Index-linked Pensions (Hansard, 5 February 1982)

§ Mr. R. A. McCrindle (Brentwood and Ongar)

The publicity given this week to the subject of index-linked pensions underlines the fact that this is an opportune moment to raise it in the House.

If anyone doubted that index-linked pensions are an emotive sublect, the various strands of opinion reported in the press this week will have convinced him otherwise. Not only is it an emotive subject, but it causes great concern to many people and produces envy and outrage in those who do not have index-linked pensions and a powerful defence from those who have them and believe that they are entitlement for which they have paid. I shall explain later that that is not always so.

I appreciate that the Government are faced with a daunting task in deciding what action to take on this difficult subject. There are three choices open to the Government. They could leave the situation as it is, they could abolish index-linked pensions for all future beneficiaries, or they could adjust the scheme to take account of the inequties to which many people have drawn attention.

Leaving things precisely as they are would be a bad course, particularly after the setting up of the Scott committee and its interesting report last year. It would also be a bad course, because there would be continued pressure from those who consider that index-linked pensions are one of the greater contributions to inflation and favour one section of the community against the other. I suggest that that course is not open to the Government.

The second course would be to abolish index-linked pensions. It would be impossible to do that for pensions already in payment, and even a proposal to abolish such pensions for those with a future entitlement would involve reneging on legal obligations and outraging not much less than half the working population.

I suggest that the only course open to the Government is to adjust and improve the scheme to bring about a better balance between the haves and the have-nots.

However restricted the Minister feels in other respects, I hope that he will restate the point that index-linked pensions for the public service must continue, for strong practical reasons. I am asking simply that he tells me that the Government cannot scrap index-linked pensions but also cannot leave the scheme untouched.

I have a few suggestions for reforms. I do not expect a definitive reply to them today, but I hope that they will point the direction that the Government may take.

Recent reports in The Guardian and other newspapers have suggested that the Government are receiving advice from Civil Service Ministers to the effect that some public servants should be expected to pay more for their index-linked pensions. There is a strong argument for looking at contributions.

The Government may consider that there is a case for a cut-off point in real terms, above which index-linking should cease.

The House will be aware of the few cases of retired admirals and permanent secretaries who, we are told, have just received an enormous increase in their index-linked pensions. Such cases are few and far between, but news 714 of them causes considerable upset. Perhaps the Government should set an absolute figure above which index-linking will cease.

Thirdly, there is a case for only limited inflation-proofing. To inflation-proof a pension up to an inflation rate of about 12 per cent. may be reasonable, but above that we may be moving to hyper-inflation. Pensioners, as well as the ordinary public, have an interest in curbing such a tendency. It is reasonable to expect them to contribute to the control of hyper-inflation.

I repeat that I expect no more from my hon. Friend than general comments. I shall be particularly pleased if he can tell me that the Government remain bound by the undertakings given in the Act passed by the 1970–74 Government that, in principle, index-linked pensions are part of their policy but that they are equally giving urgent attention to reducing costs.

I turn to an aspect of the Scott report which some would contend has already been implemented—the extension of index-linking to private occupational pension schemes. Paragraph 6 states: It is a highly desirable social objective that the standard of living of those in retirement should be protected. It does not say "those in retirement from the public service". It would bid fair to reduce the envy and discontent among people in private occupational pension schemes if there were a move in that direction.

I may be pushing at an open door. Following the Scott report's recommendation that the Government should issue index-linked gilt-edged bonds, available only to private pension schemes and insurance companies, in the Budget last year the Government took a first step. The second was taken recently. I hope that the Minister can tell us that the Government are considering accepting that powerful recommendation and moving towards the index linking of all retirement pensions.

Do the Government propose to adopt that principle? It would greatly reduce the concern. Some may consider that the issue by the Government of gilt-edged bonds to pension funds or otherwise would turn the screw of the inflationary spiral. But, had the Government held that view, it is surprising that they took the first faltering step to issue such bonds last year.

I have a few general questions. If change is needed, is it not preferable to increase the cost to the employee instead of ending index-linking? Secondly, would not an attack on contributions and benefits affect the morale in the public services and make wage settlements more difficult? Thirdly, if it is considered that some public servants should pay more for index-linked pensions, could not such an increase be phased over a period of years?

In calling for a restatement of the acceptance in principle of no scrapping of index-linked pensions as such, I am only too aware of the political hot potato that I have thrown at my hon. Friend.

May I make it more palatable by saying that, if—as he and I both hope—inflation is brought under control, much of the problem will recede or even disappear?

