HC Deb 22 October 1982 vol 29 cc645-63

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

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

I welcome the opportunity to discuss index-linked pensions in the public sector in the light of the valuable report published last year by the committee chaired by Sir Bernard Scott. I should pay tribute to the perseverance of my hon. Friend the Member for Croydon, South (Sir W. Clark), who asked for time for such a debate many times. I am glad that he is here today.

Since we last debated the subject in February, the rate of inflation has continued to show a welcome fall. In February, the annual rate was 12 per cent. Last week it was announced that the September index had fallen for the first time in 12 years and the annual increase in the retail price index is now down to 7.3 per cent., which is the lowest for 10 years. We fully expect the rate to decline further during the next few months and hon. Members will be aware of the prediction my right hon. and learned Friend the Chancellor of the Exchequer made yesterday evening of a reduction to 5 per cent. by the spring of next year, which is first-class news.

More stable money reduces the disparity in pensions that has caused such public concern in recent years. With pensions, as in many other areas, we see the tremendous benefits of controlling inflation. Hon. Members will have noticed the written answer that I have on Tuesday that compared movements in the retail price index, national average earnings and the gross domestic product since 1970. As can be seen from the table, public sector pensioners have only occasionally increased their income by a higher percentage than those in work. However, during the past decade, public service pensioners with index linking have fared better than other occupational pensioners.

Index linking was established by the Pensions (Increase) Act 1971. When the Bill was debated in May of that year it was widely welcomed. The disparities that were to be caused by rapid inflation were not then foreseen. However, before 1971 public sector pensions were uprated on an ad hoc basis, often after much public campaigning. Those irregular increases kept pensions in line with movements in prices, but the process was haphazard and unfair. The significance of the 1971 Act was that it provided regular uprating in place of the previous ad hoc and unsatisfactory arrangements.

When I listen to current pensions discussions it sounds as though some commentators believe that the choice is between index linking and nothing, but that is wholly unrealistic. The choice is between index linking and another uprating arrangement. Pensions are earned during periods of up to 40 years and they can be paid over many years of a person's retirement. Therefore, even with low inflation, some uprating is necessary. That is recognised in the private sector as well as in the public sector.

Hon. Members may also have seen another long written answer that I gave on Tuesday describing the main pension schemes in the public sector whose benefits are index-linked. I believed that it would be helpful to answer fully and I gave much information about the numbers, costs and method of financing. It is estimated that there are nearly 2½ million such pensions and 5¼ million members of pension schemes whose benefits are index-linked. That is roughly a quarter of the working population. As the table shows, the average Civil Service pension is £32.40 per week, and the average in the public services sector, taken as a whole, is £36.20 a week. Increases in line with those for the State retirement pension are due in November, which will bring the Civil Service average to £35.80.

I suppose that it is inevitable that press comment concentrates upon the increases going to admirals, judges, permanent secretaries and the like, but there are not many of these. Moreover, there is evidence that the public want to see the retirement incomes of members of the Armed Forces, widows, policemen, doctors, nurses, teachers and others protected as far as possible against price increases. To judge from my own postbag, much of the earlier uninformed and sometimes misleading criticism which concentrated on the Civil Service has abated as the facts have become more widely known.

So far I have been talking only of public sector pensions. The situation in the private sector is quite different and perhaps even more complicated. The Scott report gives some interesting information about the great variety of such schemes. This has been supplemented by the surveys which have been published since, notably by the Government Actuary's department and the National Association of Pension Funds. On the whole, although it is difficult to generalise, it seems clear that during recent years private sector schemes have made discretionary upratings of their benefits that have been well below the rates of inflation. On the other hand, the effective rate of employee contribution is usually lower in private occupational schemes. Nevertheless, I recognise the continuing public concern that private sector schemes are generally less good than those in the public sector.

