Backbench Business — [Un-allotted Day] — CPI/RPI Pensions Uprating
Bill Presented — Private Pensions (Charges, Disclosure and Accountability) Bill
12:39 pm

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John McDonnell (Hayes and Harlington, Labour)

I beg to move,

That this House
notes that the e-petition entitled Public and Private Pension Increases—change from RPI to CPI attracted over 100,000 signatures very quickly, revealing a high level of concern about the Government’s decision to change the indexation for occupational pensions from the Retail Prices Index to the Consumer Price Index, which will mean that many people, both those retired and those yet to retire, will receive less in their pension payments than they were led to expect;
and calls on the Government to reintroduce the RPI measure immediately.

The motion is tabled in my name and those of a number of colleagues, and I should like to inform you, Madam Deputy Speaker, that I would like to press it to a Division.

This important debate would not be taking place today were it not for the efforts of one individual. This is real democracy in action. Jim Singer is a member of the Public and Commercial Services Union, and he was so angered by the Government’s unilateral decision to switch the methodology of how his pension would be calculated from the usual retail prices index to the consumer prices index that he launched an online petition. Within weeks, that petition had secured more than 100,000 signatures in support. I should like to thank Jim and all those who have signed the petition. I should also like to thank the Backbench Business Committee for agreeing to the request for the debate, on behalf of myself and my colleague, my hon. Friend Dame Anne Begg. Hon. Members might know that she has recently suffered a serious accident, and she is unable to attend the debate today. I am sure that the whole House will join me in wishing her a speedy recovery.

Part of the reason that so many people signed the petition so quickly is the anger felt by so many at what they see as a betrayal of the promises that they were given before the election, particularly by the coalition parties. Those parties gave a firm undertaking that they would not interfere in people’s pensions in such a detrimental way. Within weeks of the general election, however, in June 2010, the Chancellor announced in his emergency Budget the replacement of RPI with CPI for the purposes of uprating public sector pensions and the state second pension. That is having a direct impact on 12 million public sector workers and 4 million private sector workers whose scheme rules link upratings with statutory orders. In my constituency, the switch has hit large numbers of pensioners in the British Airways pension scheme, who feel deeply aggrieved. It is not just the broken promise that has angered people; there is also a sense of unfairness that people who have done the right thing—

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Andrea Leadsom (South Northamptonshire, Conservative)

If the hon. Gentleman feels that the proposition is completely unreasonable, will he explain why the Labour

party has moved its own pension scheme into CPI on the ground of affordability?

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John McDonnell (Hayes and Harlington, Labour)

That is also a move that I would not have supported, so I am being consistent in my opposition. I am sure that delegations of Labour party organisers and others will be making representations to the party on the matter.

As I was saying, there is also a sense of unfairness, in that people who have done the right thing, joined a pension scheme and saved through their scheme to protect themselves in their retirement are now seeing their pension undermined and, in some instances, even put at risk. The effects of the shift from RPI to CPI are serious for millions of ordinary people who have pursued a career and invested in a pension with the expectation of a decent pension.

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Caroline Lucas (Brighton, Pavilion, Green)

Does the hon. Gentleman share my concern that, in the House last week, the Minister of State, Department for Work and Pensions, Steve Webb wrongly implied that the National Pensioners Convention was in favour of the switch from RPI to CPI? Will he join me in calling on the Minister to respond to the NPC’s request to set the record straight, given that the NPC actually favours a quadruple lock for pensions uprating involving CPI, RPI or earnings of 2.5%, whichever is the higher? Does he hope, as I do, that the Minister will take this opportunity to apologise?

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John McDonnell (Hayes and Harlington, Labour)

I am pleased that the National Pensioners Convention supports the quadruple lock, because that is what I have proposed in the House when we have debated this matter previously. It would come as a bit of a surprise if the NPC were to support the switch to CPI, given that a number of its members handcuffed themselves and blocked the road outside Parliament last week in protest against the measure. That is a form of direct action that I support.

The switch has had an impact on millions of people, as I have said. That is because, historically, the difference between CPI and RPI has been between 0.7% and 0.9 %. When the Government introduced their statutory instrument to force through the change, the Office for Budget Responsibility assessed that the difference would be 1.1%. Since then, in November, the OBR published a working paper that indicated that the gap would widen, and so increased its forecast for the long-run difference between CPI and RPI to 1.4%. What that means in practical terms for people’s pensions is that after 15 years a CPI-indexed pension would be 17.4% lower than an RPI-indexed pension, and after 20 years it would be between 23% to 25% less. That is a significant amount. That was confirmed by the much-cited Hutton report on pensions, which stated:

“This change in the indexation measure, from RPI to CPI, may have reduced the value of benefits to scheme members by around 15% on average. When this change is combined with other reforms to date across the major schemes the value to current members of reformed schemes with CPI indexation is, on average, around 25% less than pre-reform schemes with RPI indexation.”

Many hon. Members will have received representations from people working in different jobs about what the switch means to them. Let me cite some examples to

give the House a flavour of why there is such depth of feeling out in the country on this issue. Let us take the case of Jim Singer himself, the creator of the e-petition. Jim has worked for the Department for Work and Pensions as a partnership development manager in the east of Scotland, based in Aberdeen. He has worked for the civil service for 35 years. He has just turned 60, and he will retire on a salary of 29,000.

As a result of the pay policy imposed by his Department and the Government, Jim has had a pay increase of only 3% in the last five years. That has had the effect of reducing the value of his final salary by around 25%, as against RPI inflation over the past five years. Even if his pay had kept pace with the Government’s favoured indicator, CPI, his final salary would have been 13% higher. That in turn means that his pension will start at a level of over 3,000 a year lower than if his pay had kept pace with RPI, and that his lump sum will be cut by over 9,500. So, he will have a 1,600 pension loss and a 4,960 lump sum under CPI. In addition, the switch from RPI to CPI is likely to cost Jim nearly 23,000 in pension over a normal retirement. Jim’s wife, Sheena, worked for British Telecom and has a pension which is also affected by the switch from RPI to CPI. She stands to lose 9,000 over a 20-year retirement.

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Harriett Baldwin (West Worcestershire, Conservative)

I thank the hon. Gentleman for giving us the range of examples. Is it his understanding that it is not his party’s policy to fight the next general election on a promise to revert to RPI?

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John McDonnell (Hayes and Harlington, Labour)

I scoured the Welfare Reform Bill Committee discussions on that point, and as I understand it, those on the Labour Front Bench made it clear that they were not going to write their manifesto in advance of 2015. The hon. Lady can be assured, however, that I shall be pressing for that policy to be adopted.

Let me press on with Jim’s example. The guide to his pension—the “principal civil service pension scheme, classic”, as it is called—was published by the civil service in 2009. It explained that his pension would be “index-linked”. On page 24, the guide explained that this index-linking meant that

“your pension is guaranteed to increase in line with inflation, as measured by the retail price index”.

When he heard that the Government had changed the index-linking of his pension to CPI, he wrote to the Minister for the Cabinet Office and Paymaster General, Mr Maude. He received the following reply:

“In hindsight, because the Minister has the discretion to decide which indicator best reflects the general level of prices, perhaps the booklet should have been drafted differently”.

That gives no satisfaction to Jim, who has lost so much money. He worked for 35 years with a guarantee of RPI, then, within a year of reaching his 60th birthday, the Government reneged on that guarantee. Over his retirement, the switch from RPI to CPI will not just be a minor change to an inflation indicator. For him, the switch will cost thousands.

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Andrew Murrison (South West Wiltshire, Conservative)

I congratulate the hon. Gentleman on securing this debate. I believe that the legal position is that the Minister is allowed to take into account prevailing economic

circumstances when making his judgments. Does the hon. Gentleman agree, however, that it is important that literature such as that relating to the armed forces pension schemes of 1975 and 2005 should be scrutinised to ensure that nothing within it could give anyone misleading information on which they might base their future pension plans?

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John McDonnell (Hayes and Harlington, Labour)

The hon. Gentleman is right. Jim did base his future plans with his wife on what he was told was a guarantee—a written guarantee—in the guide itself. That is not just unfortunate, but disgraceful. I agree that others should not be misled in that way in the future, and it should not have happened in the past. Thousands of pounds have been cut from Jim’s own pension. After 35 years of public service, the Government have knowingly cut his pension to pay off a deficit he did not create.

There are so many other Jim Singers. I recently met firefighters who were particularly angry that a firefighter retiring on a full pension will lose 52,000 over 20 years. This comes on top of a three-year pay freeze, after two years of only a 1% increase, which means no real increase in pension or pay for the best part of five years. The real cut in spending power for firefighters is a pre-retirement cut of 20% and a post-retirement cut of 22%. A 40% cut in income is a terrible price to pay for a crisis these people did not create.

I have met so many others, too. A Forestry Commission worker who worked for 24 years is losing 17,000; a jobcentre worker who worked at the Department for Work and Pensions for 26 years is losing 20,000; a tax inspector at Her Majesty’s Revenue and Customs with 36 years’ employment is losing 45,000. I became angry myself when I encountered examples provided by the Forces Pension Society of some horrendous losses—I do not know whether other Members have seen them. A disabled double amputee, a 28-year-old corporal, will lose 587,000 by the age of 70; a 40-year-old sergeant in the Royal Marines will lose 212,000 by the time he is 85; members of the Royal Fleet Auxiliary will lose literally tens of thousands of pounds. This is simply unacceptable.

Why, then, the change from RPI to CPI? In past discussions of this question, the Minister has been robust in his view that whether or not there was a need for cuts to deal with the deficit, CPI is a “better measure of inflation”. Numerous others have contested the suitability of CPI as an appropriate measure for pensions. The Royal Statistical Society is a particular example, and it provided us with another briefing yesterday. Its vice-president, Jill Leyland stated forcefully in a letter to the chair of the UK Statistics Authority:

“We do not feel that CPI currently serves the purpose of being a sufficiently good measure of price inflation as experienced by households to be used in uprating pensions”.

She went on to warn that its use would

“cause damage to consumer confidence in official statistics if it is perceived that uprating to pensions and other benefits is being governed by an index perceived by many as inappropriate and unfair.”

It was reiterated in the briefing sent to all Members yesterday that it is important for any index to enjoy the confidence of pensioners—and this index does not.

CPI was invented as a tool of macro-economic policy so that inflation rates could be compared across Europe, but because there was no agreement on how to calculate housing costs across European countries, that element was left out. CPI, because of its exclusion of housing costs such as mortgages, council tax, vehicle excise duty and TV licences, is criticised for not properly representing the real costs that pensioners face.

On top of that, as Members will know from the previous debate, there is what is described as the formula effect. CPI uses a geometric mean rather than an arithmetic mean, and we have long debates about those different means, so we have all become statisticians on this issue. In its calculations, CPI is supposed to take into account the ability of a person to shop around for cheaper goods. This—falsely in the eyes of many statisticians—assumes a sophisticated knowledge by pensioners of price variations and that consumers are sufficiently mobile to shop around. In reality, many pensioners are not the perfect shoppers of the economic model that CPI puts forward and are not mobile enough or capable of shopping around to secure the lowest price of all the goods in this basket.

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Jeremy Corbyn (Islington North, Labour)

I commend my hon. Friend for securing this motion. He makes the point that housing is excluded from the CPI. Particularly in London, house prices, rents and housing costs are going up well above the rate of inflation, and continue to do so. For elderly people, it is impossible to shop around: they have no choice; they have to stay where they are in the property they occupy, and they have no control over rents and associated costs. It is a double whammy on them.

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John McDonnell (Hayes and Harlington, Labour)

That is why—[Interruption.] As the Minister says from a sedentary position, it is mortgage costs, not rents that are excluded. However, the range of other costs that pensioners have to meet are not included—housing-associated costs such as council tax, for example. That is one reason why Age UK undertook detailed research into the real spending patterns of pensioners and arrived at a more realistic assessment in its “silver retail prices index” of what price rises pensioners face. That showed that the impact of increases in basics such as fuel costs and food were hitting pensioners harder than both the RPI and the CPI calculated.

