Amendment 40

Public Service Pensions and Judicial Offices Bill [HL] - Report – in the House of Lords at 4:00 pm on 29 November 2021.

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Lord Davies of Brixton:

Moved by Lord Davies of Brixton

40: Clause 21, page 18, line 13, at end insert—“(6A) In subsection (5), a loss “attributable to the application of any provision of, or made under, this Chapter” includes a loss incurred by a member with remediable service who—(a) is transferred to the new scheme and reaches the required number of years of pensionable service to retire with full benefits under the legacy scheme, but(b) is unable to access the full value of those benefits because they must continue to work to retire with full benefits under the new scheme.”Member’s explanatory statementThis amendment provides that certain losses arising from the interaction of the rules of the new and legacy schemes respectively will be compensated.

Photo of Lord Davies of Brixton Lord Davies of Brixton Labour

My Lords, this amendment is about what has been termed “the pension trap”. Much concern has been expressed about this phenomenon by different groups and members of different schemes, not least the Police Superintendents’ Association and the Fire Brigades Union. It is important to be clear that this issue affects all the major public service schemes. It is more salient in the uniformed service schemes as they previously had a much lower pension age, so the impact of the pension trap is more significant, but it runs through all the schemes. When you put two schemes together that work on significantly different bases, problems can arise that perhaps we should have spotted at an earlier stage of the discussions on the scheme.

The key issue concerns where you combine schemes with different normal retirement ages in the legacy and new schemes respectively, and the impact of extending working lives in that situation. Extending working lives has been a theme of the reform of public service pensions, so we should perhaps have thought through this a little more clearly. I may have been a little to blame myself in my previous life. When the issue was first raised I was somewhat doubtful but, the more I have looked at it, the more I have come to appreciate that it is a real problem.

The underlying problem is where the combined benefits, old and new, do not reflect the benefits that the members lose by having a later retirement age. They suffer a net loss. With most private sector schemes and the new state or public service schemes, if you defer your retirement, you get some credit: you lose a year’s worth of pension because you have decided to retire a year later, but the money that you have surrendered by doing so is used to increase the subsequent pension. Whether you take the pension at 65, 60 or 67, overall, the broad value of your benefits remains the same. This contrasts with the situation in most, if not all, of the significant public service schemes, where, if you defer your retirement, you simply lose that year’s benefit and receive no credit for it. The reason for this difference between public and private schemes is lost in the mists of time.

The problem now is that scheme members are effectively forced to defer their retirement to accrue benefits in the new scheme but, because they are forced to defer their benefits in the legacy scheme, they are losing money. This can be significant amounts for those involved. I provided a detailed example in Committee, and I will not go through it all again—but, for example, a police constable who will be aged 40 next year and has been in the service since joining at 18 has accrued a decent pension under the legacy scheme. They could have retired at 51 on an unreduced pension but, because they are required to remain in service to further build their pension in the new scheme, they cannot afford to take it. Each year that they put off retirement in the legacy scheme, they lose the pension for that year, which they otherwise would have expected. A typical sum might be as much as £18,000 a year. So they put off their retirement until they are 52, and lose a year’s pension but are still required to face a significant reduction in their new pension because they are taking it early. Ultimately, if they keep working until they are 60, when they can get their full pension under the new scheme, they have lost nine years’ worth—at £18,000 a year—of pension funds in the legacy scheme. They incur a further loss because, each year that they stay in service, the lump sum that they can take from the scheme is reduced as well. We are talking about significant sums because of the interaction between the two schemes that they are required to belong to in order to accrue a decent pension.

The members concerned think that this simply cannot be right, and I share that view. It was not the intention that, when people were asked to work longer than they originally expected, they would lose substantial amounts in the value of their pension because of that. I hope that the Minister will give an indication that the Government take the problem seriously and realise that there is an issue here. I readily admit that my amendment does not completely solve the problem—no doubt I will be told so—but it effectively raises it and puts it before the Government. They can then give an indication that they take the problem seriously and will seek from the respective scheme advisory board—each public service pension scheme has one—a workable solution so that people to whom we owe a substantial debt do not incur a potentially unintended loss from the new combined scheme to which they have to belong.

