Public Service Pensions Bill

Rachel Reeves Excerpts

Monday 29th October 2012 Commons Chamber

[Rachel Reeves (Leeds West) (Lab)]

With advances in medical science meaning people are living longer and a pressing need to ensure that our public finances are on a sustainable path, it is right that we put in place the long-term reforms we need to manage the cost of public service pensions. That is why when in government we took important steps to ensure public service pensions were sustainable, and it is why we regret that this Government have behaved in a way that has made reform harder and that has undermined confidence in occupational pensions for teachers, nurses, police officers and others who work in the public sector.

We remain of the view that the Government’s imposition of steep contribution increases across the board and a permanent switch in the uprating of pensions to a lower measure of inflation were unfair and unnecessarily provocative. However, we support in principle the Bill’s main measures.

[David T. C. Davies (Monmouth) (Con)]

Do the hon. Lady’s comments mean that if she were the Minister, she would reverse that Government reform?

[Rachel Reeves]

We have said that we support the shift from the retail prices index to the consumer prices index for the period of this Parliament to reduce the deficit, but we do not support a permanent shift from RPI to CPI that will continue long after the deficit has been eliminated. I will discuss shortly some evidence from the Pensions Policy Institute and the Royal Statistical Society on the appropriate measure of inflation for uprating pensions.

[Andrew Gwynne]

My hon. Friend realises that the vast majority of public sector workers do not have massive gold-plated pensions. Instead they have very modest pensions, and they are concerned about their employment prospects as well as their contributions. Does my hon. Friend agree that those are the kinds of concerns that people out in the real world we speak to are talking about?

[Rachel Reeves]

My hon. Friend is entirely right. The average public sector pension in payment is under £6,000 a year, and it is considerably less for women who work in the public sector, so we are not talking about huge pensions in the vast majority of cases. Instead, we are talking about modest pensions to which people have contributed throughout their working lives.

We support in principle the main measures in the Bill, however, so we will not oppose it on Second Reading, but we will work in Committee to improve it, in order to ensure that it underpins, rather than undermines, the progress made in negotiations. We will seek to ensure it facilitates a smooth and stable transition to new scheme designs, entrenching good standards of governance, transparency, administration and consultation, thereby allowing those who give their working lives to serving the public to save for their retirement with confidence, while establishing a workable system for managing change and controlling costs to the taxpayer.

The Government and public service employees do need to find ways of adjusting to the welcome fact that people are living longer. In government, Labour had agreed and established a framework for negotiating reform and the “cap and share” mechanism to manage long-term costs, and it was always clear that this would mean increases in contributions and, as the population lives longer, a rise in retirement ages.

We have always said that the Hutton report provided a useful starting point for negotiations. Lord Hutton was right to suggest that career average schemes could be fairer than final salary schemes, and we think his proposal that public service pension ages should rise with the state pension age is right in principle. Lord Hutton also stressed the need to approach these issues in a careful and balanced way, however, with particular care for the affordability of any additional contributions for lower paid public service workers, and for avoiding fuelling a race to the bottom on pension provision. Reform needs to be fair to taxpayers and public service employees, as well as being genuinely sustainable for the long term, and that would be endangered by a search for quick cash savings or the playing of political games.

The vast majority of public service workers retire on very modest pensions. The average public service pension in payment is less than £6,000 a year, and even less for women. Tearing up decent public service pension schemes, or imposing punitive and unaffordable contribution increases, would be entirely counter-productive if that resulted in lower saving and inadequate retirement incomes.

[Margot James (Stourbridge) (Con)]

Does the hon. Lady not accept that the Government have made great strides in protecting low-paid public sector workers in response to Lord Hutton’s report, so that anyone earning £15,000 or less will not have to make any increased contribution at all, and for those earning less than £21,000 the increase will be capped at 1.5%? Surely that is the evidence she requires?

[Rachel Reeves]

That is simply not true. There are 800,000 part-time public service workers earning less than £15,000 a year, 90% of them women, and their pension contributions will rise by, in some cases, 50% or more because their full-time equivalent salary takes them above the minimum salary threshold.

