Public Service Pensions and Judicial Offices Bill [HL]

Viscount Younger of Leckie Excerpts

2nd reading
Tuesday 7th September 2021 Lords Chamber

Moved by

[Viscount Younger of Leckie]

That the Bill be now read a second time.

[Viscount Younger of Leckie (Con)]

My Lords, the Public Service Pensions and Judicial Offices Bill consolidates and strengthens a common UK legal framework for pensions across all the main public services—that is, the NHS, the judiciary, the police, firefighters, the Armed Forces, teachers, local government and the Civil Service. The Bill ensures that those who deliver our valued public services continue to receive guaranteed benefits in retirement that are among the best available on a fair and equal basis. In addition, the Bill includes measures that will address resourcing challenges facing the judiciary, recognising the unique constitutional role of judges. The Bill will also lead to the creation of a new UK asset resolution public service pension scheme for the beneficiaries of the existing Bradford & Bingley and NRAM—that is, Northern Rock —pension schemes.

I will start with the measures that relate to ensuring fairness and equality across public sector pensions, but first I will set out the wider context for reform. As your Lordships will recall, in June 2010, supported by cross-party consensus on the need for the greater sustainability and transparency of public sector pensions, the coalition Government established an Independent Public Service Pensions Commission chaired by the noble Lord, Lord Hutton of Furness. The commission undertook a fundamental structural review of public service pensions. This review was underpinned by a set of principles against which the options for reform were judged. These principles were that the measures should be affordable and sustainable, adequate and fair, supportive of productivity, and transparent and simple. These principles are just as important today as they were then, and they highlight the need to achieve greater fairness between lower and higher earners and for the taxpayer, as well as the future sustainability and affordability of public sector pensions.

Following that review, the Government introduced a number of key changes. Pension benefits would no longer be based on an individual’s final salary, but instead on career average revalued earnings. Member contribution rates were increased and the normal pension age was linked to the state pension age for all schemes, except those specific to the police, firefighters and the Armed Forces. These changes achieved greater fairness for low earners by giving many a more generous pension. In addition, the reforms will save taxpayers an estimated £400 billion over the following 60 years.

Having provided this background, I will turn to the Bill’s specific measures on the remedy. Prior to the 2015 reforms, the Government agreed, following negotiations with trade unions, to protect the pensions of those closest to retirement. They did this by allowing those members within 10 years of retirement in most public service pension schemes to remain in the final salary schemes, instead of being moved to a career average scheme. This step was known as transitional protection. However, in 2018 the courts found that this step unlawfully discriminated against younger members. Although the legal challenge was specific to the judicial and fire schemes, the Government recognised the wider implications across all public service schemes. We therefore began a thorough programme of work to identify and implement a robust remedy. This Bill brings that remedy into effect and its measures follow public consultations in 2020 and government responses earlier this year.

For the remedy period—that is, from April 2015, when the reforms were implemented, to 31 March 2022—all eligible members will be given a choice between legacy and reformed scheme benefits. For the majority of members that choice will be made at retirement, when it will be clearer which scheme is most beneficial to each individual. This is known as a deferred choice and was the preferred option in the majority of consultation responses. The exception is the judicial schemes, where affected members will make their choice before retirement in a so-called options exercise.

The local government arrangements reflect that the remedy for the discrimination does not require member choice. Instead, protection will be granted to younger eligible members via the extension of the existing underpin, which gives protected local government pension scheme members a guarantee that their reformed scheme pension will be no lower than it was in the legacy scheme. The local government arrangements also reflect that in England and Wales the scheme reforms were implemented a year earlier than other public service pension schemes—from 1 April 2014. For those members who have already taken pension benefits in relation that period, a choice will be offered as soon as is practicable. This measure therefore remedies the differential treatment of younger members as a result of transition protection.

Although the Bill ensures retrospective fairness, it is also right that we ensure that all pension savers are treated equally in future—the so-called prospective remedy. Therefore, from 1 April 2022 all legacy schemes will be closed to future accrual and all those impacted will be placed in their 2015 reforms schemes or, in the case of the judiciary, moved to a new scheme. This measure guarantees that all members within each scheme will be put on an equal footing and underlines our recommitment to the principles of the 2015 reforms. Local government workers have already moved to career average arrangements and these schemes will continue after 31 March 2022.

