Lord Whitty
My Lords, this is an amendment that reflects some of the anxiety in local government and other circles about what the Treasury’s ultimate intention is in relation to public sector schemes. The Minister may be gratified to know that I do not expect him to accept the amendment wholesale tonight, either in this form or in some other form within this Bill, but I hope that he will give sufficiently reassuring words that the matter dealt with in the amendment is not the intention, and that there will be some way of making sure that it is not.
The anxiety stems from a number of things. We all know that the Treasury likes to control things. We also know that the Treasury does not like to see the possibility of costs that it does not control but that will count against the public borrowing requirement—albeit that that definition is ludicrously wide compared to most other countries. The Treasury also likes to see large sums on the asset balance sheet. On the other hand, the Treasury likes to deal with liabilities on a pay as you go basis rather than on a long-term funded basis. When looking at the attempt to corral the local government scheme into the same box as the unfunded public sector schemes, where the funding has gone up and down significantly over the decades, all these things might suggest the possibility that if any of the 89 different local government schemes were seen episodically to be failing, the Treasury might take the opportunity to step in and take it over, or perhaps to take over large chunks of the local government scheme.
Local government schemes consist of 89 different schemes, mostly local authority. By and large, they are well run, professionally organised and based on very solid professional advice, and generally they take steps to ensure that the income is changed if the long-term prospects alter significantly. But, of course, in the current economic climate there has been some serious turmoil. The local government scheme of which I was recently chair went from a funding position of 114% down to something under 70% and back up again to 90% in the past four years, which was almost entirely due to the way in which the world stock markets have gone down, with the value of equities and other stocks, and also—and I shall return to this in a subsequent amendment—to the way in which liabilities are valued. At times, it looked as if there was danger of those funds not being sustainable even in the short term.
There is a possibility of the Treasury not liking to face the possibility that it is seen as the underwriter of last resort, which currently it is, although I notice that the noble Lord, Lord Flight, who is not in his place, is attempting to remove that position later on in the Committee’s consideration. In reality, there have been no historic examples of default, but nevertheless there could be an opportunity of the Treasury stepping in, saying that the fund is badly run and that it is going to take it over, count the assets against central government assets and push the liabilities into the long grass.
There is a precedent for this situation, and a rather large one—that of the Post Office pension scheme. Both Governments are guilty of this, although the current Government actually implemented it. It was a very large scheme and, because of previous pension holidays taken by the Royal Mail pension fund, it was somewhat underfunded. Somewhat to our surprise, the Treasury agreed to take over the scheme directly. Part of that was to soften people up for privatisation, but another part of it was that it immediately got the Treasury £26 billion on the asset side of their balance sheet, whereas the liabilities, although they are still there legally and contractually and will have to be met, actually disappear from that balance sheet in the general fund.
If that could happen in a scheme as large as the Post Office scheme—and there is the possibility of a predatory Treasury down the line—then it could happen in relation to failing or allegedly failing local government schemes. The reality is that the boards of the local schemes and the national board would need to take steps within the LGPS to ensure that such schemes did not fail, or that if they failed they would merge with other local government schemes. That responsibility to intervene at the first sign of danger rests within the LGPS, not with the Treasury.
There is a serious suspicion that the blurring between an independent local authority-based wholly funded scheme, and this scheme’s provisions for greater Treasury surveillance, could go further, and that it could allow the Treasury to seize control of a local authority fund in the circumstances that I have described, but possibly in other circumstances as well. I have put this amendment down for the resolution of that suspicion. As I have said, I do not necessarily expect the Minister to accept this amendment, but I would like, in the course of either this or the next stage, an unequivocal declaration or a different form of words in the Bill that make it clear that the Treasury would not act in this way in relation to local government schemes. I beg to move.
Lord Newby
My Lords, this amendment seeks to provide assurance that the Treasury could not take away the assets of the pension funds or place the liabilities of the local government pension schemes on to the Government’s books. I hope that I can reassure the noble Lord, Lord Whitty, that the Government have no intention of doing so, and for a very good reason.