Photo of Baroness Janke Baroness Janke Liberal Democrat Spokesperson (Work and Pensions), Liberal Democrat Lords Spokesperson (Work and Pensions) 4:15, 29 November 2021

I thank the noble Lord, Lord Davies, for his explanation of the amendment. I know we had quite a lot of discussion about this in Committee. My understanding of it in this specific case is how it affects members of the Police Superintendents’ Association. Previously, a number of years’ service entitled them to their pensions whereas the new scheme is age-related. As the noble Lord, Lord Davies, said, that prevents them being able either to retire early and still have their pension, as was guaranteed, or work later to augment their pension.

This is an important issue, particularly in terms of public services such as the police, where undertakings were given and promises made. These were parts of agreements about pay levels and general conditions of service. So I believe the Government have some obligations here, and I very much hope that this can be looked at further as the scheme progresses and that it can be evaluated and solutions found. I hope the Minister can give us some clarification on that. I certainly support the spirit of the amendment and hope that we can resolve this in future.

Photo of Lord Ponsonby of Shulbrede Lord Ponsonby of Shulbrede Shadow Spokesperson (Justice), Shadow Spokesperson (Home Affairs)

My Lords, my noble friend Lord Davies has given a thorough explanation of this issue, which will impact members of certain public service pension schemes. I simply echo the hope that the Government will look carefully at this issue before the Bill goes into its Commons stages.

To reinforce the point made by the noble Baroness, Lady Janke, the Police Superintendents’ Association has reported that this issue is one of the most-raised questions in sessions that it is holding with its members, and it is trying to talk through the possible remedies and related pension issues as they affect police superintendents. This is an unintended consequence that has arisen due to the current complexities, rather than an intentional outcome of what the Government are seeking to do.

With that in mind, could the Minister inform us, first, whether the Government have considered ways to remedy this issue, in which certain members will be caught, and, secondly, what ongoing consultation and engagement are the Government undertaking with those who are affected? I will be interested to hear the Minister’s response.

Photo of Viscount Younger of Leckie Viscount Younger of Leckie Lord in Waiting (HM Household) (Whip)

My Lords, I thank the noble Lord, Lord Davies of Brixton, for raising this issue again today, and I thank other noble Lords for their comments.

Clause 21 provides the power for scheme managers to pay compensation for certain losses incurred by members. Compensation can be paid for losses that satisfy any of the three conditions set out in subsections (4) to (6) and are of a description specified in Treasury directions.

It might be helpful for the House if I set out the background and purpose of the clause. I hope I can provide the clarifications that have been asked for by the noble Baroness and both noble Lords. The purpose of the clause is to confer power on scheme managers to make payments in relation to compensatable losses. This is an important element of the remedy provided by the Bill. The Government have set out to Parliament, in public announcements and to the courts that we will take steps to remedy the discrimination that occurred when transitional protection was provided to some members when the public pension schemes were reformed in 2015. That means taking steps to place members as far as possible back into the position where they would have been had the discrimination not occurred.

Clause 21 provides for compensation in relation to losses incurred as a result of the discrimination or the retrospective remedy provided by the Bill, or in respect of certain tax losses. The clause allows for matters that are not directly remedied by other provisions of the Bill or by the intended scheme regulations to be put right. As I understand it, having listened carefully to the speech from the noble Lord, Lord Davies, the intended effect of his amendment is to compensate members who reach the required length of service to retire with full benefits in their legacy scheme before they reach the necessary age to retire with full benefits in their reformed scheme. The amendment appears to relate closely to representations made by police staff associations, which a number of speakers mentioned, regarding members of the 1987 and 2015 police pension schemes who reach 30 years of service in the legacy pension scheme before reaching minimum pension age in the reformed scheme.

However, by referring to “full benefits” in the reformed pension scheme, the noble Lord’s amendment appears to go considerably beyond these representations and proposals, effectively requiring compensation for those below normal pension age, not minimum pension age, in the reformed scheme. I know that he raised the question of whether this applies to all public servants. Perhaps I may just gently put him right—I defer to his greater knowledge but I will put him right on this—that it does not.