As your Lordships may recall, the Independent Public Service Pensions Commission also recommended that the new public service pension schemes should include a cost ceiling to protect the taxpayer from unforeseen increases in scheme costs. However, the Government chose to go a step further and establish a symmetrical cost control mechanism that also maintains the value of pensions to members when costs fall. The mechanism was designed in such a way that, if the cost of a scheme rises above or falls below specified margins, the scheme rules must set out a process for agreeing how costs can be brought back to target. So, where costs rise above a certain level, benefits are reduced, or where costs fall below a certain level, benefits are improved.

It is right that the additional benefits that members will receive as part of the remedy are considered by this mechanism as a cost, by giving members a choice of benefits. The value of schemes to members will increase and therefore costs will rise. This assessment of the costs of member benefits is precisely what the mechanism was established to do. However, to ensure that no members’ benefits are reduced as a result of this assessment, the Bill contains a measure to waive any results that might lead to benefit reductions. This should mean that no member will be worse off. In addition, the Government have committed that, where benefit improvements are due, these will be delivered.

As I have outlined, the Bill builds on the Public Service Pensions Act 2013 to create an overarching legislative framework for all public service pension schemes. While this piece of legislation is comprehensive, I am sure your Lordships would acknowledge that pension schemes are extremely complex and must be tailored to fit each workforce’s individual requirements. As a Government, we intend that our legislation accounts for those differences, many of which are found in scheme regulations. Therefore, given the level of detail involved, these measures will come before Parliament as statutory instruments for further scrutiny. Furthermore, to demonstrate the approach to secondary legislation, I pledge to deposit policy statements in the House Library in the coming weeks for further scrutiny.

Allow me now to turn to the Bill’s next element: the package of reforms to help address the resourcing challenges facing the judiciary, recognising the unique role that judges fulfil in our constitution. The UK justice system is known across the world for its excellence, objectivity and impartiality. This is due in no small part to the exceptional expertise of our courts, our tribunal judges, our coroners and our valued magistrates.

However, as the structure and operation of our courts and tribunals have developed, so has the resourcing needs of the judiciary. The frequency and volume of judicial recruitment has increased considerably in recent years and, despite recruiting about 1,000 judges and tribunal members per annum since 2018, we have not been able to recruit the full number of judicial officeholders needed across all courts and tribunals, putting considerable pressure on judges and the justice system.

I am sure your Lordships will agree that it is vital that we continue to attract and retain high-calibre judges to secure the proper functioning of our justice system. This Bill brings forward bespoke measures to address some of the current recruitment and retention challenges facing the judiciary. It enables the provision of a new, reformed career-average judicial pension scheme. It increases the mandatory retirement age of judicial officeholders to 75, extends the potential for sitting in retirement to the fee-paid judiciary and puts judicial allowances on a firmer legal footing. Taken together, those measures represent significant steps that will allow us to continue to support our world-class judiciary, for which we are so rightly renowned, to meet the demands of the present day and the future.

I now move to the measures to establish new UK asset resolution public service pension schemes for the beneficiaries of the existing Bradford & Bingley and Northern Rock asset management pension schemes—so-called NRAM. These two schemes cover the pension schemes of the former staff members of both bodies, some of whom worked for in the region of 30 years for each company respectively. These measures are an important step in the Government’s careful long-term management of the financial assets acquired as a result of the 2007-08 financial crisis. The new schemes will provide former Bradford & Bingley and Northern Rock staff members with the assurance that their pensions are secure over the long term. Let me stress that members’ pensions and pension promises will be unaffected by this change. In addition, this measure will ensure better value for the taxpayer through the creation of a more efficient structure for the Government to meet their liabilities towards those two schemes.

There is no doubt that the Bill before the House is complex legislation. It is therefore crucial that all technical changes are robust and legally operable across all schemes. As I mentioned, we are committed to getting the detail right and to giving in-depth consideration to each scheme’s specific circumstances. Therefore, to ensure a comprehensive and effective remedy with consistent application of measures across all relevant schemes, it is expected that some technical amendments will be required during the Bill’s passage. In addition, I am pleased that the Welsh, Scottish and Northern Irish Governments are considering legislative consent Motions to aim to ensure parity across the UK for the areas where legislative competence is devolved.

Our public servants provide vital services on which we all rely. Their unwavering commitment has been particularly vital during the pandemic. We have an obligation to continue to provide guaranteed pension benefits to reward those workers for their dedicated service, but we must do so on a fairer basis, in a way that ensures that pensions are affordable and sustainable in future.

