Public Sector Pensions

Lord McCrea of Magherafelt and Cookstown Excerpts

Tuesday 19th June 2012 Westminster Hall

[Richard Fuller]

The hon. Gentleman makes an extremely fair point. I was not in Parliament in the 1970s, and I am not sure whether such points were made at that time, but clearly countries that have received the beneficence of resources—Norway is one example, and Australia another—have seen the value of looking at the long-term investment of natural resources, and have set up future funds to provide for future pension liabilities. The hon. Gentleman makes an excellent point in support of my argument. Of course, we are not as endowed with natural resources as those countries are, but the fundamental point about fairness between the generations is still solid.

Let us remind ourselves that the current level of public sector debt—the debt that we all talk about and are so worried about—is £1 trillion. The public sector pensions liability, which we do not often talk about, is £1.1 trillion. All those obligations have to be paid by future generations and, as we have so significantly ramped up this first amount of debt, should we not look for ways to reduce the unfunded part of public sector pensions for future taxpayers? A future fund would, over time, eliminate that burden from taxpayers and transfer it to the returns that would be generated from a funded pension scheme.

The Intergenerational Foundation has noted some questions about public sector pensions, and also some of the risks, and this change would reduce risk. At the moment, Lord Hutton’s proposals manage risk by way of a view of a cost ceiling on total public sector pension liabilities, which is based on projections of economic growth. The projections show the liability as a steady share of gross domestic product, falling in the long term. I am not sure that history is littered with Governments who under-predict economic growth; in fact, I think that it is often the other way around, with Governments having a rather rosy view of future growth. So, inherently, as we consider the risk that will fall on future generations, there is a likelihood that the Government, under current systems, will underestimate the liability that they are passing on. As Lord Hutton said:

“What we’ve seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of public services pensions have been shown to be too optimistic…That is going to affect the sustainability of public sector pensions in a negative way.”

The change in the pensions structure would considerably eliminate that risk.

I shall now talk a bit about the second point, which is the rebalancing of the structure of earnings, to restore the emphasis on pensions. Over the past few decades, the role that pensions have played in the round of the compensation offer made to potential employees has reduced considerably and, I would say, undesirably. There is much more emphasis today on the immediate levels of compensation, on “How much will I earn this year?” rather than on “How much of what I earn am I putting away for my long-term retirement needs?”.

House of Commons statistics have tracked the active membership of occupational pension schemes for private sector and public sector employees, and have compared 1995 with 2010. Over that period, the number of public sector workers in such pension schemes increased, from 4.1 million to 5.3 million, but the number of private sector workers halved, from 6.2 million to 3.1 million. That was a halving in the coverage of occupational pension schemes in a very short period—15 years—which is why I say that the change has been dramatic. Being conservative, I like to see things in the round of their consequences. We are now seeing that many people fear that they do not have enough money for their retirement, and the Government have rightly recognised the need to encourage pensions through auto-enrolment programmes. This would be another measure that would encourage people by, as I shall explain in a minute, creating a floor on public sector pensions that would enable the focus to turn back to how pensions will be provided for private sector workers.

The third point is the role of a future fund in creating a sovereign wealth fund. To create a future fund, we have to fund it—and, boy, does it take a lot of money. If we have £1 trillion of liabilities, that is a lot of money to save up, so a long period is needed. The Australian future fund set a period of 14 years before money could be taken out: the law was passed in 2006, and no disbursements can be made until 2020. For the UK, taking a 20-year period, it would require a minimum of at least £20 billion a year—probably significantly higher than that; somewhere between £20 billion and £30 billion a year—fully to fund all the Government pension schemes over those 20 years.

To put that in context, that figure is equivalent to 3% of total Government expenditure. It sounds a lot, but the Government spend a lot—it would be 3% of expenditure—and it would be only half the money that the Government are spending on the interest on their own debt. It is therefore a manageable amount of money, even though the amount is significant. In addition to looking to fund that out of annual public expenditure, it would also be possible to make asset sales into the fund. In fact, the Australian future fund started with an asset transfer, from the sale of part of the telecommunications company Telstra, for its seed investment. I have checked—with the Minister here, I wanted to be absolutely sure—and the Government’s deficit reduction targets would not be imperilled by any future sale of assets going into a future fund. Quite rightly, if I may say so, the deficit reduction targets are set absent of any funds from the proceeds of the disposal of certain assets, such as those of Royal Bank of Scotland.