The noble Lord, Lord Hutton, considered the funded nature of the local government pension schemes and concluded that they should continue on that basis, and we agree. Local authority pension funds allow local government to manage its liabilities efficiently and ensure the solvency of the scheme both at a local level and as a whole. Moving to an unfunded model in the local government schemes would risk greater volatility in the costs, and therefore the demands on local taxpayers. In practice, taking on the assets of local government schemes would also mean taking on the liabilities, which would have a greater cost for central government and would therefore make no economic sense. Neither would winding up any of the existing funds make economic sense. That would cost the Government far more in making provision to secure annuities for rights already built up than it would gain the Government in terms of assets.
Furthermore, there are significant legal barriers. It took explicit powers in primary legislation to move the pension assets of the Royal Mail. There are no such explicit powers in this Bill. For the avoidance of doubt, any suggestion that the Government took on the pension fund of the Royal Mail in order to improve the figures, knowing as they did that they were incurring a very significant liability in the long term, is simply misplaced. It was, as the noble Lord put it—although I would not put it in quite the same terms—part of the necessary process of preparing the Royal Mail for privatisation.
When debating closure we have said in your Lordships’ House, in another place and outside Parliament that we have no intention of winding up the existing schemes. Indeed, we have amended the Bill on a number of occasions to allay these fears. The Government, therefore, have no intention of defunding the local government pension schemes, for the very good reasons that I have set out.
I hope that I have reassured the noble Lord, Lord Whitty, that any fears that he might have about the LGPS funds are entirely unfounded, and that this amendment is therefore not necessary.
Lord Whitty
My Lords, I thank the Minister for that reply, which provides a fair degree of assurance. I will read the precise words then consult colleagues in local government as to whether that is sufficient. However, I thank him for his reply. I agree that the Post Office was a bit more complicated, but on the other hand there are suspicions out there, and it is part of the distrust to which reference was made earlier that such fears are around. The Government have to ensure that they pacify those fears. I hope that the Minister’s words will help to do that. Meanwhile, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, my noble friend has made some interesting and important points. One of the issues that really need to be faced, on Report in particular, is that in the negotiations that followed the Hutton report, Local Government Employers, the unions and the Government managed to formulate what could be called a “deal” about the way in which pensions were to go forward. Regrettably, elements of that deal do not appear in the Bill. In response to challenges in the Commons, Ministers gave assurances on a number of occasions but, given that this is expected to be a Bill lasting 25 years, covering several Administrations, these assurances should be in the Bill. A deal is a deal and simply going back to assurances is, at least partially, reneging on the deal.
Having said that in support of my noble friend, I will now speak to Amendment 35, which is also in this group. My noble friend Lord Hutton’s report recommends:
“Every public service pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration.”
One can understand why my noble friend recommended this given that, as my noble friend Lord Whitty has commented, there are 89 local government pension funds, with over £150 billion of assets under management, as well as the other pension schemes. Clause 1 currently provides for the establishment of a pension board for a scheme but leaves it completely unclear whether there is a requirement for one pension board for each fund in the Local Government Pension Scheme. Under the clause as drafted, it would be perfectly possible to have one pension board for all 89 pension funds—that is not ruled out. The Minister in another place said the combined effects of Clauses 4 and 5 rule this out. I have studied these clauses carefully and have taken advice, and have been assured that they do not rule this out. Indeed, one could have various combinations of boards servicing the 89 LGPS funds and other schemes.
Given that, as the Hutton report says,
“all scheme members deserve to know that their scheme is being properly run”,
it is entirely desirable to make clear in the Bill that a pension board for each pension fund is a prerequisite, both as a measure of efficient management and to give confidence to the members of individual schemes that they have a board that they can identify with and have access to. I will, in due course, ask the Minister to consider carefully taking on board Amendment 35 to give suitable clarity to what is meant by the establishment of pension boards and ensure that there is a pension board for each scheme.
