Public Service Pensions: Government Contributions

Gerald Jones Excerpts

Wednesday 19th December 2018 Westminster Hall

[Gerald Jones (Merthyr Tydfil and Rhymney) (Lab)]

I beg to move,

That this House has considered the reduction in Government contributions to public service pensions.

It is a pleasure to serve under your chairmanship, Sir Christopher. This debate is important to highlight the impact, across the public sector, of the reduction in Government pension contributions.

The Government are implementing a further reduction in the discount rate for public service pension schemes from 2.8% to 2.4%, which will take effect in 2019-20. Clearly, the reduction in Government contributions to public sector pensions is going to increase the strain across the public sector. Although the changes will have an impact across public services, for the purpose of the debate I will focus mainly on the police and fire services.

The reduction in Government contributions to public sector pensions will clearly add further strain to our frontline services, which have faced huge financial challenges, following eight years of Tory austerity. By 2021, police services will be expected to find around £420 million in order to set a balanced budget—that could mean losing a further 10,000 police officers. The change is also estimated to cost fire services £150 million by 2023, which is roughly equivalent to the cost of running 150 fire stations for a year.

To provide a bit of background, in the 2016 Budget the Chancellor announced a discount rate reduction from 3% to 2.8%, with effect from April next year. The Treasury decided more recently, however, that a further reduction—to 2.4%—was required. In September 2018, the Government said that the Departments and devolved Administrations would need to meet, in full, the increase in costs in the 2016 Budget announcement. The Treasury has advised that public bodies will be supported in meeting unforeseen costs in the 2019-20 financial year, when the changes first take effect, but compensation beyond the first year cannot be guaranteed.

Public service providers would have to increase employer contributions to the Treasury with no guarantee that additional moneys would be compensated beyond 2019-20. If public bodies were not compensated for the increased contributions beyond the first year, that would mean an indirect spending cut. Affected employers will therefore be forced to make costly changes without any certainty that Government funding for frontline services will be proportionately increased in years to come.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Gentleman for giving way and for securing this important debate. Does he agree that although it is right and proper that NHS funding is ring-fenced until 2023-24, other frontline services, such as firefighters and the police, must also have the same protection as a matter of right, in recognition of the type of work that we call on them to carry out—to protect and serve?

[Gerald Jones]

I agree. All our emergency services do important work on our behalf, and that work needs investment. They cannot do that important work while worrying about how they are going to fund it.

There are significant concerns that the Treasury has introduced the changes as back-door spending cuts for already tightly squeezed public bodies and those delivering public services. In 2016, the trade union for senior civil servants, the FDA, said:

“It’s only three months since departmental budgets were set and yet departments are now expected to deliver an additional £3.5bn of savings in 2019/20 through another efficiency review…By announcing a change to the discount rate on public sector pensions—without any consultation—they are effectively removing a further £2 billion from public services and transferring it to the Treasury to give the illusion of a surplus”.

[Stephanie Peacock (Barnsley East) (Lab)]

I congratulate my hon. Friend on securing the debate. On the cuts that he refers to, the South Yorkshire fire and rescue authority concluded in its financial plan that combined with the cuts and the 10 years of austerity, the pension contribution hikes will leave it no choice but to reduce fire services, with an increased risk to people and property as a result. Does he agree that the pension changes pose a clear and direct risk to the safety of our constituents?

[Gerald Jones]

My hon. Friend makes an important point. Emergency services, such as firefighters and the police, are highly regarded and do important work on behalf of all our constituents. Safety will be an issue if the finances are not put in order to ensure that the accounts allow firefighters to continue their important work.

Earlier this year, the trade union Prospect said:

“Public sector employers will have to find additional resources to reflect these changes…However there is a real danger that Treasury will not recycle this money back to public service providers; that this process will, in effect, be a hidden cut to public services.”

As I said earlier, the discount rate change is estimated to cost firefighters £150 million by 2023, based on figures from the Office for Budget Responsibility. That is the equivalent of running 150 fire stations for a year. In 2017-18, employer pension contributions accounted for 7% of the total net expenditure among fire and rescue services in England, and for 7.6% of it in Wales. In England, local government settlement funding for the fire authorities is forecast to decrease by 15% between 2016-17 and 2019-20.

