Pension Schemes Bill

Baroness Neville-Rolfe Excerpts

Monday 23rd February 2026 Grand Committee

Moved by

[Baroness Neville-Rolfe]

217: After Clause 117, insert the following new Clause—
“Review of public service pension schemes(1) The Secretary of State must, within 12 months of the day on which this Act is passed, conduct and publish a review of the long-term affordability, intergenerational fairness, fiscal sustainability, and accounting treatment of public service pension schemes.(2) In conducting the review under subsection (1), the Secretary of State must have regard to—(a) the current and projected cost to the Exchequer of such schemes,(b) their affordability in the context of long-term public finances,(c) the impact of such schemes on different generations of taxpayers and scheme members,(d) the implications of demographic change, including longevity and workforce participation, for the sustainability of such schemes, and(e) the manner in which the liabilities associated with such schemes are recorded, disclosed, and accounted for within the public sector balance sheet and related fiscal reporting frameworks.(3) In preparing the review, the Secretary of State must consult—(a) the Office for Budget Responsibility,(b) the National Audit Office,(c) His Majesty’s Treasury, and(d) such other persons or bodies as the Secretary of State considers appropriate.(4) The schemes to which subsection (1) applies are—(a) the NHS Pension Scheme,(b) the Teachers’ Pension Scheme, (c) the Civil Service Pension Scheme,(d) the Armed Forces Pension Scheme,(e) the Police Pension Scheme,(f) the Firefighters’ Pension Scheme, and(g) any other public service pension scheme designated by the Treasury by regulations as operating on an unfunded or pay-as-you-go basis.(5) The review must be laid before both Houses of Parliament.(6) Nothing in this section affects any pension entitlement accrued in respect of service.”Member’s explanatory statement
This new clause would require the Secretary of State to conduct and publish a review of the long-term affordability, intergenerational fairness, fiscal sustainability, and accounting treatment of public service pension schemes.

[Baroness Neville-Rolfe (Con)]

My Lords, Amendment 217 would require the Secretary of State to conduct and publish a review of public sector pensions. I am very grateful to my noble friend Lady Noakes for her support and am only sorry that she has other commitments this evening.

I have always worried about the cost and sustainability of such pensions. I am a beneficiary of a modest one myself from my years in the Civil Service, and it is generously uprated every year.

Interestingly, there is a lacuna in the work the Government are undertaking on pensions. We have the Pension Schemes Bill, which we are busy scrutinising and which addresses problems with local government pensions and value for money in private schemes; we have the Pensions Commission review, led by this House’s eminent pensions expert, the noble Baroness, Lady Drake; and we have another independent review of the state pension age in progress. I expect that that review, like the one I conducted some years ago, will recommend an increase in the pension age in due course, and ways to encourage people to stay in employment for longer—for many good reasons.

However, there is a glaring gap. As far as I can see, none of these initiatives will address the sustainability of unfunded public sector pensions, their accounting treatment, or how best to tackle the issue of intergenerational unfairness that is an almost inevitable result of the fiscal unsustainability of these schemes. They include pension provision for some of the most important public services: the NHS pension scheme, the teachers’ pension scheme, the Civil Service pension scheme, the Armed Forces’ pension scheme, the police pension scheme and the firefighters’ pension scheme.

The numbers are big. There are over 3 million active members in the NHS, teachers’, Civil Service and Armed Forces schemes, 2.2 million deferred members and 2.8 million pensioners. That is a total of 8 million individuals. As populations grow older, the proportion receiving gold-plated defined benefit pensions will grow if nothing is done.

This is a virtually forgotten area of inquiry, perhaps because all of the policymakers and public sector trade unions are beneficiaries. However, since I tabled my amendment, there has been a useful report on the subject by Policy Exchange. I have also discussed the problem with the Centre for Policy Studies and with the economist Neil Record. I am glad that my noble friend Lord Moynihan of Chelsea is speaking today, as he has addressed this subject in his book, Return to Growth. As we will no doubt hear, he is very passionate about the unfairness that this represents.

Most people are aware that Britain has a huge national debt, which already sits at £2.9 trillion—97% of GDP—and is growing. However, as Neil Record has argued, there is a second national debt, the public sector pension debt, reflecting the cost of public sector workers’ defined benefit pensions. This is kept out of the limelight but, on government figures, the past five years’ average public sector pension liability as a percentage of GDP is 74%. That is on a scale that approaches the order of magnitude of the actual national debt. At the heart of the problem is the fact that this is a very long-term issue, like the actual national debt, with reform virtually impossible to reconcile with the electoral cycle.

I need to explain some of the complexities. On the surface, things look fine. In 2025-26, according to PESA 2025, there was a total of £58.6 billion-worth of public sector pensions being paid to about 3.5 million pensioners—that is a CPS estimate. This compares to a total of employer and employee contributions of £57.3 billion, which has dramatically risen in recent years. So, apparently, all is well.