In conclusion, I believe that the package of measures contained in the Bill will bring about long-term sustainable changes that are in keeping with the original principles of the 2015 reforms and provide fairness for members, employers and taxpayers. I hope noble Lords will recognise the Bill as a clear sign of the Government’s responsible approach to public service pension provision, as well as responding to the specific resourcing challenges facing the judiciary. It is for those reasons that I commend the Bill to the House.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, this has been a somewhat short debate but, as always, the experience and knowledge in this Chamber has been extremely insightful on what I think we all agree is a pretty complex subject. I thank all noble Lords for their contributions, not least acknowledging the specific experience of the noble Lord, Lord Davies. I have also counted that out of the 11 or so speakers in this debate, there were no less than five noble and learned Lords—so no pressure there. I will give proportionately a little more time to touching on judiciary matters, because I think it is fair to say that the mood, tone and indeed content of the debate was more steered towards that direction. That is not to say that there are not a number of other questions that need to be answered, which I will attempt to do. There have been some technical and specific issues raised, and I will endeavour to answer as many questions as I can, but it may be that a letter—maybe a longer one than normal—is required to follow up on the technical issues.

I start by answering probably the first question raised by the noble Lord, Lord Davies, on the timetabling for the Bill. To reassure the House, we aim for the Bill to have Royal Assent in early 2022, so that Chapter 4 can come into force on 1 April 2022, as set out in Clause 113, on commencement. However, noble Lords may recall that the Government set out in their consultation response in February this year that schemes would have until 1 October 2023 to introduce retrospective changes, in order to balance bringing the discrimination identified by the courts to an end as soon as possible with giving schemes and administrators the time needed to establish systems to deliver the necessary changes. Clause 113 therefore provides that Chapter 1 will enter into force on 1 October 2023, or earlier if specified in regulations. I hope that goes a little way to answering the question raised by the noble Lord, Lord Ponsonby.

Before I address the themes and questions raised, I wanted to use this occasion to give a little more background to what we are trying to do in the Bill; in particular, this might help to address some of the concerns the noble Baroness, Lady Kramer, expressed about the 2015 reforms. By 2010, the cost of providing public sector pension schemes had increased significantly over the previous decades, with most of this increase falling to the taxpayer. At the same time, occupational pension provision in the private sector had changed significantly; employers were increasingly moving away from offering defined benefit pension schemes.

The commission set up in 2010 found that the existing structure had been unable to respond flexibly to workforce and demographic changes that had occurred over the previous few decades, and that this had led to rising value of benefits due to increasing longevity, the unequal treatment of members within the same profession, the unfair sharing of costs between members, employers and taxpayers, and barriers being put up to increasing the range of providers of public services. The final salary design of schemes was criticised for creating unequal treatment of members within the same employment. The commission’s final report, in March 2011, therefore recommended moving public service scheme members to reformed schemes with benefits calculated on CARE—the House will know that this is career average revalued earnings—rather than based upon final salary.

To control against the risk of rising longevity—which we know is there—the commission recommended increasing the normal pension age to 60 for the Armed Forces, police and firefighters, and to state pension age for all other schemes. In line with wider changes to the use of price indexation in government, changes were also made to the measure of inflation used to uprate pensions, from the retail prices index to the CPI—the consumer prices index. Member contribution rates were also increased across the schemes, other than that relating to the Armed Forces, by an average of 3.2% of pay. The House may well know this, but I think it is helpful to produce this rather complex background as to why we are where we are today.

Overall, the reform schemes were designed to ensure that members would have good pensions which, at a minimum, met the target levels identified by the pension commission of the noble Lord, Lord Turner, for the income needed in retirement. The reform designs should provide many low and middle earners working a full career with pension benefits at least as good as, if not better than, those under the previous arrangements.

I will move on to some of the issues that were raised. The first was the so-called differential treatment of judges. This was raised particularly by the noble Lord, Lord Davies, and touched on by the noble and learned Lord, Lord Hope. In addressing the point, I will highlight the difference in the recruitment and retaining of judges in particular, which distinguishes them from other public servants. Judges follow a unique career path. They often have long careers in the private sector and take up judicial office at a later stage in life. Many take a pay cut when joining the Bench. Therefore, appointment as a salaried judge in the UK is seen as the culmination of a barrister’s or solicitor’s career, rather than a career path in and of itself. This contrasts with the position in countries such as France, Germany and Italy, which all have career judiciaries, and where the judicial profession is separate from practising as a lawyer. The House may not know that salaried judges in this country may not return to private practice as a barrister or a solicitor.

