide evidence and views to the Government.

I know that many Members of the House will be concerned about pay and conditions of our Armed Forces. Let me be clear. Members of the Armed Forces will continue to make no contributions towards their pensions and will be exempt from the increases announced at the spending review.

From the beginning of this process, we have committed to ensuring that public service schemes continue to offer a defined benefit pension based on the size of workers’ salary—not dependent on the market performance of a fund, and not available to most people in the private sector. From the beginning, we have been clear that all accrued rights will be protected, in full; and that the taxpayer needs to be properly protected from future risks associated with further increases in life expectancy by linking scheme normal pension age to state pension age.

In November, we improved the offer to a one-60th accrual rate, an increase of 8 per cent that is available only in the event of agreement being reached, together with protection for those 10 years from retirement. I would like to pay tribute to the Minister for the Cabinet Office, the TUC and the scheme negotiators on both sides for their efforts to reach agreement.

I am pleased to report that heads of agreement have now been established with most unions in the local government, health, Civil Service and teachers’ schemes. It will of course now be for union executives and memberships to decide their response. These heads of agreement deliver the Government’s key objectives in full, and do so with no new money since our November offer. In future, scheme pension ages will match the state pension age, future schemes will be on a career-average basis, and all the agreements are within the cost ceilings I set in November and will save the taxpayer tens of billions over the decades to come.

Because heads of agreement have been reached, the better offer I made in November has been secured by trade unions for their members, including the no-change guarantee for workers 10 years from retirement. The heads of agreement also deliver a number of the key objectives set out by the trade unions during the talks. Negotiations on these heads of terms are now concluded. We and the unions agree that this is the best outcome that can be achieved by negotiation. This is the Government’s final position and we will bring forward legislation to the House. The full details of the heads of agreement in each scheme are today being set out in Written Statements by each department.

The key changes made are as follows. In the Civil Service, we have agreed to revalue each year’s contribution by CPI rather than earnings, allowing an accrual rate of 44ths to be offered. This costs the same as our original offer, but with a configuration preferred by the trade unions. As a consequence, the new scheme will be very similar to the nuvos scheme already available within the Civil Service, except that in future the normal pension age will be linked to the state pension age as it rises. It is therefore disappointing that the PCS has rejected the heads of agreement and walked away from the talks.

I have previously made the point that the local government scheme must be treated differently because it is a funded scheme. The Local Government Association and the trade unions have agreed that the pension age in the new scheme will be linked to the state pension age, and that their preference is to deliver a career-average scheme. Further discussions will take place over the next three months to agree the details. In health, we have agreed to a revised revaluation factor of CPI plus 1.5 per cent. This allows the accrual rate to be improved to one-54th. In education, we have agreed to a revised revaluation factor of CPI plus 1.6 per cent, allowing for the accrual rate to be improved to one-57th, along with modest improvements to early retirement factors.

All these heads of agreement are within the cost ceiling I set out in November, but in a configuration preferred by the unions. Discussions on police, Armed Forces, judiciary and fire service schemes have been a separate process from the start, and proposals will be brought forward in due course.

Let me turn to some other aspects of these deals. All of these agreements include a cap on taxpayer costs at 2 percentage points above or below the scheme valuation. This cap is symmetrical, so employees will benefit if costs fall. As Lord Hutton made clear, with the other aspects of reform now agreed, there is no reason to believe that under normal circumstances this cap will be used. It is there as protection for taxpayers and for workers if extraordinary, unpredictable events occur. In the course of all these talks, unions have stressed the importance of ensuring that their members will continue to be able to receive the benefits of these schemes if they are outsourced. This is the purpose of the fair deal policy, the future of which we have been consulting on. Because we have agreed to establish new schemes on a career-average basis, I can tell the House 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. In addition, the Government will consider what practical options might be available to reform the terms of access to the NHS pension scheme, in particular for NHS staff who move to a non-NHS “any qualified provider” delivering NHS services. At the same time, by offering transferred staff the right to remain members of the public service scheme, we are no longer requiring private, voluntary and social enterprise providers to take on the risks of defined benefit that deter many from bidding for contracts in the first place.

Replacing so-called bulk transfers of pensions with continued access to public sector schemes means that we continue to protect public service workers’ pensions, manage the risk to the taxpayer and forge ahead with our ambitious plans on public sector reform. I have committed that these reforms will be sustained for at least 25 years. The Government intend to include provisions in the forthcoming public service pensions Bill to ensure that a high bar is set for future Governments to change the design of the schemes.

