David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

I beg to move, That the clause be read a Second time. We are now into the last five new clauses—four of them, I am pleased to say, Liberal Democrat and one, no doubt, an expensive probing amendment from the hon. Member for Northampton North. That will allow me to triangulate my prudent and reasonable position wonderfully in the middle of these various contesting parties.

New clause 22 is an extremely important one, and the Minister will be delighted to see that I have tabled one that will help him to save money and, maybe, answer some of the problems that the Government have about funding a decently founded basic state pension. Hon. Members will immediately recognise and, I think, be instinctively sympathetic to the wording of new clause 22. The wording is lifted from the report of the Work and Pensions Committee, which concluded, in paragraph 418:

“We agree with the point made”—

by the right hon. Member for Birkenhead (Mr. Field)—

“that informed discussion, rather than ‘merely shuffling our prejudices’ is necessary for a debate on the future level and terms of public sector pensions. We recommend that the Government commission an independent review, which includes involvement from both the private and public sectors, about the future terms, benefits and financing of these schemes.”

You will note, Mr. Taylor, that our new clause also calls on the Government to establish an independent commission,

“to evaluate the future terms, benefits and financingof public sector pensions.”

So, I am hoping for considerable support from both sides of the House on this reasonable and prudent disposal, which was supported by Labour, Conservative and Liberal Democrat members of the Select Committee. This is not one of the dogs that  barked very much during the Pensions Commission report. Lord Turner had, after all, started off with a fairly narrow remit, but had understood that the remit could only make sense if he broadened it somewhat to include a lot of the state pension architecture. It would, perhaps, have been a bridge too far if he had debated the issue of public sector pensions as well.

Nevertheless, it was quite clear in the Pensions Commission report—I think it was in its first rather than its second report—that it was flagging up the growing inequality of provision between the public and private sectors, and the need for public policy to address that issue. In some of the evidence that outside groups gave the Select Committee, there was concern about the growing cost of public expenditure on public sector pensions. Adrian Waddingham, from the Association of Consulting Actuaries, told the Committee:

“I think there will be political resentment in future if we do have the ‘them’ in the public sector and the ‘us’ in the private sector with this huge disparity”.

When Lord Turner himself gave evidence to the Select Committee in December 2005, he took the view that it was perfectly reasonable to have salary-related pensions in the public sector as long as there was a process of “continual adjustment” so that as life expectancy goes up the generosity and cost of public sector pensions is kept reasonably stable.

I think that the Select Committee was particularly influenced by the right hon. Member for Birkenhead, who made a sensible contribution. He pointed out that a lot of the debate about public sector pensions is not informed by statistics and tends to involve a shuffling of people’s prejudices rather than a thoughtful and considered debate. That is why he and the Select Committee argued, as we are doing today, that there is an extremely strong case for establishing precisely the kind of independent commission that the Government established to look at the rest of the pension system in order to investigate that issue and ensure that public policy is informed by facts, not spin or prejudice from either end of the spectrum.

Why is that so important? In a few years’ time, public sector pensions will account for about £2 or £3 in every £100 of public expenditure. Public sector pensions represent an extremely rapidly growing area of public expenditure. At the moment, they account for about 1.5 per cent. of gross domestic product, and even after the relatively modest savings in the existing reforms that the Government are banking, the cost of those pensions will rise by about 50 per cent. as a share of GDP by 2020 to 2030, to about 2.1 or 2.2 per cent.

I suspect that when we get new figures on the cost of public sector pensions, relating to the unfunded liability and their share of GDP in the future, we will find that the rising cost profile will continue more rapidly, and that it will be powered not only by the terms of public sector pension agreements, but by the increasing numbers of public sector workers since 1999, and increasing pay costs, which recently have been a matter for public debate and comment in the NHS and elsewhere. Those things are bound to fuel the cost of public sector pensions.

It is ironic that the Government are constantly telling us that they have no money to repair the state pension architecture. Their figures show that between 2010 and 2020 the share of GDP spent on the state  pension architecture will fall by 0.1 per cent. at precisely the time when the cost of public sector pensions will continue to increase rapidly. That looks odd and we wonder why the Government’s priority is not to first restore a decent state pension architecture for every member of the public and then to fund a decent public sector pension on top of that.

James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge & Hyde, Labour)

As the hon. Gentleman knows, the proportion of GDP spent on state pension does grow. The flat period is owing to the state pension equalisation between men and women. In future, I hope that he will make that clear when he mentions that statistic.

David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

I think that what the Minister means is that I am right to suggest that the share of GDP spent on the state pension architecture is going to fall and that that fall can be decomposed into some areas of increasing expenditure offset by savings made from increasing the state pension age for women between 2010 and 2020.

I do not know why the Minister is so grumpy about this. His own regulatory impact assessment, which comes with the Bill, is plain as punch clear that there will be a decline from 6.2 to 6.1 per cent. over the next few years.

James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge & Hyde, Labour)

The hon. Gentleman knows very well that that figure grows over the period covered by the RIA. He has picked one date in order to create a misleading impression. The only reason why that is happening is state pension age equalisation.

David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

The evidence will show that I am not picking one year. I am looking at what the cost is today and at what the cost will be not just in one year but in each year from 2010 to 2019. For all of those years, the share of GDP spent on public pension benefits in the state pension architecture will be less than it is today. That looks very odd with the rising costs to public sector pensions. There is an important cost issue and perhaps we could make some savings here and put them back into the state pension architecture to deal with all the problems that we have discussed during our proceedings.

