Pension Schemes Bill

Lord Moynihan of Chelsea Excerpts

Monday 23rd February 2026 Grand Committee

Is the Minister prepared to look at this proposal constructively? Even the markets would be pleased, given the fiscal crisis we face if nothing is done to tackle this problem. I beg to move.

[Lord Moynihan of Chelsea (Con)]

My Lords, defined benefit schemes have been described as an immoral bet upon an uncertain future. Long service in the public sector can mean getting, as my noble friend stated, a pension of two-thirds of lifetime salary. That is inflation adjusted, and for as long as ye shall live. Some noble Lords in this Room will be beneficiaries of these or similar schemes, and I therefore hope that my remarks will not be received ungenerously and will not be taken amiss, because we cannot afford these schemes. The cost of them will inevitably, and soon, spiral out of control.

As long ago as 2010, the very reasonable and thoughtful noble Lord, Lord Hutton, was brought in to address this major problem. His inquiry had nine advisers; seven of them, I think, were in receipt of these public sector schemes. There was no representative of the taxpayer who pays for these schemes. The expert Neil Record was asked to be an adviser but was then disinvited. I put in two 20-plus page submissions to the Hutton commission but received zero acknowledgement. The outcome of the exercise was a few valuable tweaks but, allegedly by pre-agreement, no change in the overall money expected to be paid out.

The Hutton review’s conclusion that these schemes were a good thing was not entirely surprising. The report admitted that these schemes were costing us 1.9% of GDP but asserted that the cost would settle at 1.2%. Did it? It did not. In 2024, current costs were still 1.9% of GDP, but the OBR now says they will decline to 1.4%. Again, will it? It will not. Anyway, even 1.9% of GDP is outrageous. This is an extra pension for life, enjoyed by a privileged 20% of the population that they have awarded to themselves, and that the remaining 80% of the population who actually pay the taxes that fund this 1.9% of GDP scheme do not and will not get.

One Hutton report conclusion is that the Government must honour these promises in full, yet countries around the world have already reneged on public sector pension obligations. It is important to understand why they are having to do this and why we might have to. In the UK, current outgoings from these schemes are, as my noble friend said, £57 billion a year. Where does that money come from? There is no pot of funds accumulated to pay it. It comes from the money being paid in from currently employed public servants, assertedly to fund their future benefits. Just now, entirely coincidentally, the money paid in is also more or less £57 billion. That is right; there are two entirely separate £57 billion amounts—money paid in by one group and paid immediately out to another.

Let public servants currently employed beware that the money they are paying in, that most of them believe is to fund their future pensions, instead goes straight out to others. It does not have to fund a penny of their future pension. It is a Ponzi scheme just like Bernie Madoff, no different. While the flows currently appear to be in balance, that is just a momentary coincidence. Soon, as more public servants retire, outgoings will start getting increasingly larger than incomings. The £57 billion paid in each year will stay much the same or even decline if the number of public servants employed declines.

By 2060, as my noble friend Lady Neville-Rolfe said, the amount paid out will have risen to over £130 billion a year, which is a £37 billion gap. The £130 billion paid out in 2060 would be as low as that only if we were to stop all these schemes right now. If we do not, future money paid out will rise exponentially with the gap widening even further. That is what happens with a Ponzi scheme: it becomes unsustainable eventually. The present value of commitments to date is somewhere between £1.5 trillion and £2 trillion—not much smaller than our entire GDP. If we keep the schemes going, who knows what that number will rise to over time? It could be £4 trillion or more, a colossal sum.

What happens when people start to live even longer? When these schemes were set up, the average retiree lived just three or four years beyond retirement. Now people live to over 80—15, 20 or more years beyond retirement. That is why these schemes are now entirely unaffordable. When we start to live even longer than we do now, as we will, the cost will become astronomical. But the commitments to keep paying as long as ye shall live are being made right now, at a time when we have no idea what medical advances will be made and nor, therefore, what we will end up having to pay. That is what makes these schemes so reckless: a risky, unknowable future with undercooked analysis that passes an enormous, concealed cost to future taxpayers.

What would a moral, future-proof scheme look like? Much like what I proposed to the Hutton commission all those years ago in 2010. First, we must all be in it together, with no one law for the public sector elite and another for the rest. Secondly, therefore, the only defined benefit scheme should be for state pensions. Thirdly, accordingly, all public sector schemes should be moved instanter to defined contribution. Fourthly, all obligations—funded and unfunded—should be owned up to, not hidden as now, and published as part of the reported national debt. Fifthly, steps should be taken to fully fund existing commitments and not take them out of other pensioners’ contributions. If things get worse, perhaps let us say there should be a 75% tax rate on all public sector pensions above £30,000 a year.