At present, there are almost no schemes available in the private sector which can offer formal index linking. However, my right hon. and learned Friend the Chancellor of the Exchequer announced in the 1981 Budget that the Bank of England would be issuing index-linked gilt-edged stock as part of the Government's policy of diversified funding. Indexed gilts give fund managers an important new financial instrument.

Initially, purchase of the stock was restricted to pension funds and certain other institutions, but in this year's Budget my right hon. and learned Friend announced the removal of this restriction and the Government have issued about £4 billion-worth of indexed stock so far.

Indexed gilts are not intended to provide the basis for indexed pensions throughout the economy, although individual insurance companies may wish to use them in devising indexed schemes.

Sir Anthony Fell (Yarmouth)

Can my hon. Friend cut all this short by agreeing that the only way to get rid of this problem is to win the battle against inflation, and that the only way to do that is to stop index-linked pensions for all civil servants and for all Members of the House of Commons?

Mr. Hayhoe

I am grateful to my hon. Friend for wishing to limit the speech which I am trying to make, but I cannot go down the simplistic road that he invites me to take. It might be better if I continue to make the points which I think are relevant to this issue.

Mr. Alan Williams (Swansea, West)

Does not the Minister recognise that the hon. Member for Yarmouth (Sir. A. Fell) has a legitimate argument and is only repeating what the Prime Minister said earlier, that one of the problems bedevilling us is that so much is now index-linked? The hon. Gentleman listened to what the right hon. Lady said and the Minister is trying to alter what she said.

Mr. Hayhoe

I am reiterating what I said at the beginning of my remarks. I am sorry that the right hon. Gentleman is so remiss that within about 12 minutes he has chosen to forget what I then said. The whole problem of index linking begins to decay once inflation is under control. I hope that he will join me and my right hon. and hon. Friends in welcoming the sharp reduction in inflation that the Government have achieved. If and when inflation becomes, as it was many years ago, extremely low, the problem of index linking in and other areas will become largely of academic importance.

Mr. Alan Williams

The Minister has not dealt with the argument advanced by the hon. Member for Yarmouth. The Prime Minister made another statement on "Weekend World" in which she said that the economies that have gone for index linking and inflation proofing are those which have inflation.

Mr. Hayhoe

The right hon. Gentleman seems intent on working through the ragbag of quotations which he or his research assistant has dredged up. It might be better if he holds on to them because I am sure that they will add lustre to what otherwise will be a deadly dull speech from him.

Index-linked gilts are not intended to provide the basis for indexed pensions throughout the economy, although insurance companies may wish to use them in devising indexed schemes. However, they will make it possible for pension funds, as well as for insurance companies and individual savers, to diversify their portfolios so as to reduce their vulnerability to the risks of inflation. The existence of indexed gilts being traded freely on the Stock Market helps us to become aware of the price that the market is prepared to pay for indexed assets. This is useful in setting a value on indexed pension schemes in the public sector. In this connection, it is worth drawing attention to the work of the Government Actuary's department.

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

In introducing index-linked gilts, were the Government following the recommendations of the Scott committee, or would they have been moving in that direction even if the Scott committee had not reported?

Mr. Hayhoe

It is always agreeable to speculate on what might have happened in different circumstances. As my hon. Friend properly says, the Scott committee advised the Government to issue index-linked gilts and the Government chose to do just that. The connection between the two is not for me to say. I was not involved in the decision-making and I cannot give an authoritative ruling. However, I suspect that the link exists.

I was about to refer to the Government Actuary's department. The market's response to indexed gilts has confirmed that department's assessment of the value of differences in the inflation proofing of occupational pensions, a conclusion earlier supported by the Scott committee. I am glad to have this opportunity to record the Government's full confidence in the professional competence, integrity and impartiality of the Government Actuary and his department. We should all be grateful to them for the work that they do.