Lord Newby
My Lords, the noble Lord, Lord Whitty, has proposed Amendments 33, 36, and 44, which are concerned with ensuring that there is a scheme manager and pension board for each local authority pension fund. The amendments also provide for national pension boards in the Local Government Pension Scheme. Amendment 35, tabled by the noble Lord, Lord Eatwell, raises much the same issue.
Both noble Lords seek assurance that there must be a pension board for each local authority pension fund within the local government scheme. I can reassure them on that point. Police, fire and local authorities will be scheme managers in respect of their part of the pension schemes for those workforces. The effect of Clause 5 is that the scheme regulations must provide for a pension board to assist each scheme manager in that role. It follows that there will be a pension board for each scheme manager.
Noble Lords may say that Clause 4 does not in explicit terms require there to be a scheme manager for each local pension fund, and hence a pension board also for that fund, but that is the purpose of Clause 4(5). The intention is also clear from Clause 5(6). This anticipates that the scheme managers of locally administered funds will be the local authority or a committee of the authority.
Amendment 36 is also concerned with requiring national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland.
Lord Eatwell
I ask the noble Lord to return to the point he just made, because it is similar to a point made in another place. There is a scheme manager for each scheme. Clause 5(1) states:
“Scheme regulations for a scheme under section 1 must provide for the establishment of a board with responsibility for assisting the scheme manager”.
That does not suggest that there should be a board associated with each scheme manager. It does not say that, but a board might be just one gargantuan board that serves a variety of scheme managers. I quite understand that the noble Lord is sympathetic on this issue and wishes to assure us that that is what the Government mean but it is not what they say.
Lord Newby
My Lords, that is what we mean and I am advised that that is what the clause says. I will look at it again and if there is any further clarification that I can give the noble Lord, I will write to him. I think that we just have a difference of view about what the current provision states.
Amendment 36 would require national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland. We cannot support these amendments but, as the noble Lord, Lord Whitty, will be aware, we have tabled Amendment 45 to deal with that issue, which we will consider in due course. When we do, I hope that the noble Lord will be persuaded of it.
Amendment 115 concerns Schedule 7, which sets out the mechanism to maintain the final salary link for service in the current schemes. The schedule is designed to allow public servants’ final salary benefits to remain fixed to their final salary on leaving pensionable public service, even after they enter the new schemes. This was a key part of the recommendations of the noble Lord, Lord Hutton, and a vital aspect of the reform deal for public servants. The mechanism also includes provisions for this link to be maintained even if the person moves between public service schemes or leaves public service for periods of not more than five years. Again, this is exactly in keeping with what the noble Lord, Lord Hutton, proposed.
This approach allows public servants the flexibility, for example, to take carer’s leave or gain experience in other sectors, without being inhibited from doing so by the detrimental impact on their final salary pensions. This is consistent with a wider objective to modernise public service terms and conditions, and it smoothes movement between different sectors and departments to enable the sort of skills-sharing that is required for a modern-day workforce. Amendment 115 seeks to remove this flexibility for those in the Local Government Pension Scheme by stipulating that the link is maintained only if the person remains in pensionable service for the purpose of the new local government scheme.
I am not sure that the amendment delivers on its purpose but, none the less, I must oppose it on principle. It would leave in place a movement barrier that we wish to dislodge and be inherently unfair to local government workers. It would lead to the unfair scenario where a teacher who moves to local government for a period before returning to teaching would maintain their final salary link, whereas a local government worker who moves to the education sector before returning to local government could lose their final salary link. That would not be right.
I reassure the House, however, that the Bill does not impose any new liabilities on the funded local government scheme while a person is not in local government scheme employment. Under paragraph 2 of Schedule 7, the link applies only where someone who leaves the local government scheme transfers their rights to benefits from the old scheme, and therefore the liability, to their new employer’s final salary scheme.
