HC Deb 02 July 1976 vol 914 cc923-32

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Stallard.]

5.30 p.m.

Mr. Tim Renton (Mid-Sussex)

I am very pleased to have the opportunity to raise in an Adjournment debate the question of Civil Service pay and pensions. Over the past few months I have asked the Minister a number of Questions on this subject, to which he has always replied with unfailing courtesy, but this is a complicated matter not well suited to discussion within the framework of Questions and supplementary questions, and an Adjournment debate gives us the chance to go into it in rather more detail.

Anyone who asks a lot of Questions on this touchy and complex subject may be suspected of conducting a vendetta against the Civil Service. If that charge were levelled against me, I should wish to say straight away that I do not believe myself to be guilty of it. I greatly admire our Civil Service. I have no doubt that far and away the great majority of those who work in it work extremely hard, and until 1971 their pay, and thus their earnings-related pensions, were below comparable levels in the private sector.

The Minister may then ask why on earth I ask so many Questions, and my answer lies in that there are two matters about which I am greatly concerned. The first is the unfairness which now exists in favour of civil servants and the public sector generally, where there is inflation-proofing of occupational pensions, as opposed to the private sector, in which inflation-proofing as of right simply does not exist. Second, in inflationary times my concern is at the great burden of cost which we are laying on future generations of taxpayers in having to pay for these inflation-proof pensions.

All of us would be delighted if we were to have inflation-proof occupational pensions. It could be said to be a prime objective in applying for a job if one could look for such a pension. In this connection, let us come straight out into the open and say that, as Members of Parliament, we enjoy this right at present. In an ideal world, I think that we should all have inflation-proof pensions, because we should then be able fully to cope with rises in the cost of living after retirement at a time when we were not otherwise able to increase our income.

Nevertheless, when public resources are so desperately short I must question whether it is right for the public sector to enjoy this privilege when it is simply not available and cannot be afforded in the private sector. In an important matter such as this, I believe that social justice demands equality of treatment. Otherwise resentment grows, and I fear that such resentment is now growing between the private and public sectors.

In this respect, the Civil Service normally acts as pace-setter for the public sector. The civil servant's pension is noncontributory, it is not funded, and since the Pensions Act 1971 it is inflation-proof after retirement, without any ceiling, and it is paid for by the taxpayer.

In the private sector there are no pension funds which can afford to give that sort of treatment. When employees ask for comparable treatment, as some are now doing, the employer has to say that the profits of his business cannot possibly support such a cost. Some modern private funds inflation-proof up to a ceiling of 2½per cent. or 3 per cent. per annum. Many dipped into their reserves on a discretionary basis in order to give increases to existing pensioners over the past few years. Two of them, ICI and Unilever, were pretty well able to match their payments to pensioners to increases in the cost of living. That was done at the expense of using up past fruits earned from good investment decisions.

All those major private funds have had to warn their existing pensioners that they are not likely to be able to go on giving discretionary increases at the same level in future years. None of them can give inflation-proofing without a ceiling as of right.

Thus, in the words of the editorial of December 1975 in Pensions World, which is the official organ of the National Association of Pension Funds: The Civil Service, and other public sector employees, have thus been placed in the invidious position of occupying a favoured place in the community. My second concern is the cost of Civil Service pensions. In 1971–72 they cost the taxpayer £107 million. As the Minister said in a recent answer to a parliamentary Question, the outturn cost in 1975–76 had risen to an estimated £256 million. The net estimate for the current year is £267 million. Assuming inflation in the retail price index at the rate of 15 per cent., that £276 million will be increased by a further £10½ million, giving a total figure of £286 million. That will become the base line for the operation of next year's increases of 10 per cent. to 15 per cent. The cost of Civil Service pensions alone has thus increased from £107 million to around £286 million in seven years—nearly a threefold increase.

