Amendment 26 is a twofold amendment. Two issues that are connected, but are potentially distinct, are wrapped into one amendment. On the one hand, the amendment states that the requirements for the cost cap mechanism should be set out in regulations rather than directions; on the other, it states that the cost of remedy should be excluded from the cost cap mechanism. They work together, but they are distinct.
The use of directions as opposed to other means of establishing regulations and subsidiary legislation of any sort is an important issue that potentially needs to be discussed in principle. I shall not start discussing it in principle today. There is a debate to be had and concern that a Government could use directions to exclude important matters from parliamentary scrutiny. It is a real fear that should be taken seriously. However, that is not the case I am making today. There is a general, generic problem with directions.
The argument is related directly to these directions. It is important to understand that “directions” in this amendment are not directions in the current Bill but directions under the provisions of the principal legislation: the Public Service Pensions Act 2013. Section 12 of that Act sets out the basis on which the cost cap mechanism works. It provides in subsections (3) and (4) that the cost cap mechanism should be
“in accordance with Treasury directions.”
The Minister said, quite rightly, that when this Bill went to the Delegated Powers and Regulatory Reform Committee, it had no comment on it. I remind the Committee that it is not the directions in this Bill that I am talking about today but the directions in the principal legislation. The debate on the principal legislation took place on 5 December 2012. In the memorandum prepared by the Treasury, comments were made about these directions. The Treasury’s submission to the committee, which was accepted, was:
“The effect of the directions on the design of the scheme will be subject to parliamentary oversight when the scheme regulations are made. It is therefore considered unnecessary for the directions themselves to be subject to additional parliamentary control.”
My argument now is that the directions—which, coincidentally, were agreed last Thursday—do impinge on the design of the scheme and hence are not subject to regulations and are outside parliamentary control. The specific issue is the generic use of directions, but in this case, the Government are seeking to introduce directions—they did so last Thursday—which do subvert parliamentary control.
They do that in two important ways. The decision is made in those directions that the cost of the remedy should be included in the cost control mechanism. I believe that there is a debate to be had about that issue and the Government are avoiding it by making the decision in the directions.
I must mention again that this is currently subject to legal action—potentially; I am not sure whether or not the formal case has been submitted. A number of trade unions are in the process of challenging the inclusion of the cost of the remedy in the cost control mechanism. Obviously, we cannot interfere in the legal process but, as a matter of parliamentary sovereignty, we need to assert that a decision as important as how the cost of the remedy should be met should be subject to parliamentary oversight.
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The Government’s collective line, as set out in the directions, is that this should be included in the cost cap mechanism and potentially will feed through and have an effect on members. We are talking here about the 2016 cost cap calculation; five years later, we are still discussing it. The Government have said, quite rightly in my view, that the cost cap mechanism will not trigger an increase in members’ contributions or a reduction in their benefits. However, the application of the cost of the remedy in that way could deny members the potential of benefit improvements and/or reductions in their contributions. That in itself is a vastly important decision and not one that should be made in the context of directions.
The decision is also made in the directions that the cost of the remedy should be included in the mechanism and covered over a period of four years. Pension scheme costs are typically spread over 11, 15 or even 20 years. Spreading them over four years would obviously mean that the impact is that much greater. I am not seeking in this discussion to debate whether the remedy should be included; I will come on to that in a minute because that is the second limb of this amendment. On the crucial issue of how this decision should be made, it clearly should come before Parliament. I suspect that, as a financial matter, it will go only to the House of Commons, but that is a subsidiary issue; I have no doubt that this decision should be reviewed by Parliament.
We come on to whether the cost of the remedy should be included in the cost cap mechanism. That will also be subject to legal challenge, which, again, I do not seek to influence in any way. However, there is no doubt that we are in this mess—this dog’s dinner—because of decisions taken by the Government back at
the tail end of 2011. The decision was made to include the transitional protection. We have been told by the Court of Appeal, not the Supreme Court, that this was unequal treatment and therefore illegal. That decision should never have been made in the first place. It was the Government’s mistake—their proposal in the heads of agreement, which was legislated for in that form, and which turned out to be illegal. The question is: whose responsibility is the additional cost of that error? From the members’ perspective, there is no question but that it is the Government’s responsibility to meet this cost and it should not fall on members.
That is a point of principle; there is also a more technical argument. Government decisions on this are coming thick and fast. It was also decided last week to proceed with the reform of the cost control mechanism. Any reform of this mechanism will apply only as it impacts on the 2020 valuation and the future. We are still waiting for the completion of the 2016 procedure, for which the directions were announced last Thursday.
But here we are talking about how the cost control mechanism will work in future. The Government’s decision was that in future, from 2020 onwards, the cost control mechanism should operate on what is called—I had better get this right—a new scheme-only basis: that the impact of the old schemes should not impact the cost control mechanism. Indeed, we had a letter from the Minister, again last week; I have a copy here somewhere. Along with his colleague, Simon Clarke, he informed us that the Government propose to move the cost control mechanism to a reformed scheme-only design: to remove any allowance for legacy schemes in the mechanism so that it only considers past and future service in the reformed schemes. That is a declaration of government policy in relation to the 2020 cost control mechanism in future.
If we are going to have it on a reformed scheme-only basis in the future, it raises the question of the 2016 cost control mechanism. In reality, that has not yet been completed, even though we now, somewhat more belatedly than the Government announced, have the directions. The costs of the remedy either fall on the old scheme—if people decide to stay in the old scheme—or on the new scheme if they decide they are going to have new scheme benefits. But the way the cost control mechanism works is that it is calculated on new scheme benefits only. They assume that everyone is already in the new scheme from 2015. So, if you exclude the cost on the old scheme because you are using a new scheme basis—and for those who choose the new scheme, the cost is already included in the calculation—why is the cost of the remedy being, in effect, double counted in the cost control mechanism calculation if it is already there? People may be confused; it is a confusing process. The Government are now proposing that the further liabilities that were accrued in the old scheme should be included in the cost control mechanism going forward. It is that part which is being excluded under their new proposals.
There is real complexity here. If you exclude the cost of the old scheme from the cost control mechanism, you have to exclude that part of the cost of the remedy which is going to fall on the old schemes. To the extent that the cost falls on the new schemes, it is already
included in the calculation. I argue that the cost of the remedy should not be included in principle, but I also argue that it does not make any sense under the terms of the Government’s own policy as to how the cost control mechanism should work.
So, there are two limbs, two legs, to this amendment. First, in this specific case—without commenting more generally on the issue of directions—an important policy decision is being made in those directions, so they should not be directions. I suggest that they should be regulations. Maybe the Government could take that away and think about it, but there should be parliamentary oversight of such a crucial decision. But, over and above that, it simply does not make sense to include the cost of the remedy in the cost control mechanism. It is included only because of the way in which the principal legislation is written. I beg to move my amendment.