Some may say that taking £20 billion out of public expenditure when we are trying to create demand is a very odd suggestion, but of course the £20 billion would not be lost from the economy. Essentially, £20 billion would be transferred from current expenditure to an investment fund for long-term investment. That money would become a fund of resources that could be used to invest in long-term projects. If we take the Ontario teachers’ pension fund—I hope you will look it up later, Mr Leigh—it involves patient capital that is invested in long-term investment projects. It is there to secure the pensions of those wonderful teachers in Ontario; they are not quite, but almost, as good as the teachers in Bedford. It is there to protect their pensions, which it does by looking for long-term investment returns. It is the fund that seeded the money for Birmingham airport. If we had our own infrastructure fund set up as a future fund for public sector pensions, we could provide resources to fund long-term investment projects.

Let me say something that I rarely say, which is that I agree with the comments made by the Secretary of State for Business, Innovation and Skills, who spoke yesterday about the need for a significant investment in housing construction. Of course, we need other construction projects, but we understand that we are under fiscal restraints because we must demonstrate that our deficit is being reduced. I ask the Treasury team to consider this very carefully: in current market conditions, particularly with the constraints of fiscal responsibility and the lenient conditions for monetary policy, a future fund would be uniquely placed to provide the long-term patient capital to fund such infrastructure investments, without there being any challenge to the probity of the Chancellor’s deficit and debt reduction policies. This environment provides an opportunity to fund and seed a future fund with the resources from the Government’s credit easing or quantitative easing programmes, and that would happen in such a way that markets would see that it was matching a reduction in the country’s long-term public liabilities for funding public sector pensions.

[Dr William McCrea (South Antrim) (DUP)]

The hon. Gentleman is making a visionary proposal. How does he believe that he could bring the public with him, not only in accepting his proposals but in having a profitable engagement about them?

[Richard Fuller]

I am grateful to the hon. Gentleman for his intervention. I recently got the box set of “Yes Minister”, and “a visionary proposal” has echoes of “a courageous decision” in the lexicon of that show. However, he raises the important point of how we are to bring the public along with us. That can be done in a number of ways. First, it is a responsibility of our generation to show young people that we are doing everything we can to give them a better future. That is what mums and dads are doing around the country right now—cutting back on their own budgets to make sure that their kids have a few extra luxuries and are protected from some of the problems that we are going through as we try to reduce our deficit. The future fund would be another way of engaging with and doing something for younger generations, and I hope that groups such as the Intergenerational Foundation will press that message.

I am conscious that I am taking up the Minister’s time, but I want to make these points, if I may, Mr Leigh. Secondly, trade unions have been very concerned about a race to the bottom on pensions and—you know what—for many reasons, they have been fair in making that point. We do not want to have minimal or zero pension provision. It would be too attractive to take that headline number for this year’s income; it would be far better for us to have a structure in which people understand the proper role played by pensions. If we said to trade unions, during the process of reviewing public sector pensions, “That’s it—no more reviews,” that would deal with all the fears of people enlisting in pension programmes about another change somehow coming in. They have already had one change and now there is another, so they are thinking, “Well, there’ll be another one, so why should I contribute to a scheme when I don’t know where it’s going?” If we called a halt to that while investing in a public fund—the future fund—we could tell trade unions, “That’s the floor in public sector pensions. Now work with the Government on trying to encourage the private sector to start rebalancing the ways in which it looks at compensation, so that the role of pensions is restored to its rightful place.” In those ways, we can bring people along.

Of course, the person I most wish to bring along with me in relation to this opportunity is the Minister, but I am fearful that I am not in a position to do so today. However, I hope that, much like the hon. Member for South Antrim (Dr McCrea) and me, she is at least engaged to look at what the hon. Gentleman called the “visionary” idea of having a proper and fair way between the generations and of accounting for public sector pensions through a future fund.