Public Service Pensions Bill — Second Reading
Lord Newby (Liberal Democrat)
My Lords, this Bill offers a rare opportunity to introduce primary legislation that pulls together a new common UK legal framework for public service pensions, and it is right and necessary that we do so. We must have public service pensions legislation that is fit for purpose and ensures that those who commit their careers to delivering our valued public services continue to receive guaranteed benefits in retirement that are among the very best available.
However, we also have an obligation to ensure that these generous arrangements are provided on a fair, transparent and sustainable basis. This Bill is based on the recommendations of the independent Public Service Pensions Commission, which was chaired by the noble Lord, Lord Hutton of Furness, who I am delighted will be taking part in the debate today.
In June 2010, the noble Lord accepted an invitation from the Government to conduct a fundamental structural review of public sector pension provision and to make recommendations on pension provisions that would be affordable in the long term, fair to both the public service workforce and the taxpayer and consistent with the fiscal challenges ahead, while protecting accrued rights. This Bill fulfils the Government's commitment to bring forward fundamental changes to public service pensions based squarely on his recommendations.
I thank the noble Lord, Lord Hutton, for his significant role in bringing about these important reforms. His recommendations mark an important milestone in the history of public service pension provision, and we are extremely grateful to him for having undertaken this somewhat thankless task. I must also thank those in the other place for their work on the Bill to date.
As was made clear on Report in the Commons by my ministerial colleague the Economic Secretary there are some areas in this Bill that we are reflecting on further, following representations made in another place. For example, we are looking at the best way to reflect our commitment to member representation on scheme boards and at how personalised information is provided. As for the powers that would allow scheme managers to make retrospective changes to schemes, I am aware that this is an issue about which many feel uncomfortable and that the Delegated Powers Committee has also expressed concerns. The Government are considering their response to the Committee's report, and we will return to that matter.
As we begin our consideration of the Bill, we must not underestimate the importance of what it is trying to achieve. We are in a world where people are living longer. While this is obviously an extremely important and welcome trend, we must face the consequence of this improvement on the costs of providing public service pensions. As well as looking at how to keep the increasing costs under control, we must also consider the fairness of the arrangements. I hope and believe that the Bill gets this important balance right.
The Bill is in one respect rather curious, in that many features of public sector pension schemes are not covered in detail. They will be set out in detailed scheme rules which will eventually come before Parliament in the form of negative resolution statutory instruments. What the Bill does is provide an overarching framework for all public service pensions schemes. This is not a new approach. The Bill before us today supersedes the Superannuation Act 1972, which followed the same principle. The reason for this is simple: detailed pension schemes are extremely complicated, will vary between different parts of the public sector and will need in some respects to change over time. They are much better suited to secondary legislation.
This inevitably means that many of the most important aspects of the schemes-for example, the accrual rates and the revaluation rates-are not in the Bill. The key principles which underpin public sector pensions and the way in which pensions schemes will be determined are, however, covered by the Bill, and I should like to turn to some of its principal provisions. However, I stress at the outset that the Government intend that public service pensions continue to set a high-quality benchmark and one to which many in the private sector could usefully aim.
The Government intend that public sector pensions should continue to be based on defined benefits. For many years, these have been based on an individual's final salary. This has had a degree of inequity in that, per pound contributed to the scheme, those on high final salaries have received a greater return in terms of the pension that they have received. This Bill proposes that members' benefits should be calculated on a fairer basis; namely, on an individual's career-average earnings. By following this approach, low earners will no longer be expected to subsidise the benefits of higher earners.
The Bill links normal pension age to state pension age for most members. This will automatically track changes in longevity and protect the taxpayer from the associated cost risks. Historically, improvements in longevity have not been well managed, and the failure to do so in a timely manner has represented the single biggest risk to the future affordability of these pension schemes. The establishment of the link between public sector and the normal state pension age addresses this problem. As an exception to the link, a normal pension age is set at 60 for firefighters, police officers and members of the armed services in recognition of the unique characteristics of those public servants' work. We want to be sure that these normal pension age provisions remain appropriate, which is why the Government intend to review the provisions as and when the state pension age changes. This will ensure that a consistent approach to pension age policy is taken across government as a whole.
Of course, normal pension age does not represent the age members must work until; rather, it is a point on which to base the calculations. Members can choose to retire earlier or later if they wish and, should they decide to do so, a fair adjustment will be applied to their benefits. The same principle applies in other pension arrangements-it is built into annuity rates, for example-and it is right that it applies to public service pension arrangements, too.
In addition to the longevity link, the Bill includes provision for an employer cost cap which will provide additional protection against unforeseen changes in the cost of public pensions. If the cost of a scheme rises, the scheme rules must set out a process for agreeing how they can be brought back under control. The cap may well in practice not be breached, but if it is, the Bill provides for a clear way of dealing with what could otherwise be an unacceptably high cost to taxpayers. In effect, the employer contribution to the scheme is being fixed within specified margins. Any change beyond those will result in benefits or member contributions being adjusted to bring costs back under control. Details have been made available in the House Library regarding the practical application of the cap and the Government's intentions around the valuation procedures to be followed in the new schemes. These are new and important elements of the Government's policy, and I hope that these papers provide useful clarification to the House.
As I said earlier, I emphasise that this Bill is not just about fairness to taxpayers; it is also about fairness to scheme members. This is why we propose transitional arrangements for members of most schemes who have less time than others to adjust their retirement plans. Those who were 10 years from their current normal pension age on
Lord Naseby (Conservative)
I apologise for making an intervention, and I must declare an interest as a trustee of the Parliamentary Contributory Pension Fund, but I would like to tell my noble friend that in Committee I shall be moving an amendment to Clause 31, concerning the rights of the members of the PCPF and their appropriate protection in legislation. The Bill, as currently drafted, casts doubt in that it could be read as enabling IPSA, in relation to MPs' future pension provision, to break the link between members' accrued benefits and their final salaries. I wish to place that on the record.
My understanding is that we are going to have the Committee stage pretty soon after we come back. I hope very much that my noble friend and I can have a discussion on that amendment before we come to the Floor of the House.
Lord Newby (Liberal Democrat)
My Lords, I am very happy to have an early discussion with my noble friend and look forward to debating any amendment that he may wish to bring forward.
As I was saying, we want public pension recipients to be reassured that, as a result of the provisions set out here, the new schemes will be administered and governed as effectively as possible. The new open scheme arrangements will ensure greater accountability and transparency through a common approach, an approach that will be independently overseen by the Pensions Regulator. The Bill builds on the regulator's existing role and powers in relation to public service schemes and, as far as is appropriate, mirrors the existing approach to other occupational pension schemes. The regulator's new powers will help public service pension schemes deliver good standards of administration and governance, ensuring that scheme costs and risks are understood and managed effectively.
All these changes demonstrate that the end of the current benefit arrangements and the creation of these fairer, more sustainable pension schemes are the right and proper way forward. It is right that public service pensions continue to set a good-quality benchmark for the private sector, and a race to the bottom in terms of pension quality must be avoided.
A consistent approach across schemes regarding consultation processes and the application of financial directions from the Government will also mean that members will see unprecedented certainty about how their pensions are handled. It will no longer be the case that a member in one scheme can look over to another public service workforce and marvel at the myriad different quirks and anomalies within the scheme rules. There is some scope for variation to suit the needs of each workforce but, as the noble Lord, Lord Hutton of Furness, recommended, this is a common framework which brings all these schemes together under one legislative umbrella.
We have said that we hope and expect that the new schemes that will be drawn up under this Bill framework will last for at least 25 years. Of course, no Parliament can bind its successors, but we have included in the Bill enhanced consultation procedures, both with those who would be affected by any significant changes and with Parliament, to ensure that there is a high hurdle to be cleared before any such changes could be made.
The approach we are following will apply across all public service pension schemes, including smaller public body arrangements. We are aiming to reform the pensions in those bodies by spring 2018, and there will be no exceptions. This is why I am pleased that the Northern Ireland Government have indicated their intention to maintain parity with the changes set out in this Bill when they bring forward their legislation. Likewise, I hope our colleagues in Scotland and Wales will follow suit for the handful of schemes where competence for pension legislation sits outside Westminster.
Finally, we have also taken the opportunity of the Bill to reconsider whether certain generous historical entitlements remain appropriate in the modern age. The Great Offices of State pension arrangements, which apply to the Prime Minister, the Lord Chancellor and the Speaker of the House of Commons, give unusually generous pensions to these office holders. The scheme will now be closed to new office holders. Future holders of these positions will be entitled to a scheme that is the equivalent of those available to Ministers, thus ending this historical anomaly.
In conclusion, I believe that the package of measures contained in the Bill will fulfil the legitimate and worthy aim of bringing about long-term structural changes that are in the best interests of members, employers and other taxpayers. This is sound, reforming legislation, which I hope will continue to command cross-party support. We must, however, get the detail-
Lord Whitty (Labour)
My Lords, in everything that the Minister has said, he has failed completely to make a distinction between those public sector pension schemes which are unfunded and those that are funded-principally, the local government scheme. Can he give us a guarantee that he will address that difference during Committee, since the Bill and his speech do not adequately reflect that now?
Lord Newby (Liberal Democrat)
Of course, my Lords, but at the moment I am explaining the common elements of the framework that we are putting in place. At this point, the key thing we all have to have before us is that we are putting in place a common framework, within which all the schemes will fit. The Local Government Pension Scheme is obviously very different, in that it is funded rather than unfunded. There have been many discussions on it; I have agreed to meet the LGA and hope to do so between now and the first day in Committee. The Government are very conscious of the need to ensure that the benefits of current local government arrangements are not undermined in any way by this scheme. I certainly anticipate that we will be discussing aspects of the local government pension arrangements in some detail in Committee.