The weaknesses of CPI have been extensively acknowledged. The EUROSTAT—the European Commission’s statistics body, which came up with the original proposals on CPI—is working on a harmonised approach to including housing costs. The Minister acknowledged some of these criticisms in the Welfare Reform Bill Committee and informed us that the Consumer Prices Advisory Committee is undertaking a detailed programme of work to look at ways of including housing costs, but that this would not be concluded in the next “year or two”. In the meantime, pensioners will lose out—significantly.

Despite all the debate about the statistics, we know that the real reason for the move from RPI to CPI is to cut public expenditure. When this matter came before the courts, the Government argued that CPI

“provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI and a better representation of the way consumers change their consumption patterns in response to price changes.”

They argued that that was the reason for the shift. Three High Court judges agreed that, on the basis of the facts before them, the Government’s move to CPI was really the result of their desire to force through budget cuts.

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Katy Clark (North Ayrshire and Arran, Labour)

Does my hon. Friend agree that one concern about the shift, which will reduce people’s pensions, is that people might opt out of pension schemes? One impact that that might have is to put people even further into poverty, so they will have to apply for state benefits. The shift will therefore not end up as a money-making exercise for the Government.

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John McDonnell (Hayes and Harlington, Labour)

Yes, I will deal with that point now. The Government’s decision to move from RPI to CPI was taken at an early stage after the election. It was basically a decision to make pensioners in those pension schemes pay for the economic crisis. That was the policy decision that the Government made. Thus, the very people who made no contribution to causing the crisis will now have to pay for it by cuts in their pensions—the one thing they hoped was secure in their lives. I view that as unacceptable by any standards of fairness and equity. As my hon. Friend says, it is incredibly short-term.

We know from surveys of existing contributors to pension schemes that the combination of significantly increased contributions and cuts in pensions payments means that many people are now questioning whether to remain in their pension scheme, while others are wondering whether to join it at all.

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Derek Twigg (Halton, Labour)

I congratulate my hon. Friend on securing this debate and tabling the motion. My Halton constituency is the 27th most deprived, and I know that my hon. Friend has deprivation in his constituency. Is it not constituencies like ours, where people living on low incomes strive all their lives to put some money aside for pensions, that are going to be impacted most by this draconian measure?

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John McDonnell (Hayes and Harlington, Labour)

Those most in need and those who saved the most will be the mostly greatly affected. My hon. Friend’s constituency, like mine, is a working-class constituency in which many people suffer from deprivation. They will now suffer that deprivation long into their retirement as a result of this measure.

To return to the point raised by my hon. Friend Katy Clark about the impact on the stability of future schemes, it is quite clear that if fewer people are saving for their retirement, there will be a greater cost to the Exchequer as more people become dependent on means-tested benefits. Similarly, if fewer people are paying into the schemes, it will put those schemes at risk—thus thrusting many more on to state benefits. As I said, this decision is so short-term.

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Brandon Lewis (Great Yarmouth, Conservative)

The hon. Gentleman is generous with his time. He refers to people not paying into pension schemes, but does he agree that the Government’s move to auto-enrolment will mean that there will not be that big a drop, as the

organisations involved have said? The fact that the schemes will be sustainable will be a part of the bigger picture—one of benefit in the long run.

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John McDonnell (Hayes and Harlington, Labour)

I support auto-enrolment, which is a good thing. What these pensions do is enable people to have an element of security in the future. The auto-enrolment process will work out over time; unfortunately, a number of these pensions will be caught in that gap as a result of the significant cuts being made.

I know that the cuts are said to be necessary because we have a deficit, but there is a straightforward, fair and equitable alternative, namely to make those who caused the crisis—and who benefited most in the boom years—pay for it.

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Glyn Davies (Montgomeryshire, Conservative)

The purpose of the change that the Government have made is to make public pensions more sustainable. We have seen what has happened in the private sector when they are not sustainable; many schemes have collapsed completely. Given that much of what Labour Members are saying constitutes an attack on the Government’s position, it would be interesting to know whether the position would be reversed if the Opposition became the Government.

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John McDonnell (Hayes and Harlington, Labour)

I can tell the hon. Gentleman that if I form the next Government, it will be. I ask him to stick with me.

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Andrea Leadsom (South Northamptonshire, Conservative)

I feel the need to challenge the hon. Gentleman’s suggestion that those who created the financial crisis should pay for it. How exactly does he think they would do that? Specifically, why does he think that the real, long-term problem that we have with sustainable pensions is linked to the very recent financial crisis, which I presume is what he is referring to?

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John McDonnell (Hayes and Harlington, Labour)

I will answer the hon. Lady’s question in a moment, but let me first respond to the point made by Glyn Davies about private pensions. I think that they are sustainable. The only reason we currently have a private pension crisis—and it has happened in my constituency as well—is that in the 1980s and 1990s private companies took pension holidays and undermined the pension schemes themselves. What we need now is a period of security during which we can rebuild the balances in those schemes. If public support is required, I will back that as well. The last Government established the Pension Protection Fund so that we could bail people out when there was an individual pension scheme crisis.

Let me end—because I have spoken for long enough—by responding to the point made by Andrea Leadsom. As I said earlier, there is a straightforward, fair and equitable alternative, namely the adoption of something similar to the principle that the polluter should pay. Those who created the crisis, and who gained most from it, should pay for it. Let me suggest two simple measures. First, we should tackle tax avoidance and evasion, which, as we now know, amount to anything between 120 billion and 150 billion a year. This week—I commend the Government on the way in which they dealt with this—just one bank, Barclays, tried to introduce a 500 million

tax avoidance scheme, and that is just the tip of the iceberg given what has gone on over the years and what is currently going on.

My second proposal is that the assets of those who benefited most in the boom should be taxed. Professor Greg Philo—I urge Members to look at his work—suggests a 20% wealth tax on the assets of the wealthiest 10%, which amount to 4,000 billion. That would raise 800 billion. Wealth taxes are currently being discussed throughout Europe.

Those two measures would eradicate the structural deficit and significantly reduce the country’s debt, thus enabling us to protect our pensions. The Government’s new measures are due to come into force on 1 April, but there is still time for them to pull back from the brink. I urge them to do so, on behalf of the 100,000 petitioners, but also on behalf of the millions of members of pension schemes who will suffer so much as a result of the switch from RPI to CPI.

Several hon. Members:

rose —

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. I must inform the House that Mr Speaker has not selected the amendment.

1:03 pm
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Harriett Baldwin (West Worcestershire, Conservative)

Thank you for allowing me to speak in this important debate, Madam Deputy Speaker. I congratulate John McDonnell and the Backbench Business Committee on organising the provision of parliamentary time for discussion of this topic. Having been a professional pension fund manager myself, I leapt at the opportunity to speak today. It is not often that, on a Thursday afternoon, we experience the excitement of discussing the difference between the geometric and the arithmetic mean in indexing. I thought I would put in a few words, as I also represent a constituency that is inhabited by a higher than average number of pensioners.

As a former pension fund manager, I recall the days when Britain had a pension fund system that was the envy of the world. We had a terrific private sector-led system, and workers in the public sector were also in very good schemes. I believe that Britain’s leadership in that regard began to unravel in the first Labour Budget after the general election in 1997, when the then Chancellor imposed a tax on pension schemes. It was pretty apparent at the time that that would undermine a private sector pension system which, as I have said, used to be the envy of the world.

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Jeremy Corbyn (Islington North, Labour)

I think the hon. Lady is in danger of misreading history. The Social Security Act 1986 promoted the destruction of occupational pension schemes, promoted personal private pension schemes, and eventually led to a gross mis-selling of pensions which had to be corrected by the incoming Government in 1997. I think the hon. Lady needs to take her historical narrative a little further back.

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Harriett Baldwin (West Worcestershire, Conservative)

The hon. Gentleman has clearly forgotten the imposition of a tax on private pension schemes in that first Labour Budget of 1997, which I think many people realised at the time would be a recurrent year-on-year tax that would lead to the erosion

of private pension funding over time. Private companies then acted very rationally. Many of them ceased to offer defined benefit pension schemes.

Let me give some figures which I take to be rough estimates. There are approximately 29 million people in Britain’s work force today, 23 million of whom are employed in the private sector. I was shocked to learn that only 3.2 million of those 23 million were currently active members of a pension scheme in which the employer makes any contribution. That contrasts with the position in the public sector, in which about 5.5 million of the 6 million employees are members of pension schemes. That is the proportion that we should aspire to in terms of pension provision throughout the work force. I know that our pensions Minister aspires very much towards movement in that direction.

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Andrea Leadsom (South Northamptonshire, Conservative)

Does my hon. Friend agree that, many years ago, public sector salaries were lower and therefore pension provision was always higher, but over the last decade or more salary levels have equalised, and in many cases the lowest-paid public sector worker now earns more than the lowest-paid private sector worker and has a pension that the private sector worker can only dream of?

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Harriett Baldwin (West Worcestershire, Conservative)

Personally, I aspire to a future in which all Britain’s pensioners can rely on a secure retirement income, which will come from three main elements.

I welcome measures taken by the pensions Minister and the Chancellor to provide a triple-lock guarantee: the linking of the basic state pension, and increases in that pension, to CPI, average earnings or 2.5%, whichever is the highest. That, I think, is an extremely robust foundation. As the Minister knows, I look forward to the inclusion in the Queen’s Speech of further legislation simplifying the state pension system, eliminating the means-testing deterrent to saving and creating a stable, predictable and inflation-linked state pension which will be the foundation for a basic level of income in retirement.

Of course, we need to aspire to a country where everyone has an additional employment-related pension. About 12 million people are already pensioners, and we welcome the fact that their inflation-linked increase will rise by over 5% this year: I believe that that is the largest cash increase in the history of the state pension. This Government’s budgeting decisions are therefore focusing on the needs of current pensioners, and for future pensioners the largest employers will from October start to auto-enrol their employees into employment-linked schemes. That measure enjoys cross-party support, and it will mark the beginning of a savings programme that is estimated to bring in a further 5 million to 8 million pension savers and add a substantial sum to the savings of this country. Otherwise, we will be woefully under-pensioned in future. We are currently a very under-pensioned country. It is tragic that our country has eroded its position in respect of pensions so much. In 1997, we were one of the leading pension countries in the world, but we now have a lot of catching up to do. I welcome all the steps the pensions Minister is putting in place to improve the situation.

Having mentioned the triple lock and auto-enrolment, I shall now make a few points about the difference between CPI and RPI. We all know that inflation is the

big enemy of the pensioner, as nothing erodes retirement income more. Lower inflation results in less erosion of retirement income, of course, but all pensioners must understand that they need to protect their fixed retirement income from inflation.

CPI is the inflation measure that we have instructed the Bank of England to target and to average out over time. I therefore think the Bank of England should, perhaps, consider moving its own pension scheme on to a CPI link. That scheme is currently linked to RPI, but it would increase everybody’s confidence in the Bank’s long-term ability to meet its CPI target if it were to adopt that measure for its pensions. That is a cheeky aside, however.

Neither the RPI nor the CPI measure will ever accurately reflect the inflation that pensioners experience. We have talked about the fact that mortgage interest is not included in the RPI basket. Interest rates fell dramatically in 2008 and that led to the RPI being negative in 2009—it was minus 1.4%. Do we want to follow an index that results in people having reduced income in some years? In that instance, we decided that we did not want that so we maintained a zero rate, but people still complained to me that their pension had not increased that year.

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John Leech (Manchester, Withington, Liberal Democrat)

Does the hon. Lady agree that people might have more confidence in the Government’s decision to move to CPI if we were to use CPI for all other calculations, such as train fare increases?