It is appropriate to refer to the long-term prospects of all our pension arrangements, both State and private, the national insurance pension, which is effectively index-linked, the additional element in the State scheme which is index-linked and all the other pension arrangements that exist. Pensions are a form of transfer of income between generations. We must recognise the danger of imposing upon the working population now, or at some future date, through contributions and taxes a commitment to provide more for the retired population than can be afforded. My right hon. and learned Friend the Chancellor of the Exchequer drew attention to this in an important speech to the National Association of Pension Funds in May 1981 in Birmingham.

The demographic arithmetic is there for all to see. Without a renewal of growth in the economy, it will not be possible to protect the incomes of a growing retired population without having an effect on the incomes of those in work. This is not the central issue of our debate, but I think it right to draw attention to this more general problem, which must never be ignored when we consider pension matters.

To complete my remarks on the general context, I should perhaps mention briefly the State earnings-related pension scheme introduced by the Social Security Pensions Act 1975. In addition to the State arrangements—the basic national insurance retirement pension—employers are allowed to contract out all or some of their employees provided that they belong to suitable occupational pension schemes. Those schemes must ensure that members' pensions match, at least broadly, the level of benefit accruing in the State scheme up to retirement.

After State pension age, the State increases, in line with prices, both State earnings-related pensions and guaranteed minimum pensions earned in contracted-out employment. Thus both those contracted in and those contracted out are assured of earnings-related pensions on retirement calculated on the basis of their actual earnings, revalued pre-award in line with the movement in earnings and post-award in line with the movement in prices. When the State earnings-related scheme matures, it will provide, in addition to the basic pension, a pension equal to one-quarter of earnings in the best 20 years of the individual concerned—that is, earnings above the basic State pension and below an upper limit of about seven times the basic pension. Because entitlement accrues gradually, however, the level and number of such payments is as yet fairly small. As the House knows, the scheme will become fully mature by 1998.

I turn to the narrower question of Civil Service pensions, for which the Government have direct responsibility. Since the last debate, the report of the committee chaired by Sir John Megaw which inquired into Civil Service pay was published in July. Although primarily concerned with methods of determining pay, chapter 7 of the report is devoted to non-pay benefits including, especially, pensions. The Scott report remarked that the methods by which the pay of civil servants was adjusted under pay research were complex and obscured the reality of what civil servants contributed for their pension arrangements. The Scott report suggested that it would be an advantage if in future the pension element of the pay comparison were better publicised. The Megaw report goes further and suggests in recommendation No. 19: Provided this can be introduced at no additional cost to public funds, the basis by which civil servants contribute to their pensions should be one whereby a direct contribution is made from the pay actually received to cover the whole of the employee's share of pension costs. Both the employee's and the employer's share should be publicly declared. Much of the earlier misapprehension about civil servants not paying for their pensions has abated as a result of the Scott and Megaw reports, which made it clear that civil servants have been making a sizeable effective contribution, estimated by Scott at 7.9 per cent. Nevertheless, misunderstandings are almost bound to continue.

The Government are therefore attracted by the proposal to make the Civil Service pension scheme contributory. This would make it much easier to see the link with pay and to compare the position of civil servants with that of other groups. There would, of course, be no question of uncovenanted benefits or windfall gains going to civil servants as a result of a change to a contributory scheme. I should particularly welcome the views of the House on that suggestion. When the idea was considered from time to time in the past, the argument that the existing system was simpler and more efficient carried the day. Nevertheless, I have long seen the attraction of a contributory scheme, which would avoid the misunderstandings and misrepresentations that have dogged the present arrangements. I shall therefore listen most carefully to the views of hon. Members on this.

Mr. Gavin Strang (Edinburgh, East)

We appreciate that the Government have not taken any final decision on this, although the Minister has given a clear indication of the direction in which he is moving. Can he say a little more about the so-called efficiency factor? In practice, as some kind of deduction or contribution is made by civil servants, how significant is the so-called efficiency factor? Could not the case equally be made that it is just as efficient to require civil servants to make a full contribution rather than deducting a notional amount from the salary determined by pay research?