Most private sector companies closed their defined benefit schemes in the 1990s and 2000s. Had they not, their companies would have gone bankrupt. The public sector has long been in precisely the same situation. As I say, a possible impediment to change is that almost all MPs, and indeed some Members of this House, are beneficiaries of similar schemes. Just one MP, Jacob Rees-Mogg, always turned the benefit down, as a matter of principle. We need both our elected and unelected legislators to show that same magnanimity of spirit in rectifying this situation.

--- Later in debate ---

[Lord Davies of Brixton (Lab)]

I am glad that we are having this debate now, but only as a taster for a proper debate at a proper time—I am quite surprised that the clerks accepted this amendment as being within the scope of the Bill. I have no objection to a debate on public service pensions; I encourage one. I feel totally comfortable with having a debate on public service pensions, because I think they are eminently defendable. I accept very little of what the noble Lord has said, and the doom and the gloom that has been expressed, and a proper opportunity to have that debate would be very welcome, but I shall focus on the need for a review.

Of course, as we have been told, my noble friend Lord Hutton of Furness undertook an independent review of public service pensions in 2010-11. That review was established by the coalition Government; they set it up, they accepted its recommendations and they gave a guarantee. In a Written Statement on 20 December 2011 about Civil Service pension arrangements, the noble Lord, Lord Maude of Horsham, who was then an MP and Minister for the Cabinet Office, gave

“a guarantee, outside of the scheme designs parameters”—

that is what the benefits were—

“of no further reform for the next 25 years”

I do not know what people think a guarantee means, but to me it means no more changes for 25 years. Of course, the Statement was repeated in your Lordships’ House and the noble Lord, Lord Wallace of Saltaire, repeating the Statement, also gave a guarantee for the next 25 years. I mentioned to both noble Lords that I would be quoting their words in this debate, and it would be worth asking them what they think the word “guarantee” means. A guarantee was given to public service workers as part of their terms and conditions of employment. It was not just a policy objective; it was part of their terms and conditions of employment. I think that to make changes without breaking the guarantee would be an extremely bad approach to the settlement.

I agree with very little of what was said criticising public service pensions, but I think there is a need specifically to understand the arrangements. First, retirement age will increase in line with state pension age. That is an adjustment mechanism. The more important adjustment mechanism is that there is a cap on employer costs, and it is members who stand the risk of having their benefits cut if the cost escalates. None of that was reflected in the remarks made so far. That cap, as has been explained, is calculated using a discount rate, and that discount rate is determined in a way that adjusts for economic changes. As mentioned, a higher discount rate reduces the cost of future benefits. At the same time, a lower discount rate increases the cost of benefits. If the cost of benefits increases, as part of the settlement that was reached, members’ benefits have to be cut or their contributions increased. That is the nature of the settlement that was reached in 2011. I think it is totally wrong to mislead the Committee about the nature of the deal that was done. Am I allowed to say “mislead”?

[Lord Moynihan of Chelsea (Con)]

I hope the noble Lord will withdraw that word. I do not recognise what he is saying. My noble friend was talking about the NHS. Was it NHS workers who were required to put in that extra money?

[Lord Davies of Brixton (Lab)]

It is interesting. I thank the noble Lord for his intervention. Okay, I withdraw the word “mislead” and I apologise for using it, but the full picture was not given to members of the Committee about the nature of the public service pension arrangements. Member contributions are adjusted and have been adjusted because of increasing costs. In fact, at the valuation before last, because of the way the economic indicators work, the cost actually fell, and the last Government had to push through urgent legislation in order to stop members’ benefits being increased. I will not use the word “fiddle”, but the terms were adjusted to protect the employer rather than giving additional benefits to members, so if anyone has a complaint about the way this system has worked, it is the members, even before we get to the problem of the 10-year guarantee that arose.

As I said, I would welcome the opportunity of a proper debate defending the way in which public service pensions are provided in accordance with the Hutton report as agreed by the coalition between the Conservatives and the Liberal Democrats. The one thing on which I agree with the noble Lord is that we need pension arrangements in which we are all together. I agree totally. Given that the underlying question is what sort of incomes we want people to have in retirement and whether we want them to be adequate, I think the objective should be to offer people in the private sector the opportunity to accrue pensions on the same terms as those provided to people in public service. I will be setting that all out in my submission to the Pensions Commission.