Amendment 126 seeks to remove local government pension schemes from the powers set out in Clause 23, which allows pension payments to be made outside schemes that will be established under Clause 1. Although the pensions that will be made under the Bill will continue to be among the best, not every last person working in the public sector will want to be part of them. In these circumstances, it is important that alternative provision can be made so that public servants can continue to save for their retirement, where the scheme manager or employer considers this appropriate. The clause therefore allows for pension payments, or other benefit payments, to be made outside the new schemes to people who are entitled to join the schemes made under this Bill.
An example of an alternative arrangement would be the employer making contributions to an individual’s personal pension scheme where that individual is on a short-term contract and does not wish to be part of the public service scheme for just that short period. This is nothing new across public service schemes as a whole. The power already exists for some of the current schemes; for example, in Section 1 of the Superannuation Act 1972.
However, I recognise that there is some concern, expressed by the noble Lord, Lord Whitty, and no doubt shared by others, that these powers may be used to override eligibility for the schemes that will be established under Clause 1. I can reassure noble Lords that the clause will not allow eligibility for the main scheme benefits to be overridden. The scheme regulations will spell out who is eligible to be a member of a pension scheme made under the Bill. This scheme could not be used to remove these eligibility rights. In short, while this clause could allow alternative arrangements to be offered, where these suit an individual’s personal circumstances, it does not allow schemes and employers to make such alternative arrangements mandatory. I hope I have reassured the noble Lord, Lord Whitty, that any fears he has about the operation of Clause 23 with regard to the LGPS are entirely unfounded, and that this amendment is not necessary.
Finally, Amendment 127 seeks to remove the reformed Local Government Pension Scheme from the provisions of the Pensions (Increase) Act 1971. This Act provides for the indexation of pensions in payment across the public sector. The amendment would mean that the provisions of that Act would not apply to the CARE element of the LGPS, instead, indexation of CARE pensions in payment would be linked to the revaluation of active member benefits, which is provided for under this Bill.
I understand that this amendment has been tabled to overcome a perceived problem with the Pensions (Increase) Act, which creates difficulties for uprating pensions in the year the member retires. However, this amendment is both unnecessary and undesirable. It is undesirable in a piece of framework legislation such as this to carve out one particular scheme for special treatment. This is especially the case when the revaluation of CARE benefits in the year of retirement is a calculation that will have to be made by all the new CARE schemes established under the Bill.
Furthermore, it is unnecessary. I am pleased to be able to reassure the noble Lord that the Government already run a CARE scheme: the Nuvos section of the Principal Civil Service Pension Scheme, which makes provisions for civil servants. This issue was addressed when that scheme was introduced, and is dealt with via the scheme rules. Should the noble Lord care to look at the detail of this, I refer him to rule C.9—the retirement index addition—in the 2007 rules for the existing civil service scheme. The reformed schemes set up under this Bill, including the LGPS, will also be able to overcome any technical difficulties with appropriate provisions in scheme regulations. There is no need to make any further provision in the Bill to allow them to do so.
With these reassurances, I hope that the noble Lord will feel able to withdraw this amendment.
Lord Eatwell
My Lords, before speaking to the amendments in this group tabled in my name and that of my noble and learned friend Lord Davidson of Glen Clova, perhaps I may associate myself most heartily with the words of the noble Lord, Lord Sharkey. That should not be surprising as the first part of my Amendment 41 is virtually exactly the same as his amendment, but I must say that he put the argument beautifully. The idea that one could not accept the notion that one-third of pension board members are nominated by members of the scheme seems extraordinary. One-third is a lower limit which should certainly be accepted.
On the pension fund board which I have the honour of chairing there is one independent member; namely, myself. Otherwise one half of the remaining members are nominated by the members of the scheme and the other half by the employer. It is just under 50% because of one independent member. If that can be the case in what is, I hope, a harmonious pension scheme, I do not see why it cannot be appropriate for public sector schemes. The argument that the public sector is widely spread over different locales and can cover lots of different activities is clearly spurious as a private scheme for a very large company would be doing the same thing. That is the argument which was presented in another place, but it has been dismissed by the noble Lord, Lord Sharkey, and he was absolutely right to do so. It really has no substance at all.