Indeed, I was about to say that we are committed to getting the detail right and to giving detailed consideration to all these things in Committee. We have to take this opportunity to set in place a sustainable future public service pension landscape. I look forward to our debates on the legislation, and I commend the Bill to the House. I beg to move.
Lord Davies of Oldham (Labour)
My Lords, in the unavoidable absence of my noble and learned friend Lord Davidson, I beg leave to take his place and make the initial response of the Opposition to the Minister's speech, which I very much appreciated. We all recognise the need for further reforms to public service pensions. That does not detract in any way from the continuing need for public service employees to have good quality, sustainable pension schemes after what for many will have been a lifetime's career in public service. In government, we established a framework to manage the changes in the demography of the UK-changes which inevitably impose a need for public sector pensions to reflect them. We all know of the increased longevity of our population and therefore we support the basic principle underlying this Bill.
The area of public sector pension reform has of course been recently and independently investigated in depth by my noble friend Lord Hutton of Furness, who I am delighted to see in his place. I look forward to his contribution to this debate a little later. The report which he produced has been broadly welcomed and has substantial acceptance from this side of the House. It is regrettable that the many sensible long-term reforms suggested by my noble friend have been disrupted somewhat by the Government's sudden imposition of a 3.2% increase in contributions and a crucial switch in the indexing from RPI to CPI, all without any prior negotiation and without the benefit of falling within any of the recommendations in my noble friend's report. That has somewhat queered the pitch and made life very difficult for those representing public sector employees.
Nevertheless, that does not alter the fact that we all recognise that this Bill is based upon sound principles and needs to be supported across the House. Of course, we understand the increasing cost of pension benefits caused by increased longevity. We also understand the range of proper concerns about the Bill raised by a number of trade unions and professional associations representing public sector employees. We share some of their concerns.
We are concerned that Clause 3 is couched in the broadest of terms that permit the Government to amend through secondary legislation public sector pension provision at any time of their choosing. I accept what the Minister said, that the complexity of public sector schemes and the differentials across them require amendment from time to time. In the Bill, there does not seem to be any clear limitation on the power that may be deployed by the Government and being carried through by SIs on negative resolution procedures. Clause 21(2) provides some attempt at control, but it is expressed as applying subject only to the negative procedure as a generality. We all know the limitations of the negative procedure.
That is hardly much of a fetter on the relevant authority, which will seek to make changes. Additionally, there is little to alert the many thousands of public employees who may be affected by the use of such a power. That does not sit easily with parliamentary scrutiny on what could be very significant issues for people in receipt of public sector pensions. The capacity of Clause 3 to enable amendment, by secondary legislation, to future pension statutes, not yet enacted, is providing an extraordinary measure of discretion to the Executive in an area where the goal, we are told by the Chief Secretary to the Treasury, is apparently
"no more reform for 25 years".
Those changes, which will inevitably be necessary over a period of time, will be subject to limited scrutiny. Governance in this vital area of people's lives requires a sturdier safeguard than the one that the Minister has identified, which is in the Bill. That is why, when we get to Committee, we expect considerable debate on this issue.
Furthermore, the capacity of Clause 3(3)(b) to allow retrospective change to pension schemes by way of secondary legislation is concerning. It raises real concerns that adverse changes may be visited on existing schemes, thereby undermining accrued pension rights. The Minister sought to give a categorical assurance that accrued benefits would not be affected. That is not quite what the Bill says, so we will again wish to press him in Committee on this crucial area. Although not wholly unprecedented conceptually, retrospective alteration sits a little oddly with the Government's aspiration that there is to be no more reform for 25 years.
At Clause 21(1)(b) there is a degree of recognition by Government of the inherent undesirability of retrospection in this area in so far as retrospective regulation is subject to affirmative procedure where, in this limited area only, it,
"appears to the responsible authority to have significant adverse effects in relation to members of the scheme".
The well-known problem with this approach, through secondary legislation, is that it is not susceptible to any amendment, leaving as the only possible response acceptance or rejection.
The Opposition do not see such a possibility of retrospection as either desirable or sound in this area. The Government will be aware that secondary legislation that serves to erode or remove accrued entitlements is very much the terrain where, among other grounds, Article 1 of Protocol 1 of the European Convention on Human Rights may be effectively deployed to challenge. Such a challenge would be based on the concept that the Government should not lightly interfere with individual's property rights. That is what pensions are, of course; the accrual of pensions is the sacrifice of resources by the individual concerned and the placing of them in a pension. It is of the greatest concern that there should be any threat in this area. Surely public sector pensions should not be subject to the uncertainty and possible litigation that such retrospection invites. If the Government are opposed to creating such a situation, as one would hope, then this must be reflected in the Bill. The observations already made regarding the need for effective parliamentary scrutiny apply even more when the Government assume a power retrospectively to change or reduce pensions' accrued benefits. Why, if no more reform for 25 years is intended, is such a power incorporated within the Bill without adequate safeguards? This is an issue that we are bound to address in Committee with considerable deliberation.
In relation to defined benefit schemes, the Economic Secretary to the Treasury stated in another place on
"We do not intend to move away from defined benefit schemes in public services. Defined contribution schemes would not be the right kind of pension provision for many public servants".-[Hansard, Commons, 4/12/12; col. 770.]
That is a welcome commitment by the Government. Without appearing in any way to challenge the sincerity of such a statement by the Economic Secretary, though, is there not much to be said in favour of making that commitment clear in the Bill? It would demonstrate a resolve to support defined benefit schemes that the language of Clause 7 does not impart. We shall be looking to amend this aspect in Committee.
Similarly, regarding the provisions in Clause 11 relating to the employer cost cap, to which the Minister has made reference, that place this subject under Treasury direction, would it not be an improvement that consultation be a requirement prior to any such direction? The general obligation in respect of consultation at Clause 19 does not appear to cover this particularly significant part of the Bill.
Clause 9, in linking state pension age to normal pension age, which is set to rise to 68 years, is understandable in the light of improving longevity, and by and large makes proper exception for the Armed Forces, to which the Minister made reference, police and fire fighters. Our concern is the insufficient flexibility in the clause to allow for those public sector employees, especially in the National Health Service, whose roles impose physical and mental demands well above the ordinary. Such staff should not always be obliged to accept an increasing retirement age, especially if independently reviewed evidence of capability shows later retirement to be inappropriate for specific groups. It is also desirable that reasonable notice be afforded prior to any rise in the pension age to permit proper planning for retirement. We hope to look closely at these aspects for amendment in Committee.
In relation to the local government pension scheme, Clause 16 creates possible unintended consequences. As the scheme is, unusually, a funded pension scheme, the use of the term "closure" could permit an interpretation with unfortunate consequences, such as the splitting of funds and crystallisation events. Smaller admitted bodies, normally with limited reserves, might similarly be affected, but potentially even more seriously, if the crystallisation of debt were to arise.
I appreciate that the Government have undertaken to look at this matter. It would be helpful to know whether the Government intend to tackle this issue in a forthright manner in the Bill, and avoid the potential for considerable instability within the Local Government Pension Scheme. We welcome the acceptance by the Government of the principle that scheme members should be kept informed of their pension rights and provided with an annual update.
We will want to scrutinise a proposed amendment that the Economic Secretary promised in another place earlier this month. Accurate and effective information is the objective to enable scheme members to know where they stand and to plan for their future.
On the issue of fair deal, the Government have stated a commitment to retaining the fair deal in respect of the pension rights of employees transferred from the public sector to the private. We do not, however, see any unequivocal reflection of that statement in the Bill. Clauses 22 and 26 are prayed in aid by the Government to support the fair deal policy, but it is very far from clear that those clauses offer any kind of firm commitment. Suggestions that contracts with independent contractors could incorporate the fair deal leave very much to be desired if the objective is its retention. Surely the best way is to make a stated commitment real by placing it in terms on the face of the Bill.
Ministers may argue that the fair deal need not be enshrined in statute, but in an area which can easily be the subject of litigation, we suggest that the time has come to provide both clarity and certainty. We do not, with respect, find ministerial assurances sufficient on this topic if those assurances are to form the basis of the next 25 years of public sector pensions. We shall seek to propose changes on this subject in amendments in Committee.
On the issue of Scotland, Scottish Ministers have been responsible for the negotiation and design of the LGPS in Scotland and have not been subject to Treasury approval. As the Bill proposes to extend provisions on normal pension age and the shift from final salary to career average benefits to the scheme in Scotland, should not the consent of the Scottish Parliament be sought for such extensions? I do not suggest that this is necessarily an issue of legislative competence requiring approval by the Scottish Parliament. Rather, taking account of the distinct approach of the Scottish scheme seems a reasonable means to proceed. We shall look also at this matter in Committee.
There remains one further issue, which as I understand it operates as an anomaly under the Bill. It concerns firefighters who are employed in defence establishments and who qualify for exemption from the normal pension age neither as firefighters nor as members of the armed services. If we are correct on this point, it would appear to be an oversight that we would want rectified. I would be pleased to hear any clarification the Minister might be able to provide, perhaps when he winds up in this debate.
To conclude, I wish to make clear that we accept the need for reform of public sector pension provision, as we expressed while in government. Where we differ from the Government's proposals is that we consider that public sector employees deserve greater clarity and security than the Bill currently provides. It is for that reason that we look forward to a lively Committee debate on the Bill.
Baroness Noakes (Conservative)
My Lords, I can just about support the Bill, because it is in the right direction of travel. However, I do not think that the Government have got their policy on public sector pensions right. They most certainly cannot claim to have produced a lasting solution. I am profoundly disappointed by the policy that this Bill will implement.