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Harriett Baldwin (West Worcestershire, Conservative)

I do not think that either the CPI or the RPI basket accurately represents inflation as experienced by pensioners. Most of them will have paid off their mortgage by the time they retire. Also, the CPI basket does not include council tax. Following the 100% increase in council tax under the previous Government, many council taxes have been frozen for the past few years. That is helpful for pensioners, as council tax represents a substantial proportion of their outgoings.

Food also represents a significant element of pensioners’ costs, and food inflation has been very high recently. Over the past 20 or 30 years, however, it has been largely on a downward trend, and food now represents a smaller proportion of overall costs than it did in the past. The cost of fuel and of heating the home is also an important factor for pensioners. That has also been rising sharply. Neither CPI nor RPI accurately represent pensioners’ experience of inflation.

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Grahame Morris (Easington, Labour)

Does the hon. Lady therefore support the GMB proposal for a bespoke pensions index that more truly reflects the cost of living of pensioners? As my hon. Friend John McDonnell said, they are not generally active shoppers who can readily switch between electricity and gas supply companies, for instance.

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Harriett Baldwin (West Worcestershire, Conservative)

I certainly accept the point that CPI implies that people are active shoppers. Most of the pensioners I have come across are extremely good active shoppers, however.

Every individual faces a unique rate of inflation. We have given the Bank of England the task of managing the CPI rate. It is therefore sensible to use that measure for assessing pension increases.

We have talked about the high proportion of Britons who do not have any pension savings for retirement, the fact that many private companies have closed down their pension schemes, and the fact that Britain has become woefully under-pensioned. Giving private-sector companies the flexibility to shift their index and linking pensions to CPI are both wise policies. They serve to put the overall public-sector pension liability on a more sustainable footing, which is important for all future public-sector workers. They also make the bargain between those with no pension provision and those who enjoy final salary, inflation-linked pensions fairer.

The Chancellor and the pensions Minister have faced a series of difficult choices, and they have made the right decisions. I believe the new measures will lead to our having more people across the work force saving for a comfortable retirement, which is an objective we all want to achieve.

1:17 pm
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David Crausby (Bolton North East, Labour)

Despite all the detailed arguments about geometric or arithmetical calculations, the reality is that CPI will pay out less than RPI. Even the Treasury calculates that the difference between the two measures is 0.5% per annum, and my hon. Friend John McDonnell revealed some even more disturbing figures. That difference explains why the Government have changed the measure without consultation or negotiation. They have done so to cut both their costs and the earnings of those who will be affected. This is not an efficiency measure that will benefit us all; it is simply transferring money from poor pensioners to the Government or to private pension schemes.

Although I abhor any reduction in the earnings of poorly paid workers, I accept that it is perfectly legitimate for an employer or the Government to argue that a change in their financial circumstances means they simply cannot afford to continue to pay the same levels of remuneration. In turn, the employee, either individually or through their trade union, is then entitled in any free society to make a decision on whether they are going to accept that reduction in pay or seek employment elsewhere—or look for a different pension scheme.

That is why I believe that this issue of changing the payment of pensions should be dealt with in two parts: the future should be dealt with differently from the past. It is one thing to say that any pension earned from now on will be dealt with by indexing it to CPI, but to say that the arrangement will cover the whole of someone’s pension life is another. It reminds me of the story of the young, inexperienced trade union representative who called his members to a meeting to announce that he had met their employer and had good news and bad news to report. He informed them that the bad news was that he had been forced to accept a pay cut on their behalf. When asked what the good news was, he said that he had managed to get it backdated.

It should be a fundamental principle that employees should be aware of what their pension will pay when they qualify for it, because they will, thus, be able to

make an objective decision about whether they should pay in and be part of the scheme. Pensions, once earned, are like earnings: they are the property of the individual and not the property of the employer or the Government. The employer and the Government should just be custodians of the pensioners’ invested money, and they should look after it prudently and honestly. Pensions are deferred wages, and backdating a pension cut is like backdating a wage cut—it is ridiculously unfair. In these circumstances, it is little wonder that working people are suspicious about saving up for their pension.

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Grahame Morris (Easington, Labour)

Does my hon. Friend acknowledge that if we attempt to balance the books on the backs of future pensions payouts, as the Government are proposing to do, there is a danger that people will simply opt out of pensions provision, particularly in the private sector, and therefore the cost that falls on the state and the taxpayer in the long run might actually be more? So this measure is a false economy.

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David Crausby (Bolton North East, Labour)

I have always believed that this is principally a matter of trust between employees and employers, be they private employers or the Government, and so I agree with my hon. Friend.

I have represented poorly paid working people all my life, and my sympathy lies with those who come to my surgery to tell me, “I’ve worked hard all my life and saved what I could, but now I am retired I wonder why I bothered because I am no better off than those who didn’t work and saved nothing.” I rarely agree with that argument, because the truth is that they are nearly always better off than they think they are as a result of their prudence, and their neighbours who live on benefits are usually worse off

than they are perceived to be, although I must say that sometimes it is very close to the margin. The Government’s decision to cut pensions arbitrarily by linking them to the inferior CPI encourages that prejudice, and it will persuade poorly paid people to save their money in a different and less sensible way.

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Steve Webb (The Minister of State, Department for Work and Pensions; Thornbury and Yate, Liberal Democrat)

The hon. Gentleman makes an important point about pension promises being kept. Will he confirm that he is aware that all his constituents who worked for a company whose pension rules entitled them, in writing, to RPI increases still have that right and have not been affected by anything we have done?

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David Crausby (Bolton North East, Labour)

I accept that that is the situation on their pension fund, as long as those individuals can trust those private pension schemes to continue to pay; I have to say that during my working lifetime that has not always been a very happy experience when it comes to private pension schemes.

My principal argument is against the Government’s decision to make savings at the expense of our pensioners by using CPI rather than RPI. Of course this is not the first time a Government have behaved in this way, as the Conservatives have a track record of not treating pensioners properly. Margaret Thatcher’s decision to make a change on the link with earnings has cost pensioners across the country many thousands of pounds. The harsh truth is that the public just cannot trust the Government any

more than they can trust their employers, and I find that very sad. It is not in the best interests of our country.

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Richard Graham (Gloucester, Conservative)

If the hon. Gentleman and others of his colleagues were so concerned about the decision made by the previous Conservative Government to separate pensions uplift from earnings, why did his party do nothing about it for the 13 years it was in power?

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David Crausby (Bolton North East, Labour)

The previous Labour Government did decide to restore the link and were committed to doing so. The current Government have now restored the link at a time when wages are flatlining, and the reality is that the restoration has cost them not a penny. But the real issue is not the restoration of the link, but the many thousands of pounds that have been lost by our pensioners until the day they die since Margaret Thatcher broke the link in the first place.

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Katy Clark (North Ayrshire and Arran, Labour)

I would have liked the Labour Government to have restored the link in 1997. I do not really understand why they did not do so, because the increases that were given were greater than they would have been had the link been restored. Does my hon. Friend accept that?

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David Crausby (Bolton North East, Labour)

I completely accept that. I do not recall any of the political parties demanding that the Government of the day in 1997 restore the link. I am not making my argument on a party political basis; I am trying to make some principled arguments about how Governments should behave towards pensioners in the longer term. I completely accept that when I criticise how the Government deal with pensioners, that reflects on a series of Governments whose actions have resulted in many of my constituents not trusting in pensions at all.

That is why I make the point that the public cannot trust the Government on pensions in the long term any more than they can trust their employers. So many employers took large pension contribution holidays in the good times and then argued when more difficult times arrived that they just could not afford to pay the increased cost, and I am sorry to say that the Government—this Government are proving this—behave in exactly the same way, the only difference being that when the Government renege on a pension deal they call it legal. When Robert Maxwell absconded with the Daily Mirror pension fund he was, properly, castigated as a villain, but when compared with the behaviour of a series of Governments he was a paragon of virtue. Their behaviour is partly accounted for by the fact that, in the main, we have no accumulated pension funds, with one generation of taxpayers paying the previous generation of pensioners. Prime Ministers and Chancellors of the Exchequer find it difficult to resist the temptation to renege on the promises made by the politicians who went before them. Whatever the reason, they should be ashamed of themselves because when they do that they are no better than an employer who just runs off with the pension scheme.

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John McDonnell (Hayes and Harlington, Labour)

In the representations that I have received, even when there is a pension fund, as with the teachers’ scheme, when they are desperately seeking revaluation and when it seems completely sustainable, members of the pension fund cannot understand the

increased contributions and the shift from RPI to CPI. The accusation that is being made goes to the heart of my hon. Friend’s point about trust. These people feel that they have been mis-sold a pension scheme based on the information they were given by successive Governments about what they would receive in the end.

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David Crausby (Bolton North East, Labour)

I think that members of the public have been mis-sold pension schemes over a generation by a series of Governments. It is about time that this House instructed its leadership to behave decently to pensioners. That is why I am trying to make the principled point that one Government should stick by the promises made by previous Governments. To effectively backdate the reduction in an individual’s pension throughout their entire life through this move on RPI and CPI must be completely unacceptable—[ Interruption. ]

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. I was waiting for Members to stand. I call Stephen Lloyd.

1:30 pm
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Stephen Lloyd (Eastbourne, Liberal Democrat)

I welcome the fact that John McDonnell has secured this debate and I agree with the tens of thousand of people who signed the petition—this issue is a concern for many people around the UK, so it is good that we are able to debate it. There has been a tremendous amount of frustration and anger and, to be honest, a certain amount of misinformation. I have given a lot of thought to the CPI versus RPI issue, and I hope that at the end of the debate we will be much clearer on a couple of key issues and that the members of the public who signed the petition will also be much clearer about some of the facts of the case.

For me, the subject is a challenge for three key reasons. First, as I have said, there is a lot of misinformation. Secondly, we are all, thankfully, living much longer, which is a challenge, as all parties understand. The previous Government appreciated that fact, which is why they began to raise the retirement age, and so did the Hutton report. We all know that although the fact we are living for so much longer has tremendous pluses, it is a financial challenge. Thirdly, I want the coalition to be as fair on this issue—and others—as humanly possible.

Let me give a little bit of context, as I think it is important to do so. This April, the coalition will be increasing the basic state pension by 5.2%, which equates to 5.30 a week and is the highest ever rise to the basic state pension. In the current economic climate, I do not suppose it would surprise anybody on either side of the House to hear that a number of siren voices gave strong economic reasons why we did not have to raise it by such an amount as the economic crisis was so profound.

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Grahame Morris (Easington, Labour)

In the interests of pursuing the point about clarity and greater understanding in this talk about percentages, triple locks and so on, does the hon. Gentleman agree with the representations that I have received from a firefighter in my constituency who says that in absolute terms, as a consequence of the switch to CPI, he will lose between 25,000 and 50,000 over 20 years?

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Stephen Lloyd (Eastbourne, Liberal Democrat)

I appreciate the hon. Gentleman’s reminder that percentages can be a wee bit obscure and it is better to talk in absolute numbers. The 5.2% on the basic state pension equates to 5.30 a week. On the particular issue the hon. Gentleman raises about his constituent in the fire service, later on I have a specific question about the basic state pension that I will be putting to the Minister to get some real clarity, not just on percentages but on numbers.

For those on the basic state pension, 5.30 a week is a substantial amount. To raise the state pension by the largest amount ever at this time in the cycle, in such economically challenging times, is a good thing. I would certainly compare it, as a number of my hon. Friends have, with the 75p increase introduced X years ago by the then Chancellor, Mr Brown.

The second bit of context concerns the restoration of the link to earnings. I know that there was a bit of to-ing and fro-ing earlier about that issue, but as Mr Crausby reminded us, it was cut by Mrs Thatcher in the ’80s. I think it was a mistake then, but all these years later we have restored it. With respect to the hon. Gentleman, the previous Government had 13 years to restore it but did not do so. Whether he likes it or not, I believe he should give us credit for it.

The restoration of the link to earnings is very important.

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John McDonnell (Hayes and Harlington, Labour)

During those 13 years, almost every year I tabled an amendment to the Budget to restore the link with earnings. Members of the hon. Gentleman’s party, and others, did not support it at the time.