Instead of building on our reforms, the Government have ripped them up. They have made it much harder to make progress by seeking to impose, prior to any negotiations, a steep 3% rise in contributions and a permanent switch in the indexation of future pension income from RPI to CPI. The “cap and share” arrangements agreed and established by the last Labour Government provided the mechanism for delivering the adjustments as needed, but the current Government chose to undermine that agreement and instead announced a 3% increase in contributions in the October spending review without any discussion or negotiation with employers or employees.

[Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)]

As the hon. Lady is discussing the previous Labour Government’s reforms, will she say whether she accepts any responsibility on behalf of the Labour party for the decimation of private sector defined-benefit pensions as a consequence of the disastrous decision in the 1997 Budget of the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) to end the repayment of dividend tax credits?

[Rachel Reeves]

If that was such a disastrous thing, why have this Government not reversed it or made any efforts to do something about it? They have no intention of doing so.

The contribution increases in this Bill were based on no assessment of the future funding needs of public sector pensions and were simply a tax on public service workers who were already facing a pay freeze and redundancy risks. The increases came long before Lord Hutton had published his final report. He warned that excessive increases could hit lower-paid workers hard and result in a counter-productive increase in opt-out rates. He has said that although it is for Ministers to decide by how much contributions should rise,

“there must also be a careful examination of the implications of any possible increase in opt out rates in these schemes as well.”

But the Government chose to plough on, not mindful of the increase in opt-out rates and with little regard for the consequences.

The Government promised that lower-paid workers would be protected from excessive and unaffordable increases, but the reality is that as many as 800,000 part- time workers earning less than £15,000 a year are already paying higher contributions. As I said, for many of them the contributions are 50% higher, because their full-time equivalent salary takes them over the minimum threshold. That approach had nothing to do with long-term reform and everything to do with a cash grab by the Treasury, which made it much harder to deliver progress on the real reform we needed, because the Government acted arbitrarily before Lord Hutton reported and lost the trust of public service workers.

In addition to imposing that hike in contributions, the Government used their June 2010 Budget unilaterally to change the indexation of pensions from RPI to CPI. On average and over time, public service workers will be 11% worse off in retirement as a result. According to analysis published last week by the Pensions Policy Institute, this is a bigger hit than the extra contributions, the raised retirement age and all the other changes to pensions put together. Independent experts, such as the Royal Statistical Society, have emphasised that CPI fails to reflect the spending patterns of pensioners and the rising costs they face. As pensioners worry about the hikes in energy bills this winter and expected steep increases in food prices, we should be particularly mindful of the challenges that retired people face in meeting ever-rising costs.

Again, those changes were imposed on public service workers without any negotiation or discussion. Lord Hutton stated:

“If these reforms have any chance of succeeding then people need to know that they are being treated fairly.  We have seen…the anger that has been triggered on the state pension when older women feel the finishing line is being put back at the last minute with very little time to adjust. So there should be full and proper consultation and discussion with the trades unions. That is how we do things in Britain—the public would take a very dim view of any government that fails to honour this basic requirement. We must try and avoid the confrontation and division that marked previous decades and must not turn the clock back.”

I regret to say that the Government did not follow that advice. Sometimes it seems that they are turning the clock back to the conflicts and divisions of the 1980s, and perhaps that was exactly their objective. Their aggressive and provocative approach to these serious and sensitive issues resulted in months of stalemated negotiations and several days of strike action, which resulted in closed schools, cancelled operations, and disrupted lives for families and businesses across the country.

[Richard Fuller]

There are times when the hon. Lady seems to be making a coherent argument and then she goes back to using rhetoric. She said that the change from RPI to CPI is the most significant one. If she seeks to make amendments on that issue and she does not want to make savings on the basis of a change from RPI to CPI, will she set out where she would make the savings in order to make the overall numbers add up as they are at the moment?

[Rachel Reeves]

I am sure that the hon. Gentleman has read the Bill. The RPI to CPI change was imposed before it, so it is not contained in the Bill and we will not be able to make any amendments in terms of RPI and CPI when discussing it. The point is that the Government acted arbitrarily before Lord Hutton reported, thus making it harder to deliver the long-term reform to public service pensions that we need.