Public service pensions cost £730 million in the last year and went up by the large sum of £180 million to £910 million in the current year. None of the Civil Service pensions and relatively few of the public service pensions are funded, and we are, therefore, placing an awesome burden on the willingness of future taxpayers to honour the commitment entered into now. Many of us fear that if this commitment becomes too great, and if the discrepancy between the private and the public sector becomes too large, it is questionable whether future generations will be willing to meet it.

I have stated the problems and it is only fair that I should state what I believe to be the solution. The job of the Pay Research Unit is to investigate and to ensure that the pay, pension, holiday and general working conditions within the Civil Service are comparable to those within commercial firms. But the staff of the PRU is entirely made up of civil servants, who are inevitably interested parties. I suggest that the character of the PRU should be changed so that it acts as an independent commission. Its members should be drawn from both the public and the private sector, from the actuarial professions, industry, pension funds, and so forth so that it becomes an independent unit with an impartial chairman. There should be more open disclosures of the unit's findings, and how they are arrived at. The new unit could then look at the cost of civil service pensions.

Also there is real confusion. It was recently said that the cost of Civil Service pensions was only 10.5 per cent. of the payroll, which compared favourably with industry. But this is trying to compare chalk with cheese. Ten and a half per cent. of civil servants' pay is the current cost for payment in one year, whereas occupational schemes have to fund fully every year the total liability. If one day the future taxpayer were to refuse to pay, all civil servants' pensions would cease, whereas the occupational pensioners would be secured for all pensions accruing to the date of cessation.

In The Times of 24th May there appeared a letter from Mr. John Dryden, the Secretary General of the Civil Service National Whitley Council, in which he referred to deductions directly related to Civil Service pension arrangements. I quote: In the first place, pay rates have been abated in a percentage figure equivalent to the contribution rate in the outside field of comparison, that is, 5 to 6 per cent. Secondly, a further abatement of 1¾ per cent, is made to take account of differences in overall benefits. As I have repeatedly pointed out to the Minister, there is a great deal of controversy surrounding that second figure of 1¾ per cent., and the general view from the outside professions, actuaries and pension funds is that it is very inadequate. I have asked actuaries and life insurance companies for the cost of inflation-proofing for private occupational schemes. They have advised me that, on a typical model scheme similar to that of the Civil Service, if one assumes a 9 per cent. investment return and 8 per cent. salary increases, thus giving a 1 per cent. positive yield, an additional 14 per cent. of current salary should be required to produce 10 per cent. increases in future pensions. If 15 per cent. increases are required—that is, 15 per cent. Inflation-proofing—that 14 per cent. of current salary rises alarmingly to 40 per cent. If nil yield on returns is anticipated rather than a 1 per cent. positive yield, the 14 per cent. of salary for the 10 per cent. inflation-proofing becomes 17 per cent., and the 40 per cent. becomes 52 per cent.

One can therefore see here a range of from 14 per cent. to 17 per cent. of salary for 10 per cent. inflation-proofing, and deductions as high as 40 per cent. to 52 per cent. of salary for 15 per cent. pension inflation-proofing.

It is against that background that I suggest to the Minister—I know that this is a highly complicated subject—that the 11 per cent. currently deducted is grossly inadequate. I should like to suggest that he considers the following: that the Pay Research Unit, having been reshaped, as I suggest, under an independent chairman, should then take exhaustive advice from the National Association of Pension Funds and Life Offices. It would then be in a position every year, after the increase in the Retail Price Index had been announced, to advise the Whitley Council, based on the current rate of inflation and the likely trend, that the deduction from gross salary for total inflation-proofing should in its judgment be, let us say, 10 per cent. or 15 per cent. or indeed, if inflation is down to nothing, nil per cent.

However, it would then be optional to members of the Civil Service whether or not they accepted that deduction. If inflation were too high and, therefore, the suggested rate of deduction was in their judgment too great for any individual member to bear, he could opt out and opt instead for the basic pension without inflation-proofing. In this case he would receive his salary without deduction for inflation-proofing. The fact of having this option would, of course, be of considerable benefit to members of the Civil Service.