I shall deal briefly with the amendments tabled in my name. Amendment 38 is all about transparency and effective governance. Under Clause 6(2)(c) pension boards are obliged to publish information about,
“matters falling within the board’s responsibility”.
As we can see in Clause 5(2), these include compliance with a whole series of aspects of the scheme’s regulations, whether it be an unfunded scheme, a defined contribution scheme or, indeed, a funded scheme with respect to its investment strategy. All the amendment seeks to do is ensure that the financial information associated with the running of the scheme is available to the board members so that they can comply with the requirements set out elsewhere in the Bill. If they do not have all the financial information they need, how can they fulfil the responsibility of ensuring that the scheme complies with regulations and other legislation relating to governance? Surely having knowledge of the financial structure and oversight thereof is key to this. We learnt from the Financial Services Bill that oversight does not mean control of but simply access to information about, so if this Bill is to be consistent with that Bill, oversight here would mean access to information that will allow the board to fulfil its responsibilities.
Amendment 39 similarly is devoted to transparency and requires that a policy governing the appointment of board members should be published. High quality board members are absolutely essential if public service pension schemes are to be well run. It is vital that the process for appointment is clear and well considered. It is therefore important that this is a transparent process so that members are reassured as to the quality of their board members. This will also promote fairness in appointments. Given that under Clause 5(4) scheme managers have an obligation to ensure that board members do not have any conflicts of interest, a clear and open appointment process with established criteria for appointment will aid scheme managers in fulfilling that statutory obligation. All Amendment 39 does is say, “Publish your policy on your appointment so that everybody knows what the criteria are, how they can apply, and so on”.
Regarding Amendment 41, I have already referred to the part which deals with the one-third of board members, and the noble Lord, Lord Sharkey, has put it better than I could. Amendment 41 also includes the requirement that there be one independent member. It is enormously valuable to have independent members, who often have professional expertise, to assist on pension fund boards. The report of the noble Lord, Lord Hutton, made it clear that it would be desirable for pension boards to have independent members. The amendment seeks to ensure that the recommendation of the noble Lord, Lord Hutton, is taken into account.
Finally, Amendment 42 uses exactly the same definition of member nominee and independent board member as the Pensions Act 2004 and provides for a nomination process for board members. In that respect, it simply mirrors the Pensions Act 2004, and in particular mirrors the definition of an independent board member, referring specifically to the nature of their independence. The criteria set out in Amendment 42 are those which we have already accepted for the private sector, and it seems entirely appropriate that they should fit here. These amendments are to provide transparency, which will enable the boards to do their jobs better. Transparency over an appointments process and a nomination process will enable the boards to be better constructed.
Lord Newby
My Lords, I begin by speaking to government Amendment 40. It deals with matters related to those that have been raised by the noble Lords, Lord Sharkey and Lord Eatwell. Amendment 40 delivers the Government’s policy commitment for scheme members to be represented on pension boards. Our amendment explicitly requires scheme regulations to provide for members of a public pension scheme, and any connected scheme, to be represented on the pension board. Unlike the amendments proposed by the noble Lords, Lord Sharkey and Lord Eatwell, it does not specify a proportion of board members that must be member representatives, nor does it say how member representatives are to be appointed to the pension board.
The noble Lord, Lord Sharkey, asked whether draft regulations could be made available to Members of your Lordships’ House. I confirm that we will make them available to all Members who have spoken in the debate today. In our view, these matters are rightly left to scheme regulations. In their amendments, the noble Lords have broadly sought to replicate the requirements that relate to boards of trustees in other occupational pension schemes. Amendments 34 and 41 seek to adopt the requirement for at least one-third of board members to be members or their representatives in trust-based schemes. Amendment 42 seeks to adopt a similar process for nominating member representatives to the board.