Labour Members think that those strikes could and should have been avoided last year, and that it is a matter of deep regret that this Government have lost the trust and damaged the morale of millions of public service workers, whose engagement and commitment is vital at a time when they are being asked to accept prolonged pay restraint while delivering continued improvement in the quality and efficiency of public services with fewer resources.



Let me turn from the Government’s mishandling of the issue to the specific provisions in this Bill. The Bill is designed to put the new schemes on a clear and consistent legal footing, with clear lines of accountability to scheme members, public service employers and taxpayers. That, in itself, is a worthwhile objective. I have already emphasised that our big disagreements with the Government’s approach to public service pensions lie elsewhere, so we will not oppose the Bill on Second Reading.

However, we have a number of concerns about the Bill that we hope to address in Committee. It is an ill-prepared and poorly drafted Bill containing a number of mistakes, including giving the wrong dates for the transitions to new schemes. The Bill fails to deliver on the commitments and assurances given by this Government to underpin the provision of decent pension schemes that allow public service workers to save for their retirement with confidence. In short, as we have come to expect from this Government, it is a shambles of a Bill that has not been properly thought through, risks creating more problems than it solves and fails to deliver on the promises that Ministers have made.

First, we think it is right that pension ages rise in line with longevity, but it is essential that that is done carefully and fairly, with due notice given to people whose retirement plans may need to change and due consideration given to the impact of working longer on people in front-line or particularly strenuous occupations.

[Derek Twigg (Halton) (Lab)]

My hon. Friend makes an important point. Many of my constituents contact me about the impact on pensioners of the wholesale changes that the Government are proposing and have made in respect of this notice period and the fact that people are having to change their plans. That has caused great distress and worry to many of my constituents. I am pleased that she is addressing the point, because the Government seem to be ignoring it.

[Rachel Reeves]

I thank my hon. Friend for his intervention. We argued exactly the same point when the Government arbitrarily increased the state pension age for women in their late 50s with just six years’ notice given. When Lord Turner carried out the review of state pensions for the previous Government, he recommended a 15-year notice period be given, and the Pensions Policy Institute recommends a 10-year notice period. Such notice needs to be given and it is not enshrined in this Bill.

[Andrew Gwynne]

Does my hon. Friend recognise that one of the reasons why that notice period is required is that as the retirement age rises careers may also have to change to ensure that employees are not forced into ill health and are not forced to do work that is unsuitable for their age?

[Rachel Reeves]

I thank my hon. Friend for that intervention. We also believe that this Bill should not pre-empt or cut across ongoing discussions—this builds on the point that he raised, as did my right hon. Friend the Member for Rother Valley (Mr Barron)—between the Department of Health, NHS employers and NHS workers about the implications of working longer for some staff groups, especially those, such as paramedics, in physically demanding roles.

We think that the Bill should reflect Lord Hutton’s recommendations that the link between public service pension ages and the state pension age should be kept under review and that this should be conducted by a properly independent body, with public service employees and employers represented and consulted. The Chief Secretary to the Treasury said in his speech that that will happen, but it is not guaranteed in the Bill—indeed, it is unclear whether it is even compatible with the Bill. These are all issues that we will be raising in Committee to get the commitments that public service workers deserve and thought they had been given during the negotiations behind the Bill. These are also issues that we will have in mind as we look to any future increases in the state pension age itself.

For our finances to be sustainable, and for decent pensions to be affordable, it is right that retirement ages rise with longevity. However, as Malcolm Wicks, the late Member for Croydon North reminded us in some of his most recent work, many people doing manual jobs started work at 16 or 18, with some doing so even earlier, and find it harder to continue work into their late 60s. We should be mindful of people’s capacity to work later and later, especially if support is not in place for them in the workplace.

Secondly, there are real worries that the Bill fails to take due account of the special characteristics of the local government pension scheme. Members will know that it is a fully funded scheme administered by local authorities and we should welcome the hard work of local councils and trade unions, who have made very valuable progress in negotiations on a mutually agreeable agenda for reform. The Bill threatens to unravel the agreements that have been reached and destabilise financially the local government pension funds by forcing a disruptive and potentially disastrous closure of existing schemes instead of facilitating a smooth transition to the new scheme design. That extension of Treasury interference into aspects of scheme valuation and design could prevent local authorities from delivering on the deal they have agreed with their work force. Indeed, the view of the pensions manager at the Chartered Institute of Public Finance and Accountancy is that the relevant provisions in the Bill represent

“a major shift in the governance of local authority pensions and”

raise

“questions about future local democratic accountability for those pension funds.”