My only caveat would be that once having opted out of inflation-proofing and having received a higher salary and, in consequence, a higher take-home pay, it would not be possible to come in again and pay for an inflation-proofed pension in later years.

I have absolutely no doubt that the Minister, civil servants themselves and the Whitley Council wish their treatment to be fair in pay, pensions, holidays and all other benefits. It should not only be fair but be seen to be so.

I fear that the confidence of the outside world needs to be re-established in the work of the Pay Research Unit. I believe that this confidence is lacking at present, but I hope that the solutions which I have suggested will be taken on board by the Minister and examined seriously. I believe that my proposals would create the confidence that I wish to see.

5.45 p.m.

The Minister of State, Civil Service Department (Mr. Charles R. Morris)

I was impressed by the reasonable manner in which the hon. Member for Mid-Sussex (Mr. Renton) expressed his concern on the subject of Civil Service pay and pensions. I wish to exonerate the hon. Gentleman from any vendetta against the Civil Service generally, and I was pleased to hear him express his admiration in regard to the contribution made by the Civil Service.

Having said that, I am to some extent distressed that, once again, we have seen an attempt to single out the Civil Service as the target for criticism in terms of pay and pensions. It has been suggested today, and indeed on a number of occasions, that in some way the Civil Service has contrived to secure special privileges for itself in pay and pensions. I submit that this is fantasy rather than fact. But as the facts in this case do not always seem to speak for themselves, I am grateful for this further opportunity to set the record straight.

I wish to make plain from the outset that I cannot accept that there is any substance in the idea that civil servants are over-generously provided for as compared with the rest of the community in respect of their pay and pensions.

The hon. Gentleman will no doubt be aware that the principles relating to civil servants' pay were laid down 20 years ago after a thorough and most searching review of the issues involved in settling Civil Service pay by a Royal Commission chaired by Sir Raymond Priestley, and they have been applied by Governments of both parties since that time. The Commission recognised that it would be wrong for the Government to set a lead in the rates paid to their employees but that, in fairness to those employees and to ensure that the service was staffed by suitable recruits, pay for the Civil Service should be comparable with the pay enjoyed by those performing broadly similar work in the private sector. That is the basis of fair comparison.

I turn to the main argument advanced by the hon. Gentleman, who referred to the inflation-proofing provisions that exist for the Civil Service and for public service pensioners. The hon. Gentleman said that social justice demanded equality, which was a moving comment. I hope to justify the arguments that the provisions implemented for the Civil Service represent that equality.

I wish to comment on the arrangements for inflation-proofing of public service and Civil Service pensions under the provisions of the Pensions (Increase) Act 1971 introduced by the then Conservative Government. I know that the hon. Gentleman, who has a deep interest in this subject, will have studied the words of his party's spokesman during the passage of that Act. He will be aware of his party's views that the Act was a far-reaching and overdue reform"— [Official Report, 25th May 1971; Vol. 818, c. 239.] It set out to put on a fair basis arrangements for maintaining the purchasing power of the pensions of those for whom central and local government had a particular responsibility.

That description does not cease to be true merely because the burdens that inflation would otherwise inflict on these pensioners have turned out to be far more onerous than anyone at that time could foresee. However, as I have said on several occasions, no group of pensioners can expect that the real value of their pensions will necessarily be protected at all costs, whatever the economic circumstances of the country.

Much has been made of the suggestion that the private sector employee is at a serious disadvantage compared with the public sector employee in this matter. The hon. Gentleman has reinforced this view again today. It is a view that I do not share. I do not think it is possible to generalise in this way without gross oversimplification. Certainly many private sector pensioners have done at least as well as the Civil Service and public service pensioner. The hon. Gentleman quoted the cases of the retired employees of ICI and Unilever. When it comes to the better-off pensioners in the private sector, let us not forget that in many cases, particularly where selective use is made of the options available to pension scheme managers, private sector pensions can be very much higher than the highest pension in the public sector.

Those cases apart, it should not be forgotten that, for the Civil Service at least, comparative benefits and contributions are taken into account by the fair comparisons process, and I want to deal with the hon. Gentleman's suggestion that the Civil Service and public service pensioners make no contribution to their pension.