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Stephen Lloyd (Eastbourne, Liberal Democrat)

I thank the hon. Gentleman for giving me that information. I was not aware of it, but it does not surprise me in the slightest. I know that the hon. Gentleman has been a doughty fighter on this point for many years and it is a great shame that he was not able to persuade those on his Front Bench to act when they were in government. I heard earlier that perhaps all those things will change when he leads the Labour party, so I look forward to that day.

The triple lock, to pick up on what Grahame M. Morris said, is one of those things that are a bit confusing. What the hell does it mean, the triple lock, 2.5%? I understand that it is difficult to explain to people. I find it difficult to understand what it means, because I am not very good with percentages. Where are we coming from with phrases such as “triple lock”?

When my constituents ask what the triple lock really means, I tell them—forgive me; I am not trying to make a huge political point, but this is true in Eastbourne—that the 75p pension issue they were so furious about would not be possible under the triple lock guarantee. We need to find the language and best way of putting across such points, and this one is very important.

I know that a few people want to speak and that the Minister will have a lot of details to cover, but there is one key issue that I have been mulling over for quite a while. I, like many hon. Members, get a lot of information from different sides of the divide. Some people say that they will lose tens of thousands because of the switch to

CPI, whereas those on the other side of the argument say the figures are nowhere near that amount and will be X rather than Y. To be honest, I am a bit confused.

As we are having this debate—again, I pay tribute to the hon. Member for Hayes and Harlington for securing it—I want the Minister to answer one specific question, so that it has been asked in the Chamber and is in Hansard . Will he confirm today that combining the triple lock guarantee, restoring the earnings link and benchmarking by CPI will mean that the basic state pension will, on the best estimates available over a 20-year period, be about 13,000 more than if we had simply retained RPI? I would be grateful if the Minister could confirm that unambiguously so that the public can be confident, in one way or another, about what the changes mean. Will they be 13,000 better off? Yes or no?

1:38 pm
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Katy Clark (North Ayrshire and Arran, Labour)

It is a pleasure to speak in this debate. I listened carefully to what Stephen Lloyd was saying and, in particular, to his question at the end about the basic state pension. Of course, the increase in the basic state pension might offset the loss for some people as a result of this change from RPI to CPI, but my understanding is that for the vast majority of people the amounts of money that are being talked for the basic state pension will not help individuals such as the firefighter to whom we have already referred. That firefighter is due to retire and planned his finances on the basis of a pension he was expecting to get, but now understands that he is likely to be in the region of 25,000 worse off if he lives the average length of time of someone in that situation.

Some very important principles are involved in this debate. I have always been surprised by pension law in this country and the fact that there is so much discretion. Within our system there is no guaranteed pension and there has always been a legal set-up within which it has been possible for employers to take pension holidays when the stock market has been doing well. There seems to have been a collective belief that things would stay the same and a failure to understand the very turbulent nature of the financial system. That is particularly important when we talk about pensions because people pay up and make decisions about their pension over many decades. They make decisions at the beginning, one hopes, of their working life that are going to affect what they receive 40 years later.

I believe that the Government’s decision to move from the retail prices index to the consumer prices index has been made on financial grounds—to save money. However, as I said earlier, I am not convinced that it will save the amounts the Government hope for in the long term unless there are going to be absolutely savage cuts in welfare benefits, although that might well come from this Government.

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May I endorse the hon. Lady’s approach to this issue regarding a number of the points she is making? This issue causes serious concern to my constituents. Age Sector Platform has highlighted that a pensioner with a 10,000 annual pension will receive more than 36,000 less—those figures are in direct contrast to some of those given by the hon.

Member for Eastbourne (Stephen Lloyd). These changes are a serious threat in my constituency, where pensioners spend their money in the retail sector; our retail shops and other outlets are taking a hammering, with many closing. Does my hon. Friend agree that although the primary problem here is a pensions problem, there will be a bigger impact on local micro-economies?

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Katy Clark (North Ayrshire and Arran, Labour)

I fully agree with the hon. Gentleman about the wider economic impacts the changes are likely to have. Indeed, that was one of the points I was trying to make in last Thursday’s debate on the uprating of social security benefits and pensions. If the collective effect of some of these changes is that some of those on the lowest incomes and on modest incomes have less money in their pockets, that will have ramifications for the economies of constituencies such as his and mine. Unfortunately, my constituency is extremely reliant on the public sector because we still have not recovered from the decades of industrial decline and the closure of traditional industries in areas such as North Ayrshire. We are therefore over-reliant on the public sector and nothing that the Government are currently proposing looks likely to reverse that trend.

I believe the proposal is about cutting public expenditure and I do not accept that it is about the deficit. The Government’s position is that the policy will be a long-term one, not a short-term one for four years or so. At the beginning of this Parliament, the Government’s policy was that they would pay off the deficit within the Parliament, but if we look at the progress that has been made to date and the economic impact that their policies are having, we see that the growth and unemployment figures suggest that we will still be left with that deficit at the end of the Parliament.

I intervened on my hon. Friend John McDonnell regarding opt-outs from public sector schemes. This is an important issue, particularly for those on low incomes. I have been provided with figures by the trade union Unison, as I believe have other Members, about the impact some of the changes will have on its members. These figures have been quoted in the House before and as far as I am aware they are accurate. Unison says that a woman receiving the average local government pension scheme pension for women of 2,600 a year would be 37 worse off this year and that a member—a man or a woman—receiving the average local government pension scheme pension of approximately 4,100 a year would be 58 worse off this year. It gives a further example of a woman on a median woman’s pension in the NHS pension scheme of approximately 3,500, who would be 49 worse off this year. As the hon. Member for Eastbourne indicated, there might be an element of offset so that if there are increases in the basic state pension and in other forms of benefit, some of those people might recover that money in other ways. However, going back to the example that Dr McDonnell gave, of someone on a public sector pension in the region of 10,000, I understand from what the Minister said in last week’s debate that such an individual would be unlikely to obtain equivalent sums in other ways and would be worse off as a result of the changes.

I am concerned about opt-outs and I would be grateful if the Minister addressed this issue today or on a later occasion, because there will be long-term consequences

of these changes, particularly for public sector schemes. There is great concern, particularly regarding those on low incomes, that we might see far higher levels of people opting out of public sector schemes as a result of this policy. That will be compounded by people’s experiences over recent years with the financial crisis. As we know, there is a complete crisis of confidence in the financial institutions and in the ability of vehicles such as pensions adequately to provide for people or to provide any certainty for future years. That is one reason why changes such as this RPI/CPI change are so unhelpful: it contributes to the erosion of that confidence when people do not know what they are going to end up with. They think, “If they make this change now, perhaps they’ll come back again and try to erode the scheme further in future years.” For people on low incomes, particularly women, this is a big issue, and I would be grateful if the Minister responded to my points. I know that some figures were provided more than a year ago about the likely impact of these policies on opt-out rates and there was great concern that those figures might have been over-enthusiastic.

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John McDonnell (Hayes and Harlington, Labour)

There have been other surveys since then. The Fire Brigades Union surveyed its members and the results showed there was potential for 30% to opt out of the scheme, which would threaten its viability.

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Katy Clark (North Ayrshire and Arran, Labour)

Of course, firefighters are a relatively well-paid group compared with some of the other groups we are talking about. It might well be that 30% of firefighters do not opt out of the scheme but that they are thinking about it at the moment because they are so concerned about some of the changes being proposed. One point to consider with firefighters and others who work in occupations that rely heavily on physical exertion is that they may not have the choice of working for longer. Paramedics and firefighters have very physical jobs and for them working extra years to pay more into their pension pot is often not a realistic option.

Finally, we need to address the issue in a broader context. I was very interested to hear the comments of Harriett Baldwin. I thought she was absolutely correct when she talked about the serious situation, with so few people having decent pensions to rely on. That is appalling. Her points about the retail prices index and the consumer prices index in relation to pensioners in particular were incredibly important. We know that housing costs are an issue, but council tax is also an issue for pensioners because they spend a far greater proportion of their income on council tax than others in the community. There is merit, then, in the GMB trade union’s suggestion that we consider what it calls a bespoke pensions index. We should perhaps explore that possibility more to compensate accurately and ensure that people enjoy pensions increases that mean that their living standards are not affected in real terms.

I want to make a broader political point about pensions. Many Government Members support this and speak about it regularly: we should be encouraging people to save for their retirement. We should not be encouraging people to have to rely on the state when they retire because their levels of income are so low that they are eligible for welfare benefits. Although we need a decent

basic state pension that everybody can afford to live on, we should live in a society in which people are encouraged to save through occupational pension schemes, regardless of whether they work in the private or public sectors.

I was extremely relieved, therefore, that the Government decided to continue with Labour’s legislation on auto-enrolment, which sets out the framework for doing something about the chronic levels of under-pensioning, particularly in the private sector. However, if we keep changing the basis on which people think they are paying into pensions, we will erode faith in the pensions system. Those thinking about auto-enrolment may take that into account when making their decision.

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Grahame Morris (Easington, Labour)

As usual, my hon. Friend is making some excellent and pertinent points, but will she comment on the arguments made by Government Members about this being a more sustainable package? Is not the issue the sustainability of the pensioners themselves—their income and ability to pay their way—and the need to offer them security in retirement? In truth, is there not an alternative—for example, taxing the likes of Vodafone and Barclays, and closing loopholes—if we want to make the public purse more sustainable?

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Katy Clark (North Ayrshire and Arran, Labour)

I agree with what my hon. Friend says about tax avoidance and evasion. We should be focusing on that much more. He will be aware that at the moment, while the living standards of those on low and modest incomes are falling in real terms—because pay has been frozen or cut in the public and private sectors and because the cost of food, energy and other commodities on which we all rely is rising so much—those at the top of society are also becoming wealthier. That gap between rich and poor has been escalating over the past two years, which, as a matter of public policy, is to be deeply regretted.

I am concerned that cumulatively the decision to move from RPI to CPI will have a substantial impact on the living standards of many thousands and millions of pensioners in the country. I do not believe that these decisions should be taken for short-term reasons—to balance the books over a short period—and as I have said, I am not convinced that they will work like that. We should be aiming to get cross-party agreement on the need to put in place a framework of financial incentives for people to save and to pay into public and private pension schemes. We need a safety net for those unable to do that, but we must also provide incentives to ensure that we have decent public and private sector pension provision in the future.

1:53 pm
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Richard Graham (Gloucester, Conservative)

I join others in congratulating John McDonnell on securing this debate. I recognise his sincerity and the consistency of his position on pensions over some time. I am also sure that his party—perhaps his party leader in particular—will have taken careful note of his desire to form the next Government, although he must forgive me if I do not immediately flock to his standard.

I draw attention to my statements of interests. I am chairman of the all-party group on occupational pensions and a deferred pensioner of the civil service pension scheme. That means, first, that I recognise the important

differences between CPI and RPI, although everyone in the House should recognise that this is a fairly nerdy subject to most of the public, and, secondly, that I would personally benefit from the hon. Gentleman’s proposal to form the next Government if the reversion to RPI is the cornerstone of his policy platform. I suspect, however, that the increased costs of his forming the next Government would greatly outweigh any selfish benefit for me.

That takes us to the nub of the issues that the hon. Gentleman raised. Why the change? What are the consequences? Is his motion the right way forward? I will first tackle the change. The difference between CPI and RPI, and the change made by the Government, reflect the growing costs, particularly of public sector pensions. I can do no better than quote from the Hutton commission’s final report, in which Lord Hutton, a distinguished former Secretary of State for Work and Pensions, wrote that

“between 1999-2000 and 2009-10 the…benefits paid from the five largest”

unfunded

“pension schemes increased by 32 per cent. This increase in costs was mainly driven by an increase in the number of pensioners, a result of the expansion of the public service workforce over the last four decades, longer life expectancy and the extension of pension rights for early leavers and women.”