What does this deal really mean? For our workforce, it means they will continue to receive the best quality pensions available in this country—and rightly so. These pensions could be bought in the private sector only at the cost of one-third of salary. This is a proper reward for a lifetime’s commitment to serving the public. This new scheme is fairer to women too. By moving to career average, we will be giving a better pension in future to those, mainly women, who have low or steady salaries throughout their careers.

The Government have been clear that, because we are living longer, public service workers must work a bit longer and pay a little more for their pensions but, in return, we have also made an important commitment: that at retirement, those on low and middle incomes will get at least as good a pension as they do now. I can confirm today that we have met that commitment. For people who depend on our public services, it means that most unions will be asking executives to lift the threat of further strike action while work is done to conclude the final agreement, and I hope that the remaining unions do the same. For the taxpayer, it means that tens of billions of pounds extra that would have been spent on unreformed pensions over the next 30 years is now available for other pressing demands.

These are reforms that significantly improve the long-term fiscal sustainability of this country and reinforce the credibility of our fiscal stance. The Office for Budget Responsibility will provide a forecast of these savings in its next fiscal sustainability report. For industrial relations, I believe this shows that it is possible to reach agreement through negotiation in good faith, based on clear objectives. That is the right way to approach relations between government and the trade unions. In these difficult times, it is important to show that people can come together to achieve genuine reform, preserving the best of the past but recognising the realities of the future. This is a fair deal for public service workers, an affordable deal for the taxpayer and a good deal for the country. I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, it is important to remember that what we are discussing is the reduction in the lifetime living standards of a significant proportion of the people of this country. We are discussing the fact that the real incomes of public service workers will, in retirement, be significantly lower than they had every right to expect when they took up their positions in the public service. When the noble Lord speaks of “reform” of public service pensions, he means reduction of public service pensions, and when he speaks of saving,

“the taxpayer tens of billions over the decades to come”,

he means reducing the incomes of pensioners by tens of billions over the decades to come.

Noble Lords will be aware of the difficult choices that we all face over the question of pensions. The excellent report a few years ago by the noble Lord, Lord Turner, and the recent study by my noble friend Lord Hutton have spelt out the consequences of lower birth rates and greater longevity for the provision of pensions. Given that the standard of living of everyone depends on the goods and services produced by the working population, the smaller the working population is in relationship to the whole the more difficult it becomes to provide for the non-working pensioners. The choices that need to be made when facing such a major, secular shift in demography and in the economy should have been the subject of bipartisan national debate. They should have been approached with the clear understanding that what is under consideration is the decision to reduce lifetime living standards.

In his report, oft cited by the Government, my noble friend Lord Hutton stressed the need to approach these issues in a careful and balanced way, with particular care for the impact of any increased contributions on lower-paid public service workers, and the need to sustain high-quality, reliable pensions provision. Having people retire into poverty, dependent on state benefits in their old age, cannot be an answer under any circumstances. In taking up my noble friend’s points, the Government failed on both counts by seeking to impose a steep rise in contributions and a permanent switch in indexation from RPI to CPI, neither of which measures formed part of my noble friend’s recommendations.

The consequence of this arbitrary and authoritarian approach to reducing the lifetime incomes of some of the lowest-paid people in the country was 10 months of stalemated negotiations and then strike action, in many cases by people who had never dreamed that they would ever go on strike. The strike on 30 November, a strike that could and should have been avoided, seems to have brought the Government to their senses. We on this side of the House are pleased that the people who rely on public services, as well as millions of public sector workers, can approach the holiday season knowing that proper negotiations are taking place at last and that a solution that is fair to pensioners and fair to taxpayers may be on the horizon.

We are pleased that the Government have at last recognised the need to protect the lowest-paid from unaffordable increases in contributions, the need to reassure older employees worried about how long they will have to work and the need to ensure that people who dedicate their working lives to our public services can expect a decent income in retirement. It is important that, in any proper national consideration of how best to tackle the changing demographic factors behind pensions provision, the Government should provide the fullest and clearest information on what is proposed and on the consequences for public service workers at all levels of income.

For each of the four schemes under consideration, what are the new proposals for contribution increases? What is the timetable according to which they will be introduced? How do the Government intend to ensure that the new contributions are affordable for lower-paid workers, including part-time workers? What assessment have the Government made of the impact that their proposed changes might have on the number of public service workers opting out of the scheme, of the impact that this may have on future pensioner poverty and of consequential demands on state benefits? In taking steps to increase the pension age, what allowance do the Government intend to make for those in physically demanding jobs where the current retirement age from that particular line of work may indeed be appropriate?