I am not against pensions for public service employees. I fully support workplace-based pension provision, but I have great difficulty in supporting public sector pension arrangements that are disconnected from those in the majority of the economy-namely, the private sector.
Put simply, I do not believe that taxpayers should be asked to pay for public sector pensions on terms that are increasingly not available outside the public sector. There is no fairness in that. I have the greatest respect for the noble Lord, Lord Hutton of Furness, and his report, but I think that he was wrong to have landed his recommendations in a space that is not in touch with what is happening to pension provision generally. The noble Lord characterised alternatives to his recommendations as a race to the bottom, and that formulation has been used whenever his recommendations have been discussed. But that language grossly overstates the argument. The majority of private sector employees currently have no pension provision, although after auto-enrolment we hope that most of them will be in what is admittedly a minimalist version of a pension scheme, via the NEST arrangements. But no one, not even from the right-wing think tanks that I occasionally dip into, suggests that public sector employees should be levelled down to that. This is not an issue about racing to the bottom. The real issue is about the available issue of defined benefit pensions.
The facts are stark. In the last Office for National Statistics survey, 79% of public sector employees had access to DB pensions, while the figure is only 9% for the private sector. In 1995, there were more employees in open private sector DB schemes than in public sector ones, but the blow dealt by Gordon Brown's ACT raid added to other emerging factors, notably longevity, resulted in pension burdens that the corporate sector simply could not bear. Some companies have even been forced into bankruptcy because of the impact of their DB pension liabilities. In 1995, 4.9 million private sector employees were active members in open DB schemes; by 2011, this was just 0.9 million. This is the real background to public service pension reform. The reforms which are delivered in this Bill continue to give DB pensions to public service employees, and this is simply out of alignment with the rest of the economy.
There is, of course, a policy shift to a career average approach, rather than a final salary one, in line with the recommendation from the noble Lord, Lord Hutton. This will put downward pressure on the costs of providing pensions to public sector employees, but mainly for the minority who have significant salary progression through their career. However, the public sector will still unambiguously be entitled to defined benefit pensions, which is beyond the grasp of the vast majority of the UK's workforce.
There are some good things in this Bill. The alignment of the pension age with the state pension age, as recommended by the noble Lord, Lord Hutton, is long overdue and welcome. The inclusion of judicial pensions, so long virtually a no-go area in pensions reform, is also welcome. Control of the costs and risks of providing public sector pensions must be at the heart of these reforms, and I welcome the cost control clauses. The Government have accepted the recommendation of the noble Lord, Lord Hutton, of a fixed-cost ceiling. It remains to be seen how robust the arrangements will prove to be in practice, if faced with very high cost increases, but I agree that it is well worth the effort to see if an automatic cost-stabilising mechanism can be made to work.
The most important measures, which will help to reduce the cost of public sector pensions, will come from other sources. The noble Lord, Lord Davies of Oldham, has already referred to these. By far the biggest financial impact will come from shifting pensions indexation from RPI to CPI. The fiscal sustainability report issued by the Office for Budget Responsibility this year shows that the vast majority of the forecast reduction in the costs of public sector pensions as a percentage of GDP comes from this source, from the shift to CPI, and calculates it as 0.4% of GDP benefit by about 2050.
The second most important contribution to reducing the cost burden on the public sector is additional member contributions. However this produces only about 0.1% of GDP and is a long way behind the contribution of CPI. All the rest of the changes facilitated by this Bill trail in behind that, accounting for around 0.1% of GDP. As I have mentioned, these cost reductions are not fully delivered until around 2050, according to the charts in the OBR's report. Of course, massive modelling assumptions lie behind those figures. Without any sensitivity analysis, it is difficult to be certain about whether a long-term benefit will actually be delivered by the reforms in this Bill.
In the short term, however, there will be an increasing net cash cost of pensions, according both to the OBR's figures and the Treasury's public expenditure survey figures. An excellent paper for the Centre for Policy Studies by Mr Michael Johnson shows that the expected cash cost for public sector pensions over the three years to 2014-15 has risen by £10 billion in just the past year. This is cash that the Treasury has to raise from today's taxpayers. This Bill should fight against the shorter-term real costs, as well as the longer-term implications of public service pensions.
Lord Hutton of Furness (Labour)
I did not intend to interrupt the noble Baroness's speech, which I was enjoying. However her last point is very important. If she is saying that the Government should reduce those additional costs that she just identified, the only way would be to interfere with the accrued rights of those pensioners. To do so would raise serious legal challenges. Does she advocate a policy of retrospectively amending accrued rights?
Baroness Noakes (Conservative)
Perhaps the noble Lord can wait. I will deal with part of the issue of accrued rights in a few moments. I said that the Bill should fight against this short-term cost as well as the longer-term cost because of the large and growing cash impact-which is a real impact that we can measure-set against the rather more esoteric longer-term modelled reduction expressed as a percentage of GDP. Given the assumptions embedded in there, those longer-term projections are not much more than conjecture.
Lord Flight (Conservative)
I thank my noble friend for giving way. The issue of funding the growing cash deficit is not necessarily about altering rights, but also about contributions for as long as there is a pay-as-you-go system.
Baroness Noakes (Conservative)
My noble friend is right. Nobody would pretend that the solutions are easy, but there are solutions other than altering accrued rights. The important aspect of needing to deal with the short-term cash costs brings us to the transitional provisions. I believe that the Government's transitional provisions are nearly incomprehensible, certainly to those who have had to make the hard decisions about changing pension arrangements in the private sector. First, the Government adopted a classic short-term/long-term political fudge by giving protection to all those within 10 years of retirement. This is designed to buy off most of those who might work out how much it would cost them. Most private sector changes to pension arrangements come with transitional protections, but I have never come across a transitional protection extending to 10 years, as the Government have devised theirs.
Secondly the Government have adopted the definition of the noble Lord, Lord Hutton, of accrued rights and protected the final salary element of pensions for anyone who has accrued rights prior to the implementation of the changes. This is out of line with private sector practice where schemes are increasingly closing to further accrual, with indexation of accrued benefits rather than salary-based post-award dynamism. This makes a significant difference to the ultimate costs. All this adds up to a very disappointing Bill. At the very least, I hope that the Government will remain committed to resisting calls to dilute this Bill further.
I conclude by saying that I firmly believe that the total pay package for public sector workers should be comparable in the round with those available in the majority of the economy-namely, the private sector. This is fair. However, it is not fair for taxpayers to have to support the preservation of benefits in the public sector beyond those available to employees more generally, unless-and this is a big proviso-the value of those benefits is fully reflected in other elements of pay, generally in basic pay. I fully support the recommendation of the noble Lord, Lord Hutton, which stated that public service employers should,
"take greater account of public service pensions when constructing remuneration packages".
I had hoped that this Bill would enshrine that requirement and its absence is yet another disappointment.
Lord Sharkey (Liberal Democrat)
My Lords, this is a necessary Bill which addresses fundamental problems left largely unaddressed by successive Governments. Unlike my noble friend Lady Noakes, I believe that it is broadly successful in achieving a practical balance between the interests of the taxpayer and of those in the public service.
In many ways, the Government had no choice but to act. The cost to the taxpayer of public service pensions has been increasing at a truly alarming rate. The taxpayer cost of public service pensions has increased by a third over the past 10 years and now stands at around £32 billion annually. Without reform, this amount would rise by a further £7 billion by 2016-17 to a total of £39 billion. That is a 22% increase. The current scheme has failed to respond to the rising life expectancy of the population. As the noble Lord, Lord Newby, said, as things now stand, highly paid workers get more for their contributions than those on much lower, steadier incomes. That is because final salary pension schemes benefit high fliers and those with big salary increases awarded near retirement. That is obviously unfair.
Overall, taxpayers have seen their contributions to public service pensions rise very significantly. For example, when the teachers' pension scheme began, employees contributed 5% and so did the taxpayer. The figures now stand at around 6% and 14%. Although previous Governments have in fact made some attempt to sort out the situation, the fundamental problems still remain and these and the growing gap between private and public pension provision clearly make the current position unsustainable. Indeed, the noble Lord, Lord Hutton, said in his interim report of October 2010:
"It is my clear view that the figures in this report make it plain that the status quo is not tenable".
I think the Government were right to take corrective action and have done very sensible things. It was eminently sensible to ask the noble Lord, Lord Hutton, to review and report on the situation and to make clear remedial recommendations. It was eminently sensible to agree to implement those recommendations and to set out to negotiate with the trade unions in an inclusive, detailed and non-adversarial way. My right honourable friend Danny Alexander and Mr Brendan Barber deserve a lot of credit for this even if they probably will not get much at all.
There are lots of good things in this Bill. The lowest paid public sector workers are protected. There will be no increase in contributions for those earning less than £15,000 and no more than 1.5 percentage points for those earning between £15,000 and £21,000. All pension rights already accrued will be protected and there will be transitional arrangements for those who are within 10 years of their normal pension age on
But having said all that, some aspects of the Bill may be a cause for concern and certainly call for detailed discussions in Committee. I have five areas in mind. The first is the retrospective power in Clause 3 that has been mentioned by other noble Lords. Clause 3(3)(c) states that scheme regulations may "make retrospective provision". This clause generated much discussion as the Bill made its way through the Commons, with some claiming that the Bill allows for the reduction of accrued pension benefits. The Government have said that this will not be the case. The Chief Secretary to the Treasury said in a speech to the IPPR in June 2011:
"We will honour, in full, the benefits earned through years of service. No ifs, no buts".