Again, we expect those concerns to be addressed in Committee.

Thirdly, on the question of good governance, the Bill must underpin and not undermine high standards of scheme governance. As Lord Hutton stated in his final report,

“there is a powerful case for…much stronger governance of all the public service pension schemes. This should keep government, taxpayers and scheme members better informed about the financial health of these schemes. There should be minimum standards set for scheme administration. There is also a proper and legitimate role for representatives of the workforce to be formally involved in these new governance arrangements.”

The Bill fails to include key recommendations from Lord Hutton’s report, such as the inclusion of member-nominated and independent members on pension boards; the establishment of pension policy groups to consider major changes to scheme rules; the need to ensure that pension boards are responsible for the oversight of financial management and, in the case of funded schemes such as the local government pension scheme, for investment management; and the commissioning of a review into how standards of administration in public service pension schemes can be improved. Those measures would improve the efficiency and cost-effectiveness of scheme administration and would ensure that public service pension schemes matched best practice in the private sector.

Finally, we must ensure that the Bill adequately reflects and reinforces the progress made in negotiations. We should give public service workers a system they can trust and pensions that they can save towards with confidence, ensuring protection against retrospective or arbitrary detrimental changes. We also have concerns in this regard, which some hon. Members have already mentioned, and we will seek to address them in Committee. For one thing, the Bill subjects many aspects of public service pension provision to unilateral Treasury control. Although it is right that mechanisms should be in place to ensure that costs to taxpayers are contained, public service employees also have a right to know that critical changes will be consulted on and that their pension savings will not be vulnerable to arbitrary interference and opportunistic cash raids.

Furthermore, Lord Hutton has stated that

“there must…be full protection of accrued rights”,

but the Bill does not rule out retrospective changes that reduce benefits already accrued, going against the fundamental principle that pension benefits accrued are pay deferred and must therefore be honoured. The Government have reiterated their commitment to maintaining defined benefits in the public sector, and the Chief Secretary reaffirmed that to the House last year. He said, as he has on a number of other occasions, that his commitment was that

“public sector schemes will remain as defined benefit schemes, with a guaranteed amount provided in retirement”.—[Official Report, 2 November 2011; Vol. 534, c. 927.]

Clause 7, however, provides for the creation of new schemes that are

“defined benefits…defined contributions…or…a scheme of any other description.”

That should not be a means to drive a coach and horses through the commitments the Government have given and allow another round in the race to the bottom on pension provision.

In addition, the Government have made much of their promise of

“no more reform for 25 years”.

In his foreword to the Treasury’s document on new scheme designs, published last December, the Chief Secretary wrote that

“we need a long term solution that will last a generation”.

Clause 20 specifies “protected elements” of scheme design that cannot be altered for the next 25 years without clearing a “high hurdle” of comprehensive consultation and a report to parliament.

We think it is right that public service workers should be given an assurance that their pension savings will not be vulnerable to further arbitrary and unfair changes without adequate scrutiny and debate, but the Bill seems to be riddled with loopholes, excluding a number of important scheme features from the list of “protected elements” and stating that the “high hurdle” can be bypassed in order to meet a cost cap that is in turn set by the Treasury with no such requirement for consultation and report. Furthermore, it was a critical part of the agreements reached with employee representatives that protection should be provided to staff transferred to alternative providers as a result of public service outsourcing —the so-called fair deal policy. The Chief Secretary told the House last year that

“we have agreed to retain the fair deal provision and extend access for transferring staff. The new pensions will be substantially more affordable to alternative providers, and it is right that we offer workers continued access to them.”—[Official Report, 20 December 2011; Vol. 537, c. 1203.]

Yet there is no guarantee in the Bill that public service workers transferred to new employers will be able to keep their public service pensions. We will seek to address all those issues in Committee to improve the Bill and the protections granted to public service workers.