But I am afraid that is not the case. The sums paid in pension contributions by employees do not go towards their pensions but to pay the pensions of those already retired. There are no savings to pay future retirees. I know that the figures in the OBR’s Fiscal Risks and Sustainability report of July 2025 are lower than Mr Record’s, but it is partly a question of how you do the calculations. Estimates on longevity and long-term public sector salaries are particularly difficult to predict.

My main point today is that, on any credible estimate, the numbers are frighteningly large. Something must be done. Moreover, the situation is getting worse, as commitments grow over time. It is unfortunate and regrettable that the scale of the problem is not properly reflected in the national accounts, although this is very difficult to unravel, even for those who are reasonably financially literate.

It is hidden by a combination of the accounting conventions and the moves in interest and gilt rates, which have made things look temporarily much healthier than they are. One of the most important variables in pensions is the interest rate applied to notionally invested contributions. Higher interest rates result, according to standard accounting conventions, in lower pension costs, and, of course, vice versa. However, when the facts are unravelled, even if no new pension commitments are made from this point—that is, if all the current schemes were closed to new accruals—existing public sector pension payments will continue to rise until the early 2060s, which, on best estimates, will by then amount to some £130 billion a year, with no capping mechanism of any sort.

You will struggle to find any acknowledgement of this in our national accounts. The Government use a long-standing convention called SCAPE—superannuation contributions adjusted for past experience. I will not go into the detail, but it is uniquely vulnerable to manipulation and, according to informed opinion, has been manipulated with the use of artificial rather than market-based interest rates.

I have also discovered an allegation that there has been a surprising adjustment in the NHS arrangements—the largest of the public sector pension schemes. So, when employer contribution rates were raised, as they certainly needed to be, from 14.3% to 20.6%, the then Government decided to finance the gap of 6.3%—allegedly temporarily—by paying that amount directly from the Treasury rather than charging the NHS employing organisations. In 2024-25, the gap rose to 9.4%, or £6.6 billion per annum, which the Government have now decided to fund permanently. Although there is no overall impact on the public finances, this sets a poor precedent of obscurity in an already obscure system. So, can the Minister kindly let us know the justification for this decision to fund this gap permanently?

--- Later in debate ---

[Baroness Sherlock (Lab)]

My Lords, I thank the noble Baroness, Lady Neville-Rolfe, for introducing Amendment 217, which would require the Secretary of State to produce and publish a review of public service pension schemes, focusing on different aspects of the cost, affordability and accounting treatment of these schemes. I remind the Grand Committee that I am a member of the parliamentary pension scheme, and therefore of my appreciation of the work of the noble Viscount, Lord Thurso.

The noble Baroness is quite right to focus on the affordability of these schemes and what this means for intergenerational fairness, given that unfunded public service pension schemes pay out over £60 billion in pensions and lump sums each year and are often the single largest liability in the whole of government accounts.

However, as has been indicated already, and as the noble Baroness will know only too well, her party conducted a major review during the coalition Government, in the form of my noble friend Lord Hutton’s Independent Public Service Pensions Commission. That led to major reforms, including the new schemes to which all active members of the main schemes are contributing today, with a move from final salary to career average design, higher pension ages and higher member contribution rates. Due to the McCloud judgment and the resulting choice exercise for affected members, those members may have been building up only since April 2022, meaning that these major reforms are only now fully bedding in for all members. As my noble friend Lord Davies noted, the then Government committed to the 25-year guarantee, in effect committing to no further major reforms to public service pension schemes until 2040.

The proposed review would be conducted by the Secretary of State for Work and Pensions. However, I note that statutory public service pension schemes are the responsibility of the Chancellor of the Exchequer, and I know that the Treasury works closely with the OBR and the NAO on this policy area already.

The centrality of the questions that the amendment would require the review to consider means that much of this information is regularly published already. For example, the OBR publishes a forecast of the cash-flow cost of public service pensions over the coming years as part of its forecast at every fiscal event, including spending on pensions and lump sums, income from pension contributions and the net balancing payment to or from the Exchequer. The OBR also publishes long-term projections of spending on public service pension schemes as a share of GDP as part of its fiscal risk and sustainability reports. As noted, the most recent forecast from September 2024 projects that spending will decline from 1.9% of GDP to 1.4% of GDP over the next 50 years.

Demographic changes as a result of longevity or migration are taken into account in the OBR’s long-term analysis. The sensitivity of scheme liabilities to longevity is central to the four-yearly valuation reports used to set employer contribution rates across schemes. Both the valuation reports and the whole of government accounts contain detail on different accounting treatments of scheme liabilities and how to interpret the resulting headline figures. Given that all this information is regularly published already, and the reforms to public service pension schemes that have already been implemented, a government review into the affordability of these schemes would merely collate existing information in one place.