"I can tell the House that the Government do not have a closed mind on this serious issue ... I can only reiterate that we are listening and do not have a closed mind. I am sure that the issue will be discussed in the other place, and we shall listen carefully then as well".-[Hansard, Commons, 4/12/12; col. 786.]
I think that this is the right approach and acknowledges that the issue is serious, that it is a cause of real and justified uneasiness and that it is unresolved.
The second area relates to the powers of the national boards, currently defined in Clause 5(1) as "assisting the scheme manager". I know that many have argued that unless these boards have the power to recommend or even to direct, they have little real discernible purpose. I look forward to hearing the Government's views on this in the debate at Committee stage.
Thirdly, there is the question of member representation on scheme boards. I think there is a strong case for having on the face of the Bill a requirement to have one or more member representatives. I was very glad to hear that the Government are reflecting seriously on this. Fourthly, there is the rather vexed question of whether the Bill is entirely in compliance with EU pensions regulations. I look forward to the debate, as I am sure does the Minister, on whether the LGPS is or is not in compliance with Articles 8 and 18 of the well known institutions for occupational retirement provision directive.
Fifthly, and finally, I have heard a very strong and compelling case for the inclusion of ambulance staff who are 999 responders, with firefighters, the police and the Armed Forces, among those who may retireat 60. I look forward to discussing that further in Committee.
I hope that the Minister will take these comments on board and reflect on them before Committee stage. If he does, I believe that it will help to make a good Bill even better.
Lord Monks (Labour)
The growth of occupational pensions was one of the outstanding, if rather unsung, features of 20th-century Britain. As the noble Baroness, Lady Noakes, said, there has been a relationship between the public and private sectors, in this case, with the public sector, along with some enlightened private companies, leading the way in pensions provision. Pensions spread after the Second World War, particularly in the 1960s, to white-collar workers in the private sector on a fairly general basis and then to more and more blue-collar workers in that same sector. Some missed out, including many women and part-time workers. It was not a universal progress. Some companies did not introduce this provision but many did. However, overall, there was substantial progress. Indeed, by the 1990s, the surpluses of pension funds were used to fund generous redundancy packages in both the public and private sectors and many employers took pensions holidays. However, all that seems a long time ago. As others have said, today, defined benefit schemes in the private sector are in full-scale retreat, are closed to new starters or are being wound up altogether.
This issue was looked at by the noble Lord, Lord Turner, and the noble Baroness, Lady Drake. We miss the noble Baroness who is not present as she is unwell. We all send her our best wishes for a quick recovery. Their report showed the paucity of provision in the private sector for many people. This matter is being addressed by the auto-enrolment programme to a degree: that is, the compulsory provision of pensions by all employers in due course with the auto-enrolment of employees in the scheme. We simply need this programme to work, and to work well, certainly much better than the stakeholder pension scheme which was the last attempt at dealing with the problem.
Why did we get into this mess? Gordon Brown was mentioned in dispatches by the noble Baroness, Lady Noakes, but there was a range of issues that are now fairly clear. Actuarial revaluations were done rather suddenly; longevity rates-a very welcome development -increased; new accountancy rules highlighted pension liabilities in company accounts and the Maxwell scandal triggered some tightening of the rules. Legal and tax changes certainly played their part. Apart from those introduced by the Labour Government, the noble Lord, Lord Lawson, made some changes which encouraged the sale of personal pensions-or should I say the mis-selling of personal pensions-on a pretty large scale. The noble Lord, Lord Lamont, also made some changes which encouraged pensions holidays by employers.
A further factor was the practice of top managers establishing their own top hat schemes, which, not surprisingly, seemed to lessen their commitment to maintaining the scheme of their employees.
Lord Flight (Conservative)
I thank the noble Lord for giving way. I would like to add two other factors. First, stock market performance has been weak for more than a decade-stock markets are generally lower than they were 10 years ago. Secondly, pensions became overburdened with obligations in the private sector, the costs mounting all the time. Financially, those have been two of the most important ingredients.
Lord Monks (Labour)
I acknowledge that they were important, but it is just a pity that so many employers did not make provision for that when they took their pensions holidays. They did not put away for a rainy day-it certainly came, and it is still with us.
This brings me back to the relationship between the public and private schemes. There have been many like the noble Baroness, Lady Noakes, who have been suggesting that because the pensions provision in the private sector, although not collapsed, has seriously receded, we should see some equivalent steps taken in the public sector. I am very pleased to see that the Government's view was significantly modified during a series of talks with the public sector unions, which were facilitated by the TUC general secretary, Brendan Barber, to whom the noble Lord, Lord Sharkey, has paid due tribute. Incidentally, Brendan retires at the end of the month, and I know the House will wish him well and record our appreciation for the job that he has done in many areas, not just in this one. I think those talks have been successful, particularly in the continuing commitment to defined benefit schemes across the public sector.
Then the talks move down to sectoral level, where the picture varies. Some agreements have been made, some talks are continuing, and we have some disputes in certain sectors. In the view of some of the public sector unions, the Bill uses legislation to make changes that were not acceptable in the negotiations. The reaction in the fire service, parts of the Civil Service and parts of the teaching profession bear this out at the present time. The inevitable reality for these groups of workers is that pensions are becoming more expensive and they could be unaffordable at the rates of contribution that are being charged for many staff. Retirement ages are increasing and the scope of the benefits is being cut. I hope that during Committee there will be an opportunity to look at the way these changes are going to affect particular groups of workers for whom it will be different according to, for example, the arduous nature of their job, as my noble friend Lord Davies mentioned at the start.
This framework has been sorted out nationally, and that is reflected in the Bill. However, the Bill has some problems which I hope that we can address. There is some unnecessary detail in some areas including revaluation rates where it cuts across some of the packages agreed at sectoral level. There is an omission in some cases of a full commitment to the Fair Deal policy for workers contracted out of public services. Where is the recommendation of the noble Lord, Lord Hutton, for a review of the link between the state pension age and the normal pension age in public sector schemes? I think that the noble Lord, Lord Newby, expressed some assurances that had been made in the other place, which I hope will be put into effect when we get into the detail in this House.
The Local Government Pension Scheme is in many ways is a distinctive scheme, and I will want to pursue issues about its governance in Clauses 4 to 6. Again, some assurances have been given, and we will be testing in due course exactly what they will mean. One other technical area that could be important is scheme closure, which has the potential to trigger major changes in the local government scheme's investment strategy. I hope that we can close down legal ambiguities in this area.
Some public sector workers will be paying more for their pensions and working longer before they are eligible to take them. For some individuals, that will be a bitter pill that will change their expectations of the future. However, I pay tribute to those in the talks who have softened some of the proposals by taking a diametrically opposite view to that of the noble Baroness, Lady Noakes. The pensions remain good, and we should continue to be proud of that. I hope they will provide an example to the private sector as they did in the early years of the 20thcentury about what its direction of travel should be.
I hope that the Government will take fresh note of the concerns that have been expressed in this debate and be ready to address them in Committee.
Baroness Eaton (Conservative)
I was very pleased to hear the Minister say that he is going to have detailed conversations with the LGA about the Local Government Pension Scheme. As we have already heard, the LGPS is a funded scheme. Its members and employers pay contributions which are invested to meet the costs of paying benefits. The funded nature of the LGPS means that pension benefits are paid for by underlying investment funds and not general taxation. It is therefore unlike the rest of the public sector pension schemes, which are unfunded and paid out of tax receipts-that is, current workers' contributions and taxes.
The LGPS is collectively the biggest pension fund in the UK and the fourth largest in the world. There are 89 funds in England and Wales holding some £145 billion in investments and assets, which is enough to pay benefits for over 20 years. The 89 LGPS funds in England and Wales are required under scheme regulations to undertake a valuation of the fund every three years setting the employer contribution rates for the following three years. This framework allows for local circumstances-for example, life expectancy-to be considered when determining the employers' costs.
The scheme has a positive cash flow, with income from investments and contributions exceeding expenditure. Unlike other public sector pension schemes which work on a pay-as-you-go model, the LGPS has sufficient funds to cover benefits for over 20 years. Members contribute an average of 6.5% of pay to the scheme, with higher earners paying proportionately more-currently up to 7.5%-and there is also provision for the lowest-paid workers to pay a lower percentage of contributions, currently 5.5%.
Throughout the process of reforming the LGPS, the Local Government Association worked closely with the UNISON, GMB and Unite unions through the LGPS 2014 project board, leading to a scheme design which received overwhelming support from both employers and trade union membership. The Bill as drafted does not fully reflect this agreement and therefore, in my view, requires amendment. It does not reflect the unique nature of the scheme or the fact that the arrangements have been fully agreed by the unions and the Government.
The scheme regulation provisions contained in Clause 3 could see detrimental changes imposed on scheme members without agreement. This is not the case under current scheme regulations. If left unchanged, the Bill would undermine confidence in the scheme and provision for future benefits. The provision for retrospective changes, which could have a material detriment for scheme members, would be in stark contrast to provision in private sector pensions, which allows for consultation and agreement before introducing any such retrospective changes.
As the noble Lord, Lord Monks, said, there are concerns that measures in Clauses 4 and 5 could impact on the transparency of the LGPS because there is no segregation between the scheme manager and the scheme board. For the LGPS, local boards are responsible for each of the individual 89 funds and are concerned with the effective and efficient administration of the scheme at local level. The scheme board would have concern for the scheme at national level, with a central focus to ensure efficient and effective overall management of the LGPS nationally. The scheme board and scheme manager being, in effect, the same committee would not promote good governance of the scheme and would not allow for effective separation of responsibilities at local and national level. Furthermore, the agreement reached between the unions, employers and the Government specified the need for a national board, as proposed by the noble Lord, Lord Hutton, in order to give it a national focus in line with the treatment of other public service pension schemes under the Bill.
