New clause 5 - Report to Parliament (No.1)
Armed Forces (Pensions and Compensation) Bill
3:30 pm
Mr Desmond Swayne (New Forest West, Conservative)
I beg to move, That the clause be read a Second time.
You may recall, Mr. Griffiths, that when I spoke on the sittings motion I said that we should have this debate. During the debate on proposed new clause 1, I asked the Minister why the review body had presented the case that the armed forces pension scheme should remain an unfunded pay-as-you-go scheme. The matter was presented as a fait accompli—there had been no discussion, nor any consideration of the possible alternatives, such as a part-funded or fully-funded scheme. I asked the Minister during that debate whether he could share with us some of the logic that went into reaching that decision, but he did not respond.
I therefore tabled this proposed new clause, entirely with the intention of being helpful to the Government. Labour Members may be surprised to discover that the Government have a target for funded pensions. The target is that 60 per cent. of all pension liabilities should be fully funded by 2050, as opposed to 40 per cent. at present. There is not the slightest chance of the Government achieving that target unless they start taking radical initiatives now. I am providing them with an opportunity to do so, by tabling the proposed new clause.
It may be that it is inappropriate to move the armed forces pension scheme on to a funded basis; there may be perfectly logical and acceptable arguments to be made on the matter. However, we must have that debate. The proposed new clause calls for a report, and provides the Minister with two years to do the research work for that report. Such a report would enable us to have the debate properly, and to reach decisions.
Under a pay-as-you-go system—the existing system—this year's taxes are used to pay for this year's liabilities. Nothing is saved; nothing is invested. Imagine the considerable impetus to economic activity of investment on the scale that we are discussing, if we were to move to a funded scheme. The potential benefits would not just be for members of the armed forces who are the beneficiaries of the scheme, but to the entire economy. Arguably, a funded scheme would also encourage additional voluntary contributions, and that could have a significant impact on the benefits that would be payable.
Historically, it was always thought sensible to handle public service pensions on a pay-as-you-go basis, be they pensions for the military, the police, teachers, the fire service or civil servants. It was thought to be more sensible to pay for them out of current revenue, rather than to hand over money to the private sector, incurring fees and charges, to
generate and manage the funded schemes. However, times have changed, not least because the population has aged significantly. An existing pay-as-you-go scheme is in effect a sophisticated pyramid selling operation, because payouts depend entirely on the expectation of a future continued level of paying in.
In the past, it was always thought entirely sensible to consider that expectation legitimate, but with a much smaller working population in the future having to pay the tax revenues to pay for the liabilities being incurred now, I would suggest that that is no longer a certain equation. Therefore, the pyramid selling aspect is not one that we can look to with as much equanimity.
Pension payments now account for an increasing proportion of the services budget. Fully one quarter of our annual expenditure on the police force is taken up by pensions. It would be interesting if a Minister were able to provide similar figures for the proportion of defence expenditure that is now accounted for by pension payments. Given the amount spent on procurement, perhaps it would be more interesting to examine the total cost of manpower, with the pension cost as a proportion of that. That would be more realistic.
The total liabilities that we have built up with the pay-as-you-go pension schemes that the state now sponsors are truly enormous—probably equivalent to the entire gross domestic product, or about £600 million. It is undeniable that public sector pensions have been denied the stock market growth available to private pensions, which have enabled them to keep up with the market. We have discussed in Committee ways in which we might want to improve the scheme, but the cost of those has to fall entirely on the taxpayer because we have a system that prevents that cost falling on the stock market and on economic growth and other benefits. The asset growth of the funded system would have far outstripped any cost of management fees or any other such fees and made the same benefits much more easily affordable.
There is a counsel of despair that our obligations are so large that they cannot realistically be funded at all. If we struggle to pay the unfunded pensions now, how can we afford in addition to put money aside to fund new entrants at the same time? That is undoubtedly a counsel of despair. There are funding strategies that can be devised to deal with that. That is why the report gives the Minister two years in which to look into this question and to examine funding strategies.