Let me address some of the specific questions that were raised, turning first to the treatment of pensions and the whole of government accounts. In recent years, liability has decreased significantly, falling from £2.6 trillion in 2021-22 to £1.4 trillion in 2022-23 and £1.3 trillion in 2023-24. The whole of government accounts report is fully transparent in explaining that these changes were driven by an increase in the applicable discount rate rather than changes in the amount of pension being accrued by scheme members. The whole of government accounts reports present this liability in accordance with the international financial reporting standards. There are no plans to change that approach and nor do we think there should be.

However, I am aware that members of the PAC have asked whether this liability could be presented on a more permanent basis, to show how it would change in the absence of changes to the discount rate, to aid user understanding. The Treasury is currently exploring options to present pension liabilities on a constant basis. To be clear, any such presentation would be purely supplementary and would not affect the underlying pension liability calculations or the way those are presented in the financial statements.

The noble Baroness, Lady Neville-Rolfe, asked why the Government are funding the gap permanently. The answer is that current contributions reflect the cost of current employment—pensions to be paid in the future. Current contributions are not intended to be and do not relate to current pensions in payment, which were earned years or indeed decades ago. So current pension costs reflect pensions earned. This is therefore not an appropriate basis to consider affordability. Traditionally, the central measure for Governments has been pensions as a proportion of GDP.

On whether it is right to be paying these kinds of pensions, I am very grateful to the noble Viscount, Lord Thurso, for his stirring defence. It is really important to recognise that, sometimes, this is discussed as though all public sector employees are calling in huge salaries and doing little for them. He defended how so many people in the public sector are driven by vocation and a calling into public service: they do things to serve and often have lower salaries than they might have elsewhere. I pay tribute to all those who are in that position.

It is true that, compared with the private sector, remuneration in the public sector is weighted towards pension. This is why public service pension schemes are so central to the Government’s fiscal forecasts. However, the noble Viscount is quite right: public sector remuneration has to be considered in the round, across pay and pensions. That is why pension provision is specifically taken into account as part of the pay review body process across the major public service workforces.

It is also important to distinguish between the generosity and cost of the schemes and their DB design. My noble friend Lord Hutton noted in his review for the coalition Government that they are a large employer capable of bearing the risks inherent in a DB design. It is thus in a different position from other employers. In a sense, cutting public service remuneration, whether from pay or pensions, would allow any Government to score savings for the Exchequer, but the fact is that reward packages for each public sector workforce have to be designed to maintain the required levels of staffing and to deliver the required public services.

Finally, it is worth remembering that the changes made following the Hutton review were significant. As I said, the scheme design changed from final salary to career average; pension ages were increased to state pension age for most schemes and to 60 for the police, firefighters and the Armed Forces; member contribution rates were increased across schemes, except for non-contributory Armed Forces schemes; and other aspects of scheme design were modernised, for example, in supporting flexible retirement. At the time, it was estimated that those reforms would save £400 billion over 50 years. Separately from the Hutton reforms, the then Government also switched the indexation of the scheme from RPI to CPI, in line with other forms of spending.

This has been a very interesting debate but, as I have said, most of the information that has been sought in the review is out there already, so such a review is not currently worth while. I hope the noble Baroness can withdraw her amendment.

[Baroness Neville-Rolfe (Con)]

My Lords, I am grateful for the support I have received this evening, particularly from my noble friend Lady Stedman-Scott and the noble Baroness, Lady Bowles, who, like me, cares a lot about transparency and favours a review. I listened with care to what the Minister said, and will look carefully at Hansard, but I do not think that the arrangements are very easy to understand, nor do I think that the OBR or government accounts are easy to understand or transparent.

I tabled my amendment because I wanted to air the problem of the unsustainability of public sector pension schemes as I see them. My noble friend Lord Moynihan described the current schemes as a Ponzi scheme, which was very strong, but he is right that we have a sustainability issue. That is in part caused, as has been mentioned, by the happy fact that we all now live longer. We face this issue in all our pension discussions and we cannot hide from it.

The noble Lord, Lord Davies of Brixton, helpfully agreed that a debate on these issues is needed. He and I go back, and we debate these things, which is very useful, but I was surprised to hear that a 25-year guarantee can be given by any Government. However, as has been said and is true, contributions by employers and employees in the public sector have increased as a result of Hutton, but we still have an unsustainable situation, so we need new thinking and certainly a review. I have been careful not to make any recommendations today, but to highlight the issues as I see them. It is wrong that this important Bill sidesteps the issue that is storing up problems—for our children and our grandchildren—from the pay-as-you-go schemes that we have.