Mr. Hayhoe

I think that I have made my own feelings on this fairly clear. When such proposals were put forward in the past, the Governments of those days took the view that the old system was simpler and more efficient. Moreover, there are problems in changing from a noncontributory to a contributory scheme in such a way as to avoid windfall gains or uncovenanted benefits going to some pensioners. However, partly as a result of the way in which modern technology facilitates more complicated calculations, what would have been difficult in the past is much less so today.

Mr. Richard Wainwright (Colne Valley)

As the Minister has invited comment on this very interesting indication of Government thinking, it is important that we are fully clear as to what is in his mind. Will he confirm, as I expect that he will, that although it is suggested that the scheme may become contributory, there is no him at all of starting to build up a funded scheme?

Mr. Hayhoe

The hon. Gentleman's assumption is correct.

Mr. Ian Wrigglesworth (Thornaby)

The crucial qualification in the Megaw report is that it should not cost the public purse a great deal more to administer the scheme. I am sure that in reaching a view on this the House will be interested to know what the cost will be. Can the Minister give any guidance on that?

Mr. Hayhoe

My memory of the Megaw recommendation is that the transfer should not involve increased cost, by which I think it meant that those benefiting from the new arrangements should not draw windfall gains or new benefits. At this stage, when the matter is still so tentative, I cannot give a firm estimate of the cost of administration but I am certainly prepared to look into the matter and perhaps to write to the hon. Gentleman.

I have indicated the Government's attraction, at this stage, to a move in that direction and it seems to have been well received by the House, but I know that hon. Members will wish to consider the matter extremely carefully and I hope that we shall hear comments from them on this during the debate

Elsewhere in the public services, the Armed Forces and the police for example now make a more appropriate contribution towards their pensions, which are more favourable than those of most other groups because of the relatively early retirement age required due to the physically demanding nature of their work. These fast accrual schemes, as they are called, clearly demand a higher rate of contribution and those two groups now effectively pay an 11 per cent. pension contribution. The contribution of firemen, who also have a fast accrual scheme, is under consideration.

Much of the public concern about public sector pensions is focused on the cost of index linking and there is understandable resentment at any additional burden upon taxpayers as a result. Few would dissent from the proposition that public service pension schemes should be based upon fair contributions from those concerned. In this context, the cost of pension increases must be included as well as the cost of the basic pension.

It is also worth noting that action on contributions produces more money more speedily than action to cut the level of benefits. The sums involved are substantial. For example, this year's increase in the contribution rates of the police will save the Exchequer about £47 million in a full year. Over the public services as a whole, a 1 per cent. effective increase in pension contributions would amount to about £200 million—I give that figure for purely illustrative purposes—whereas a 1 per cent. reduction in the amount of pension increase would amount to £30 million. The ratio is £200 million to £30 million.

Another important section of the Megaw report relating to Civil Service pensions recommended that the advantages enjoyed by civil servants, in terms of better pension rights on changing jobs, should be taken into account in pay negotiations. Discussions between the Government and the Council of Civil Service Unions are taking place, and I do not wish to comment upon the merits or substance of that recommendation, but it illustrates one of the other main disparities between public and private sector—mainly the treatment of early leavers. It is comparatively easy for an employee to change his job within the public sector since the schemes are similar. He can either take his pension rights with him or have them preserved until retirement age.

In much of the private sector, as the Occupational Pensions Board has shown, people who change jobs can be put at a severe disadvantage as regards their accrued rights. That can be a disincentive to changing jobs.

The Government believe that the managers of pension funds should review their current practice, which is often both unfair and a constraint on mobility, and therefore on economic performance. The House will have noted the important statement made by my right hon. Friend the Secretary of State for Social Services on Tuesday.

In recent years, many suggestions have been put forward for replacing the present system of index linking—for example, returning to a system of discretionary uprating, including an element of discretion to cut back the increase if the index goes up by more than a certain figure, reducing the increases for those with the biggest pensions and so on. They all have advantages and disadvantages. I am sure that many will be referred to during the debate. However the arguments ebb and flow, and whatever the economic justification for one course or another, let no one underestimate the severe legislative and institutional difficulties in making changes that apply to all index-linked schemes. There are about 130 such schemes, and the legislative and contractual bases on which they are built differ considerably.

