§ 11.6 p.m.
§ Mr. Graham Page (Crosby)
I beg to moveThat an humble Address be presented to Her Majesty praying that the London Authorities (Superannuation) Order 1965 (S.I., 1965. No. 621), dated 25th March. 1965, a copy of which was laid before this House on 31st March, be annulled.As this is the last half hour in which I can pray against this Order I shall have to speak rather rapidly and perhaps hon. Members will forgive me if I do not give way. The Order transfers the assets and liabilities of the superannuation fund of the London County Council and the Middlesex County Council to the Greater London Council and it also transfers the superannuation funds of the Metropolitan boroughs to the appropriate London boroughs. Those transfers occur in Article 4 of the Order by reference to the Schedule on page 19.
The Order contains a lot of consequential provisions with which I do not intend to deal. I have no quarrel with the machinery of the Order nor do I intend to deal with the transfer of superannuation funds from the Metropolitan boroughs to the London boroughs. My quarrel is with the substance of the Order as it affects the transfer of what I would term the scandalously deficient L.C.C. superannuation fund to the Greater London Council. I say that the Government, finding that the London County Council after many years of Socialist control had a deficiency of £16 million in a £40 million superannuation fund ought not to have started this new authority, the Greater London Council, with this fantastic millstone around its neck.
If this was a fault inherent in the existing law then the law should have been amended before this Order was brought into effect when this deficiency came to light in December last. If the fault lay not in the law but in the administration of the law by the Socialist council of the L.C.C., then again the law should have been amended to stop it happening in the future. I say at once that almost every transfer authority, if not every one of them, handed over, under this Order, a deficit on its superannuation fund. This arose because of the method laid down 1357 by law for fixing the contributions of the employer and the employee and fixing the pension. That is all right if the deficiency is made up regularly. But if it is allowed to accumulate and if, as in the case of the L.C.C., the deficiency is borrowed then the fund is losing interest on it all the time.
This is one thing that happened on a massive scale with the L.C.C. fund. In 1955 the valuation of the superannuation fund showed a deficit. I do not know how much, but I do know that in 1961 the 1955 deficit was still £5,300,000. The fund had lost interest on that sum for a period of six years, a matter of £350,000. In those six years a further £6,500,000 deficit had accumulated, an additional deficit to the £5 million-odd which was outstanding in 1961 of the 1955 deficit. The trouble was that the L.C.C. did not know about this. It did not know until 1964 when it received the report of its actuaries. It only obtained information on its 1961 deficit three years later. By that time the controller of the L.C.C. had to advise the council that another £4 million deficit had accumulated. So the total deficit handed over to the Greater London Council under this Order is about £16 million.
There is nothing magic in the calculation of these figures in the valuation of a superannuation fund. The way one does it is to take the assets side, the actual cash assets of the fund, the amount invested for the fund, and the present value of future contributions, and on the liability side, the pensions being paid and the prospective pensions. One says, in effect, "If we stop the fund now and sell to someone for cash our right to collect contributions from existing employees, what would there be in the kitty to provide for present and prospective pensions?" Quite simply, on that basis, the L.C.C. kitty would have been £16 million short, and the Greater London Council will have to make up this sum by collecting £1,400,000 a year for 10 years from its ratepayers.
There are several contributory factors to this deficit. First, there is the delay in ascertaining the deficit. The London County Council did not know its 1955 deficit until 1959; it did not know its 1961 deficit until 1964. Second is the consequent delay in payment of the very substantial deficiency sums, and the con- 1358 sequent loss of interest on those sums. There are much more serious factors even than those in this deficiency. In any commercial undertaking, the superannuation fund is vested in trustees. It may be that the employer and the trustee is the same person, but when he is holding that fund as trustee, he holds it as trustee, and if a commercial undertaking borrows from its own superannuation fund, it is a breach of trust.
This is just what the L.C.C. has done over the past 10 years. In addition to the investment of 1½ million in L.C.C. stock—about which I do not complain, because this is a proper investment—the L.C.C. has borrowed £14½ million from a £32 million superannuation fund, as it was then. I know that it has the statutory authority to borrow from the superannuation fund, provided that it pays proper interest. It was paying interest in this case ranging between 5 per cent. and 6¾ per cent. But since 1958, £10 million of that fund could have been invested in equities, with the resultant capital accretion. That was the power granted to the L.C.C. under the Act of 1958, to invest 25 per cent. of its fund in ordinary shares.