That places in context the increases in Government spending and in the amount of taxpayers’ money spent on these pensions because all unfunded pension schemes are currently paid for directly from taxation.

The hon. Member for Hayes and Harlington is right that over time there will be a significant difference between the two rates of indexation—the Hutton commission estimated it at approximately 15%—and that that might reduce the pension benefits paid out to people previously accustomed to RPI. It is also worth mentioning, however, why CPI is a more appropriate index for pensions, and on this issue I can do no better than quote Mr Brown, who said in 2003:

“The long-term credibility of our symmetrical target will be enhanced—as the independent Office for National Statistics reports in its paper published today—by adoption of the internationally recognised measure of inflation, the harmonised consumer prices index. It is more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old”

retail prices index, because the spending patterns take

“better account of consumers substituting cheaper for more expensive goods.”—[Hansard, 10 December 2003; Vol. 415, c. 1062-3.]

The hon. Member for Hayes and Harlington did not say anything about that at the time the statement was made or in subsequent debate, although he might have had stronger feelings on the issue when it became more apparent that this would be applied to pensions.

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John McDonnell (Hayes and Harlington, Labour)

We need to be clear about what the then Chancellor introduced. He confirmed the measure of CPI for macro-economic policy with regard to comparisons across Europe. At that point, the intention was not to use it for pensions increases themselves, although a number of us said that if it was translated to the uprating of pensions or benefits, we would oppose it.

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Richard Graham (Gloucester, Conservative)

I am grateful to the hon. Gentleman for his intervention. He is correct, as I had just pointed out, that it was not then intended to apply to pensions, but it set the train in motion.

I want to address one technical issue. As I said earlier, I do not want the debate to descend too rapidly into every technicality on this very technical issue, but there is one issue that I have flagged up for the Minister: a relatively recent study by the Office for National Statistics on the differences between CPI and RPI. That raises the question of whether one of my assumptions about the differences is correct. I had assumed in a previous life that the major difference between the two indices was the absence of any provision for mortgage costs in CPI, but the recent ONS study puts a question mark over that and ascribes much greater impact to the difference between CPI and RPI in the formula reached. The Minister might wish to comment on that later if he has had a chance to study it, or reply at a later stage.

To return to the question, “Why the change?”, I have touched on the growing cost of public sector pensions, as laid out in the Hutton report, on the move from RPI to CPI as a better measure of inflation under the previous Government and on the recent ONS analysis of the differences between the two indices, but there is a further aspect to consider: the heavy cost of maintaining the RPI link over time. The hon. Member for Hayes and Harlington suggested that the benefits of these changes to the Government were short term, but it is worth mentioning that the Hutton Commission’s conclusion was precisely the opposite. It concluded that

“gross expenditure on unfunded public service pensions will remain close to current levels as a proportion of GDP over the next decade.”

Lord Hutton anticipated—the Minister might care to update us if he has further figures—that the financial benefits of the changes being made would be seen over a much longer time period. He estimated that some 20 billion would be saved by 2060, but that is in the very long term—long after the hon. Member for Hayes and Harlington has formed his Government and retired from this place, I suspect. The benefits were not intended or calculated to be short term; they were precisely the opposite.

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Grahame Morris (Easington, Labour)

The hon. Gentleman refers to the Hutton report and predictions about the call on the public purse, but my understanding is that, as a consequence of the negotiated settlement reached between the previous Labour Government and the public sector trade unions, the costs were projected to fall from 2% of GDP to 1.4% by 2060. Does he agree?

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Richard Graham (Gloucester, Conservative)

To be honest, I have no insights on the talks between the previous Labour Government and the unions at the time. However, with regard to what the previous Government said they could or would do, I am reminded of the earlier comments of Mr Crausby about the Labour party’s commitment to reforming or restoring the link between pensions and earnings. I have to ask him and Grahame M. Morris how long a party can have a commitment to doing something without doing it and retaining any credibility. If my wife asked me to do something and I say that I am

committed to doing it but some 13 years later I had done nothing about it, it would be hard for her to believe a word I said.

The hon. Member for Hayes and Harlington rightly talked about the importance of trust in the long-term provision of pensions and of sticking to promises, but he was silent on this issue. I suspect that he agrees with me and would have preferred his party to have done something about its commitment rather than just talk about it.

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John McDonnell (Hayes and Harlington, Labour)

The hon. Gentleman must not have heard me. I was not silent on that issue; in an intervention I said that I supported the commitment. In fact, on an annual basis I proposed the restoration of the link with earnings. Eventually we secured a commitment from the previous Government that they would introduce the link no later than 2012. To be frank, that is what this Government have done to a certain extent. With regard to the GDP figures, the Hutton report sets out clearly the falling costs. On the point about the union negotiations, the hon. Gentleman will know, because the Secretary of State reported it, that in the last negotiations the unions accepted that any costs resulting from increasing longevity would be borne by increasing contributions, but they would not accept the shift from RPI to CPI.

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Richard Graham (Gloucester, Conservative)

I am grateful to the hon. Gentleman for his intervention and for confirming his position on the previous Government’s stance, which is what I had assumed it to be.

I have covered in some detail the question of why this change is being made and will now touch briefly on what the consequences will be before concluding with whether the motion is the right way forward. The hon. Gentleman referred to three consequences that cause him concern: first, pensioners will lose out; secondly, workers might leave the schemes; and thirdly, the fact that both those consequences would have a negative impact on social service expenditure.

It is of course true that those pensioners and future pensioners, such as myself, who would benefit from the retention of RPI as the index of inflation will lose out absolutely, but I do not believe that anyone involved will lose out relatively. It is important to realise that very few countries in Europe have defined benefit pension schemes at all. Most of us who will benefit as a result of being members of a public sector defined benefit scheme, such as myself, even if for only a few years, will still be much better off than most workers in the UK and Europe.

Above all, it is important to realise that the people who suffer the most in retirement are those who are not members of any pension scheme at all, those for whom the new pension scheme—the national employment savings trust—is intended to be of great use, and those who depend entirely on the basic state pension. In that context, it is relevant that the Government have done a considerable amount to help those who survive on the basic state pension partly through the triple lock guarantee: the reversion to the link with earnings, a basic absolute increase of 2.5%, and the link to inflation. That is important and was referred to by Members who spoke earlier, including my hon. Friend Harriett Baldwin and Stephen Lloyd.

It is important that the change to the basic state pension envisaged by the Government will also be of great benefit to workers and to almost all women who work part time in order to bring up their children and will save considerably on the administrative costs of having two current basic state pension schemes, one of which, the means-tested one, has in my view had a discriminatory impact on those people whom the hon. Member for Bolton North East rightly referred to when he said that some of his constituents with a small amount of savings might be no better off than those with no savings at all. It is important that the Government remove that difference so that we can establish once and for all the principle that those who save will always be better off. I know that that is what the Minister is driving towards and very much hope that we will be able to achieve that goal, that we can state it with confidence and that our constituents will be able to believe it before the end of this Parliament.

I do not believe that the consequences of the changes will be as drastic as the hon. Member for Hayes and Harlington claimed they would be. I reject the argument that the change is principally about contributing to the Government’s efforts to bring down the budget deficit. In fact, I do not think that it will make any difference to the budget deficit in the short term. I also reject the idea that our most vulnerable workers will suffer, because the most vulnerable workers are those who are not on defined benefit schemes and survive purely on the basic state pension. I applaud the fact that the Government have been generous to those of my constituents who are on that scheme. Instead, I believe that the long-term savings to be had from the change will hugely benefit all our constituents. First, they will reduce the amount of interest currently paid on our vast mountain of debt—120 million a day—which is money that could much better be spent on education, health and other good causes.

Secondly, if those businesses that have defined benefit schemes are able to change the index from RPI to CPI, they will increase their chances of surviving, growing and providing jobs for our constituents, and that is important, because many smaller businesses that have been going for about 100 years in my constituency are engineering companies that do not have great, specific investment skills, and the money that they are spending to top up their defined benefit pension scheme is being spent often at the cost of growing their business, of establishing more investment in their factories and of providing more jobs for my constituents.

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Richard Graham (Gloucester, Conservative)

Of course I will give way to my distinguished and gallant hon. Friend.

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Bob Stewart (Beckenham, Conservative)

My hon. Friend is very kind. For me the most important thing that we can do for the future is to look after the people who now do not have a pension. We have a basic state pension, but we want to encourage as many people as possible to get on to a supplementary pension, and I hope very much that the Government’s scheme will do so. I am thinking of the poorest people in the country, and about them having not just a state pension, but an add-on, so that we can lift them out of poverty in retirement.

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Richard Graham (Gloucester, Conservative)

My hon. and gallant Friend is absolutely right, and that is precisely what the new NEST pension is designed to achieve. I am sure that he will join me later this summer, when the NEST pension arrives at the same time as the Olympics, in hoping that many of our poorest constituents will indeed benefit from that new savings scheme.

Is the motion the right way forward? I believe that it is not, because above all else the change in the pension inflation index, from RPI to CPI, which this Government have seen through, is all about benefiting future workers, who are those who will pay for the pensions of current pensioners, about benefiting our children and about benefiting our grandchildren.

Governments are often accused of being short-term and of purely looking for votes in the next election, but Governments should be looking to future generations and to what we can pass on to them. The changes made will, in the longer term, benefit our country and our constituents hugely. I understand the emotion and the beliefs behind the motion in the name of the hon. Member for Hayes and Harlington, but I will be voting for future generations, our children, our grandchildren and their interests, and that is why I will be voting against the motion.

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. I do have to remind hon. Members that, having indicated that they want to speak, they have to carry on standing—not looking at their phones.

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

I call Grahame M. Morris.

2:12 pm
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Grahame Morris (Easington, Labour)

I am grateful, Madam Deputy Speaker. Thank you very much, indeed.

I congratulate my hon. Friend John McDonnell on securing this important debate and thank the Backbench Business Committee for granting us this opportunity, which has arisen out of an e-petition signed by in excess of 100,000 people.

I have also received many representations from constituents, in letter, in person and by e-mail petition, so I should like to make some points in the debate, and I am grateful for the opportunity to do so. I shall try not to repeat those points that Members on both sides of the House have already made.

There has been a decision to change the index that is used to increase state pensions, public sector pensions and, indeed, large aspects of private sector pensions. In an earlier intervention, the Minister said that the change would not affect private pensions that already have RPI in their terms, but certain private pensions that have a statutory link will be affected, so perhaps he will clarify that point in his final remarks.

My concern—this is based anecdotally on evidence that constituents have presented to me in letter form and in person—is that some members of public service pension schemes might lose up to 25% of their pensions. It is difficult, as Richard Graham said, to understand the complexities of RPI

against CPI, but my fairly simplistic view is based on what is the bottom line for the people who are affected. I am concerned that many of my constituents, who are not well-paid public sector pensioners, will be adversely affected by the change.

To reinforce the point that the hon. Gentleman made from the Conservative Benches, I note that it seems that the Office for Budget Responsibility underestimated the gap between RPI and CPI by about 100%. When the OBR made its forecast, it said that the difference would be about 0.7%, but it has turned out to be nearer 1.4%. In other words, the switch could cost pensioners in Easington and, indeed, throughout the country, many thousands or even tens of thousands of pounds over their retirement.

I do not believe that it is disputed that the change will save the Treasury and employers with private sector pension schemes billions of pounds, at the expense of those saving for their retirement. In an earlier intervention, I raised an issue that was raised with me by the GMB trade union, which suggests that we look at a bespoke pensions index that might more accurately reflect the cost of living faced by pensioners. When I read the suggestion, I thought that we should look at it a little further, given the controversy raging about which is the correct measure, but in response to an earlier point I must say that the previous Government used CPI as a comparator. I stand to be corrected if need be, but the traditional index that we have used in this country since the 1940s has always been RPI. The previous Government introduced CPI not for pensions but because the measure was used in the European Union and was more readily understood when used as a comparator across other EU states. I would never advocate applying it for the purposes of pension calculation.

