PENSIONS (INCREASE) ACT 1971 (AMENDMENT) (Hansard, 3 November 1976)

§ Mr. John Pardoe (Cornwall, North)

I beg to move, That leave be given to bring in a Bill to amend the Pensions (Increase) Act 1971; and for connected purposes. As the House is probably by now well aware, the Bill is about public sector pensions. It seeks to amend the Pensions (Increase) Act 1971 by deleting Section 2 and so to restore the situation regarding the upgrading of public service pensions to what it was before that Act was passed.

My Bill does not seek to impose on any Government any one way of dealing with public service pensions, although I shall briefly suggest the choices before the Government. My Bill does not attack public servants. I do not believe that they are idle layabouts. There are 1 million of them—teachers, National Health Service employees, policemen and firemen and many more—all or most of them doing a very good job of work, even though we may question the value of some of the work done by the bureaucrats. Not all of them are well paid. Some employees of the Department of Health and Social Security are paying out to many of their applicants in weekly benefits more than they are taking home in their pay packets.

The Bill is certainly not an attack on public service pensioners. My object in bringing it forward is to bring a little reason and a sense of fair play to bear upon public service pensions.

It is not my intention to blame any one Government or party for the 1971 Act. It was Parliament that made a mistake in 1971, if mistake there was, and I accept my share of responsibility for that. No one foresaw in 1971 that a time would come when prices would rise faster than incomes. It is that fact that has caused the problem and resulted in the need for my Bill.

Before the 1971 Act the situation was that the Government reviewed public service pensions as and when they saw fit. An Act of Parliament was required each time and that meant that Parliament could debate, discuss and decide the issue. 1412 The 1971 Act provided for a two-yearly review of official pensions— against any rise there may have been in the cost of living during the review period". That provision was amended almost immediately afterwards by Section 25 of the Superannuation Act 1972, which provided for an annual review of official pensions.

The result of those two Acts is that official pensions are increased each year on 1st December by an amount equal to the rise in the Index of Retail Prices during the previous 12 months. That is sometimes called indexation because it links pensions to that index. I support the principle of indexation, but it cannot be done for one part of the economy or one section of the community alone, because that leads to distortions in the economy and injustice between one group and another.

This is neither the time nor the place to argue the principle of indexation. I and my Liberal colleagues have for some time been committed to full-scale monetary correction as advocated by the Nobel economics laureate Professor Milton Friedman. Before his time it was advocated by Lord Keynes. To link one section of pensions only, or even pensions and wages, with the index—as was done with the threshold agreement—without linking all other financial contracts with the index is economic lunacy. It is a question of all or nothing with indexation; we cannot go half way.

In the Pensions (Increase) Act 1971, the Government indexed only public service pensions. They hoped—a perfectly reasonable hope at the time—that they would thereby set an example to the private sector. At first, some of the best firms in the private sector took up that challenge and followed the Government's example. But where is the money to come from?

All pension schemes in the private sector are funded from a fund built up from past contributions. Those funds are inevitably eroded by inflation. The fund managers try to keep up by skilful investment, but that has proved impossible for most of them. Some firms top up the funds, but the topping up has to be done out of profits, and the profits are not there to enable that practice to continue, and it cannot be guaranteed.

1413 In a "pay as you go" scheme, in which current pensions are paid for out of current contributions, it may be possible to cope with inflation, but it places an immense burden on the shoulders of the current generation of workers which they may not be prepared to continue to shoulder. In the public sector, the burden of indexation falls on the taxpayer. His shoulders are presumed to be infinitely broad and capable of carrying any darn fool burden anyone likes to lay on them.

What are the results of the 1971 Act? First, public service pensioners have done very much better than have private sector pensioners. That, inevitably, will encourage people to go into the public sector as opposed to the wealth-creating private sector. Over a period that will have disastrous results on the balance between public and private sectors in a mixed economy.

The second result is that many public service pensioners who retired in 1973 now have higher pensions than do people doing the same job in the public sector who retire now. Because of compound percentages, the increase in public service pensions since 1973 is 82.6 per cent. There is almost no one in the private or public sector whose pay has kept up with that.

Thirdly, public sector pensioners have beaten the pay policy. They have gone well ahead of the pay policy and I do not think that the Government will argue that that is a good thing.

So indexation is unfair between the public and private sector pensioners, unfair between public sector pensioners and the whole working population, and unfair between public sector pensioners and public sector employees.

1414 What should the Government do? They might accept the advice of the TUC and Professor Michael Fogarty and index-link all pensions, private and public, but that can be done only by a topping up from the taxpayer. There is no other source for the funds. The taxpayer will, therefore, be chary of that advice.

Secondly, we could go back to a regular review by Parliament.

The third course—the one I advocate—is for the Government to apply the pay policy to pensioners in both public and private sectors. No one who has ceased to work should be allowed to get an increase in his income which is larger than he would have received had he stayed at work. What the unions asked for in 1971 was said by the Government to be too expensive. The unions asked that pensions and pay should be tied together. My Bill leaves the Government free to do that or to apply the pay policy to pensions. I commend the Bill to the House.