By 1961, the L.C.C. had used that power not to the extent of £10 million, but to the extent of less than £5 million —less than 15 per cent. of the fund instead of using its full power of up to 25 per cent. of investment in equities, while itself borrowing £14½ million, or 44 per cent. of the fund as it stood in 1961. So a paltry 15 per cent. was invested in equities, where there might have been an accretion to the capital, and 44 per cent. borrowed from the fund itself. The Controller-General of the L.C.C. sought to justify this by saying, "It is in the best interests of the council, which anyway has to make up the deficit on the superannuation fund to borrow from this cheap source for capital outlay." This sounds horribly like dad breaking into his kid's piggy bank and saying, "It is better to pinch the kid's money than to pay interest on my overdraft at the bank." This is, in effect what the L.C.C. was doing.
Since 1961, not only did it have the power under the 1958 Act to invest 25 per cent. of the superannuation fund in equities, but, under the 1961 Trustee Act, to invest as much as 50 per cent. in 1359 equities, the power given to any other trustee to make that sort of investment. The council did not use it; it was too busy borrowing it itself.
On the actuaries' assessment of the position as made in 1964 and reported to the L.C.C., first the interest which could have been earned by using the investment powers reasonably to the full, and secondly the growth potential of ordinary shares as an investment medium, would have covered the liabilities from an increase in the level of wages and salaries by a matter of 3 per cent.
It is perfectly true that the wages of the L.C.C. have gone up by more than 3 per cent. per annum and that there would have been, even with the proper use of these investing powers, a slight deficit. But not a 40 per cent. deficit on its superannuation fund—not a £16 million deficit. The Government ought not to have given that gross mismanagement by the Socialist L.C.C. their tacit blessing by this Order.
§ 11.16 p.m.
§ Mr. Jack Dunnett (Nottingham, Central)
This is a common problem, common to all local authorities with, I believe, one or two exceptions only. I believe that the rate of deficiency runs at something like 30 to 40 per cent. in all cases, not merely in the case of the L.C.C., which the hon. Member for Crosby (Mr. Graham Page) chose to select for this attack.
The reason that the deficiency exists in all these authorities is the rising level of local government salaries. This is due to the rapid increase compared with the pre-war and immediate post-war levels of salaries, and this in turn means that contributions paid at any time will be quite insufficient to meet any pension based on the last three years of a pensioner's earnings. In addition there is, as we all know, an increasing length of life in all individuals, which means that pensions have to be paid longer, which in turn contributes to the deficiency in the fund.
The reason why the L.C.C. has the highest deficiency of all is, of course, that it was the biggest authority. I am not sure why the hon. Member chose to concentrate his attack on the L.C.C., but he might have drawn attention to the 1360 Middlesex County Council where the average rate of deficiency was virtually the same—£550 per individual compared with £552 in the case of the L.C.C.
The local authority has a duty under the provisions of the Superannuation Acts 1937 and 1953 to meet the deficiency, and this obligation was specifically placed on the Greater London Council by virtue of the London Government Act for which the hon. Member's friends were responsible. They were equally responsible for the rather limited timetable for bringing that council into being. This problem had to be dealt with by the 31st March, 1965. In the circumstances, this overall Order was the simplest method of dealing with the deficiency.
I do not wish to detain the House long, but I should like to deal with one or two points raised by the hon. Gentleman. In the light of events it would seem that this was the most prudent course, if the capital value of the fund is a relevant fact. If we compare the value of gilt-edged over the relevant period with internal investment, there must be a very considerable advantage in internal investment.
If the hon. Gentleman wishes to take the point that rather than merely hold the value he would sooner see an increase in value by investment in equities, as soon as they were able to do so the L.C.C. and the Middlesex County Council did invest in equities, as behoves the holders of large funds held in the quasi-capacity of trustees.
Once the Trustee Investments Act, 1961, made it common practice, the L.C.C. and the M.C.C. plunged into equities on a much greater scale, so much so that the L.C.C. had 41 per cent. of its fund, compared with the permitted 50 per cent., in equities at 31st March, 1965. The L.C.C. in effect invested nearly half in equities, which it hoped would improve the value of the fund, and the greater bulk in internal loans, which could not lose their value.
In these circumstances, I hope that the Prayer will not be successful.
§ 11.21 p.m.
§ The Joint Parliamentary Secretary to the Ministry of Housing and Local Government (Mr. James MacColl)
After just having had a Church Commissioners' Measure, the bon. Member for Crosby 1361 (Mr. Graham Page) rather fittingly reminded us that this was the last half-hour of Prayer. I would only add that while this is not the day of judgment, it is the last opportunity we have to discuss the Order before the time expires.