On the comparative cost of public service schemes, it should be remembered that no attempt is made to fund a pensions increase; the cost is met as it arises. No guarantee is given for the future and, if the cost becomes unreasonably high, the whole arrangement can be reconsidered at any time. At present, the annual cost to the nation is very much less than many uninformed critics have suggested.

Mr. Tim Renton

The hon. Gentleman said that the whole arrangement could be reviewed or changed at any time. Does he agree that the suggestions that I made could be implemented without legislation?

Mr. Morris

I assure the hon. Gentleman that I shall give very serious consideration to the many points that he made during his speech. As regards the arrangements for modifications, I remind him that the 1971 Act contains certain provisions under which the whole scheme can be re-examined and that these provisions are the subject of a review which is being conducted at present.

As I was saying, the annual cost to the nation is very much less than many uninformed critics have suggested. Indeed, at the present time, working on a pay-as-you-go basis, the fact of the matter is that, after account is taken of staff pension contributions of some 7 per cent. through adjustment of salary and direct contribution, the net cost to the taxpayer of Civil Service pension benefits, including inflation-proofing, does not exceed some 3.5 per cent. of the salary bill. By no standards of comparison with private sector schemes can that be held to be excessive.

These are but some of the complex considerations that need to be taken into account in arriving at the decision about the increase due on public service pensions this year, a decision that I hope we shall be in a position to announce within the next few weeks.

The hon. Gentleman indicated his concern about the way in which Civil Service pension arrangements are taken into account in determining pay. Let me try once again to clear up some of the confusions that still seem to exist. First, the role of the Pay Research Unit needs to be clarified. As I indicated earlier, the unit is essentially a fact-finding organisation, so it does not itself become involved in the adjustment of rates to take account of the differences between the Civil Service pension scheme and outside schemes. This is done by the negotiators within the rules set out in the 1974 pay agreement negotiated by the Official and Staff Sides of the National Whitley Council.

Secondly, arrangements for dealing with the comparative value of pension provisions need to be understood. Briefly, they provide for the outside pay rates used in making comparisons to be reduced to take account both of the fact that an outside scheme may be contributory and of any advantage in benefits of the Civil Service scheme over those avail-able elsewhere. Thus, for example, if the outside comparable rate of pay is £3,000 and a 5 per cent. contribution is paid for personal benefits, the Civil Service equivalent is taken as £2,850. A further adjustment is made to take account of differences in benefits of comparable schemes.

The 1974 agreement provides for the second adjustment to be made by deduction of a single figure of 1.75 per cent. The hon. Gentleman referred to that as being a matter of some controversy. but this figure was negotiated on the basis of the Government Actuary's advice for surveys completed before the agreement was made.

The agreement also provides for the figure to be reviewed after each annual pay research round on the basis of the advice of the Government Actuary. But the system of fair comparisons is in suspension, as is the pay research system. Therefore, the figure of 1.75 per cent. will not be reviewed because of the suspension. It has been suggested by the hon. Gentleman that 1.75 per cent. is inadequate to cover the advantage to the Civil Service of inflation-proofing. As I indicated, I accept that the figure may be a little out of date, but the hon. Gentleman will be aware that we are dealing with a long-term assessment in which unusually high rates of inflation in particular years have less significance than the long-term trend.

Perhaps the hon. Gentleman would like to put himself in the position of a clerical officer aged 18 who will not receive his pension until well into the next century. Would he not rightly be suspicious of an over-reaction to one year's inflation on an adjustment that affects his pay now? The figure of 1.75 per cent. could not at the time of negotiation have taken account of the exceptionally high inflation by 1975, but when economic circumstances and pay policy permit a return to fair comparisons the gure will be reviewed and will take full account of the situation at that time.

I hope that what I have said will assist the hon. Gentleman in understanding the basis of the system of Civil Service pay and pensions.

Adjourned accordingly at Six o'clock.

Question put and agreed to.