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Katy Clark (North Ayrshire and Arran, Labour)

I am listening to my hon. Friend with great interest. Does he agree that the British economy and, particularly, British housing costs have traditionally operated in a different way from those of many other parts of Europe? That is one reason why the retail prices index might be a better way of doing things—as other European economies work in a different way.

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Grahame Morris (Easington, Labour)

Absolutely; that is a very good point well made. I am certainly aware, from visits to Germany and elsewhere, that there is a much larger private rental sector in Europe, so it is quite right that we retain RPI, as it takes account of mortgage costs, which are a significant factor for many people.

I support the motion because the change from RPI to CPI means that many people, both those already retired and those yet to retire, will receive less than they were led to expect. As my hon. Friend said in her speech, many of those people have made long-term decisions about their income in retirement, such as to pay off mortgages and other commitments, based on the fact that they would receive a pension that was linked to RPI. Retrospection is unfair, and the House should call on the Government to reintroduce the RPI measure immediately. For a typical firefighter on a full pension this year, the actual cost over 20 years of retirement is between 25,000 and 52,000—that was confirmed in a survey that was carried out by the Fire Brigades Union—and that is because the Government have imposed this measure. I emphasise that these changes have been imposed without any consultation.

The argument that CPI is a more appropriate measure for how pensions should be paid is false. Indeed, all three of the judges in a test case brought by the FBU stated that the move to CPI is merely to do with the desire to force through budget cuts. To pretend otherwise is ridiculous. Government Members are suggesting that it is not about deficit reduction, but it is certainly about budget cuts and placing the burden of those cuts unfairly and unjustly on to pensioners.

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Katy Clark (North Ayrshire and Arran, Labour)

On my hon. Friend’s point about the effect on individuals, he will be aware that one of the other changes proposed for many public sector pension schemes is to increase the contribution—the payment—that the individual makes while reducing the percentage that the employer pays. Does he agree that that, combined with the RPI/CPI change, means that employers will be paying less as their part of the contribution towards the pension while the employee is paying more?

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Grahame Morris (Easington, Labour)

That is an excellent point. It is a double whammy.

Research that I have seen shows that between 1989 and 2011, RPI was on average about 0.7% higher than CPI inflation.

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Steve Webb (The Minister of State, Department for Work and Pensions; Thornbury and Yate, Liberal Democrat)

I would not usually interrupt the hon. Gentleman but, to set the record straight, he is grossly misrepresenting what the judges in the court case said. I have a copy of the judgment with me. He said that the judges found that the CPI shift was about forcing through budget cuts. Can he point to where in the judgment they said that?

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Grahame Morris (Easington, Labour)

I was alluding to the FBU’s response to the judgment. I apologise if I have misled the Minister in that regard.

It is worth noting that significant changes to public sector pensions were negotiated with the trade union side by the previous Labour Government. Those changes recognised some of the issues that have been highlighted about people living longer, which is genuinely a good thing, and about affordability. The trade unions demonstrated a genuine desire to reach an accommodation that was fair and just. The response to the switch to CPI that I am hearing says that it is an enforced settlement that is not fair or just.

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John McDonnell (Hayes and Harlington, Labour)

In order that nobody is misleading the House whatsoever, let me quote from the judgment. Judge Elias said:

“There can be no doubt that the immediate driving force behind the change from RPI to CPI was the need to secure cuts in the welfare budget.”

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Grahame Morris (Easington, Labour)

I am grateful for my hon. Friend’s intervention, as I did not have the judgment to hand. I am sure that the Minister will have taken note. [Hon. Members: “That was a dissenting judge.”] Even so, it is a fairly radical criticism of the justification for this change, and the Government would do well to take note of it from such a learned source.

The TUC’s general secretary, Brendan Barber, has said of the general pensions crisis:

“The real pension crisis in the UK is the retreat by employers from providing pensions in the private sector”—

that point has been acknowledged by Government Members—

“and the big unexpected looming bill for tax-payers is the cost of means-tested benefits for the millions let down by their employers.”

That is another reference to the issue of false economy, which the whole House should take into consideration. There are risks in implementing this strategy. If we try to balance the books now on the basis of future payouts to pensioners, we may well be storing up costs for the future as people decide to opt out of pensions altogether. That would mean that when they retired they qualified for means-tested benefits, so the cost to the Exchequer would be higher.

In the private sector, large numbers of pensioners are already starting to feel the pinch from these moves.

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John McDonnell (Hayes and Harlington, Labour)

I am sorry to interrupt my hon. Friend again, but as hon. Members said from a sedentary position, “That was a dissenting judge”, let me quote a second judge, who said that he accepted the submission of Mr Beloff QC for the Police Negotiating Board claimants on the basis that, on any fair reading of the evidence, the need for deficit reduction was the driver and that the other merits of CPI were essentially deployed in order publicly to justify the switch.

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Grahame Morris (Easington, Labour)

I am grateful for that point of clarification. By my arithmetic, that makes two judges out of three, which is a majority.

That strengthens the argument that the Government should at least be honest that this measure is not designed around fairness but is placing the cost of deficit reduction, or cuts in public expenditure—whatever terminology one uses—on to public sector pensioners instead of looking for an alternative. As my hon. Friends have said, there is a simple alternative. The case for more cuts to pensions and public services has now been lost on the back of evidence that growth in our economy has been falling for two years and unemployment continues to rise. The Chancellor himself has indicated that we are borrowing 158 billion more than he originally anticipated. We need to offer people security in their jobs and in their retirement.

The case put forward by Conservative Members, in particular—notably yesterday in a Westminster Hall debate—for rolling back workers’ rights, as well as slashing pensions, was this week shown the red card by the Bank of England in an evidence session in a House Committee. No less a person than Sir Mervyn King said that making it easier for companies to sack staff would make no difference to his economic forecasts. Instead, we need to get the economy growing. We should be creating jobs to boost the economy, giving people job and pension security. From the perspective of the economy, the bonus—I am not referring to bankers’ bonuses, because I do not think that those should be paid—is that that is more likely to cut the deficit. As my hon. Friend Mr Crausby indicated, many pensioners use that money directly in the local economy. Reducing pensions has an immediate negative effect in local economies and the national economy. To argue otherwise is disingenuous and, indeed, nonsense. Cutting jobs and pensions will damage the economy now and in the future. What is worse, it will increase the deficit.

Like elsewhere in national policy, my view is that the Government have it wrong on this issue. We should be investing in housing and public transport. We should be looking at the issues that Labour set out in its five-point plan for jobs and growth. Given the news this week about tax avoidance and evasion, I think that we should be taking measures on that issue. I welcome the fact that the Government have closed one particular loophole, so that Barclays and others will have to pay their fair share of tax and not be able to dodge it. However, the Government are penalising pensioners before even asking about the millions that Vodafone is refusing to pay in taxes on the profits that it made from activities in this country. That is an absolute disgrace.

In conclusion, the House should support the motion and send the message to the Government that their priorities are at best mixed up and at worst explicitly wrong. We should value the pensions that take care of our ageing population, and we should not put people off saving for their future.

2:30 pm
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Guto Bebb (Aberconwy, Conservative)

I will be brief. It is a pleasure to speak in this debate and to follow Grahame M. Morris. I congratulate John McDonnell on ensuring that this issue is debated on the Floor of the House.

Detailed rebuttals of the arguments of Opposition Members have been provided by my hon. Friends the Members for West Worcestershire (Harriett Baldwin), for Gloucester (Richard Graham) and for Eastbourne (Stephen Lloyd), who said that we have to consider the changes in context. Part and parcel of that context is what is being done by the Department for Work and Pensions, which is getting to grips with the need to reform not only the welfare state, but our pensions system. By all measurements, our pensions system was one of the best in Europe in 1997, but was left to us in 2010 in a complete and utter mess.

I have heard it said time and again in this debate that people should have security when planning for the future. I could not agree more, but I worry that the 75% to 80% of people listening to this debate who are not in the public sector will be wondering about their security and pension provision, which were attacked by the previous Labour Government in a raid worth 5 billion a year, starting in 1997 and going on for year after year. That has reduced the value of private pension provision and made it more difficult for private companies to keep that provision in place. As a result, final salary benefits are now almost unheard of. That was not the case 13 years ago.

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David Davies (Monmouth, Conservative)

I am delighted that my hon. Friend has given way. I congratulate him on what he is saying. Does he share my concern that some unions are in the habit of lambasting shareholders, as though shareholders are people with top hats and canes from a previous century, whereas the majority of them are people in the private sector who are dependent on private sector pensions?

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Guto Bebb (Aberconwy, Conservative)

Indeed. When people say that HSBC’s 14 billion profit is indefensible, I make the case that for somebody with a private pension, that profit is impressive

because the greater the profits, the better the pension provision for people who are saving for their own retirement.

The proposed changes have to be looked at in context. The triple lock should be welcomed. It has been semi-dismissed by Opposition Members today. They talk about the importance of the RPI link, but under the previous Government, the RPI link resulted in a 75p increase in the state pension. Under this Government, with the triple lock in place, the increase will be 5.35 in the coming financial year. Anybody who says that that change is not worthwhile should talk to pensioners in my constituency who are grateful for the additional 5.35 that they will receive.

We have also heard about the impact of the change from RPI to CPI on people in the public sector who are planning for their retirement. I heard about that at first hand when I took part in a phone-in programme on Radio Cymru. I was contacted by the headmaster of a very good school in the constituency of Hywel Williams. He stated that the changes were completely and utterly unacceptable because he would lose almost 80,000. People who called in to respond to that were flabbergasted that somebody could lose 80,000 as a result of the change, because it brought home to them the difference between the provision that they were able to pay for through their own saving and what was available in the public sector. The average private sector pension pot is 30,000. To hear of somebody losing 80,000 as a result of one technical change was shocking to the majority of people.

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Hywel Williams (Shadow Spokesperson (Cabinet Office); Arfon, Plaid Cymru)

How typical does the hon. Gentleman think that head teacher is of pensioners in my constituency, in which he lives, and of pensioners in his constituency, which is full of people on public sector pensions?

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Guto Bebb (Aberconwy, Conservative)

The hon. Gentleman makes a good point. Of course the individual in question is not typical, but I am afraid that the sense of entitlement he portrayed in that conversation is typical of a public sector that does not understand that the average wage is about 4,000 higher in the public sector than in the private sector, excluding pension provisions.

I am not attacking the public sector. I—and others—am trying to highlight the fact that public sector provision is significantly better than the provision for the majority of the population. In their changes to public sector provision, the Government are not attacking the concept of a defined benefit pension scheme. They are introducing proposals that will ensure the survival of defined benefit pensions. The truth is that we cannot carry on with a situation in which the majority of the population are expected to live in very difficult circumstances when they retire, yet their taxes are used to support unaffordable pension schemes.

By getting to grips with the need to change the retirement age and increase public sector workers’ contributions to their pension pots, the Government are putting their pensions on a more secure footing by ensuring that they will be available in the long term. They are also ensuring that the feeling of unfairness about the difference between private and public sector provision is reduced. Private sector workers will see that public sector workers are now making a greater contribution to their own pension provision. It will still be less than

the taxpayer contribution, but it will be greater than before. In that context, I applaud what the Government are doing.

It is very difficult to accept the comments that Opposition Members make when we highlight the positive changes that the Government have made. Those who have spoken in the debate have said that the weaknesses that we point out in the Labour Government’s performance between 1997 and 2010 do not reflect their position. Clearly they do not reflect the position of the majority of Labour Members, because they are not here to defend their track record. I accept entirely that the Members who have spoken in the debate are genuine about wanting to protect RPI, but the majority of their fellow Labour Members are not here. For 13 years, when they could have done something about the decline of the UK pensions sector and private sector provision, they took no action.

One thing that really damages confidence is the fact that many people who saved in private sector pension funds remember being told that the raid on their pensions was to get young people back into work, yet we all know that youth unemployment was higher in 2010 than in 1997. Even the reason behind the raid on private sector provision was a failed policy of the Labour Government.

