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.
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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.