Most importantly, the Government must now realise that a pensions agreement in the public services should be for the long term and should be part of the fundamental relationship between Government and people, whichever party is in power. How will the Government make good on their promise to deliver a deal that is secure and sustainable for the next 25 years? Will they learn from their errors of the past year and understand at last that a properly informed public debate, and an appropriately negotiated agreement with strong bipartisan support, is the only way to achieve a fair and lasting agreement?

My Lords, I am sorry that the noble Lord, Lord Eatwell, does not welcome the deal that the Government have come to today with the great majority of unions in the public sector. The Government must get a grip on the significant increases in the cost of providing public sector pensions that have simply arisen from the fact that people are living longer. That is why we asked the noble Lord, Lord Hutton of Furness, the Work and Pensions Secretary in the previous Government, to look at the current position and identify whether further reform was required. The noble Lord, Lord Hutton, set out an overwhelming case for reform, saying that,

“the status quo is not tenable”,

and that,

“Future costs are inherently uncertain”,

and that at present,

“the … public cannot be sure that schemes will remain sustainable in the future”.

It is based on his recommendations that we have reached an agreement with the unions today.

It is a good deal. It ensures that public service pensions will remain among the very best available. If members retire later, as most of them will, most of them will not see a reduction in the pension that they receive at retirement; indeed, many of them will get more than they would now. I do not think that the noble Lord, Lord Eatwell, recognises that. The deal delivers on our objectives to ensure that most low and middle earners working a full career will receive pension benefits at least as good as, if not better than, what they would get now.

I turn to the specific questions that the noble Lord asked me. On the increases in contributions, the scheme-by-scheme contributions for 2012-13 are set out on the respective departmental websites. They follow on from separate consultations that were held over the summer. The average is a 3.2 per cent increase over three years, with 40 per cent of that increase falling in the first year and 40 per cent in the second, building up to the full increase in the third and final year. The projections are that anyone with earnings below £15,000 will face no increase and that those between £15,000 and £21,000 of earnings will have their contributions increased by only 1.5 per cent over the three years. Individual schemes have worked out other particular protections; health, for example, has protected those earning up to £26,000 by having no increase in the first year.

On the question of part-time workers, it is the case that all public service scheme members, whether full-time or part-time, are included, apart from those within 10 years of retirement who are, as I have explained, protected. The lower-paid will not pay more for their pensions. The pension benefits themselves are based on full-time equivalent earnings and it is appropriate that the contributions are calculated, as are benefits, on the same basis. There are approximately 350,000 part-time workers in local government, where alternatives to contribution increases are being considered, and a further 150,000 part-time workers would be partially protected as their full-time earnings are less than £21,000.

On the question of opting out, the general point to make is that there is no reason why members should do so. There will remain a strong economic rationale for them to remain in their schemes, and it is important that all employees in the public sector hear that message clearly. Beyond that, we have committed to reviewing the impact of opt-outs following the increase in members’ contributions. We will do that before final decisions are taken on how future increases are made. It needs to be borne in mind that it would cost a member around 30 per cent of their earnings to purchase equivalent benefits in the private market.

I turn to the question of the increase in pension age and the effect of that, particularly on those in physically demanding jobs. For the armed services, firefighters and police, the noble Lord, Lord Hutton of Furness, recommended an earlier retirement age of 60, and we accept that recommendation. For the other schemes, we have agreed that the retirement age will be the state retirement age, the same age when other citizens will receive their state pension. It will be for employers to review the appropriateness of certain jobs for older employees and to make appropriate arrangements for staff possibly to move into alternative roles as necessary. The NHS, for example, has already agreed to set up a tripartite review involving the department, NHS employers and the NHS trade unions which will look at addressing the impact of working longer in the NHS, with particular reference to staff on the front line and in physically demanding roles, including emergency services. I accept that this is an important point but it is one which is already being addressed.