I wish to touch quickly on the unions’ decision to challenge the changes. I find it very difficult to understand why any changes to public sector provision are challenged in the High Court, yet people working for private companies have accepted changes as a necessary means of ensuring that they carry on getting the support that they want from their pension provision. For example, my best man works for HSBC. He left school to work there at 17 years old, and I told him he should not have done it. However, going to the bank was a job for life and he was happy to take the opportunity. He started off contributing nothing to his pension fund. Now, he contributes a significant percentage and carries on doing so because he values the fact that he will get a worthwhile pension. People working for a private company understand that they will have to contribute to the benefit that they will get. I do not understand why the unions cannot see that the same is true of public sector workers.

We should at least welcome the fact that the unions, in challenging the decision at the High Court, used their members’ funds for their proper purpose, which is to defend their members. They might have been mistaken, but at least they were using their members’ funds to try to change a policy that they perceived to be unfair. That is a big change, because most of the time they appear to use them to bankroll the Labour party.

It is important to point out that the Unite union, for example, which has been prominent in challenging the changes, contributed 5.2 million to the Labour party in 2010 and a further 2.6 million in the first three quarters of 2011. As Unite is such an influential funder of the Labour party, and as it was willing to take court action against the Government’s proposals to move from CPI to RPI, I wonder what influence it brought to bear on the Labour party when Labour decided to move its own staff’s pension provision from RPI to CPI. I would be delighted if Unite sent out a press release explaining how it fought against the Labour party’s internal decision to move from RPI to CPI, but I suspect that we will hear nothing.

Labour Members who signed the motion have been singularly unsuccessful in changing the Labour party’s position. That is a fundamental point. When it comes to the Labour party’s financial needs, we hear nothing, but when it comes to saying that the taxpayer should fund the difference, the Labour party is willing to protest and people are willing to sign motions.

I note that other parties support the motion, and that two Plaid Cymru Members have signed it. My understanding—I am happy to be corrected if I am wrong—is that the Labour party is moving towards defined pension provision based on CPI, not RPI, but that Plaid Cymru members of staff are in a money purchase scheme. Again, Plaid Cymru is happy to use taxpayers’ money to make a political point, but not willing to find the funding to protect its staff. That is the hypocrisy behind the motion, which I oppose.

2:40 pm
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Gregg McClymont (Shadow Minister (Work and Pensions); Cumbernauld, Kilsyth and Kirkintilloch East, Labour)

The debate has been interesting so far, with the temperature raised a little at the end by Guto Bebb. [Interruption.] My pronunciation of the hon. Gentleman’s constituency is almost as good as the attempt by Richard Graham to pronounce Kirkcaldy and Cowdenbeath.

I pay tribute to my hon. Friend John McDonnell for securing the debate, which has covered several matters. I want to touch on four in particular. The first is the notion of a broken promise, which was mentioned by my hon. Friend, as well as by my hon. Friends the Members for Easington (Grahame M. Morris) and for Bolton North East (Mr Crausby).

Before the general election, the then shadow Chief Secretary to the Treasury, Mr Hammond, stated in a letter on 27 April 2010 that the Conservative party

“has no plans to change the current index-linking of public sector pensions in payment. We agree with the view that the right to indexation of pensions already accrued is part of the accrued pension rights and those rights will be protected.”

That is at the heart of the debate and of the legal challenge by the trade unions. My hon. Friend the Member for Hayes and Harlington emphasised that point and also the cost to 16 million pensioners—12 million in the public sector and 4 million in the private sector. He rightly paid tribute to Mr Jim Singer, who played such a big part in pushing the e-petition. I note that Mr Singer’s pensions booklet referred to indexing by RPI and that, according to my hon. Friend, he is likely over the course of a normal retirement to lose up to 23,000. Clearly, that is a lot of money, and it shows why there is such interest in the matter.

Much of the debate revolves around whether CPI is an accurate measure of inflation for pensioners. The subject was debated as recently as last week and the Minister made it clear that the Government view CPI as the most appropriate measure of price inflation for the purpose.

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Harriett Baldwin (West Worcestershire, Conservative)

Will the hon. Gentleman confirm my understanding that it is not the Opposition’s current policy to restore the link to RPI?

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Gregg McClymont (Shadow Minister (Work and Pensions); Cumbernauld, Kilsyth and Kirkintilloch East, Labour)

The Labour party’s position is that, if the Government had introduced the switch to CPI as a temporary deficit reduction measure, it would be worthy of serious consideration, but since they have made it clear that they view it as permanent, we cannot support it. [Interruption.]

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. If Richard Graham wants to intervene, he should stand up. It is impossible to conduct a debate when comments are shouted across the Chamber and Hansard cannot properly record them. If Gregg McClymont does not mind, perhaps Mr Richard Graham will intervene.

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Richard Graham (Gloucester, Conservative)

Thank you, Madam Deputy Speaker. I do apologise. I was following the example of the shadow Chancellor.

Will the hon. Gentleman confirm for the record that his party’s policy, therefore, is to revert to an indexed inflation link with RPI if it gains power?

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Gregg McClymont (Shadow Minister (Work and Pensions); Cumbernauld, Kilsyth and Kirkintilloch East, Labour)

Alas, the hon. Gentleman must wait for the next Labour party manifesto to satisfy his curiosity.

Clearly, the issue is whether CPI is an accurate measure of inflation. The Government and the Minister are clear that it is, but some important authorities, including the Royal Statistical Society, have emphasised that CPI fails to reflect the spending patterns of pensioners and the rising costs they face, especially housing costs, which was mentioned by some of my hon. Friends. The UK Statistics Authority has indicated that it does not believe that CPI should become the primary measure of data inflation until housing costs are included.

I know from our previous discussions that the Minister will look closely at the consumer prices advisory committee proposals on adding housing costs to CPI. We await that with great interest. Heating, which was also mentioned by a number of my hon. Friends, is also important in that context. Heating costs have been rising fast, which could mean that pensioners face higher inflation on average than other groups in society, which is significant given the removal of 100 from the winter fuel allowance.

In the end, this is a political decision. The UK Statistics Authority observed last year:

“Questions about compensation, who to compensate and what for, are straightforwardly political questions, not for statisticians.”

We cannot support adopting that approach in the long term. In just five of the last 20 years has RPI been lower than CPI. As was mentioned by my hon. Friend the Member for Hayes and Harlington, the Office for Budget Responsibility November economic and fiscal outlook states that the long-run difference between RPI and CPI is likely to be 1.4% rather than the current 0.7%.

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Harriett Baldwin (West Worcestershire, Conservative)

On the hon. Gentleman’s last point, can I therefore clarify that it is a 2015 Labour manifesto pledge to restore the link to RPI?

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Gregg McClymont (Shadow Minister (Work and Pensions); Cumbernauld, Kilsyth and Kirkintilloch East, Labour)

The hon. Lady’s desire to write the Labour party manifesto three years before a likely general election is admirable, but I cannot advance on the answer I gave to the hon. Member for Gloucester.

Whether CPI is an accurate measure of inflation is an issue—the hon. Lady made important points on heating and housing—but in the few minutes remaining, I want to raise some broader questions. We can talk about CPI or RPI pensions uprating in isolation. The uprating of the state pension using CPI, which happened for the first time this year, is one thing, but as was indicated in the debate, the flat-rate, single-tier state pension, to which the Minister is committed, is important to the debate, as is the future of NEST.

I do not want to misquote the hon. Member for West Worcestershire, but I believe she said that she was looking forward in the Queen’s Speech to legislation on a single-tier, flat-rate state pension. The Opposition are hopeful that the Minister can move in that direction quickly. I wonder whether the Treasury has a significant role in that. Perhaps negotiations must continue before we can get there. The Opposition will be keen to consider very closely such proposals when they come to the House.

NEST, which has been mentioned throughout the debate, has a huge role to play in moving towards a more sustainable pension system. The Opposition are disappointed at the delay in the staging dates for the move to auto-enrolment. It is not just a question of the companies: contributions from both the Treasury and employers will be lost for those saving into a pension for the first time.

Finally, the hon. Member for Aberconwy emphasised the private pension system. Both he and the hon. Member for West Worcestershire suggested that all the difficulties in the private pensions world have arrived since 1997.

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Gregg McClymont (Shadow Minister (Work and Pensions); Cumbernauld, Kilsyth and Kirkintilloch East, Labour)

I think that is what the hon. Gentleman suggested, but it is far more complicated. There are significant issues with the private pension system, a significant number of which can be traced to other Governments and the shift from occupational pensions to group personal schemes—my hon. Friend Jeremy Corbyn mentioned 1986.

In the spirit of wanting to create a better pension system, I must be clear that we cannot support the switch to CPI as a permanent measure given the impact of that on so many pensioners and future pensioners. I thank my hon. Friend the Member for Hayes and Harlington for securing this debate.

2:50 pm
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Steve Webb (The Minister of State, Department for Work and Pensions; Thornbury and Yate, Liberal Democrat)

I join hon. Members in congratulating John McDonnell and the Backbench Business Committee on bringing this important issue before the House. It affects a large number of our constituents, which is why I am more than happy to debate it for the seventh time in this House, both in Committee and in the Chamber. I also join the hon. Gentleman in sending our good wishes to the Chair of the Work and Pensions Committee, who co-sponsored the motion, but is unfortunately unable to be with us today following a fall. We wish her well with her recovery.

There are two sets of issues for us to consider today: the right measure of inflation for uprating pensions, and the impact of the changes that have been made. They are two separate issues. The first concerns the fact that each year we have systems in place to recognise that the cost of living goes up and that we need to measure that increase so that we can keep people’s living standards from falling owing to inflation. The measure of inflation historically used has been the retail prices index. As for what has happened, in the summer of 2010 the Chancellor of the Exchequer indicated that the Government would use the consumer prices index for uprating benefits, tax credits and additional state pensions—and, through the statutory link therefore, public sector pensions. The Department for Work and Pensions had to make a judgment on whether we would impose the consumer prices index on private sector pensions.

To return to the point that I made in an intervention on Mr Crausby, I want to make it clear to the House that if somebody was saving in a pension with the retail prices index in their scheme rules, they have lost nothing. We had to judge whether to use a statutory override to allow those schemes to rewrite their scheme rules. We decided not to do that, because we believe in pension promises. In other words, people who saved in a private pension in the expectation and belief that their scheme rules did indeed say “retail prices index” will get a pension revalued where they said “revaluation”—and indexed where they said “indexation”—by RPI. The question of whether the changes are retrospective is an important one. For example, a public sector worker did indeed have a right to indexed pension, and they still do. The right to that indexed pension is crystallised when they retire and is indexed every year by the measure of inflation that the Secretary of State of the day believes prices increased by the previous year.

I entirely accept the point that some of the scheme literature did not always say that. However, let me quote the High Court judges who looked into what the scheme rules said:

“No reasonable reader of this material could have thought that this index”—

that is, RPI—

“would be used for up-rating purposes whatever the changes to it that might develop or whatever schemes for measuring price inflation might emerge in the future.”

Therefore, the High Court judges, who have been referred to in this debate, did not find that to be a criticism, and the trade unions that have appealed against the High Court judges have not appealed on that point. Although we absolutely want scheme literature to be as accurate as possible, the scheme rules are what give people the right. The scheme rules in the public sector gave people a statutory right to a link with whatever we were doing with additional pensions, and we have kept that right—we have kept that promise. My right hon. Friend Mr Hammond was quoted—I think by the shadow Pensions Minister—as saying that pensions indexation should be honoured, and indeed it should, in line with the rules of the scheme. That is what people sign up to, and that is what we have honoured.

Photo of David Crausby

David Crausby (Bolton North East, Labour)

Regardless of the legal judgment, does the Minister not accept that any reduction in pension—clearly the move from RPI to CPI creates a reduction, and it is backdated—is simply a clear breach of trust?