There is a lack of clarity around the impact on fund valuations which are included in the Treasury's scope within Clauses 10 and 12. This lack of clarity surrounds the apparent inclusion of both local fund valuations and the national notional model fund valuation within the control of Treasury regulations. Individual fund valuations are currently undertaken by fund actuaries under parameters set out in scheme regulations and assumptions agreed with the individual fund. It would be a marked change if such valuations were now to come completely under Treasury control. If the intention were to include only the notional model fund in the Treasury's scope, the clauses would need to be amended to prevent future misunderstandings.
Clause 11 provides for the Treasury to set the scope, extent and methodology of cost management in the LGPS. It is difficult to see how the principles agreed in December 2011 for self-determination can sit easily with this clause. In contrast to the unfunded schemes, the agreement reached for the LGPS called for a separate cost management process and for the control of cost management issues to be the responsibility of the principal stakeholders of the LGPS. As a funded scheme, this is particularly important, given that funding of the LGPS is carried out independently of the Treasury.
In summary, although I acknowledge the need for the Bill to cover the LGPS, I remain concerned that it does not fully reflect and cater for the unique funded nature of the scheme or the agreement reached by the LGA and unions for the LGPS from 2014. That agreement received overwhelming support from employers and members alike, and the concern is that the progress made following agreement with the Government would be at risk should the Public Service Pensions Bill not fully reflect the unique nature of the LGPS among other public sector schemes.
Baroness Donaghy (Labour)
My Lords, I should declare an interest as I am in receipt of two public sector pensions-one from my university career and the second from ACAS. I have been involved in public service pensions since the early 1970s and I helped to establish a final salary pension scheme for non-teaching and support staff at the University of London in the mid-1970s. Many of the schemes established before that were administered by insurance companies, which charged significant administration fees and allowed the staff no voice. I mention this because I have direct experience of the world before a decent occupational pension was established. There was no consultation with staff and no transparency, and the insurance companies exercised powers that would make Henry VIII look like a wimp. Therefore, I do not want to go back to that world.
Framework agreements were reached with most of the unions involved in the negotiations last year. The main objective is to make sure that some of the fundamentals are adhered to in this Bill-that Treasury powers should not undermine scheme arrangements or introduce retrospection. The trust of public sector workers, which has been shattered by having to negotiate two major changes in a very short space of time, should now be rebuilt. The Bill should not cut across negotiations which are taking place in the health service and fire service on normal pension age, and the unique features of the Local Government Pension Scheme should be recognised. I fully support the noble Baroness, Lady Eaton, in what she said on that. Ministers have given certain assurances which are not reflected in the Bill, and I will be seeking to table amendments, if necessary, to try to make sure that those assurances become a reality.
The Bill is based on negotiations in England and Wales, and has not been subject to the same level of negotiation in Scotland. I am aware that the noble Lord, Lord Newby, referred to this and hoped that the Scots would come along, but my emphasis would be that the Scots should be given full consultation rights and that the Bill should be amended to maintain the powers of the Scottish Parliament to design and regulate the public service pension schemes that are devolved to Scotland. The Bill prescribes the design of Scottish schemes in a way that current UK primary legislation does not.
"The Government intend to include provisions on the face of the ... Bill to ensure that a high bar is set for future Governments to change the design of the schemes".-[Hansard, Commons, 20/12/11; col. 1203.]
The wording of the Bill erects a much lower hurdle for scheme design changes than currently exists by introducing wide-ranging new Treasury powers, repealing relevant sections of the Superannuation Act 1972 and replacing them with limited consultation rights.
On retrospection changes, which have already been referred to, the Government indicated at the Report stage in the Commons that they do not have a closed mind on this issue, and that is welcome. Clause 3(3)(c) provides for enabling provisions which would allow scheme regulations to make retrospective changes. Although I do not object to that in principle, it is essential that regulations that have the effect of reducing accrued rights to pension benefits cannot be made unless the scheme members or their representatives agree to that change. The absence of such wording could undermine the commitment given by government that accrued rights up to the date the schemes are changed will not be reduced. This would ensure that workers in public service pension schemes enjoyed the same protection in relation to their accrued pension rights as exist for workers in the private sector under pensions law.
On the subject of retrospection, the Bill currently allows for pension revaluation rates to be negative, meaning that someone's accrued pension earned to date can be negatively revalued if inflation is negative. This was not mentioned in the scheme negotiations and is a change from current practice whereby scheme revaluations can never be less than zero. This would have been a deal breaker in the local government scheme and Civil Service schemes where a revaluation of CPI alone has been agreed. No other pension funds outside those provided for in this Bill have the potential for negative revaluation and I hope the Government will be prepared to accept an amendment to ensure that a revaluation will never be less than zero.
On consultation and scrutiny, members should receive the same level of protection accorded to scheme members as that provided under the Superannuation Act 1972. It is essential to the spirit of the agreement that any future changes to the scheme design that are likely to have an adverse effect on members' benefits are subject to meaningful consultation and at least require the affirmative procedure rather than the negative. There are a number of issues on governance which need to be clarified in the Bill and on these matters I support the words of the noble Lord, Lord Sharkey. There should be a clear separation of powers between scheme managers and scheme boards to avoid conflict of interest, as recommended by the noble Lord, Lord Hutton. There should be national and local boards for the Local Government Pension Scheme to ensure effective separation of responsibilities. Although there was a small amendment in Committee in the other place, it identifies only the structure of the local boards within the Local Government Pension Scheme and not the relationship between them and the national board. Once established, national boards must have explicit powers to make real recommendations to scheme managers, as they do now, otherwise they have little purpose. The Bill should clarify the advisory nature of such boards. Although I accept there was no agreement in negotiation about the number of member representatives on scheme boards, nevertheless the Bill should require explicitly that boards must include member representatives among their number.
I hope the Minister will give an assurance that all the schemes will comply fully with the European legislation-namely, the institutions for occupational retirement provision. The Bill sets the local authority as a scheme manager but does not say how that board is to be constituted. The current Local Government Pension Scheme is not compliant with Articles 8 and 18 of the European directive. Article 8 requires the legal separation of fund institution from any sponsoring employer. Article 18 requires pension funds to invest in accordance with the "prudent person" rule. That is, investments should be made in the sole interest of members and beneficiaries. Will the Minister agree to add sub clauses on compliance with Articles 8 and 18 of the EU directive and ensure that one of the pension board's functions is to ensure such compliance?
The power currently in Clause 7 of the Bill, to replace defined benefit schemes, will undermine confidence in the negotiated agreement and we will have to come back to that in Committee. We will also have to return then to the issue of normal retirement age. The current wording of the Bill restricts the work currently being undertaken by the NHS Working Longer Review Group to make evidence-based recommendations. There is also no mention in the Bill to there being regular review of the link between state pension age and normal pension age, which was a specific recommendation of the review of the noble Lord, Lord Hutton. At the very least, ambulance service staff should be included in any exemptions.
In Clause 10 on scheme valuations, it should be made clear that Treasury directions should be subject not just to consultation but to the agreement of the Government Actuary. Also, the Treasury should be required to consult and to take into account the opinions of the existing scheme governance structures before making a direction. To do otherwise would undermine the role of scheme-specific governance structures.
Clause 11, as it stands, gives the Treasury discretion over how the cost cap is set. The negotiated agreement in local government ensures that control of cost management issues are the responsibility of the principal stakeholders of the scheme and, as mentioned by the noble Baroness, Lady Eaton, this should be made clear in the Bill. The issue of Fair Deal has already been mentioned by other speakers and I simply wish to endorse this.
There is much to be done. If the trust of public service workers is to be rebuilt, it is vital that the Government keep faith with the negotiated agreements by reflecting them in the Bill.
Lord Flight (Conservative)
My Lords, I begin by paying tribute to the work done by the noble Lord, Lord Hutton. I have worked in the pension investment management industry going back almost 40 years and, as a result, have been significantly involved in the pension sector. I want to talk about the 85% of public sector employees in schemes that are not funded, rather than the remaining 15% referred to by the noble Baroness, Lady Eaton, who are largely local government employees.
This Bill is not just about pensions, it is about sorting out the public finances and, we must admit, fairness in society. I remember that many years ago I asked my economics master why people in the public sector were paid approximately 10% less, level by level, than those in the private sector. He replied that they generally had better pension provision and better security of employment. There was therefore an overall fairness to the situation. It should be noted that today pay level, layer by layer, is now some 10% higher in the public sector than in the private sector and there is a question mark as to why there should also be considerably better pension provisioning.
The problem for decades has been that contributions have been set well below the subsequent financial cost of meeting the pension payments to today's retired workers. Pay as you go masks the true cost of labour and pushes the problem into the future. The legacy of successive Governments' inability to implement the necessary reforms is now increasingly manifesting itself as a rising tax burden on the majority of people working in the private sector whose pension provision, as others have pointed out, has been severely ravaged and reduced not just under the Labour Government but currently under the coalition Government also. Following the reforms, most employee contributions will still be less than 10% of incomes. The Chief Secretary of the Treasury made this point himself on
"To earn the equivalent pension in the private sector... Both would require an annual contribution of around a third of salary".-[Hansard, Commons, 2/11/11; col. 928.]
Focusing on the liability is, in a sense, a red herring; it is a nebulous concept too remote from individuals' day-to-day experience. Consequently it does not impose any meaningful political pressure. What matters is cash flow, cash cost. Today there is a rapidly growing and highly visible cash flow shortfall between contributions and pensions in payment which is immediate unambiguous. A prerequisite of pay as you go is that over time what comes in broadly covers what goes out. It is this that should provide the political pressure point which needs addressing and where the reforms in the Bill do not address this problem.
