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Public Service Pensions

Statement I wish to update the House on progress in the reform of public service pensions and to set out the new offer that we have made as we seek to bring this issue to a conclusion by the end of the year. Our objective is to put in place new schemes that are affordable and fair for taxpayers and public service workers, and that can be sustained for decades to come. That is not easy, but it is the right thing to do and I recognise that this is a contentious area. Public service workers deserve a good pension in retirement as a fair reward for a lifetime spent serving the public. That is why in June last year, the Chancellor commissioned Lord Hutton, the Secretary of State for Work and Pensions in the previous Government, to take an impartial, dispassionate look at this issue and to bring forward proposals for reform. His landmark report has set the terms of the debate and I am sure that the whole House will share my gratitude for his work. Lord Hutton's interim report found that there was a clear justification, based on the past cost increases borne by the taxpayer, for an increase in member contributions. We accepted that recommendation, and increases in member contributions will take place starting next year, although next year's increase merely reflects the increase already planned by the previous Government. In his final report, he set out a blueprint for a new landscape of public service pensions based on retaining defined benefit schemes, but moving to a fairer career average basis, and increasing the retirement age in line with the state pension age to protect the taxpayer against future increases in life expectancy. We accepted Lord Hutton's recommendations in full as a basis for consultation and we have been discussing the recommendations with the trade unions. Those discussions started in February and are still going on. Despite some of the public comment, significant progress has been made. I pay tribute to the Minister for the Cabinet Office and the general secretary of the TUC for their tireless work to reach common ground on reform. The trade unions have welcomed many of the commitments that we made at the start of this process, including that public sector schemes will remain as defined benefit schemes, with a guaranteed amount provided in retirement, and that all accrued rights will be protected. Everything that public servants have earned until the point of change, they will keep, and those things will be paid out in the terms expected and at the retirement age expected. Final salary means just that: a person's accrued rights will be based on their final salary not at the point of change, but when their career ends or they choose to leave the scheme. No public sector worker needs to have anything to fear for the entitlements that they have already built up. We have also reached agreement on the importance of transparency, equality impacts, participation rates and opt-outs, scheme governance, and high level principles to inform consultations on scheme-level pensions. However, the central issue of the value of new schemes remains to be agreed. I believe that two aims need to be met. First, for most low and middle income workers, the new schemes should generate an income at retirement that is at least as good as the amount that they receive now. Secondly, the taxpayer needs to be properly protected from the risks associated with further increases in life expectancy, by linking the scheme normal pension age to state pension age. In early October, we set cost ceilings to meet those tests. Those cost ceilings are based on Lord Hutton's recommendations and generate an accrual rate of 1/65th for the new schemes. Scheme-by-scheme discussions have been taking place on that basis since the beginning of October. Although the talks have been productive, trade unions and Ministers have given consistent feedback about what they think needs to change. Last week, the Minister for the Cabinet Office and I met the TUC negotiating team, who pressed for a more generous cost ceiling and explicit protections for those workers nearest to retirement. I have received similar feedback from the Secretary of State for Education and the Secretary of State for Health. Having listened to those views, I have decided to revise the Government's offer. Cabinet discussed these matters yesterday, and I met the TUC this morning to set out the terms of our new offer. The offer increases the cost ceiling and provides for generous transitional arrangements for those closest to retirement. I have made available to Members today a document that sets out the detail. This generous offer should be more than sufficient to allow agreement to be reached with the unions, but it is conditional upon agreement being reached. I hope that on the basis of this offer, the trade unions will devote their energy to reaching agreement and not to unnecessary and damaging strike action. In that way, the offer can inform the scheme-by-scheme talks that will continue until the end of the year. Of course, if agreement cannot be reached, we may need to revisit our proposals and consider whether the enhancements remain appropriate. I can announce today that I have decided to offer an increase to the cost ceiling. Future schemes will now be based on a pension to the value of l/60th of average salary, accruing for each year worked. That is an 8% increase on the previous offer. I will give the House some examples of what that means. A teacher with a lifetime in public service and a salary at retirement of £37,800 would receive £25,200 each year under these proposals, rather than the £19,100 that they would currently earn in the final salary teachers' pension scheme. A nurse with a lifetime in public service and a salary at retirement of £34,200 would receive £22,800 of pension each year if these reforms were introduced, whereas under the current 1995 NHS pension scheme arrangements they would only get £17,300. Pensions would remain considerably better than those available in the private sector. To earn the equivalent pension in the private sector, the teacher retiring on £37,000 would need a pension pot of around £675,000, and the nurse retiring on £34,200, a pot of £600,000. Both would require an annual contribution of around a third of salary. In addition, I have listened to the argument that those closest to retirement should not have to face any change at all. That is the approach that has been taken over the years in relation to increases to the state pension age, and I think it is fair to apply that here too. I can also announce that scheme negotiations will be given the flexibility, outside the cost ceiling, to deliver protection so that no one within 10 years of retirement will see any change in when they can retire or any decrease in the amount of pension they receive. Anyone 10 years or less from retirement age on 1 April 2012 can be assured that there will be no detriment to their retirement income. We need to be clear about the backdrop against which this offer is made. I fully understand that families across the country are feeling financial pressure right now. These are unprecedented and tough economic times. But reform is essential because the costs of public service pensions have risen dramatically over the last few decades. The bottom line is that we are all living longer. The average 60-year-old today is living 10 years longer now than they did in the 1970s. That is a remarkable and welcome achievement, but it also means that people are living in retirement longer and claiming their pension for longer. As a result, the costs of public service pensions have risen to £32 billion a year, an increase of a third in the last 10 years. While they accounted for just under 1% of GDP in 1970, they account for around 2% of GDP today—more than we spend in total on police, prisons and the courts. And for the most part, it has not been the public service workers footing the bill, but the general taxpayer. We have to reform to ensure that the costs of pensions are sustainable in the long term and to ensure that costs and risks are fairly shared between employees and employers. I believe this package is affordable. I believe it is also fair to public service workers, and delivers significant long-term savings to taxpayers who will continue to make a significant contribution to these pensions. If reform along these lines is agreed, I believe that we will have a deal that can endure for at least 25 years and hopefully longer. People are living longer, so public service pension reform is inevitable. But we have listened to the concerns of public sector workers and come up with a deal that is fair and affordable. The lowest paid and people 10 years from retirement will be protected, and public service pensions will still be among the very best available. If reform of this sort is agreed, then no party in this House will need to seek further reform of the overall package. This sustainability is an important prize. So I hope that the trade unions will now grasp the opportunity that this new offer represents. I also hope that the Labour party will do the right thing, put party politics aside, and support the proposals, which—after all—came from John Hutton, in the interests of securing a long term consensus on the future of public service pensions. It is the chance of a lifetime to secure good, high quality, and fair public service pensions. Yes, we are asking public service workers to contribute more. Yes, we are asking them to work longer, along with the rest of society, but we are offering the chance of a significantly better pension at the end of it for many low and middle income earners. It will be a fairer pension, so that low income workers stop subsidising pensions for the highest earners. It will be a sustainable deal that will endure for at least 25 years, and an affordable deal that will ensure that taxpayers are asked to make a sensible contribution, but will keep costs sustainable and under proper control. That is the new offer I am putting on the table today, it is an offer that the Opposition should support and the unions should agree to and I commend this statement to the House.