Pension increases for the Civil Service are provided directly by statute by the Pensions (Increase) Act 1971, to which I referred earlier, and the Social Security Pensions Act 1975. Some of the other schemes in the public sector at present use a notional fund, while others operate solely on a pay-as-you-go basis.

In most nationalised industries there are fully funded pension funds financed by employer and employee contributions which cover the costs of the benefit. It is an immensely complex subject.

I do not propose to announce firm Government conclusions upon that today. We are making progress towards getting pension contributions right. It must be correct to see that existing index-linked pensions are properly paid for.

I am glad that the debate provides an opportunity for hon. Members to express their views on the complex and important issues involved. I assure all who contribute that careful consideration will be given to their views. I hope, if the House agrees, to have an opportunity to reply to the debate.

10.3 am

Mr. Alan Williams (Swansea, West)

I apologise in advance for what, as the Minister rightly anticipated, will be an intensely boring speech. Many Opposition Members and those on the Government Benches will feel that it was worth coming in today, even though we have had to wait 20 months to hear what we have heard. After listening to the Minister, I understand why we are holding this debate on the last Friday of the Session. A month is a long time in politics, and 20 months seems to be a full evolutionary cycle. How the Prime Minister must have hoped that the backwoodsmen were on their high-speed trains to their backwoods and that 20 months later everyone would have forgotten the expectations that she raised when she established the Scott committee of inquiry. We have even had the technological revolution adduced to justify the turnabout. It is the Government's most remarkable climb-down. The Prime Minister's reputation in her stand against the Civil Service has been severely damaged by what we have heard this morning.

The fact that what we have heard is correct only makes what we have heard during the past two years more absurd. We have had the suggestion that a flight into the microchip means that things can be done now that were impossible 20 months ago. We have been told—as we expected—that the Government can do this because there has been a change in the rate of inflation.

The level of inflation at the time the Scott inquiry was set up was quoted. At that time, the Government were saying that inflation would fall, and they are only 1 per cent. or 2 per cent. out on the figure that they were prophesying. The turn-round has been only marginally different from what they expected when they were telling us that it was impossible to retain index linking. During an intervention, I quoted a comment made by the Prime Minister on "Weekend World". It is worth repeating in the context of the claim that the Government can do as they propose because inflation is falling. The right hon. Lady said that the economies which have gone for index linking have inflation. She was telling the public then that index linking was a major cause of our inflation.

Sir William Clark(Croydon, South) indicated assent.

Mr. Williams

I respect the hon. Member for Croydon, South (Sir W. Clark). He is one hon. Member on the Government Benches who has retained his integrity throughout the 20 months. What a political pirouette by the Prime Minister. It is not just a U-turn—

Mr. K. J. Woolmer (Batley and Morley)

Election year?

Mr. Williams

How could my hon. Friend the Member for Batley and Morley (Mr. Woolmer) suggest anything so Machiavellian as an election having anything to do with the Prime Minister's thoughts? We know well that elections have no influence on her, and that she in no way tempers her thinking according to political considerations. It always was nonsense to suggest that we should abolish index linking. Paragraph 6 of the Scott report states: It is a highly desirable social objective that the standard of living of those in retirement should be protected. This is clearly recognised in countries like France and West Germany where the benefits enjoyed by pensioners are superior to those of this country and the benefits of index-linking are extended alike to both public and private sectors. It can be done in France and West Germany, but we were told months ago that it could not be achieved here.

It took the vengeful mind of the Prime Minister, not to say that index linking is a protection and that we should give it to those who do not already enjoy it, but to seek to turn those who did not enjoy the protection of index linking against those within our society who do, to justify taking index linking away from them, although they have been paying on the basis that that was the contract that they had with their employer, the Government.