Reflecting this difference with other public sector workers is important. When we return judges to a tax-unregistered scheme—which is the position that they were in prior to 2015—without these changes there would be continued issues with recruiting judges, threatening the effective functioning of our justice system and its reputation. While the scheme will be unregistered, it is important to note that other aspects of the scheme will be consistent with the principles of the 2015 pension reforms, to ensure its long-term affordability and fairness to the taxpayer.

This matter was raised by the noble Baroness, Lady Kramer, who asked why this could not be extended to other groups. I hope that I have helped to put our view on that. The noble Baroness raised the matter of military generals and touched on doctors, but I stress, on that point, that the manifesto committed to addressing recruitment and retention issues for doctors through the pensions tax system. At the Budget in 2020, the Government spent £2.175 billion on increasing the annual allowance taper threshold and adjusted income limit. These measures apply to all individuals across the UK and are a significant step in resolving this issue. These changes mean that any public servant whose sole income after deducting pension contributions is less than £200,000 has been taken out of scope altogether. We estimate that these changes have taken up to 90% of GPs and up to 98% of NHS consultants outside the scope of the tapered annual allowance. I am sure that there is more that I can say on that, but I hope that it provides some explanation to the noble Baroness, and to the noble Lord, Lord Davies, who raised the same point.

Moving on to the subject of what might rather loosely be termed judicial diversity, there was quite an interesting debate on this. Many noble Lords touched on diversity, linking it to the mandatory retirement age. I will perhaps give a more expansive response to this. I was pleased to hear the initial debate raised by the noble and learned Lords, Lord Woolf and Lord Brown, and my noble and learned friend Lord Mackay. I was particularly interested that he was the one who originally lowered the age from 75 to 70 and that he is now behind our move to raise it again to 75—that was a very interesting reflection from my noble and learned friend.

To give a little background on this, the Government are absolutely clear on the importance of judicial diversity and of having a judiciary that is representative of society. That is why the Ministry of Justice, as a member of the Judicial Diversity Forum and of the magistrates’ recruitment and attraction steering group, is committed to continuing the work to improve diversity across the judiciary and the recruitment pipeline.

I recognise that concerns have been expressed over the impact on judicial diversity of a higher retirement age. Let me start by saying that we acknowledge that the retention of older officeholders could have an impact on the flow of new appointees to judicial office, which may impact on the rate of diversity change. However, as some noble Lords have recognised, there is another side to the story. As many judicial officeholders do not continue to sit until 70 now, we do not expect that all will wish to continue in office until 75. For that reason, and because of the ongoing demands on our courts and tribunals, we will continue to recruit a high number of new judges and magistrates for some time, so we expect that the overall diversity will continue to improve, reflecting the greater diversity of new appointments. The Government also believe that there will be positive diversity impacts from mandatory retirement at 75, and we expect it to encourage applications from a more diverse range of candidates, including those who may have had extended career breaks to balance professional and family responsibilities, or from lawyers who feel ready to apply to the judiciary later in their career.

I should have mentioned the noble and learned Lord, Lord Etherton, and I noted, particularly from him, that he declared that he was—how should I put it?—less than impressed with the decision that we have taken and has asked us to think again. That came also from the noble Baroness, Lady Kramer. However, I do not believe that we will be doing that, and I hope that this explanation will help.

I will move on to the consultation, which was also raised by a few Peers, including the noble Baroness, Lady Kramer, and the noble Lord, Lord Ponsonby. I reassure the House that the decision to raise the mandatory retirement age to 75 was taken after careful consideration. The consultation in 2020 received over 1,000 responses and—as was raised this afternoon—84% supported an increase. I acknowledge that there were mixed views on the age at which it should be set: 67% supported an MRA of 75, recognising that the limited diversity impact was outweighed by the retention benefits and the flexibility afforded to judicial officeholders to sit longer. The Government are confident that an MRA of 75 will provide the right balance—and it is a balance—between protecting the need to have a mandatory retirement age and the benefits to the justice system from retaining such valuable expertise for longer and attracting a wider range of applicants. However, as I said in the briefing yesterday, I have pledged to write, particularly to the noble Baroness, Lady Kramer, and I will do so to all noble Lords who have taken part in the debate today, with some further detail on the feedback from the consultation, particularly in relation to feedback from women, which was raised by the noble Baroness, and from the black community, as raised by the noble Lord, Lord Ponsonby.