The cash flow in 2005-06 was an innocuous £200 million; it has grown rapidly since. It was £3.2 billion in 2008-09; it is forecast to rise to £14.3 billion in 2015-16 and £15.4 billion in 2016-17. If you take the actual cash flow shortfall in this last period and add the contributions being made by employers into employees' pension schemes, the total being paid by the tax payer amounts to £32.6 billion, representing the equivalent of £1,230 for every household in the country. That means that nearly £4 out of every £5 paid in pensions to former public sector employees comes from taxpayers. Particularly surprising is the increase in the forecast shortfall between the two OBR reports, because the 2012 report includes the proposed cost-saving reforms. It might have been expected that the forecast shortfall would start reducing after 2014, when the reforms are due to be implemented, but, unfortunately, the opposite is expected to happen.
We all know the various causes of the shortfall: improving longevity, with the latest analysis indicating that people will live some six years longer than expected; a growing headcount imbalance, with fewer workers per pensioner and schemes maturing-PAYG works only if scheme membership continues to grow; and now the reality of Madoff economics in our public sector pension arrangements. The wage freeze in the public sector limiting contributions has also had an impact, while pensions in payment remain indexed to CPI. The coalition's last minute concession to the unions to ensure that all those within 10 years of retirement will suffer no detriment to their retirement income means that at a stroke this concession vaporised the prospect for at least the next decade of exerting any significant control on the widening cash-flow shortfall. Finally, the inclusion of the Royal Mail pension scheme between the last two Budget reports added, from 2012 to 2013, some £1.5 billion per year to the forecast shortfall.
The reforms increase employee contribution rates by an average of 3.2% of income and are expected to raise an additional £1.2 billion in 2012-13, rising to £2.9 billion in 2016-17. This additional income is included in the 2012 Budget report but, alas, is dwarfed by the scale of the relentless increase in pensions in payment. Staring at one is the point that, if public sector pensions are to remain defined benefit pensions, there is an onus on employees to pay adequately for that arrangement, particularly given what has happened in the private sector.
Defenders of the status quo point out that with a pay-as-you-go framework, contributions are intended to correspond to the economic cost of employees' accruals and not to meet concurrent pensions in payment. That may be so but, in the mean time, public sector workers will continue to enjoy certainty of income in retirement, based on career-average wages, until the day they die, mostly paid for by 80% of the workforce in the private sector, almost none of whom will have such security. Furthermore, over the next few years, it will be become impossible to ignore the alarm bell that is the burgeoning cash-flow shortfall between contributions and pensions in payment. If we are to leave the system in place, I believe that one way or the other the finances will need to operate so that the cash-flow shortfall is minimal.
The coalition Government have justified their reforms on the grounds that they achieve a 40% reduction in the total liability, going down from 2.2% to 1.3% of GDP by 2061-62. This 40% reduction is significant but it is half a century away, which is far too late to address public opinion in the next few years and, as others have pointed out, we have no idea what GDP will be 50 years hence. We are already falling well behind the assumed GDP growth rate and early deviations compound. The noble Lord, Lord Hutton, has made the point:
"What we've seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of public service pensions have been shown to be too optimistic. That is going to affect the sustainability of public sector pensions in a negative way".
It is time to consider a solution that will be lasting, affordable and fair. The coalition might start to prepare the public sector for a risk-sharing arrangement, such as an unfunded cash balance scheme or, as the noble Baroness, Lady Noakes, argued, to look at a wholly DC framework. Personally, I think the latter is almost too difficult, largely because of the issue of paying twice. If the unfunded pay-as-you-go DC schemes are to stay in place, it is not fair that they will end up costing ordinary taxpayers more and more.
Finally, the Government might look at what has happened in Ireland, admittedly faced with acute economic problems, but this is a difficult world. It is a world where our public finances are unsustainable, if they continue with present deficits, a world where increasingly across the nation people expect the solution to problems to be seen as fair between one group of citizens and another.
Lord Hutton of Furness (Labour)
My Lords, it is always a great privilege to speak in your Lordships' House. I think we all feel that privilege and responsibility very acutely if we also feel a sense of parental responsibility towards the legislation. I confess that I feel some parental responsibility for this Bill.
A little context might not go amiss. We should all remind ourselves how significant a part public service pensions play in our savings culture in the United Kingdom. Today, it has been estimated that about 12 million people have a direct stake in a public service pension scheme. That is one in five of the total UK population. They are hugely significant. About 85% of those who are employed directly in the public service contribute to one of those pension schemes. In other words, they are doing exactly what successive Governments, we in this House and those in another place have urged employees to do for a very long time, which is to do the right thing, to act responsibly and to prepare for the time when they may no longer be economically active. They are making a sacrifice now to enjoy the rewards when they retire.
All of those things are really good and we should try to hold on to them in this debate. Most people in the public sector are saving for their retirement. As many noble Lords who have spoken in the debate so far have confirmed, that is not the case in the private sector today. The contrast with the private sector is pretty stark. Probably only about one-third of the private sector workforce participates in an employer-sponsored scheme of any kind and those numbers are going down-they are not increasing. That is a huge problem and even with that context, many in the private sector who are contributing are not saving enough.
Successive Governments have been trying to address this formidable challenge and my noble friend Lord Turner has done sterling work for the country in proposing the reforms he did a few years ago. I hope that we are now beginning to head very much in the right direction. Given the importance of public service pension schemes, in this House we should try to do all that we can to ensure their long-term sustainability. We also need to ensure their adequacy. We face a huge demographic challenge. I do not think that the price that we should pay as a society for becoming older is that more and more old people retire in poverty. We face that risk right now and I do not think that we should compound it by ill thought-through reforms to public service pensions.
I hope it is clear to your Lordships' House that the Bill will help us to achieve those important public policy goals. I welcome the new legislative framework that this measure will introduce. I hope it will provide the necessary underpinning to secure the long-term future for public service pensions, which is a very important objective. As we all know, no legislation is perfect; we have not yet devised that sort of procedure. I say to the Minister, for whom I have very high personal regard, that the Bill is certainly not a flawless piece of drafting. Many who have spoken in this debate have highlighted those areas where there is scope for improving the Bill in its later stages in your Lordships' House.
However, today we are debating the principles of the Bill, and these I can strongly support. So far, no one has mentioned what these principles might be, so perhaps your Lordships will allow me to make a few important points that I think need to be made. I see these principles as, first, trying to find the right way to respond to the challenge of demographic change in a fair way, so that we strike a better balance between what employees pay and what taxpayers pay for these schemes. Secondly-this is a hugely important advance in the Bill-we need to ensure that the schemes themselves are fair to those saving within them; and that is absolutely not the case in the vast majority of public service pension schemes at the moment. Only the new Civil Service scheme is a career average scheme; the final salary schemes that make up the rest of the public service pension schemes are essentially unfair to the people we should be most concerned about-those in the public sector who earn the least. It is those people who earn the least in a final salary pension scheme who subsidise the pensions of those who earn the most. That is profoundly unfair, and this Bill will remove that unfairness from the public service schemes.
The Bill will also ensure that pension schemes are better governed in the future than they are now. This is not just a bit of process that we tend to get fixated by; it is a very important principle. Through better governance, there is a prospect that these schemes can command the confidence of both employees and employers alike.
Successive Governments have recognised the need for reform in this area if these pension schemes are to be sustained and supported for the long term. Costs have been rising dramatically in recent years, and it was clear in my report that that was set to continue for some time to come. The noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, referred to these increased costs in their contributions. It is true that the increase in these costs has been borne largely by taxpayers, not scheme members, and I took a very strong view in my report that that was an unsustainable benchmark for the future.
However, it is very difficult to think about short-term measures that we can take to reduce the inevitable rise in costs, because that rise is driven by a number of factors. It is driven largely by scheme members' accrued rights and by the increasing number of people retiring from these schemes. Unless we are prepared either to reduce those rights or to further increase contributions to those schemes, this is a cost that we will have to manage as best we can. After the 3% increase in contributions that the Government have required scheme members to make, I doubt that there is a way of controlling these costs through further contribution increases unless we are going to drive hundreds of thousands of people out of these schemes altogether. That would represent not an advantage to the taxpayer but very much a loss.
The previous Government introduced higher pension ages for new entrants and cap-and-share arrangements to try to share risk more equitably between taxpayers and employees. I welcome all of those reforms. They were necessary and the right thing to do. However, in my two reports of 2010 and 2011, I set out in some detail why I thought that these important reforms had not gone far enough. Your Lordships will be delighted to know that I do not intend to rehearse these arguments in any detail today. It was quite clear from the debate after the publication of my report that not everyone shared my analysis. That is a feature of our democracy and I have no problem with that. However, I did try to set out the facts as I saw them and to try to draw the right conclusions from them. For me, they pointed very strongly to the need for further reform.
I am glad that we have found a way to sustain defined benefits schemes into the foreseeable future-I regard that as a very big gain-and I am delighted that the Government did not take a slash-and-burn approach to solving this problem. That would have served only to impoverish future generations and would almost certainly have led to higher welfare costs. That would have been entirely the wrong thing to do. It would have undermined the personal responsibility that we have to encourage in the UK among all those in the workforce, whether in the private or public sector, to save for their retirement. I am glad that that is not the Government's intention.
It was very clear from this debate and from other debates that people are beginning to recognise that public service pensions are far from being the gold-plated employee benefit that some people have claimed. I hope that today we can dispense with that myth. On the whole, public service pensions provide, on average, fairly modest retirement incomes. However, without reform there would be a danger of these costs eventually spiralling out of control. That would put at risk what I think is really important in this debate, which is the necessary public support to sustain these pensions over the long term. So again, I think that the Government have very much taken the right path in bringing this Bill forward.