In conclusion, we think public service workers with understandable fears for their financial futures deserve better than being treated as pawns in this Government’s political games, with the consequence that it has been harder to reach agreement on reasonable reforms that control costs to the taxpayer. Indeed, perhaps the best case for the Bill is that it should ensure that never again can an opportunistic Government create unnecessary conflict and disruption by imposing unfair and arbitrary changes without adequate consultation, scrutiny and accountability. Let us ensure that it fulfils that objective.

Finally, let us remember that the real pensions crisis is not in the public sector but in the private sector. It is right that we should ensure public service pensions are sustainable and affordable for the taxpayer, but we should not allow that to distract us from the unacceptable inadequacy of pension provision in the private sector. Too often, it has sounded as though the Government’s answer to disparities in pension provision across the public and private sectors is to level down, not level up. Indeed, we have seen more than a million lower paid workers excluded from automatic enrolment when we should be ensuring that the National Employment Savings Trust can deliver low-cost, high-quality pensions to all who could benefit.

[Andrea Leadsom (South Northamptonshire) (Con)]

Does the hon. Lady accept that in the 10 years since the previous Prime Minister decided to get rid of advance corporation tax relief on pensions, that decision has destroyed £100 billion of private sector pension savings? Does she accept that that was the fault of her Government?

[Rachel Reeves]

I look forward to the hon. Lady’s private Member’s Bill to restore that relief. The real crisis is that some people are not saving at all for their retirement and are not in any type of occupational scheme.

[Andrea Leadsom]

rose—

[Rachel Reeves]

I shall take another intervention so that we can hear about the hon. Lady’s private Member’s Bill.

[Andrea Leadsom]

How on earth does the hon. Lady think that anyone can put right £100 billion wiped off the value of private sector pensions? How does she expect anybody to right that wrong today? It has been done; it is too late.

[Rachel Reeves]

It could be reversed so that dividends were not treated in such a way in the future, but the Government have no intention of doing that. I do not think the hon. Lady understands the real crisis: some people are not saving at all for their pensions and have no occupational pension to save into, and the 20% of people who earn less than a living wage do not feel that they can put money aside every month. That is the real crisis we face and the Government excluded 1 million people from automatic enrolment and have done nothing to tackle the excessive fees and charges automatic enrolment schemes can charge. The Government should be focusing on that challenge to bring up the quality of pension provision for everybody so that nobody risks retiring into poverty and having to rely on means-tested benefits.

Improving governance and reducing costs across private pension schemes while cracking down on the excessive fees and charges that erode pension income should be the Government’s priority, but it is not. Instead, to address disparities they want to level down the pensions enjoyed by those who work in the public sector.

[Kelvin Hopkins (Luton North) (Lab)]

My hon. Friend is right to draw attention to the pathetic performance of private sector schemes. Is not the answer a compulsory state earnings-related pension scheme for everyone in the private sector?

--- Later in debate ---

[Rachel Reeves]

Automatic enrolment could bring into saving for retirement 10 million people who are currently not saving. They would not just be contributing their own money, but getting a contribution from their employer that they have never had before. That scheme started in October this year and by October 2017 it will be fully rolled out.

The pensions Minister is now in his place. It is disappointing that people on low pay and in part-time work are excluded from that scheme, and that the waiting period was increased to three months, which means that some people who could have benefited from it, particularly those who change jobs regularly, will be excluded. The Government need to do more to bring people into saving for occupational pension schemes through automatic enrolment, and they need to ensure that excessive fees and charges do not erode that pension income. We urged the Government to amend the Pensions Act 2011 to cap those fees and charges, but the Minister did not take those proposals on board.

Lord Hutton argued that public service pensions should remain a gold standard, so let us make sure that the Bill delivers on that objective and then seek to spread that standard across the wider economy so that everyone can benefit from good quality pension schemes. Instead of this Government’s divisive political games, pitting public sector against private sector, union member against taxpayer, we need to work together—Government, businesses, employees and civil society—reforming our economic institutions to give everyone a stake and a fair share in prosperity, building the one-nation economy that our nation needs to succeed.