Another important subject is the cost control mechanism—the so-called CCM—which was raised by the noble Lord, Lord Davies, and the noble Baroness, Lady Janke; the noble Lord, Lord Ponsonby, also touched on this. As was mentioned, the Government’s consultation on changes to the cost control mechanism closed on 19 August. The Government are considering all responses received and will publish their conclusions shortly. The aim is to implement any changes in time for the 2020 valuations, and the Government will legislate for any changes once they have responded to the consultation and when parliamentary time allows. However, I want to give a little more detail on this, because it is an important subject—particularly the 2016 valuations.

The cost control element of the 2016 valuation process was paused, as we know, in light of the McCloud judgment regarding transitional protection. The potentially significant and uncertain impact arising from the court’s judgment made it impossible to assess with any certainty the value of schemes to members. In July 2020, the Government announced that this pause would be lifted and the 2016 valuations completed. HMT will, when possible, set out in directions the technical detail of how the restarted 2016 valuations will operate. Outcomes for individual schemes will not be known until the results have been finalised. The noble Lord may not find this answer satisfactory, but I am afraid that it is the only answer I can give this afternoon.

The related issue of member cost was raised, not least by the noble Lords, Lord Davies and Lord Ponsonby. The Government have announced that the legislative remedy should be taken into account when completing the cost control element of the 2016 valuations. This is because, when the cost control mechanism was established, it was agreed that it would consider only costs that affect the value of schemes to members. Addressing the discrimination, giving members a choice of scheme benefits for the remedy period, involves increasing the value of schemes to members. The usual way these costs are managed is through the cost control mechanism. However, as I mentioned in my opening speech, this Bill will waive the impact of any ceiling breaches that may occur, so that no member will see a reduction in benefits as a result of the 2016 valuations—although any floor breaches will be honoured.

I move on to another important subject, the Police Superintendents’ Association, which was raised by a number of Peers, including the noble Lords, Lord Hendy and Lord Davies, the noble Baroness, Lady Janke, and the noble Lord, Lord Mackenzie. As the House might expect, I cannot comment too much on the specifics of any live, ongoing litigation. However, I confirm that this Bill will ensure that all eligible public service workers have access to high-quality defined benefit schemes on a fair and equal basis. From 1 April 2022, all those who continue in service in the main underfunded schemes will do so as members of the reformed schemes, regardless of age. Legacy schemes will close to future accrual, which means that from this point onwards all members will be treated equally in terms of which pension scheme they are a member of. I noted very strongly the points raised in particular by the noble Lord, Lord Mackenzie, and, while I cannot comment too much, I shall pledge to pass his comments on.

I want to say a little more on this point. The Government consulted on proposals to remedy the discrimination identified by the courts in July 2020. Officials met with the scheme advisory boards for the public service schemes, including the scheme advisory board for the police pension scheme. The Government published the response in February this year, and officials have arranged a further meeting tomorrow to discuss the Bill with stakeholders, including the Police Superintendents’ Association. The Home Office will undertake further consultation with employee representatives of the police pension scheme in relation to the scheme regulations, which will set out the detailed changes to the scheme. I hope that gives some comfort that some progress has been made.

I have not really managed to answer properly some of the questions raised by the noble Baroness, Lady Janke. Can I say something about trust? She raises a very important point—that trust between the Government and all the public service sector workers and the operators of the scheme is incredibly important. She made the point that perhaps the trust is not there and, okay, I have noted that and will pass it on. Perhaps we need to work hard on that, but it may be linked to the fact that these matters are extremely technical; there are a number of matters that we need to sort out, as she knows. She herself mentioned that this Bill and this area are quite complicated.

In the same breath, may I answer a point raised by the noble Baroness and by the noble and learned Lord, Lord Hope, about giving information to members to inform them on decisions that they might care to make as a result of the transitional period decisions? As I said at the beginning, statements will be provided so that individuals can weigh up the choices. By the way, that is the case for the judiciary as well, just to reassure the noble and learned Lord on that.

I shall check Hansard, as there were probably a number of other questions, but I hope that I have covered the main themes from this important debate. I finish by thanking all noble Lords for their contributions. It is very important to say that we must ensure that those who deliver our valued public services continue to receive guaranteed benefits on retirement on a fair and equal basis and in a way that ensures that pensions are affordable and sustainable. I commend the Bill to the House.

Bill read a second time and committed to a Grand Committee.