That is all well and good. The principles are sound and robust and will withstand criticism from inside and outside the House. However, it is probably necessary, too, to refer to where I think the Bill needs further work. It is not a simple piece of legislation. There are a number of areas where I hope it can be improved during its progress through your Lordships' House. One thing on which I reached a very firm view during the course of my commission, and particularly afterwards in the public debate that ensued, is that if we have any prospect of building support for pension reform, and if it is to command a strong consensus, it absolutely must be built on a solid foundation of trust and confidence in the nature of the changes and, equally, in the way that those changes will be implemented and delivered. I accept that this is what Ministers have sought to do in the clauses of the Bill, but it is here that I have the greatest concerns over the current drafting.
I have three concerns that I want to raise this afternoon. I have already stressed the importance of good governance and how central that is to building confidence and support for these schemes going forward. I welcome the establishment of the new pension boards. That was the instrumental part of my filed set of recommendations and it is absolutely the right thing to do. I am convinced, in particular, of the need for employee representation on these boards. This is not spelt out on the face of the Bill but it needs to be. We should remind ourselves that in private sector schemes there is a legal requirement for a third of the trustees to be employee nominations, and there is a very strong case for something similar for the pension boards that the Bill will set up. This is not a bit of window dressing; it is absolutely fundamental to good governance and the building of strong support for these schemes. Again, I have reason to believe that this is very much what the Government are thinking about, and I hope that somehow they can convert their intentions into the Bill, because that will do the Bill a lot of good and give it a strong tail wind. I think that would be important.
Many in this debate have raised the position of accrued rights and how they are to be protected. That was absolutely part of my recommendations. In my report I recommended that the Bill should contain a definition of what these rights are. We tend to assume that we know what they are. They are not spelt out anywhere in the Bill. We do not have a definition for the purpose of the public sector pension schemes of what an accrued right is. We all probably think we know that, but I think that if we were all asked what it was, we would all come up with a completely different set of understandings. For those in private sector defined benefit schemes, there is a statutory definition of these accrued rights in the 1995 legislation, and there would be some benefit if the Bill were to take a similar path.
The issue of how accrued rights are to be protected is important, too. We will not build confidence and long-term sustainability in these schemes if there is any sense that what you have paid for can somehow be taken away from you. That, I am afraid, is a possible interpretation that could be placed on Clause 3. So I do not believe that the Bill in its present form is quite good enough. The danger of retrospective changes to accrued rights would strike very much at the heart and soul of building support for the savings culture, and we should not allow that to pass unchecked.
Lord Flight (Conservative)
If the noble Lord thinks that the growing cash-flow deficit cannot be solved by increasing contributions and should not be solved by changing benefits, how is he going to solve it?
Lord Hutton (Crossbench)
One of the great things about no longer being in government is that I can point to the government Front Bench-to people who can answer that question. I do not want to put words into the Minister's mouth or the Government's mouth, but they have set out their stall as to how they can manage and contain these costs. There is going to be an increase in costs-there is no doubt about that-but through higher contributions and changes to the indexation rules for public sector schemes, they have set out their strategy for managing that pressure on public spending. That is the Government's concern. I think the noble Lord has more of a concern with his own Front Bench in this regard than with anything that I have proposed.
However, I accept that it is a big challenge. These are difficult things to wrestle with. To be fair to the Government, they have set their sights on ensuring an adequate level of pension benefits from these schemes and I support that principle. I do not think that there is an answer to the demographic challenge we face in simply stripping away further benefit entitlement from retirees in the public sector. The combined effect of both the changes that the Government, whom I was proud to serve, and now the changes that this Government have made has been to reduce the value of these pensions by about 25%. That is a substantial change. If we were to go very much further we would undermine the principle point and purpose of those pensions, which is to give people adequate income when they retire.
The noble Baroness, Lady Noakes, referred to a lack of public support for these schemes but I wonder whether that is so. I have never found anyone in the country who begrudged a soldier, sailor or airman a proper defined benefit pension. I never met anyone who did not think that police, firefighters and others did not deserve one. There is one job that is probably more important than anything else in our society. We entrust those who teach our children with a very great deal of responsibility and I for one do not begrudge teachers a defined benefit pension.
In relation to retrospectivity, the Government have a serious problem. We have to be mindful if there are to be DB schemes in the public sector. We know that there are fewer in the private sector, but those 2.6 million people in the private sector who still have access to a defined benefit scheme know for certain, because of the current law that their accrued rights cannot be changed unless they give their consent to that change. The same rules should apply in the public sector. I do not believe that we can have a different set of rules in relation to accrued rights for people in public sector schemes.
Many people have spoken in this debate-this is my final concern-about how this Bill affects the Local Government Pension Scheme. It is fundamentally different in its characteristics because it is not just about contributions for employers and employees; it is about assets and the investment income that is produced. My concern about the Bill and Clause 16 in particular with its reference to closure, implies some sort of segregation between the Local Government Pension Scheme as it now is and as it will be post-2014. That could run the risk of a whole set of additional costs and complexities creeping in and we should try to avoid that.
Again, I know from studying proceedings in the other place that Ministers have made it clear that that is not their intention. As a good rule of thumb, if it is not the Government's intention, they should have that on the face of the Bill, because once this Bill reaches Royal Assent, which it will, how are pension advisers to reconcile the difference between what the Bill says and what a Minister may or may not have said in Committee in this House or the other place? That is a difficult set of challenges. If the purpose of this Bill fundamentally is to create a simpler, straightforward legal framework, we would have absolutely failed if we end up with a contradiction between what the Bill says and what ministerial intentions are.
That is all I want to say about the Bill. I am looking forward to working with the Minister and colleagues on both sides of the House in improving its detailed clauses as we make further progress with it.
Lord Davies of Oldham (Labour)
My Lords, I will keep my remarks brief because I have been obliged to speak twice in this debate and I am quite aware of the tolerance of the House in that respect.
I have drawn sustenance from the debate in so far as it has been quite clear on all sides of the House that the basic principles of the Bill command assent and support. We certainly want to see effective legislation enacted but we have clear areas of anxiety. They have been reflected in several of the speeches made during the course of the debate. I was grateful to the noble Lord, Lord Sharkey, for emphasising aspects with regard to governance. It is certainly an area that we need to look at quite carefully and there is no doubt that the Minister will be under considerable pressure to improve on the model that obtains within the Bill at present.
I understand that the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, have certain fundamental positions with regard to public sector pensions and the gold-plated nature and indulgence of the public sector in terms of provision these days. I think my noble friend Lord Hutton in his remarks indicated that in fact the average public sector pension is quite a minimal amount. It is not the case that we should point out to the private sector that there are enormous advantages in being in the public sector. There are not enormous advantages. One of the points that the noble Lord, Lord Flight, emphasised was security. Where is the security when the Government are involved in several hundred thousand jobs being lost at the present time? Where is the security when in quite an arbitrary way the Government have indicated that the costs of pension contributions must increase? We all know the reasons for that, but that is not to deny the degree of reduction in resources that apply to those people, who are often on quite modest salaries in the public sector.
I was also grateful to my noble friends Lord Monks and Lady Donaghy for identifying crucial areas in the Bill about which there is real anxiety among those who know the representations that have been identified by trade union negotiators. We must take these points very seriously. I am sure that the Minister will do so. Of course they identify particular areas on which the Bill at present does not command a great deal of assent across the country, which is essential. I was grateful to my noble friend Lady Donaghy for emphasising the issue with regard to the Local Government Pension Scheme in Scotland.
As was pointed out, in the past all arrangements were on the basis of full consultation and participation. There is an arbitrary quality about the way in which this is expressed in the Bill, which the Minister has an obligation to respond to.
Most of all, I am grateful to my noble friend Lord Hutton for participating in this debate. He has proposed a report that has given us the basis on which to consider very seriously what we all recognise is a fundamental issue with regard to public finances and public provision. We are as one with the Minister in wishing to see aspects and principles of the Bill achieved, but my noble friend identified crucial areas in which the Bill falls far short of what is necessary to win the confidence of the nation, and it is on that basis that the legislation will become effective.
Lord Newby (Liberal Democrat)
My Lords, I start by thanking all noble Lords who have taken part in the debate today. It is a great pleasure to hear the noble Lord, Lord Davies of Oldham, twice. It must take him back to his time as a Minister. No doubt he is sorry that he will not be speaking twice more often in the coming months.
At the outset, I must say that while I will try to deal with as many points as I can, I almost certainly cannot deal with them all. We will have ample time in Committee to look at them all. I also declare an interest. Although it is more than 30 years since I resigned as a civil servant, if I live long enough, I will be in receipt of some pension for my time there, although I do not think that anything that the Bill does will have an impact on that. That is a good segue into talking about retrospective powers, about which much concern has been expressed.
There is a lot of suspicion about this that is misconceived. Pensions legislation has historically contained such powers, which have been seen to be necessary for the lawful and efficient operation of the scheme. They are generally used for minor and technical changes, for rectifying errors and making changes for the benefit of members. The intent of the Bill is simply to allow for these minor changes. There is no sinister intent.
There is concern about the broadness of existing powers in the Bill. I should perhaps explain that at the moment there is no set standard of protection offered across the current schemes. That is why we have not carried across the protections in retrospectivity that can be seen in the previous legislation, such as the Superannuation Act 1972. We have also been clear that taking forward the most extreme of these-member consent locks-for any retrospective changes is not the way forward and it would not be right to do that.
