This will take three minutes. At least I hope I can be as quick as that. Not because this amendment is not important—it is probably the most important aspect of the discussion on exit caps.
The purpose of this amendment is to exempt pension costs from the exit cap. My objective throughout these debates on Clause 26 is to protect those employees on lower income with long service. If pension strain costs are included in the exit cap it will affect thousands of people in the public services. I will use local government as an example.
The local government pension scheme, LGPS, has approximately 4.6 million members. Recent changes to the pension scheme rules, as a direct result of pension legislation, mean that an employee over the age of 55 years who is made redundant is automatically entitled to early retirement without any reduction in pension. It is important to remind ourselves that in these circumstances the redundant employee would not be receiving a lump sum of money. He or she would simply be entitled to access their pension early. While the redundant employee will not have earned as much pension as they would have if they had remained employed for more years, there would normally be a significant reduction to the pension for accessing it before the normal retirement age. As part of the agreement, the employer pays the pension fund a lump sum to compensate the scheme for having to pay an unreduced pension much earlier than anticipated. This is known as the strain payment.
The employee benefits indirectly because they receive an unreduced pension. They do not receive a direct pay off in the sense normally understood by the high-profile cases. Those with long service, say 20 years, on a moderate salary who are made redundant at 55 could easily be affected by the provisions in the Bill. To give a hypothetical example, a career librarian with an average salary of £25,000 per year reaches 55 and is made redundant after 34 years of service. Her pension would be calculated at £17,346.93 per year. The librarian would receive this 11 years earlier than her normal retirement age, so the initial strain payment would be £190,816. To offset that, money would have been saved in salary and salary increases for 11 years and other factors such as local longevity would also be taken into consideration. So, the strain payment is always lower than the initial calculation. Nevertheless, a cap of £95,000 would almost certainly be breached and the employer would be unable to make the member redundant without either breaching the proposed cap or the current local government pension scheme regulations. These were recently negotiated and would not have been cleared without the Government’s consent. Multiply that by the 99 pension funds which exist and have their own actuarial methods of calculating the actual strain payments.
In Schedule 4 to the Bill it is very clear that the pension regulations will be amended to allow for this cap. This makes a nonsense of the previous Government’s statement that there would be no more meddling with public service pension schemes for 25 years. To renege on an agreement is bad enough. However, the schedule also makes it clear that where a pension strain payment would breach the cap the consequences would either be a reduced pension or that the member would have to find a lump sum in order to buy out that reduction. I remind the Committee of what I said earlier: the member will not receive a lump sum on redundancy in this instance. They would have to find the lump sum from their savings. I do not know how many public sector employees on £25,000 a year have substantial savings. More importantly, neither do the Government. I say that because I am still looking for the impact assessment and I look forward to receiving the copy that I have been promised.
This is an extremely serious issue for all people in public sector pension schemes. It will be treated as if it is going back on very recently negotiated agreements on pension changes.