§ The Minister of State, Treasury (Mr. Barney Hayhoe)

I congratulate my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) on his responsible and constructive speech on an important subject. As he said, the whole issue of index-linked pensions generates strong feelings, both for and against, among those directly 715 affected who see their legitimate expectations at risk, as well as among those who resent what they see as privileged treatment of the public sector.

Many millions of individuals are directly concerned and, as my hon. Friend recognised—he is an expert in pension matters—considerable complexity is involved. There are no easy or simple solutions if the Government are to achieve their aim which is—I reiterate the words used by my right hon. Friend the Prime Minister yesterday—to ensure that pensions for public servants are fair to taxpayers in general as well as to employees, pensioners and their dependants.

At the outset, I wish to make it absolutely clear that I have no new statement of Government policy to make today. Anyone who listened to Prime Minister's Questions or to the response of the Leader of the House to a question on the Business Statement in the House yesterday, will recognise that both my right hon. Friends confirmed that the Government have not yet reached conclusions on the matter. I wish to put the whole question into perspective and respond, at least in some way, to some of the points raised by my hon. Friend. As my hon. Friend recognises, index-linking goes wider than simply the Civil Service. It applies virtually to the whole public sector. In addition to civil servants, it includes the Armed Forces, local government employees, teachers, the judiciary, doctors, dentists, nurses, policemen, firemen, postmen, miners and a whole host of other occupations—including Members of Parliament. Index-linking covers about half the occupational pension structure in Britain. If we include the wives of public sector employees who may one day qualify for a widow's pension, about one-quarter of the adult population are receiving index-linked pensions or are potential recipients. In all, more than 10 million people have a direct interest.

It is useful to recall how public service pensions were increased before the 1971 Act introduced index-linking. Increases required special Acts of Parliament, which were passed every few years. Strong emotions and sharp arguments were generated. I well recall, when I first entered the House, the campaigning and lobbying by public service pensioner organisations. Inevitably, the ad hoc system threw up all sorts of anomalies. For example, a police constable who retired on full pension in 1944 saw the purchasing value of his pension decline by 25 per cent. by 1969. However, his colleague—with whom he may well have walked the beat, who retired in the same circumstances only two years later in 1946, hardly lost at all by 1969. The person who retired in 1952 had his pension increased by 10 per cent. in real terms by 1969. Similar anomalies were found in all the other services.

Overall, the cost of pensions and their increases before 1971 was little different from what it would have been if full indexation had applied in those years. The 1971 Act, therefore, was seen as a rationalisation. Indeed, the main argument then was whether the link should be with earnings or with prices, as the then Government preferred. No one then, of course, foresaw the inflation that was to come.

The experience before 1971 is relevant when we consider the present cost of public sector pensions. Even if we had not had index-linking under the 1971 Act, substantial increases would, I am sure, have been granted over the last decade, because prices have quadrupled during the last 11 years.

716 It is unrealistic to suppose that, say, a clerical officer retiring on a pension 11 years ago would have stayed at anything like the £12 a week that was relevant then, or that a ward sister retiring from the Health Service would have had a pension of £14 a week continuing right through the 1970s.

Therefore, it is not reasonable to blame index-linking for all—and I stress that word—the increases to pensions that are now being paid. However, having made that my qualification, let me immediately refer to the very substantial sums of money that are involved in public sector pensions.

The total cost this year of about £4 billion includes about £1 billion paid in lump sums to those who retire because, as my hon. Friend will know, there is what one might call forced commutation of part of the pension in the public sector, in that gratuities are paid and then the remainder of the pension provision is the part that is index-linked.

The remaining £3 billion provides the 1.6 million pensioners with an average payment of about £36 a week. For men over 65 and women over 60 that is, of course, in addition to the national insurance retirement pension, which is also index-linked. The basic rate is now £29.60 for the single person, and £47.35 for the married couple.

Perhaps understandably my hon. Friend referred to this specific point—we hear a great deal about the very biggest pensions, those paid to the retired permanent secretaries, the generals, the admirals, the judges and others. But these are a tiny minority. Taking the Civil Service as an example, more than half the 384,000 pensioners receive less than £20 a week. The average for the whole of the Civil Service sector is £32.60 a week. Fewer than one in 20 of Civil Service pensioners receives more than the national average wage after one includes the State pension, and only about one in 400 receives about twice average earnings.

That is the position across the whole public sector. For the 280,000 Armed Forces pensioners, £33.80 a week is the average. For the 183,000 teachers now on pension, the average is £58.60. For over 200,000 ex-NHS employees, the average is £36.40. For the 356,000 local government people now on pension, the average is £25.70. For the 100,000 or so firemen and policemen, the average is £44.20.