The noble Lord, Lord Sharkey, asked me to explain our rationale from first principles. I am not sure whether I shall go quite that far back, but I will attempt to explain it. We believe that the amendments fail to recognise the major differences between the public service pension schemes and the trust-based schemes that these provisions were designed for. For example, the effect of Amendment 42 would be to require Norfolk County Council to allow every member of the local government pension scheme in England and Wales, directly or indirectly, to participate in the selection of member representatives to their pension boards. The same would apply to each of the other 88 funds in the Local Government Pension Scheme. This is clearly unintended but it serves to highlight the fact that the public service schemes are indeed different. A one-size-fits-all process for nominating member representatives to pension boards would not, in our view, be appropriate, nor is it appropriate to set a quota. The public schemes are not directly comparable to trust-based pension schemes. The public service schemes are significantly bigger than most occupational pension schemes and many involve multiple and diverse employers. For example, there are over 5,000 employers in the LGPS in England and Wales. Those are not just local councils but also local charities and housing associations. That broad range of interests needs to be represented on the public service pension boards too.
Consequently, our view is that imposing a requirement for one-third of pension board members to be members, or their representatives, could lead to them being the largest interest group on the pension boards. Of course this is not an issue in private sector schemes, where there is often only a single employer to accommodate on the trustee board. The Bill already provides the necessary flexibility for the details to be agreed in each scheme, following consultations with members and other interests. This approach will allow the pension board membership to be tailored to the varying structures of each of the public schemes. The pension boards will then be able to appropriately reflect the range of employees and employers in each scheme. We believe that this is the right approach.
One of the other amendments in the name of the noble Lord, Lord Eatwell, relates to public pension boards having an independent member. The noble Lord, Lord Hutton, did indeed say in his report that it was important that pension boards include independent members. Although we accept that independent members can play a role in pension boards, we do not see a case for mandating each pension board to have such members. The reasons for mandating independent trustees in the private sector do not, in our view, flow through to the public sector schemes. Independent trustees reinforce the separation of pension schemes from the employer in the private sector and, as we have discussed previously, we are not convinced that this is required in the public scheme.
Amendment 39 would require a scheme manager rather than scheme regulations to determine the policy governing the appointment of pension board members. Clause 5 provides that it is the scheme regulations that would provide for the establishment of a board. Within that, schemes are likely to set out the detail of a board appointment process in the scheme regulations. If schemes determine to delegate this matter to scheme managers, then scheme regulations could require the scheme manager to publish these matters. It would be wrong for the Bill to prejudge the outcome of scheme-level discussions about how to best constitute and appoint pension boards in each of the schemes.
Having said that, we agree with the sentiment of the amendment. Pension boards must be transparent and representative of the interests of stakeholders, both members and employers. That is why Clause 6 already requires the publication of details of pension board membership and the board’s responsibilities.
In responding to Amendment 37 from the noble Baroness, Lady Donaghy, I hope she will not mind if I repeat what I said at Second Reading: the Government believe that the Local Government Pension Scheme,
“is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits”.—[Official Report, 19/12/12; col. 1586.]
I am well aware that Unison has long argued that the scheme is not compliant with the European directive, and I recognise that it feels strongly on this issue, but we simply do not agree. The reasons why have been set out in a number of letters from Ministers to Unison over the past five years, not just the past two.
The previous Government implemented EU directive 41/2003 through the Pensions Act 2004. As that Act relates to the governance and administration of pension funds, that legislation is therefore already within the scope of Clause 5(2). I assure the noble Baroness that Amendment 37 is therefore not necessary. I hope that she will feel reassured and not press it at the appropriate time.
The final amendment in this group is Amendment 38, tabled by the noble Lord, Lord Eatwell. This amendment was considered in another place and resisted on the grounds that its application would be inappropriate. One of the key concerns that we have with this amendment is that it seeks to give the pension board of a funded scheme responsibility for the oversight of investment management. The existence, performance or level of any local authority pension fund has no bearing on the benefits that members receive.
Lord Newby
“( ) requiring members of the scheme and any connected scheme to be represented on the board.”