On the final questions of the noble Lord, Lord Eatwell, around how the Government will be able to deliver a commitment on no further reform for 25 years, the critical point here is that we have set out a position that is not only fair and sustainable for those who work in the public sector but is a reform that is sustainable in terms of the public finances. I reiterate the point that, as the Government address the very difficult fiscal position that we inherited and as we compare ourselves with countries in Europe and elsewhere, this is an important reform that will underpin the fiscal sustainability of the public finances for many years to come. Therefore, I believe that no further reform should be necessary for 25 years. To give substance to this, we intend to include provisions on the face of the forthcoming primary legislation to ensure that a high bar is set for future Governments to change the schemes, as I said in repeating the Statement.

My Lords, having listened to the Minister claiming the support of the noble Lord, Lord Hutton—the architect of the scheme—for his interpretation, and then having listened to my noble friend Lord Eatwell give a different interpretation, I am all the more sorry that the noble Lord, Lord Hutton, is not here to give his interpretation. I wish to ask the Minister a question, as in 2008 I negotiated pension agreements with local government workers. That is a different pension scheme from the state one as it is funded by the employers and the employees. We made major changes in that pension agreement which I do not have time to explain. We did that with a struggle but we did not have the strikes that we have witnessed on this occasion. We have learnt that there is a heads of agreement with the unions, and we hope that they will move to some sort of agreement. The Minister mentioned this in his contribution. However, tonight we learn that another letter has been written by the Secretary of State for the Environment, Mr Pickles, who is well known as the rogue elephant in the Cabinet, which states that the limits to be placed on the employers’ contribution are quite different from what the Treasury is saying. Will the Minister say which letter is operating in these negotiations? I am told that the letter I have mentioned has been withdrawn. Is Mr Pickles in charge or the Treasury as regards the difference between the two schemes? Will the Minister explain that to us?

My Lords, I am happy to try to clear up any misunderstandings on this. As the DCLG has made clear this afternoon, it is in discussion with the unions to resolve any misunderstanding and reassure them that the intentions of the department and of the Government have not changed. It would seem that the unions have read more into the letter that was issued today than was intended by the DCLG. No new conditions are being imposed by the department. In order to iron out any ambiguity, the department will be issuing a new letter to make clear that there is no ambiguity, there is only one deal and there are no conditions. Therefore, I am confident that this can be resolved quickly, but as noble Lords will understand, there have been many deals with a lot of unions and several departments. We must clear up this ambiguity that has slipped in on one particular aspect.

My Lords, the Government and the unions that have signed the heads of agreement deserve congratulations on having achieved this in this day and age, given the immediate financial pressures and the reality that we will all live much longer and therefore need pensions for a much longer period in our lives. They have achieved an agreement that retains defined benefit schemes—when the private sector has essentially abandoned that and gone on to defined contribution schemes—and have provided protection for those approaching retirement and for those on the lowest incomes. That is a real achievement by both sides and we ought to acknowledge it.

However, I wish to ask the Minister two questions. Can he clarify for us where the negotiations now stand with the PCS? The experience that has been described tonight demonstrates that negotiation has to be the way forward, not strikes. The Minister said that the PCS had walked away. The newspapers used the phrase, “not invited to future talks”. Can he clarify what he sees as the progress that can be made in that regard—preferably progress which does not inflict any more strikes on the long-suffering British public?

Secondly, can the Minister expand a little on an area I find most intriguing: namely, the position of staff transferring from the public service to the voluntary or private sectors or to social enterprises who will retain access to a public service pension? I cite the example of the NHS in that regard. Should we see that in narrow terms, or are we moving towards an arrangement which will allow a much more flexible structure for future public services as technology and demand change, creating the opportunity for movement in and out of different organisational arrangements? Is this the first building block of something larger, or is it just something to be seen narrowly within the terms of this negotiation?

My Lords, I am grateful to my noble friend for welcoming this deal. She rightly points out that it means that public sector workers have among the best pensions available in this country, including defined benefit schemes which are not now generally available to people entering private sector schemes. Therefore, I endorse entirely her comments in that respect.

The PCS has not agreed to put the final design of the Civil Service scheme to its executives. It is important to remember that the PCS represents fewer than 5 per cent of the members of the public service schemes and discussions will continue without it. We believe that the final deal—it is a final deal—is a good one and that the remaining unions will recommend it to their members. We are clear that what has been set out today is the Government’s final position.

My noble friend asked about the ability of members exiting a public sector employer to remain in the pension scheme under the “Fair Deal” provision. Implicit in her question was the notion that this may have wider implications. I certainly think that this opens up all sorts of possibilities, whether in relation to the mutualisation of services or the ability of people to come in and out of the public sector.