Then there is the issue of the future stability of these schemes. Frankly, in changing the state pension age, the Government have demonstrated the right way to manage some of these big public expenditure issues. They have taken the decision now and they are making these changes for 20 or so years’ time so that people have a proper chance to plan. What people object to are sudden changes to their pension benefits or arrangements over a very short period so that they have no ability to plan and make adjustments.

The risk of the Government’s closing their eyes to some of the issues and the growing cost of public sector pensions is that at some stage when public expenditure pressures are bearing down on them or on a future Government, as they assuredly will, there will be huge pressure to make changes to public sector pensions swiftly and in a rather chaotic way. Perhaps there will be a risk not only that people will feel  aggrieved but that we will throw the baby out with the bathwater and end up getting rid of what in many respects are schemes based on principles that we might want to retain in future. The stability of these schemes depends on making sensible reforms in a timely fashion and not leaving things to the last minute when there is some kind of fiscal crisis to which the Government must respond.

The third issue which relates to the importance of public sector reform is mobility between the public and private sectors. It is increasingly difficult to persuade people, particularly later on in their careers when they have final salary schemes, to shift from the public sector to less highly paid, less stressful jobs in the public sector with a lower final salary or to switch between sectors. The Confederation of British Industry and other business organisations are extremely concerned about the potential disparity between the public and private sectors.

In the past there was a strong argument that some parts of the public sector appeared to have quite low pay rates compared to the private sector so there was a trade-off between pay and pension benefits; the public sector got a better pension deal but a worse pay deal. The figures that have been produced not only by the CBI but by groups such as the Pensions Policy Institute appear to indicate that that is no longer true; there is no longer a pay disparity between the public and private sectors. That obviously depends on how one defines the comparisons. It certainly gives us cause to reflect on the traditional argument that has been used to defend high public sector pension benefits.

I have given three reasons why this issue is so important. What sorts of reform could we expect to see in future and what should those reforms be based on? I very much hope that in reforming public sector pensions we will not simply enter into some sort of race to the bottom. I am not inviting the Government, and I would not invite any independent commission, simply to draw a line between where we are on public sector pensions now and the lowest or average levels of pension provision in the private sector. We would want to ensure that public sector workers have good pensions to retire on. We respect the fact that there are many public sector workers who have quite low pay throughout their careers and who retire on amounts of money that would not appear to be generous in many people’s terms.

The issue with public sector pension reform is therefore not simply to have a race to the bottom but to ensure fairness between the private and public sectors and to ensure that if there are good public sector pension schemes, public sector workers pay for them. We must not rely on the general taxpayer to fill a growing hole in the years ahead, at a time when the taxpayer who does not work in the public sector also has to make greater contributions to his or her own private pension or accept severe cuts in the level of those pensions.

It is disappointing that the Government have been so timid in this area, given that the Prime Minister is always talking about tough choices and suggesting that radical reform is on the agenda. He must be aware of the growing cost and of the Pension Commission’s figures, which show that 85 per cent. of public sector  employees are in an occupational pension scheme, compared with 30 per cent. of private sector workers. A big gap is emerging.

I notice that Ministers are not so uncompromising when they have to account for their position in less friendly environments than those to which they are accustomed, such as Labour party conferences or meetings with the unions before the 2005 general election. In other places, such as at the Financial Times business pensions summit, which took place in November last year, what they say is not quite as intransigent as what they say to their hon. Friends on the Back Benches and in private to the union leaders, whose support and finance they are keen to get prior to a general election.

In Pensions Week of 27 November 2006, Daniel McAllister quoted the answer given by the Secretary of State at the Financial Times business pensions summit when he was asked about the cost of public sector pensions and the growing inequality between the public and private sectors. The Secretary of State said:

“It would be a bad place to end up where only people in the public sector had DB pensions. If that happened we would have to go back and review the deals made. The general public would not want to contribute in taxes to a special pension for civil servants that they don’t have access to.”

Nigel Waterson (Shadow Minister, Work & Pensions; Eastbourne, Conservative)

I wonder whether the hon. Gentleman is aware that at a recent ABI gathering—he may have been there—the self-same Secretary of State made a similar comment. He said that the Government would have to revisit the deal with the public sector unions that was reached by his Cabinet colleague.

David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

That is interesting, and it adds even more fuel to the fire. It appears that Ministers have been caught saying one thing in one place and something slightly different in another. One suspects that the instinctive modernising tendencies of the Secretary of State are coming face to face with the grim financial realities of the Labour party and the concern of the  Chancellor of the Exchequer to ensure that he has support in all the right places.

Sally Keeble (Northampton North, Labour)

The hon. Gentleman just referred to civil servants, but when he talks about public sector pensions is he talking about all the local government employees and fire service employees as well? There is a plethora of schemes that are subject to different pressures.

David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

The hon. Lady makes an excellent point, as ever. I agree that there is a wide variety of different schemes, which I will discuss in a moment. We should distinguish between the different schemes involved, because the level of generosity is often quite different. We should not assume that all public sector schemes are unaffordable just because some of them are.

Sally Keeble (Northampton North, Labour)

I was thinking in particular about different occupational pressures. The firefighters’ pension, for example, is surrounded by particular pressures. It has been subject to the most severe criticism, but it is known that firefighters have particular problems because of the high injury and early retirement rates.

David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)

The hon. Lady raises an excellent point, although I think that in the past there were quite a few abuses of early retirement in many public sector schemes. If she looks at the figures for the past few years, she will see that the percentage of early retirement pensions has been falling rapidly, which indicates that something rather odd was happening before.

The hon. Lady raises an excellent point in relation to the differences between different schemes, which is another argument for having an independent commission.