I want to make it clear, as I did when the Scott report was published, that the Labour Party stands firmly behind the concept of indexation. We accept the Scott report. As the Minister said, the new State scheme is index-linked, and that was introduced by the Labour Government. It is a pity, as he implied, that the private sector has not taken the opportunities presented to it by the various tax concessions that it receives and the introduction of the index-linked bond to do as is done in France and West Germany.

The Government's apathy reflects their whole attitude. Let us consider what happens with privatisation. When parts of State industry are sold off and returned to the private sector, all too often workers lose their rights to index-linked pensions. That has happened with steel industry sell-offs, and in the maritime and other industries. In such instances, the Government have sold out their employees, despite their original agreement with them.

It is ridiculous that we should need to have today's debate. It is even more ridiculous that we have had to wait 20 months for it. Anyone reading Scott does not need 20 months to see the logic of his case. It is clear that indexation is socially just and, as Scott revealed, viable. The Prime Minister, by her malevolent intervention, stimulated the erroneous concept in the public's mind that civil servants were on a non-contributory bonanza.

Mr. Peter Viggers (Gosport)

While the right hon. Member is explaining the Labour Party's attitude to the Scott report and to indexation, will he deal with the general and important issue of what the Labour Party thinks should happen if the growth in gross domestic product falls behind the rate of inflation?

Mr. Williams

I shall come to that in time. I should like to develop my arguments in my own way. I have said that we intend to retain indexation. The Labour Party stands by that. Indeed, I have the authority of the shadow Chancellor of the Exchequer to make that commitment on behalf of the Opposition.

The Prime Minister helped to stimulate the false concept that civil servants received index-linked pensions on a non-contributory basis. As Scott, Megaw, the Government Actuary and the 1981 National Association of Pension Funds report say, far from being privileged, recipients of a concession, civil servants pay twice as much for their pensions as workers in the private sector. I accept that Civil Service pensions cost more, but civil servants pay between 45 per cent. and 50 per cent. of the cost of their pensions whereas employees in the private sector pay only one third of the cost. The Prime Minister has never brought that to the public's attention.

In addition to the direct deduction of 1.5 per cent. for dependants' allowances, the civil servant pays 7 per cent. in reductions in pay. The upshot is that civil servants are paying about 8.5 per cent., not 7.9 per cent., of their salaries in pension contributions. That is well within the Scott range of what is appropriate for the benefits received.

The question of the contribution versus the notional reduction in pay is important. We must face that issue to avoid the cheap, petty propaganda campaign that the Prime Minister mounted against civil servants two years ago. I am inclined to agree with Megaw that it is difficult for the public to understand the concept of a notional reduction in pay. The fact that we have moved away from comparability with the private sector is irrelevant. Because the public do not understand it, it would be better to give civil servants their full pay and make the full cash deduction so that it is transparently clear that they pay fully for their pensions.

The Minister of State emphasised that there should be no gratuitous gain to civil servants, but there is another side to the coin. There should be no extra cost to civil servants as a result of the decision to change. There should certainly be no accrual to the Government from the change.

The confusion in the public mind raises a more important aspect. One can appreciate that the public would not understand the notional reduction in pay, but what about the Prime Minister? After all, she was a member of the Government who introduced indexation in 1972. Why was she unaware of how the system worked? Why was she unaware that it was not a non-contributory scheme? The Prime Minister constitutionally is the head of the Civil Service. I should have thought that she would have at least a limited awareness of how the system worked. Was she not briefed by officials in the Cabinet Office and the Treasury? They were aware of how the system worked because they managed to produce a lengthy and detailed answer during the week as part of the Minister's softening up operation for his Back Benchers. One must conclude that the Prime Minister was incredibly ill-informed and ill-briefed, although she prides herself on her mastery of technical detail. Alternatively, she must have made a deliberate attempt to whip up public feeling against civil servants for her own political objectives.