The impact on police is equally stark. By 2020-21, the police will face a financial black hole as their pension liability rises by around £420 million. The chair of the National Police Chiefs Council has warned that it could amount to a loss of a further 10,000 police officers, because the police are legally obliged to set a balanced budget. The recently announced settlement offers no certainty on the issue.

The National Police Chiefs Council is reported to have sent a formal letter to the Treasury saying that it will seek a judicial review of the Government’s proposals, and it is protesting against the fact that forces will have to find an extra £417 million in just two years’ time to pay for an increased minimum contribution to officers’ pension pots. That figure is set to rise from 2% to 3% by 2019 and, as I said, equates to the funding of around 10,000 officers a year. In response to an urgent question on 6 November about liabilities for the police pension schemes, the Minister said that funding arrangements for 2020-21 onwards would be discussed as part of the spending review.

I have covered the national picture, but I will highlight the local impact on my constituency. Two-thirds of my constituency is covered by South Wales police. The gap in that force for 2020-21, and for every year after, is likely to be around £7 million. If that burden is dumped on police forces, it will effectively be another massive cut to police budgets and lead to a further cut in police numbers. Those changes come on top of the additional £20 million that South Wales police have to find for local policing, having lost about a third of the police grant since 2011. In south Wales, the changes would be the equivalent of 130 fewer police officers on the streets, on top of the 444 officers who have already been lost since 2010.

The Home Office appears to have accepted that the police budgets are under severe constraints and, in the absence of central Government money, flexibility is being granted to raise local police precept to help to offset an enormous sustained challenge to police funding from seven years of cuts. Raising ever-increasing amounts from council tax payers, however, is not sustainable. Will the Minister fight to restore police funding to sustainable levels in the planned comprehensive spending review? Will he promise that the gap in funding for police pensions will be paid in full by the Government, having accepted that the police pensions costs increases cannot be funded from existing police budgets for 2019-20? I ask the Minister to note that the Home Affairs Committee said that the police funding formula must be addressed urgently. Can he assure us that that will also be tackled in the comprehensive spending review in 2019?

The other third of my constituency falls within the area of Gwent police. In cash terms, the changes add £2 million of extra costs to its budget in 2019-20—although some of that will be offset by the Home Office—and a further £3 million of extra costs in 2020-21. That totals around £5 million, recurrently. A recurrent pension pressure of £5 million for the Gwent force equates to 100 police officers in Gwent communities. It would be necessary to increase the local precept in Gwent disproportionately, by about 8% by 2021. Such figures are not sustainable and would transfer ever more pressure to local council tax payers.

As I said at the start of my contribution, the changes will impact across the public sector. I have focused on police and fire, but I will highlight briefly the effect of the recent changes to the teachers’ pension scheme on universities throughout the UK. The Treasury appears to have shown little awareness of the significant impact that those changes would have on universities and students, and has failed to commit any additional support for the institutions affected. I accept that the Minister will respond on behalf of the Home Office, but I hope that he will convey our concerns to his colleagues. I understand that the Government themselves estimate that the changes will mean additional pension costs of £142 million, shared across only 70 of the modern, or post-1992, universities. That will clearly place huge strain on budgets that are already under significant pressure.

Today, I hope that the Minister will be able to offer some good news to our overstretched public services. We all acknowledge, I know, that public services—our public servants—and our emergency services in particular, work incredibly hard on our behalf and deserve our thanks and appreciation. However, public services cannot survive on thanks and appreciation.

[Chris Stephens (Glasgow South West) (SNP)]

Does the hon. Gentleman not share my concern about the lack of consultation with the devolved Administrations? He might have seen correspondence about that, because the lack of consultation is actually against the UK Government’s statement of funding policy.

[Gerald Jones]

I very much agree with the point made by the hon. Gentleman. We are talking about significant amounts of money, and maximum consultation should be required, at the very least. As I have said throughout my contribution, such figures are too unsustainable to be transferred to local budgets anyway.

