New Clause 22
Pensions Bill
1:30 pm
David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)
Welcome back to the Chair for the final furlong, Mr. Gale. We have just five fences to clear before we have an opportunity to get home before, as you say, Britain freezes over.
This morning we were discussing public sector pensions, and I invited members to back the recommendation of the cross-party Work and Pensions Committee. We touched on the rather limited nature of the reforms that the Government have so far made to the public sector pension architecture, and the rather different things that Ministers have said in different places about their enthusiasm for reform.
It is fair to acknowledge that a number of the public sector pension schemes have been reformed recently. Some of the reforms are still in the process of being agreed and to a small extent these will trim the cost of public sector pensions in the years ahead. Nevertheless, the figures that I gave this morning for the rising cost of public sector pensions were the costs after reform. So there is still a significant increase in the costs.
As a result of the manner in which the Government have sought to deliver many of the reforms, many injustices have arisen. For example, for a Government who claim to be very female-friendly in their pension policy, it is rather odd that it has been agreed that all existing public sector employees will be grandfathered in relation to their ability to take public sector pensions at an early age. Even individuals who had not joined the public sector when the agreements were struck with the Government will be grandfathered in that sense, or one might say pre-grandfathered.
The people who will pay the price of these reforms, therefore, are the individuals who will join the public services in the future. The reason why that may be unfair to women is that women are far more likely to have career breaks; they may be in the public service now but may need to take a career break and return to it in the future. As I understand it, many of those individuals will lose their entitlement to retire early at 60 and find themselves disadvantaged compared with male members of the same public services who joined at precisely the same time.
The hon. Member for Northampton, North raised this morning the important differences between many of the public sector schemes, and I think it is worth touching on them for a moment. It would be wrong to think that all of the schemes are the same in their characteristics and costs. That is one of the reasons why it would be particularly sensible to establish a commission to look into the issue so that we distinguish clearly between those public sector pension schemes that are more unaffordable and those that are more affordable.
It is worth saying that, of all the public sector pension schemes, only two to my knowledge are funded and therefore have a funding discipline. One of them is the local government pension scheme and one of them is our own, although a sense of discipline in our own is somewhat undermined by the fact that the taxpayer simply fills up the hole in the funded scheme, whatever that may be. The hole at the moment approaches a contribution of 27 per cent. of our salaries. I have managed to ask a number of parliamentary questions recently on how the employer contribution rate varies between schemes. In other words, this is the percentage of salaries that effectively are contributed by the general taxpayer. This seems a more sensible way to look at affordability and fairness issues in public sector pensions than simply looking at the issue of the unfunded liability, which does not necessarily tell us very much in terms of how sustainable and affordable public sector pension schemes are.
So there is an enormous gulf between the employer contribution rates for different schemes. When comparing the public sector and private sector pension schemes and assessing whether or not they are fair, it is sensible to compare the employer contribution rates of both. We know that, in crude terms, the private sector has a lot of defined-contribution schemes, where average contribution rates are about 7 per cent.—the Minister might have a better figure on that. The average contribution rates in private sector defined-benefit schemes are about 13, 14 or 15 per cent., whereas the lowest public sector employer contribution rates are about 13 or 14 per cent. Such rates apply to the pension schemes for local government, teachers and nurses. At the top end, the employer contribution rate to the judges’ pension scheme is slightly less than 30 per cent. of salary. The figure for the MPs’ scheme is slightly less than 27 per cent., and the scheme figures for the police and the firefighters are 24.6 and 26.5 per cent. respectively.
There is an enormous gulf between the different schemes. Some may require relatively little adjustment and reform in the future such as the local government scheme, which is funded and appears to have quite a low employer contribution rate, whereas it appears that others will need a lot more reform. In discussing reform of the larger and, apparently, more expensive public sector schemes, we need a debate about how long we expect people in the public sector to remain in work in the future.
Traditionally, the pension schemes for firefighters, police and the armed forces were expensive because individuals who went into the schemes in those professions had low retirement ages. Until quite recently, it was possible for a police officer who joined when they were 18 and a half to retire at 48 and a half with a full pension. That represents an interesting public policy issue for the Government. At a time when we are trying to encourage people to work longer, should we expect people in the public services who have physical and demanding jobs to be able to access a pension relatively early on in their working lives or should they be looking to make other changes and to take up other employment opportunities?
The same things apply to other areas, such as the armed forces. Understandably, people do not necessarily stay on in the SAS or in other strenuous jobs until they are 65, 66 or 67. In the previous armed forces pension scheme, it was possible to retire with a full career pension at 55. Those who had completed 16 years as an officer or 22 years in the ranks—I am not sure why an officer was able to retire six years earlier than somebody in the ranks, but those were the rules—were entitled to an immediately payable pension.
There are some big issues to address, including the costs of different schemes; how long we should expect people in the public services to work; and whether we should continue with final salary schemes, which can be very inflexible in terms of labour mobility, or whether we should move to career averaging schemes. Given that we have had such an extensive debate on pensions, it seems bizarre that we should be leaving out proper scrutiny of this particular area.
I should have thought that there was a lesson to be learned from the Pensions Commission. We brought in an independent and respected group of individuals representing a range of opinions and experiences—in this case, the unions, business and academia—to report on this area. Such a group is in a strong position to look into contentious issues and clear the confusion that often exists about the statistics and the facts. It can then make recommendations for reform that can command the sort of cross-party support that will be needed to make such contentious changes much easier in the future.
I am little surprised that the Government have been so conservative and so unwilling to move in this area. I can only think that there is nervousness about the guarantees that have been given to the public sector unions. I hope that in the near future there will be a more positive Government line on the issue and a greater willingness to open up the public sector schemes, in the cause not of devaluing them to the lowest common denominator in the private sector but of ensuring that they are affordable and sustainable in the future. They should be fair to hard-working public sector employees and to those working in the private sector who are paying increasing amounts of tax to fund the public sector while the value of their own pensions dwindles away.