I give these figures so that hon. Members may get a better understanding of the position and how it applies to the very large number of people involved.

Against that background I come to the root of the problem referred to by my hon. Friend. Few would deny—he certainly did not—that there is a widely perceived unfairness between the public and private sectors. Formal index-linking is confined to the public sector. Although some private sector pensioners have received reasonable increases in their pensions in recent years, many others have not, and as a result they have faced great difficulties over the past few years.

Moreover, public service pension increases are financed from public funds, and people in the private sector resent paying taxes to provide index-linking for public service pensions, particularly when they have no such guarantee themselves.

In May 1980 the Government, recognising all these problems and the strong feelings that exist, set up the Scott committee to provide an independent view of the problem. It published a thoughtful and authoritative report last year.

717 My hon. Friend referred to the view that is expressed that protection of an individual's retirement income against inflation was a highly desirable social objective. I trust that everyone in the House would share that view.

The committee also went on to emphasise the widespread feeling of injustice in the private sector, which needed to be taken into account. They noted that the State scheme, as it matures over the next 16 years—this is the new earnings-related State scheme—will come to narrow the gap between the public and private sectors. In paragraph 8 of the report the committee says: This will be particularly significant for those who, when employed, were on average earnings or less, since the State pensions taken with the Guaranteed Minimum Pension, where appropriate, will provide pensions of 40 per cent. or more of pre-retirement earnings, and this amount will be fully protected against inflation. It also noted that if the fight against inflation is successful the present inequalities will further diminish. Above all, it reminded us that good pensions, like anything else, have to be earned and paid for during working life and by all people at work.

The Scott committee provided a valuable contribution to the public debate on this issue. The Government's task has been to consider, in the light of that analysis, whether and what changes may now be required. Two main courses of action are open to us. The first is to curtail in some way the increases granted in public service pensions. The second is to increase the contributions which public servants pay towards their pensions and a wide variety of detailed options are opened up under these two broad headings. In assessing them, our aim has been to arrive at proposals that are fair to pensioners and taxpayers, employees and employers alike.

All this is taking a great deal of time. When the Scott report was published about a year ago we had hoped to have made our response by now, but as the work has proceeded the complexities have become more and more apparent. There are about 130 different main public-sector pension schemes. All of them have their own distinctive features. The financing arrangements vary from pay-as-you-go to notional funding, to full funding. Who pays for index-linking, how and by how much varies from scheme to scheme. The legal arrangements vary—some are provided directly under statute, others under trust law and yet others in some combination of the two.

The Government have been very conscious of the fact that some possible changes could have a retrospective effect and could require retrospective legislation, never a popular course in the House. Added to that is the need to 718 get our proposals absolutely right because of the importance of the issues that are raised and the need to get a solution that will last because it is accepted as fair.

My hon. Friend referred to the possibility of perhaps having a ceiling or a cut-off point in dealing with large pensions that attract more than their fair share of criticism. As I have explained, these large pensions are a small minority. The financial savings of doing anything would be small and would tend to discriminate against those with long service who have transferred in pension rights perhaps from previous employment or who have bought added years at their own expense and see themselves as having entered into a contractual arrangement of that kind.

The counting of war service might also put someone on the wrong side of any line we drew. I can imagine the comments that would be made in the House if that were to happen. My hon. Friend referred to the hope that the private sector would gradually be able to match the public sector. As inflation comes under control, that will be much easier. However, it is not a matter in which the Government should intervene directly, because it involves private sector employers and employees, and insurance companies and others. As it matures, the new State earnings-related scheme will narrow the gap. Indexed gilts—although not issued in response to the Scott recommendation or as a panacea for all pension problems, as my hon. Friend will recognise—may be of some help. They are proving to be a valuable addition to the range of investments open to fund managers.

As all hon. Members will agree, inflation is the problem. As it falls, the difference between public and private sector schemes will diminish. Therefore, we have been debating some important aspects of the problems that arise when inflation erodes the value of pensions and puts at risk the incomes that people have set aside for retirement. The problem affects private sector pension schemes just as it affects the public services. It causes them great concern.

The conquest of inflation is of prime importance and Government policy is firmly directed towards that end. Until we have achieved that, we shall be faced with the issues raised by pension indexation and the Scott report. The Government recognise that many people are keenly awaiting its views on such matters. I assure them and my hon. Friend that the Government still have such issues under consideration. They are being dealt with carefully and as a matter of urgency and I hope that we shall reach our conclusions soon. We shall then announce them to the House.