As I said, our public services cannot survive on thanks and appreciation. Investment is required to sustain the services that we already have. The Government need to come to the table and outline what support they will offer to address the problem. Our public services—our emergency services—have suffered enough.

--- Later in debate ---

[The Minister for Policing and the Fire Service (Mr Nick Hurd)]

It is a great pleasure to serve under your chairmanship, Sir Christopher. As a humble foot-soldier in the Government, it is not for me to reason why I drew the straw for this debate. I assume it is because I am the Minister for Policing and the Fire Service, and I understood that the primary concern of the hon. Member for Merthyr Tydfil and Rhymney (Gerald Jones), as was reflected in the debate, was the impact on emergency frontline services. It is a great pleasure to respond to the debate, and I congratulate the hon. Gentleman on securing it. It is an important debate, because it throws a spotlight on two important issues.

The first is how we ensure that public pensions are funded in a sustainable way to protect the value of the pensions of those of our constituents who work in the public services; I know the Labour party cares about that and I would not want to give the impression that it does not. It is entirely legitimate to probe and ask questions about the impact, particularly on emergency frontline services, which we recognise on a cross-party basis are stretched and under pressure. This is an entirely legitimate debate and I welcome it.

The hon. Gentleman rightly asserted that our emergency services deserve our thanks and respect—particularly at this time of year but, frankly, every week and every month of every year—but they also deserve a decent pension, and our constituents as taxpayers deserve full debate and reassurance on how those pensions will be funded in a fair, sustainable way that strikes the right balance between the contributions of the central taxpayer and the local employer. That is what underlies the Treasury position, as I will explain. I hope to reassure the hon. Gentleman and others that the Treasury, which is not here to explain itself today, and the rest of the Government are doing everything we can to help our emergency services in particular, but also other Departments, to manage any uncertainties in terms of unexpected costs in 2019-20. I will go into some detail on that.

Quite rightly, the hon. Gentleman and others voiced concerns about what happens after 2020-21, but they will know that the fundamental truth is that at that point we will be into a new comprehensive spending review period. That is an extremely important moment in setting the framework for longer-term funding, not just for our emergency services, but for other Government Departments. I can give the hon. Gentleman my absolute assurance, if I continue to be Minister at that point—we live in uncertain times—that I am determined, as I have said publicly and as my boss the Home Secretary has said publicly, to ensure that the emergency services are properly resourced against demand and risk. That includes a need to ensure that they have the resources necessary to meet their obligations to public pensions.

The hon. Gentleman will understand that at this moment in time, no Government could give absolute reassurances about what the next CSR period will bring, but we have signalled clearly that increased employer contributions to public pensions from 2020-21 will be taken care of in the CSR. In the meantime, the Treasury has set aside £4.7 billion, which I think would seem to all our constituents to be an extremely large number, to help Departments cover unforeseen additional costs in 2019-20. I will go into some detail on the areas of my direct responsibility, police and fire, because concerns have been expressed about people in those services from both sides of the Chamber.

Before I address those concerns, I acknowledge an important point made both by the hon. Gentleman and by the hon. Member for City of Durham (Dr Blackman-Woods) about concerns within the community of universities. That is not my area of direct responsibility or expertise, but I undertake to write to the new Universities Minister on their behalf to highlight the concerns expressed in the debate and to ask him to respond to the hon. Member for Merthyr Tydfil and Rhymney in the light of those concerns.

To give a bit of context, the Government—I am sure with cross-party support—want to make sure that public sector pensions remain among the best pensions available, especially for police officers and firefighters, in recognition of their role. We are determined, as any Government would be, to make sure that the cost of providing pensions is fair to the scheme’s members, the employers and taxpayers. I think any Government would take the same approach. We want to be sure that they remain affordable and sustainable for generations to come. That is the context of the changes announced to the discount rate at the Budgets in 2016 and 2018. As the hon. Member for Lincoln (Karen Lee) said, they were based on the latest independent Office for Budget Responsibility projections of GDP growth.