As implied by the reference to the required number of years in the amendment text, this issue arises for members of schemes where retirement on full benefits is based on length of service rather than age. The 1987 police pension scheme falls into that. Members of other public service pension schemes will often move from a scheme where the normal pension age is 60 to a scheme where the NPA is equal to state pension age. However, it is not quite the same issue as the normal pension age and a legacy scheme, for these members will be higher than the minimum pension age in their reformed scheme. I hope that offers a reasoned explanation.

Turning to the police pension scheme, under the Bill all members in active service on 31 March 2022 will be moved into the reformed 2015 police pension scheme in respect of service from 1 April 2022 onwards. That is what is known as a “prospective remedy” to ensure that all active members are treated equally from that date onwards. I am grateful for the hard work and extraordinary dedication shown by police officers. The Government support the police and the important work that they do to protect the public, and recognise that they face changing demands from crime.

The reformed police pension scheme is, rightly, one of the most generous pension schemes in the United Kingdom. Moreover, members with service under the 1987 police pension scheme are already afforded significant protections in the Bill, including by maintaining the final salary link of the 1987 scheme and the protection of weighted accrual. This means that accruals in the 1987 scheme will be calculated in relation to a member’s final salary when they retire or otherwise leave the police pension scheme of 2015 in the future, not their salary at the point when they leave the police pension scheme of 1987 on 31 March 2022. The improved accrual rate linked to length of service in the older scheme is also protected and will remain the same in relation to service in those legacy schemes.

The Government have been considering the issues raised by the police representatives and this amendment carefully, including the question of whether there are viable policy mitigations. I want to answer the important point raised by the noble Lord, Lord Ponsonby, on engagement. The Home Office is also currently consulting on detailed regulations to implement the prospective McCloud remedy for the police pension scheme; I hope that provides some reassurance that this is an important matter. That includes communication as well. However, the Government must not take action that would be contrary to the Bill’s intention to remove the discrimination identified by the courts and to ensure that all members are treated equally from 1 April 2022 by accruing service in the reformed schemes, regardless of their age.

It is important to stress that the Court of Appeal found in the McCloud and Sargeant cases in 2018 that the transitional protections offered under the PSPA 2013 amounted to unlawful discrimination against younger members, because they allowed older members to accrue service in the legacy schemes for longer because of their age. Accordingly, offering compensation to members depending on their age and resulting position relative to service length and normal pension age would risk perpetuating such unlawful discrimination through different means. This is an important point of clarification for the noble Lord, Lord Davies.

I thank the noble Lord for bringing attention to this issue and reassure him that the Government have been considering the position of these members, including the viability of policy solutions such as the proposal submitted by police staff associations. However, careful consideration must be given to the need to avoid introducing new discrimination against other pension scheme members—I made this point earlier—and a broadly drafted amendment to the Bill risks doing just that. I therefore ask, with that rather full explanation, the noble Lord to withdraw his amendment.

Photo of Lord Davies of Brixton Lord Davies of Brixton Labour 4:30, 29 November 2021

I thank the Minister for his detailed reply. At the appropriate time, I will indicate my intention to withdraw the amendment.

First, I want to say that the purpose and intention of the amendment—I never believed that it was complete in itself—was to prod the Government into taking the issue seriously. The problem arises in any scheme where, if you do not take your pension at the scheme pension age, you do not get any credit for giving up the pension that you lose by deferring your retirement. That is the underlying problem, and it occurs across the public sector. It is currently far more acute, as we have been told in detail by the Fire Brigades Union and the Police Superintendents’ Association.

I have no doubt that the real solution to this issue lies in scheme-level discussions, but such discussions will take place only if the Government give an indication that they take this issue seriously and want the respective scheme advisory boards to discuss and address the issue and seek out practical solutions. Whether they can be funded, and the extent to which any solution would fall within the cost cap and so not incur substantial additional cost, would have to be addressed as part of those discussions. That is all I am asking for.

I am grateful to the House for the opportunity to raise this issue. On that basis, I beg leave to withdraw the amendment.

Amendment 40 withdrawn.