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Steve Webb (The Minister of State, Department for Work and Pensions; Thornbury and Yate, Liberal Democrat)

Let me deal with the issue of backdating, as the hon. Gentleman has used that term. People’s pensions are revalued from the point at which they cease to work for the company until they retire and then indexed once the pension is drawn. The revaluation has not been backdated. In other words, all the revaluation up to the date of the change which used RPI will still use RPI, so there was no backdating of any of that. It is future revaluations that will use CPI. Furthermore, the right to indexation cannot exist until a person draws their pension. They build up a pension, and when they draw it they have a right to have it indexed. We have defined indexation according to what we think is a better measure of indexation. The right to indexation existed all the way through, and continues. The law has always been that the Secretary of State of the day has to measure inflation in an appropriate manner, and that is what we have done.

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David Crausby (Bolton North East, Labour)

Is the Minister saying that at any point in the future he can decide what the measure of inflation is and then refer it back to the whole of an individual’s pension? Is he not seeing this just as a matter of his judgment at any point in time, in effect producing an index very much lower than the expected one?

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Steve Webb (The Minister of State, Department for Work and Pensions; Thornbury and Yate, Liberal Democrat)

No. What I am saying is that the law of the land requires the Secretary of State to make an assessment of the increase in the general price level each year. If the Secretary of State were to make such an assessment in a flippant way, by coming up with the first low number that he thought of because it suited him to do so, he would soon find himself in the High Court, and rightly so. That is not what is being done.

The Secretary of State has chosen a measure of inflation that is internationally standardised and used by the Bank of England for macro-economic targeting, and that better reflects the spending patterns of pensioners. One of the big differences between CPI and RPI in regard to the basket of goods is that the CPI does not include mortgage interest. It is worth pointing out that only 8% of pensioners have a mortgage. Why would we insist on using a basket that gives huge weight to mortgages for a population that hardly ever has a mortgage?

My hon. Friend Harriett Baldwin mentioned in her excellent speech that in the year to September 2009 the RPI was negative, not because pensioners’ living costs had fallen but because something that most pensioners did not have— mortgages—had got a lot cheaper. Does the hon. Member for Hayes and Harlington really think that in the year to September 2009 the RPI was giving an accurate measure of the cost of living of pensioners? I am sure he does not. It was negative, but I am sure he would not say that that was because pensioners’ living costs were falling; they were not, but the index suggested that they were, because it was using the wrong basket of goods.

There is a second difference between CPI and RPI. As my hon. Friend Richard Graham said, in addition to the basket of goods being different, the way in which people are deemed to respond

to price changes is different. That is called the formula effect, and in general it is the bigger difference between the two. On that point, the Institute for Fiscal Studies has said that this was a sound basis for the change that we made because it better captures the way in which people on lower incomes respond to price changes. It has been suggested during the debate that pensioners do not shop around, but my experience tells me that they do. In the shops, for example, they will choose between a branded product and an own-brand product. I think that most pensioners are pretty canny. They are the most likely to shop around, and that is the way in which the CPI is constructed.

It has been suggested that the switch to CPI was purely a cost-saving measure that was dreamt up post-election. I have been reading through the evidence given to the court, and the judgment, and I found out something quite startling about what was happening in the Treasury before the last general election. In 2009, the Treasury was considering whether the CPI was the best measure to use. The court judgment refers to a senior Treasury official, Dr Richardson. It states:

“Dr Richardson confirmed that the Treasury also considered that CPI was superior for…all benefits, tax credits and public service pensions. The Treasury had reached the same conclusion that ‘CPI provides a fairer reflection of inflation experience than RPI over the longer term…’ Dr Richardson also stated in 2009—that is, even before the 2010 election—once it had become widely anticipated that RPI inflation to September 2009 would be negative, the Treasury had formed the view that a move to CPI would ‘better reflect the experience of those affected by up-rating measures’”.

Now, the Treasury had decided before the last election that CPI was a better measure, so why did it not implement it? Because in that year, CPI was higher. In other words, on methodological grounds the Treasury had decided before the last election—I think Stephen Timms was a Treasury Minister around that time—that CPI was a better measure, but it held off from implementing it because it would have cost money. We think the CPI is a better measure, and we implemented it after the election, following a period when the RPI was clearly misrepresenting pensioner living costs—and I believe that to have been the right thing to do.

There was some discussion about whether the judges said that the change was just about cuts—I think it was Grahame M. Morris who suggested that it was. Let me quote him paragraph 63 of the court judgment:

“In our judgment, the evidence from Mr Cunniffe and Dr Richardson”—

the civil servants—

“set out above makes it plain that both the Secretary of State and the Chancellor independently came to the view that the CPI scheme better reflected the effect of inflation on the spending power of benefits and pensions, for a variety of reasons quite independently of cost.”

That was the majority view of the judges. Even if the hon. Gentleman does not want to take my word for it, the High Court looked at it independently, with no locus to defend the Government, and judged that a range of factors was in play. Clearly, the fiscal context was important to the decision—no one is pretending it was not—but the most appropriate index, CPI, was chosen by the Government, which is the one we went ahead with.

The position of the official Opposition and the Labour party pension scheme have been discussed, and the shadow Minister, Gregg McClymont, said that the Labour party could not support the move to CPI. What is not clear to me is whether it can oppose it. A week ago, we talked about CPI and RPI in relation to an uprating order. Shadow Ministers made their trenchant criticisms of our policy, but when the vote came they walked away. After the contribution of the shadow Minister today, I am a little hazy about whether he is going to walk away again today. I think the trade unions would want Labour MPs to back the motion, but my impression is that whereas Labour Back Benchers will back it, Labour Front Benchers will be busy when the Division comes. I am of course happy to give way if I am misrepresenting the position of the official Labour party.

Important issues were raised in the debate. One of the key ones was the impact on individuals. In a sincere and well-informed contribution, Katy Clark listed particular groups of people she was worried about: women, low-paid workers who retire on low occupational pensions, NHS pensioners, and the average occupational pensioner. We have estimated the impact of the CPI change along with the impact of our triple lock. The hon. Lady accepts that the triple lock helps people and the CPI change reduces people’s incomes on average. She gave three examples: people on pensions of about 2,000, 3,000 and 4,000. We estimate that in all three of those examples, people will gain more from the triple lock than they lose from CPI. The very people she is most concerned about will, on average, benefit from what the Government have done on indexation.

My hon. Friend Stephen Lloyd asked about the 13,000. To be absolutely clear, what we are saying is that if people retire this year on a full pension, the change to the triple lock compared with RPI will provide a cumulative 13,000 extra on average over the course of their retirement. Even if we strip out the CPI effect, people will, on average, be 6,000 better off because of the combined changes we have made. I should say—I thought the House would want to know—what would have happened if the triple lock had been applied by the last Government back to 1997. If that had been the case, we would now have a pension nearly 10 a week higher than the current one. We heard in the debate that the last Labour Government kept meaning to restore the earnings link but they just never quite got round to it. If our policy had been place, we would now have a pension 10 higher to start with, on which to build subsequently.

It is clear that there are gainers and losers from these changes. The gainers are average pensioners with average occupational pensions. It is true that the highest earners with the very largest occupational pensions will lose more from CPI than they gain, but I thought the Labour party was a progressive party that would welcome our protection of the most vulnerable. That is what we have done.

I welcome the fact that 100,000 people wanted this debate. It is a debate that we are willing to have. We accept that these changes have a big impact, but they should be seen in the context of, for example, the triple lock, which will mean that the average pensioner benefits

from our policies. These are significant and important changes. We believe that we are measuring inflation properly and appropriately, and we believe that we have protected people through the triple lock. That is a combination that I urge the House to support.

3:04 pm
Photo of John McDonnell

John McDonnell (Hayes and Harlington, Labour)

I am grateful to all who have contributed to the debate. I think that it has been incredibly constructive, and a credit to the House.

Harriett Baldwin displayed her experience of these matters, but I do not agree with her. She criticised the CPI, but argued that it was about the best we have. Not even the Government accept that—they are undertaking a review of the CPI in order to install the housing costs that we have argued should be included in it. Within two years, or perhaps one, they will produce their report, and the system will change again. In the meantime, however, people will lose out as a result of the removal of the RPI link. I believe that although the hon. Lady was clear in her defence of the CPI for the moment, she acknowledged the need for change at a later date.

My hon. Friend Mr Crausby hit the nail on the head: this is a matter of trust. People were told that if they contributed to a pension scheme, they would receive a certain defined benefit. It is no good the Minister’s saying that they should have looked at the scheme rules, because in leaflet after leaflet and in scheme after scheme, they were told that they would be protected by the RPI. It is almost like a dodgy car salesman saying “You didn’t look at the hire purchase agreement in sufficient detail.” The hon. Gentleman mentioned Maxwell, and that resonates in this context.

Stephen Lloyd mentioned the calculations that would need to be verified. As was explained earlier, according to one calculation someone with a 10,000 pension would lose out, because he or she would not even gain as a result of the other measures.

There are two issues. We expect the changes in the state pension to improve matters, but that improvement should not be at the cost of people’s employment pensions. It is not acceptable to wrap the two together as if they would be of some benefit to people with employment pensions, because those people will lose out whatever happens. As my hon. Friend Katy Clark rightly pointed out, the long-term prospect is that some people will give up on their pension schemes and will not contribute, and as a result the viability of some pension schemes will be at risk.

Today’s debate smacks of the debate that took place many years ago about the link with earnings. People now regret the breaking of that link, because it led to the erosion of the state pension over the years. Unless the Government’s decision is reversed, the same despair and anger will be expressed in 20 years’ time.

Richard Graham spoke eloquently about the need for sustainability, and he was exactly right. We must ensure that pension schemes are sustainable. Most contributory schemes

are, and we must ensure that state-funded schemes are as well. That means ensuring that contributions are made, both through tax—a fair taxation system means tackling evasion and avoidance, so that there is a sufficient amount in the Exchequer—and from scheme members themselves. The unions have made it clear that if the costs increase because of the increasing longevity of their members, they will be willing to pay more, but not to subsidise the Treasury.

My hon. Friend Grahame M. Morris presented his assessment of the Government’s decision in his usual honest and extremely thoughtful manner. He said it was about placing the burden of the deficit and the economic crisis on the pensioner rather than on the tax avoider and tax evader, and I entirely agree with him.

Guto Bebb was entertaining as always, and irrelevant as always. [Interruption.] I do not wish to be too cruel to him, but the fact is that we are not debating the Labour party’s pension fund. That is a debate for another day and, possibly, another Back Bencher’s application.

We are debating a serious matter. As we have pointed out time and again, firefighters will lose between 25,000 and 50,000 as a result of these changes, and the Forces Pension Society has emphasised that some former military personnel who were injured in action will lose up to 200,000. As the Minister said, the Secretary of State has the right to set any indexation level in law, but I think there is a moral obligation to abide by the commitment given over decades that the link should be with RPI, because the link with CPI will undermine the pensions that people are paid.

The issue of retrospection was raised. People feel that they are having their pensions cut retrospectively.

There will be a debate about what is the appropriate index. My view is that CPI is not the right index. I urge the Government to introduce the reforms to CPI as rapidly as possible. Pensioners face the threat of losing significant sums of money. They must not do so.

The judgment in the courts was very clear. The objective of—

Photo of Dawn Primarolo

Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. The hon. Gentleman knows that he is supposed to be speaking for only a few minutes, but he has now been speaking for about eight minutes. I will therefore be very grateful if he completes his remarks.

Photo of John McDonnell

John McDonnell (Hayes and Harlington, Labour)

This is an important debate, but I apologise, Madam Deputy Speaker.

The judges made their view very clear. The Government’s motivation is to do with deficit reduction and cuts, not which inflation measure should be adopted. The Government are placing the burden of the cuts on pensioners. Pensioners will never forgive them for that.

Question put.

The House divided:

Ayes 33, Noes 232.

Division number 481

See full list of votes (From The Public Whip)

Question accordingly negatived.