The only other conclusion that one can reach is that the right hon. Lady listened to the Conservative Party Centre for Policy Studies. That is more than likely. What did Scott say about the centre? Scott hammered it because it got its figures wrong. It said that it would take 50 per cent. of salaries to pay for index-linked pensions. The centre has had to keep its head down ever since.

I expect that there was added spice for the Prime Minister, because by kicking something set up in 1971–72 she could make a side kick at the right hon. Member for Sidcup (Mr. Heath) who was primarily responsible for introducing the scheme. That might have added spice to the pleasure that the Prime Minister gained from turning civil servants into whipping boys. The Prime Minister played a destructive and misleading role in the public debate prior to the publication of the Scott report.

The Prime Minister's hatred of the Civil Service is well known. [Interruption.] Tory Members obviously do not like my saying that. They have kicked civil servants round Whitehall for the past three years but no one must mention it. It was the Prime Minister who tore up the 25-year-old agreement on pay research to ensure comparability. That agreement was also introduced by a Conservative Administration.

I am not surprised that the Minister of State went out of his way to pay respect to the Government Actuary. He should have gone on his knees and apologised to the man because he has been pilloried indirectly by the Prime Minister. She would not accept his recommendations on pensions and contribution levels, so she set up the Scott committee. Scott vindicated the Actuary and even Megaw was allowed to have a go in the hope that he would do what the Scott committee failed to do, despite its members being hand-picked by the Prime Minister. The Prime Minister wanted her own preconceived prejudices to be substantiated.

Such is the Prime Minister's love of the Civil Service and her fear for her own political survival that even now she is trying to blame Foreign Office officials for the fact that she did not do her job properly during the Falklands crisis.

The Prime Minister's pay struggle with the civil servants—eventually settled for the same amount; it could have been settled at the outset—cost us over £500 million in interest on uncollected taxes. Her errors are dear—£500 million in her clash with the civil servants, and over £1,000 million for her ineptitude in failing to recognise the signs in the South Atlantic. It is hard to believe what most Conservative candidates said in reply to questionnaires that they received from the Civil Service unions in the last election. Overwhelmingly they supported the idea of indexation. On the eve of the election, in a programme called "Election Call", the Chancellor of the Exchequer—at that time, he was a shadow Chancellor with hopes—went out of his way to emphasise that an incoming Conservative Government would preserve indexation of Civil Service pensions. Nevertheless, within 12 months of coming to office, the Prime Minister singled out this issue as one of the prime targets for her malevolence and for whipping up a public campaign.

Why is the issue raised now? Might it not have been better for the Prime Minister to bury it? She tried to bury the Scott report. Might it not have been better to leave it buried, gathering even more dust on the Treasury shelves? The hon. Gentleman said that facts have become better known. They have indeed. Certain facts have become better known to the Prime Minister as a result of a paper submitted by Baroness Young to her Cabinet colleagues, pointing out that there were certain minor political disadvantages in taking on the civil servants on this issue because there happened to be 5½ million people in the public sector with index-linked pensions, all of whom would be affected, and there happened to be 2¼ million existing pensioners on index-linked pensions. So, 7¾ million people, together with their families, would be affected by the Government's decision on Scott.

As my hon. Friend the Member for Batley and Morley said, an election year is coming up. Today, we have heard a desperate attempt by a frightened Government to buy back the Civil Service votes that they lost in their campaign over the past years against the civil servants. The Government know very well that they could not leave the matter buried, because the same civil servants who sent questionnaires last time would send questionnaires this time, and having been deceived last time, the civil servants do not intend to be deceived this time. So the Government had to try to defuse the issue in advance of the election.

