Pensions Bill

This amendment is designed to encourage the Government to take an issue seriously and, indeed, to encourage society more generally, trade unions and all relevant parties to do so. It is in that spirit that I speak in its support. I also speak as someone who believes that salary-related pensions are a sensible part of public sector pay packages and who accepts that there is nothing inherently wrong with some of these being unfunded and therefore paid for out of future taxation. It is essential, however, that the total burden on future taxpayers is seen as reasonable, relative to other demands on tax revenues, that the retirement age terms of the pensions are seen as fair, relative to those facing the rest of society, and that the arrangements are internally fair between different employees within the public sector. On each of those three criteria—cost, fairness relative to the private sector and fairness within the public sector—the deal that the Government reached with the unions in 2005 is inadequate and will need to be revisited at some time. It will be best revisited if there is transparency about the facts. On fairness between the public and private sectors, it is vital to recognise that in future the vast majority of private sector employees will be retiring with defined contribution, rather than salary-related, pensions. There are today only about 1.7 million employee members of private sector salary-related schemes that are still open to new members. So evenif no further scheme closures occur, within a few decades far fewer than 10 per cent—possibly as few as 5 per cent—of the private sector workforce will retire with salary-related pensions paid at any defined retirement age. Over 90 per cent of the private sector workforce will therefore be choosing their retirement age in the light of available annuity rates, which at any given age—the annuity rate at 65 or at 68—will fall as longevity rises. They will also be choosing their retirement in the light of a state pension age that will rise to 68 by 2045 and, I predict, still higher in subsequent decades. It is therefore likely that average retirement ages in the private sector will increase sharply towards 68 and that we will have significant proportions of peopleby the middle of the century working beyond 68. However, private sector employees working to 68 or even later will observe those civil servants who managed to join their scheme before 1 July 2007 retiring at 60, while even those who join after 2007 will still be retiring, in mid-century, at 65, an age likely by then to be several years below the average age of retirement in the private sector. That will not be perceived as fair, because it is not, and it will be the cause of continual and growing resentment. Then there is the question of internal fairness within the public sector. The Government’s deal has left completely unchanged the position of those who have already joined the Civil Service, or who get in in the next three weeks—I encourage noble Lords, if they are thinking of applying, to get there quickly, as there are only three weeks left—irrespective of their age, even if they are in their early 20s. Such people will continue to enjoy a final-salary-related scheme and a retirement age of 60, while subsequent new entrants will be switched to a retirement age of 65 and an average-salary scheme. These new arrangements will, on average, be slightly less generous, but for high flyers they will be much less generous. In some cases, that will create a very large and quite unsustainable inequality between people doing exactly the same job. A woman presently in the Civil Service who leaves for a number of years, perhaps to have children, but who then rejoins, could find herself at the age of 40 doing the same job for the same cash salary as a man of the same age, but she will have a retirement age of 65 versus 60 and will be on an average-salary scheme instead of a final-salary scheme. As a result, it is quite possible that her total remuneration package—salary and pension combined—could in some cases be worth as much as 10 per cent less than that of the man alongside whom she is working. What will that woman do? She may well try to sue for gender discrimination and, whatever the legal resolution, in fairness, she will have a case. Or she will make absolutely sure that she takes a lengthy leave of absence rather than losing her grandfathered status within the existing scheme. But if she does that, the Government’s assumptions about the savings that will result as people migrate from the more generous to the less generous scheme will become unsound. I know that what the Government and unions say in response is that this grandfathering of existing members’ rights is exactly what the private sector has done. It has closed defined benefit schemes to new members but kept them open with unchanged generosity to existing employees. That is indeed what the private sector has predominantly done, but it is highly regrettable. It is creating, within companies, a two-tier workforce, which I think will be challenged in the private sector, as in the public sector, as discriminatory. The danger of that discrimination is likely to be resolved in many firms by the total closure of the defined benefit scheme, even to existing members. I know companies in which discussionsare taking place about the unsustainability of the discrimination and the fact that it can be resolved only by closing the scheme to new accruals as well as to new members. The fact that the private sector has made unfair decisions that have defended existing employees at the expense of the generality of all employees and of new employees is, frankly, a lousy basis on which to seek to justify the same unfair approach in the public sector. Finally, I turn to the cost to taxpayers. During the Pensions Commission’s work, there were extensive and robust debates about whether society could afford to devote another 1.5 per cent of GDP to ensure adequate pensions for the 100 per cent of the population who depend, to different degrees, on the basic state pension. At the same time, in the 2004 Long-term Public Finance Report, the Government issued estimates showing that, even after their intended reforms but before the impact of latest life expectancy increases, which we knew were still pending, the cost of unfunded public sector pensions was likely to rise from 1.5 per cent to 2.3 per cent of GDP by 2033. That is an increase of 0.8 per cent of GDP, going to the 10 per cent or so of the population who are members of the unfunded public schemes. The Treasury appeared simply to accept that increase at the time, with none of the legitimate robust challenge that was directed towards the commission’s state pension proposals. The estimate of 2.3 per cent in 2033 has been revised down, in the latest 2006 Long-term Public Finance Report, to 2 per cent in 2035. That is still a significant increase from today’s 1.5 per cent, but less of an increase, despite the fact that we have new and higher life expectancy assumptions. Given that thatis a little surprising, it is worth inquiring how this decreased estimate has resulted. The answer, which is apparent from the Government Actuary’s Department’s technical paper of 26 January this year, is a crucial and startlingly large change in GAD’s assumption about the percentage of public sector employees who leave employment at any given age. In the 2004 figures, it was assumed that, between the ages of 35 and 40, about 17 per cent of male employees will leave a public sector scheme of which they were a member aged 35. By the 2006 paper, that assumption had gone up to 29 per cent. This is a crucial change in assumptions. When you follow a grandfathering approach to benefits, leaving unchanged the existing arrangements while introducing new, less generous terms for new employees, you need high staff turnover to get cost savings. The higher the staff turnover, the greater the savings and the more rapidly they are achieved. However, the very fact of grandfathering the existing terms for existing members creates a very big incentive for employees, if they are sensible, to stay put or at least to maintain their formal employment status during extended leaves of absence. Therefore, the Government are assuming much higher staff turnover rates than before while simultaneously putting in place a big disincentive to staff turnover. I am frankly unconvinced that those assumptions are safe. I am also not convinced by the second key assumption in GAD’s technical paper that the number of public sector workers will stay constant perpetually after 2008. If we had a stable population, that might be a reasonable assumption, but GAD’s central forecast for the UK’s population, on whichall the other assumptions in the Long-term Public Finance Report build, is that it will grow from60 million today to 69.5 million by 2057, which is an increase of about 16 per cent. If you combine that population forecast with flat public employee numbers, that implies that by mid-century we shall have about 14 per cent fewer policemen per head of population, as well as 14 per cent fewer doctors, teachers and nurses per person to be cared for and taught, which sounds to me like a somewhat unsafe assumption. There are strong reasons for believing that the issues of public sector pensions—their fairness relative to the private sector, their internal fairness and their future affordability—have not been subject to the rigorous analysis and open public debate that these issues deserve and to which the state pension proposals have been subject. They should be subject to that analysis and debate; if they are not, my fear is that public sector defined benefit pensions will one day go the way of their private sector equivalents, towards abolition rather than sensible reform. Because I strongly believe that sensible reform would be much better than abolition, I urge the Government to take seriously the spirit of this amendment.