Pensions Bill

My Lords, I regret to have to differ with the noble Baroness, Lady Turner, as I share one of the concerns that underlies the amendment: that public sector pension provision is riddled with faults and should be reviewed. The patchwork of schemes that make up public sector provision share a number of characteristics: mostly direct benefit, mostly final salary, mostly, but not exclusively, unfunded, and with longevity risk and investment risk largely borne by the employer. Why are those arrangements, in my view, not fit for purpose? First, they are poorly adapted to a world in which we are living longer, working longer and moving jobs more often. Indeed, we are actively encouraging people to move within and across public sector boundaries. For example, final salary schemes do not cope well in a world—which we will see more of—in which people are happy to work beyond 60 but often in a less taxing and less well paid job than they once had at the peak of their career. Secondly, the cost of unfunded schemes is deeply untransparent and provides poor incentives to act speedily to correct problems. Thirdly, there is no mechanism systematically to link pension age to life expectancy, so over time, those schemes become more and more expensive. When I joined the Civil Service Pension Scheme in 1970, on average, men would expect to draw the pension for 17 years. They are now expected to draw the pension for 27 years. The extra 10 years has been entirely free; contributions to that scheme have not changed over that period. Fourthly, the schemes distort the total remuneration package in the public sector. Too much is going into deferred pay, where no performance conditions can be attached, and too little into current pay and bonuses. Deferred pay is not much help to you in trying to get a mortgage to buy a house in London. Above all, these schemes are deeply unfair and arbitrary. They are unfair to millions of taxpayers who no longer have access to DB final salary employer-guaranteed schemes, but who have to pay for those who enjoy such arrangements. Two-thirds of employees are now outside such schemes. They are unfair between long-stayers and early leavers. I confess that I am a beneficiary of that unfairness. They are also unfair between junior and senior staff, because the junior staff have a higher turnover. They are unfair between existing and late joiners. When you add up what for two people earning the same money who have the same performance and get the same pay increase has been added to their notional pension pot, you find a difference of thousands and thousands of pounds. They are unfair between existing and future staff. I give the example of two brothers. One has joined the Civil Service. He has a retirement age of 60. His younger brother joins in three years’ time. He will have a retirement age of 65. In 40 years’ time, they will be wondering how on earth that difference came about and how it can still be justified. It is also unfair between those in public sector-funded schemes, such as local government, where there are pressures to keep contributions and benefits in line, and those in unfunded schemes, where the pressures are less or even non-existent. One of my last acts as head of the Home Civil Service was to propose a move from final salary to career average, which is still within the category of defined benefit, and a rise in the pension age for new joiners and for the future service of existing staff, after a transitional period. The hope was that that would be followed by other public sector schemes. It was deeply regrettable that the now Secretary of State for Health, no doubt under instruction, swept all that under the carpet so that it did not become an election issue. We cannot allow that to continue. The leaders of public service unions are being shortsighted in not addressing the issue. Thirty years ago, there was a groundswell of resentment about inflation-proofed pensions in the public sector and Ministers seriously considered whether they should do something about it. Fortunately, increasing control over inflation and the arrival of indexed bonds defused the issue, but the inequity of pension schemes will not go away so easily. Rather than allow resentment to build up, with the risk of precipitate action by some future Government, it would be better to plan for changes now in which greater control over the cost of pensions is traded for more pay, bonuses and performance pay. Assigning that task to a reconstituted pensions commission would be a welcome start. It could sort out fact from fiction and begin to build consensus. The final task assigned to it concerns trends in mortality and longevity. That is not exclusively the work of actuaries. It involves a whole host of disciplines. You have to understand how society is working and how migration is working. It is not an advanced form of mathematics, so a broadly based pensions commission is a better place to locate work of that kind.