I echo the opening remark of the noble Baroness, Lady Kramer, in referring to the constructive nature of the recent negotiations, albeit at the eleventh hour. I hope that the Minister will take care in saying who represents 5 per cent of what. One minute he is talking about the total public sector negotiation and the next minute he picks out a statistic which is to do with the Civil Service. We ought to be very careful not to pick and mix in that particular way.

I hope that the Minister will comment on a general point: namely, now that we have reached where we have got to, it would be very useful for all of us to discourage people from going in for rhetoric such as many Members of the Minister’s party, both in this House and in the Commons, have indulged in. Their slogan can be summarised as, “Private sector employment is productive; public sector employment is unproductive”. It is not just the Daily Mail, the Daily Express, the Daily Telegraph and the Murdoch newspapers that say that—it is members of his own party in this House and the other House. I do not mean that anyone in this House tonight has said that, but it has been said on other occasions. Such comments are quite ridiculous. People will think that nurses and teachers are unproductive, and that hedge fund managers and second-hand car dealers are productive. Is it not time that, in a modern social democracy or mixed capitalist economy—I do not mind what you call it—we agreed that that is a ludicrous way of dividing people up?

That leads to the point that we must get on with improving pension provision in the private sector. The Adair Turner report on auto-enrolment has been stymied to some extent. Is it not important that we do not have a race for the bottom as regards pensions? I am glad that we have drawn back from that to some extent.

Am I not right in thinking that CPI has been selected instead of RPI because CPI has been growing more slowly in recent years? Would the Government have preferred CPI to RPI if it had been growing faster? I have been around for long enough to know that that is exactly how the Treasury thinks. I ask the Minister whether he agrees with me that there is a position in the final set of correspondence which refers to CPI plus 1.5 per cent or 1.6 per cent, and that that is the rationale for some of the arithmetic, which—understandably, given the Government’s predicament—is based on getting more in for the Treasury, hence the 3 per cent take-away.

Finally, is this not also the time to say, given the huge growth in pension pots for the top 0.1 per cent of people—which is scandalous and is getting up the nose of everyone in the country, apart from that 0.1 per cent—that the idea that we are all in this together is a bad joke, unless that issue is also addressed?

I am sorry—I thought there was a new and welcome procedure whereby Back-Benchers could answer questions on my behalf. That is an excellent idea, but it might require discussion before we do something so radical.

I should first be clear about the interesting analysis of the noble Lord, Lord Lea of Crondall, on how we have got to this point and what else we should be doing. When he talks about an eleventh-hour deal, it is worth reminding the House that the final deal was put on the table by the Government on 2 November. The agreement today is entirely in line with what was put on the table then, well ahead of the strike action on 30 November.

The question around CPI and RPI broadly relates to the nature of the deal whereby individual negotiations were carried out, scheme by scheme, around the level of benefit accrual and indexation rates. That is why we allowed considerable flexibility for the unions to vary the balance of factors within the total cost caps that were set. That is why a variety of different approaches was taken. There was considerable flexibility within the overall parameters set by the Treasury.

As to the question of what people in the private sector should be doing, perhaps we had better stick to public sector pensions, which are very important and should be what we are talking about.

I must apologise to my noble friend for jumping up. It is just that I was slightly goaded by the noble Lord, Lord Lea of Crondall. I want to come back to him about the CPI versus RPI issue, because I have a pretty long memory, too. In the early stages of the Monetary Policy Committee and the Labour Government, there were endless discussions every month about the RPI. One of the reasons that the statisticians wanted to move to the CPI was so that they could get month-by-month comparisons with mainland Europe—the EU. That is exactly why it happened, and then it all started to go wrong. We should have a discussion off the Floor of the House and go to the Library to look at all that. It was fascinating stuff, and an enormous number of people wanted to go for the CPI, as opposed to the RPI.

I should be very glad to have such a discussion, but I have an even longer memory. For many years, I represented the TUC on the Retail Prices Index Advisory Committee, which was abolished by the Treasury when we made a recommendation that it did not like. The recommendation in about 1970 was that we should stick with the RPI for general purposes because—

I am quite entitled to come in for a second time within the 20 minutes. I have been asking a question. Is there not a case for looking at which index should be used, based on considerations other than which one is likely to increase more slowly than the other?

My Lords, this was a negotiation between the unions and the employers. It was a choice regarding accrual rates and indexation, and the unions have expressed a preference for going for that measure of inflation, essentially as a way of funding better accrual rates. That was just the nature of the negotiations.