The changes to the discount rate have resulted in an increase to public sector employers’ contributions to their pension schemes, including the police and firefighters’ schemes. The hon. Lady was quite right that the intention was not to increase the members’ contribution rate. I confirm that that is not being contemplated. It is an increase in employers’ contributions. Critically to the point of this debate, the Government have provided financial support for additional pension costs that could be reasonably expected to be unexpected. The extra funding is £98 million for fire in 2019-20 and £153 million for the police. As I have said before, funding levels for future years will be considered as part of the spending review. That is inevitable, given where we are in the funding cycle for Departments.

A lot of concern was expressed on behalf of both the services. I know the hon. Member for Merthyr Tydfil and Rhymney is aware of the police funding settlement that I proposed last week, although obviously it has not been passed by Parliament. That recognised the additional pension costs to the police. He mentioned a number of more than £400 million. Actually, in 2019-20, the additional costs to the police system would be approximately £330 million. He will be aware that the overall police funding settlement enables up to £970 million of additional investment in our police, although that depends very much on what individual police and crime commissioners do on the precept.

The hon. Gentleman will also know that this funding settlement sees the first increase in the Home Office grant since 2010. The proposed funding for South Wales police, for example, which faces the pressure of additional pension costs of £6.8 million next year, is an additional £3.3 million in Government grant and £3.1 million in specific pension grant, while the police and crime commissioner, Alun Michael, will have the flexibility to increase the precept up to £12.7 million, making a total of £19.1 million. I hope he will welcome that.

The hon. Gentleman also talked about Gwent police, which I know partly covers his constituency. The funding settlement enables additional public investment of up to £8.5 million in Gwent police, which faces pensions pressures of £2.9 million. He will be aware, because he will have heard me bang on about it, that Gwent police is an outlier, with £56 million in reserves—more than 45.3% of its total funding. Those reserves have increased since 2011.

I hope the hon. Gentleman will acknowledge that the provisional police funding settlement, which is yet to be ratified by Parliament—I hope he will support it—goes well beyond meeting the specific additional pension costs and tries to support police forces both with their cost pressures and in their ambitions to increase capacity. That is part of a broader funding settlement that proposes a substantial increase of up to £970 million in the police system, compared with additional pension costs of £330 million.

I should also note that the police funding settlement talks about a word that never comes up in these conversations, but that is important for all our constituents, who ultimately pay for all this through their taxes: efficiency. The shadow Minister views austerity as ideological but, after eight years of austerity, that we can still sit down with our police leaders and agree £120 million of further cost savings through smarter procurement—they are spending our constituents’ money—tells us that we are still not at the end of the journey of making sure that our public services are efficient. Where the police lead, the fire service will undoubtedly follow, not least as they are both under the guidance of Her Majesty’s inspectorate of constabulary and fire and rescue services.

[Gerald Jones]

We have had eight years of austerity. I come from a local authority background myself, and identifying efficiencies at first is relatively straightforward, but it gets more difficult over time. The Minister mentions reserves, and I know that some areas have reserves. However, there is a big difference between reserves earmarked for certain projects, which all local authorities, police authorities and others have, and undisclosed reserves, which are much lower for many organisations. The point about reserves is that, once they are spent, they are gone. They are there for a rainy day; they cannot be used as part of a recurring budget. It is unfair for recurring expenditure to fall on council tax payers to an even greater level than it does already.

[Mr Hurd]

I understand the hon. Gentleman’s point and I absolutely respect his local authority experience. I am certainly not in denial about the financial pressures, particularly on our police system but also on certain fire services as well. He is right that, in the early years of needing to get back to living within our means and controlling public expenditure, some fruit was easier to pick than others, and it gets harder. However, I was making the point that we are talking about £120 million of savings agreed by the police—this is not a Home Office number—over the next two years through collective procurement. That is just smart buying.

The hon. Gentleman will know very well, and it is the same for the fire service, that a fragmented system of more than 40 different forces each doing their own thing —buying helmets, uniforms and equipment independently—is not necessarily the most efficient route to getting the best value for our constituents. All I am saying is that, even after eight years of tightening and reducing budgets, we can still find £120 million left on the table because of inefficient procurement practices. I hope he welcomes that. That money was effectively being wasted and can be better used for frontline service delivery. I hope he agrees.