While I understand the difficulties under which the hon. Gentleman laboured, he did not do himself justice by saying that he had no quarrel with the machinery involved here. I have never heard him admit that before when speaking about a complicated piece of administrative machinery. Had he spent more time looking at the machinery and less on some flamboyant remarks about the deficit, the House and the ratepayers would have been better served.
We are not in any way responsible for the L.C.C.'s scheme, which was a local Act scheme. It was entirely under the L.C.C.'s supervision and we therefore have no responsibility for operating it. Of course, it no longer exists. As my hon. Friend the Member for Nottingham, Central (Mr. Dunnett) so effectively said, the remarks of the hon. Member for Crosby were exaggerated. I fear that the hon. Gentleman's remarks may create the impression that when one talks about the deficits of a superannuation fund one really means that the fund is bust and that nobody who retires will get a pension. To create that impression among the general public is an unfortunate thing because we are concerned with a very rarified actuarial exercise.
That is why the exercise takes so long. The actuaries must consider the expectation of life of everybody in the scheme and do some extremely complicated calculations to work out whether, at a future date, there is a risk that if an unexpected catastrophe happens there might arise a situation in which the fund would not be self supporting. Even then, of course, it would have behind it the security of the rate fund. There is no question, therefore, of a scheme of this sort not being viable and solvent.
It is true that when the actuaries have performed their rather mystic operations money must be paid out of the rate fund, because it cannot be paid by contributions, to make the fund solvent. That is what the L.C.C. has done. However, all we are concerned with in the Ministry is whether the arrangements proposed for carrying this on the rates are reasonable.
1362 We have had agreement on most, almost all, matters with the various local authorities involved in this operation and it has come out of our discussions that they regard these as reasonable arrangements. The burden is not an extreme one on the Greater London Council—at slightly over a halfpenny rate—so that cannot be said to be out of all proportion to the size of the L.C.C.'s operations.
It is easy, in terms of words, to chuck millions of pounds around, to say that the L.C.C. has a deficit of so much and that it is a tremendous burden. But, then, the L.C.C. was a tremendous body until it was wrecked by the party opposite. As I say, we are not responsible for this fund, but it occurred to me when listening to the discussion that the hon. Member did not persist in his change of a breach of trust. Parliament has consistently authorised that local authorities can borrow from their superannuation funds. The hon. Member, with his usual fairness, said that, and it should be underlined. There is no question of any hole-and-corner practice about this. It is a perfectly reasonable arrangement which every local authority employs. I do not think it a full condemnation to say that the L.C.C. should have gone more into equities and gone into them earlier. It occurred to me in my many years on a finance committee that it does not necessarily pay always to put superannuation moneys into equities. What is wanted is rather income than capital appreciation, because money has to be paid out in the form of pensions.
I do not want to become involved in a technical argument, but this is a much more complicated problem than the hon. Member had time to explain. I have no doubt at all that London County Council and Middlesex County Council and other authorities whose funds are involved in this very complicated scheme have conducted operations efficiently and with that sense of public responsibility and public duty which all finance committees of local authorities are expected to adopt. There is no suggestion that anything has happened that was not in the normal high traditions of local government, carried out by extremely responsible people under very responsible advice.
The thing to do with these deficits is to take them onto the rate fund of the Greater London Council. There may 1363 have been something to have been said for having one common superannuation fund for all local authorities in Greater London. That was discussed and explored and I think the Ministry had temptations in that direction, but it was not desired. The local authorities wanted to keep the funds separate and decided that, so that is in the Order. There is the one exception that people who are transferred are able to stay on their old county fund.
This is not something which can be altered. Under Section 151 of the 1933 Act it is possible where financial responsibility after reorganisation needs adjustments for local authorities which are affected by them to come to agreement and make adjustments of that sort. There is room for flexibility.
This seems an understandable attempt to raise political tension and to try to make this an example of scandalous inefficiency and incompetence, but the hon. Member ought to know better, because we all try to take a pride in our local government system. We know that that is not the way in which local authorities behave. Whatever the party in power, a local authority does its best to look after the welfare of its staff and to see that it has a well-run superannuation scheme.
§ Mr. Graham Page
I said that it would cost the G.L.C. £1,400,000 over 10 years to pay off this deficiency. The hon. Gentleman said it amounted to only a halfpenny rate. Is that correct? Surely it is a larger sum?
§ Question putt and negatived.