However, we understand that there is a considerable strength of feeling on this issue reflected not just in today's debate but also by the Delegated Powers Committee. We will therefore further consider the provisions of the Bill to make sure we are striking the right balance between the protection of members and the efficiency of the scheme. I hope that gives some reassurance to noble Lords.
The noble Lords, Lord Davies and Lord Sharkey, and the noble Baroness, Lady Eaton, asked about the local government pension fund and the possible crystallisation of liabilities if the fund is closed. We believe these concerns are unfounded. We set out in detail in another place why Clause 16 does not have that effect. It only prevents members of the local government schemes accruing further service under current terms unless transitional protections apply. The existing funds will continue in respect of service prior to and following the reform of these schemes and the crystallisation of liabilities does not arise. I hope we are able to reassure people fully on this in Committee.
There has been an exchange of letters between the Economic Secretary to the Treasury and Chris Leslie. The letters were copied to Sir Merrick Cockell at the LGA. Subsequent correspondence with Sir Merrick should really put the matter to rest. I think it may be of benefit to noble Lords who have spoken in the debate if I circulate that correspondence. It is technical but pretty conclusive.
The noble Lord, Lord Davies, asked why the Bill contained reference to defined contribution schemes when the Government do not intend them to replace defined benefits schemes. There are a couple of reasons for this. First, there is already a defined contribution scheme-the partnership scheme-operating within the Civil Service. It is a small scheme with only a few thousand members but it needs to be covered. Secondly, although the Government have absolutely no intention to change the basis of the schemes, it makes sense for a piece of legislation, which we hope has a long life itself, to allow flexibility in the future if there are unforeseen changes.
The noble Lord, Lord Davies, was concerned about limited parliamentary scrutiny on the Treasury powers. I agree that, as a general principle, a negative resolution instrument does not give you much scope for scrutiny. However, they are not like normal statutory instruments as there will have been a very considerable degree of formal negotiation outside Parliament. I think it is fair to say that Parliament has never seen its role as being to decide on the detailed components of pension schemes. In that respect we will simply continue on the same basis that we have up to now.
Noble Lords, including the noble Lord, Lord Davies, and the noble Baroness, Lady Donaghy, asked about the Scottish Government's consultation. The overall principles in the Bill are very much based on those put forward by the noble Lord, Lord Hutton, and his recommendations were, I think, accepted by the Scottish Government. They accept the generality of our proposals; in terms of more detailed consideration, the Chief Secretary has written to Scottish Ministers inviting them to propose amendments if they feel the provisions of the Bill are not suitable for the Scottish pension scheme. So far, no such amendments have been proposed. Any regulations made by Scottish Ministers will be subject to the procedures in the Scottish Parliament,
The noble Lord, Lord Davies, asked about MoD firefighters. MoD firefighters are in the Civil Service Pension Scheme at the moment. They will have their pension age linked to the state pension age to ensure consistency within the scheme. The Bill does not move any groups from their current schemes. Indeed, these MoD firefighters have always had different terms and conditions from other firefighters. This already includes a pension age of 65 for new joiners as a result of changes implemented by the previous Administration.
I turn now to the comments made by the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight. They both drew very heavily on Michael Johnson's paper for the CPS which looked at the cash flow implications of the proposals. The noble Lord, Lord Hutton, dealt extremely eloquently with the question of whether the Civil Service and public sector pension schemes should now, because of their cost, be moved to a newer lower level. I do not want to reiterate his points other than to say in as clear terms as I can that the Government have set their face against defined contribution schemes and are proposing a reformed version of defined benefits schemes.
It is obvious, and nobody disputes it, that the Government are topping up member contributions to fund pensions. This is extremely expensive but it is not surprising. Longevity is increasing and in recent years the size of the public sector has shrunk. I suspect this is a development that the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, probably support. However, one of the consequences is that the inflow of member contributions has fallen as numbers have fallen. We have taken steps to remedy this by rebalancing contributions-saving nearly £3 billion a year by 2014-and as the noble Lord, Lord Flight, pointed out, the total reform package is projected to save £430 billion. It may be over the next 50 years but it is a very significant sum. The employer cost cap means that we cannot have a runaway cost here without formal legal requirements to deal with it through reformed contribution levels or lower benefits.
The noble Baroness, Lady Noakes, felt that the transitional provisions were too generous. There are going to be transitional provisions of some sort. We have taken the view that they are a balanced package. Although people within that transitional phase will get the same pension that they would otherwise have got, they will be paying more for it. They are not completely unaffected.
The noble Lord, Lord Sharkey, made a number of points including retrospection, which I have covered. He asked about the local government pension scheme and, in particular, whether it was in compliance with the relevant IORP directive. The Government believe it is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits. LGPS benefits are guaranteed by statute, not the existence or levels of any funds. There is no risk to members and no means by which local government employers can access pension funds or entitlements. I suspect that that is one of the many aspects of the local government scheme that we will want to clarify in Committee.
The noble Lord, Lord Monks, brought his considerable experience to bear in his contribution. I join him in congratulating Brendan Barber on the role which he played in this scheme. Those negotiations, which led to agreement in principle along much of the framework, were crucial in getting us to where we are today. I join the noble Lord, Lord Monks, in wishing Brendan Barber well for his retirement.
The noble Lord asked specifically asked about Fair Deal, as did other noble Lords. Perhaps I may deal with it because it is very important. The Government are committed to reforming the Fair Deal policy and formally announced their intentions for newly transferred staff back in July. We agreed to maintain the overall approach to Fair Deal but to deliver it by offering access to public service pension schemes for newly transferred staff, which will ensure that those transferred staff will continue to have access to good-quality pensions while helping to remove the barriers to plurality of public service provision. We recently published a formal response to the Fair Deal consultation, with further consultation questions and draft guidance. In the light of the details that emerged from the original consultation, it is appropriate to do some further policy work on contracts retendered under Fair Deal that were let under previous Fair Deal arrangements. We are currently considering how the new Fair Deal should be implemented. A start date for the arrangements will be announced in due course.
Fair Deal has always been a non-statutory policy. The new requirements will be reflected in contracts before public services are tendered, and I see no prospect of this Government moving away from their commitment to providing newly transferred staff access to public service pension schemes. However, it is important that we consider fully the views of stakeholders, including those who will be affected, through further consultation before making a final decision on the issue. It would be inappropriate to include Fair Deal in the Bill until all the policy detail is worked through.
The noble Baroness, Lady Eaton, gave us the benefit of her very considerable experience on local government issues. I do not intend to deal in detail with her points now other than to say that I hope to talk to the LGA before we reach Committee and that we will look very carefully then at all the points that she raised.
The noble Baroness, Lady Donaghy, raised a number of important points. We have one thing in common if nothing else. The noble Baroness is a former president of NALGO. As a boy, I benefited from NALGO because my father was an active member in the Yorkshire Electricity Board branch and we used to take our family holidays at NALGO conferences. I have particularly fond memories of one in Brighton where I got as a present-because he had been given it-a particularly gaudy, purple Biro, which, as a seven year-old or whatever I was, I treasured very greatly.
The noble Baroness slightly overdid it when she said that trust had been shattered as a result of these negotiations and what we are putting forward. As we have heard in the debate, there is not absolute unanimity that everything that we are doing is the best. There are many people who wish that we were being a lot less generous. We think that we are striking the right balance. The noble Baroness asked whether the bar was high enough. Again, it is a question of balance. It is quite tricky to set a very high bar because no Government can bind their successor. We are trying to make it more difficult to make changes. It is quite important to get agreement, as I believe there is, between the parties that there should be no thought at present other than that this should be a persisting scheme and that it should last for at least 25 years. Politicians come and go, but all we can do is make our position as clear as we can and do what we can in the legislation.
The noble Baroness asked whether the Government Actuary should have a more decisive, rather than advisory, role. I am advised that the Government Actuary believes that his role is advisory-that is the nature of the job-and does not want to have in essence a quasi-policy or an actual policy role because that would bring him into the area of public debate, which he believes would be inappropriate.
The noble Baroness asked about the Bill providing for the Treasury to direct how local authority pension fund valuations are to be undertaken. Clause 10 provides for the Treasury to specify how scheme-level valuations are undertaken. This is quite distinct from the valuation of local authority pension funds, which are provided for under Clause 12 instead. Local authority pension fund valuations continue to be a matter for the scheme actuaries. Treasury directions will not apply to those valuations.
The noble Baroness pointed out how under Clause 5 there appeared to be no separation of the scheme manager from the pension board. The clause allows for scheme regulations in the LGPS to establish pension boards that are entirely separate from any existing local government committees. It also provides for them to be combined if that is what is wanted. This is a matter for scheme-level discussions. We are committed to establishing a national board in the LGPS in England and Wales and will consider what is needed in the Bill to deliver that.
Until the last minute or two of the speech of the noble Lord, Lord Hutton, I thought that my only comment was going to be, "I agree with Lord Hutton". I think that I nearly agree with him in his concerns about employee representation, accrued rights and the LGPS at Clause 16. We will come back to him. It is not in the nature of Ministers, far less Treasury Ministers, to give Christmas presents, so I shall not do that at this point, but we will come back to those points, I hope in a positive and generous spirit, in the new year.
This is, as everybody agrees, an important and much needed Bill which will put public service pensions back on a sustainable and affordable footing. Although the Bill itself does not directly implement the reformed pension schemes' designs, it provides a sensible framework for their creation. The Bill's measures on cost control and monitoring, and those to improve standards of governance and administration, go further than previous legislation on public service pensions. I therefore commend the Bill to the House.
Bill read a second time and committed to a Committee of the Whole House.