So we saw the softening up of the Back Benchers with the enormous bludgeon of the PQ the other day. I think that one of the papers called it an eight-page press release. The Government are still dodging the basic issue. They still will not answer the basic question. The hon. Gentleman tried to fudge the fundamental issue on which the representatives of the Civil Service unions and the other public sector unions want answers. They describe it as tentative and therefore open to discussion. What is to be the new contribution? That is what the unions want to know. The hon. Gentleman used the words "tentative" and "not at this time." He wants to consult and consider. He will study till the cows come home—or, certainly, until the boats come home. Certainly, the Government will not make a statement, if they can avoid it, about contributions. Their decision on what the split should be— one-third or one-half—will determine whether those people currently receiving index-linked pensions lose as a result of the change that the Government intend to make. So the Government have fudged and will continue to fudge the basic question of contributions.

Nevertheless—this should not be misunderstood outside—we have witnessed today a major U-turn by the Prime Minister. It is easy to understand why she waited 20 months before she allowed this debate to take place.

Mr. Woolmer

My right hon. Friend talked about fudging by the Minister. Am I not right in thinking that at no point did he give any commitment to preserve index linking? Was not the phrase that he used that the choice was not between index linking or no index linking, but between index linking and some other form of uprating? Will my right hon. Friend press the Minister to assure us that the Government are intending to guarantee to keep index linking, or if not, to press him on what he meant by that phrase?

Mr. Williams

The hon. Gentleman's implication was that index linking was obviously more desirable than the arbitrariness of the alternative. However, my hon. Friend is right, and when the Minister winds up, I hope that he will state, categorically and unequivocally, the Government's continued commitment to indexation. I hope, too, that he will clarify the question of contributions.

As I said, we have just seen a major U-turn by the Government. It was no surprise to me. I had already anticipated that today, instead of hearing so much about civil servants, we should hear—as we did—about widows, the police, the Armed Forces and the nurses. Those are groups, of course, behind whom the public will rally. Now that the Government want to change their position, they put the hated civil servants into a quiet dark locker and bring out on parade the police, the Falklands hero's, the Armed Forces, the nurses, and the poor widows, in an attempt to stimulate a change in public attitudes and conceal the fact that this has been a major defeat for the Prime Minister.

It is a humiliation for the right hon. Lady, as her Back Benchers appreciate. It is a capitulation. She has been caught, not by the logic of the situation but by the inevitability of the electoral timetable. So today, the Government have surrendered on an issue to which the Prime Minister tied so much of her standing and reputation with the Right wing, the backwoodsmen of her party.

Mr. John G. Blackburn (Dudley, West)

We have followed closely the right hon. Gentleman's interesting speech. Will he grant us the courtesy of replying to the question from my hon. Friend the Member for Gosport (Mr. Viggers)?

Mr. Williams

I said—and if it needs any further clarification, I adduce the views of the Shadow Chancellor on the matter—that we are committed unequivocally to the continuation of indexation.

We have heard the Minister's statement today. We appreciate his position. It may embarrass him if I say that we know that from the outset he knew the impossibility of the posture taken by the Prime Minister. He and the noble Lady have actually had the courage to tell the Prime Minister—obliquely, I trust, for survival's sake—that she is wrong.

Mr. Charles R. Morris (Manchester, Openshaw)

If the situation envisaged by the hon. Member for Gosport (Mr. Viggers) comes about, not only index-linked pensions will be at risk, but everyone's pensions.

Mr. Williams

Of course. The difference is that we happen to believe in growth policies and this Government believe in non-growth and negative policies.

At last—and for the first time—we have heard common sense from the Government Front Bench on this issue. What the representatives of the unions will want to be told—

Mr. McCrindle

As the right hon. Gentleman is outlining Opposition policy on these matters, will he tell us whether a future Labour Government would continue to issue index-linked bonds and whether it would be the hope that, in the event of high inflation, index linking would be possible for private pension schemes and not just those in the public service?

Mr. Williams

The mechanisms are a matter for discussion and I suggest that the hon. Gentleman raises the matter in an economic debate. We have given our commitments and shall choose the appropriate mechanisms at the right time. It is for the Government to convince—

Mr. McCrindle

rose—

Mr. Williams

No, I shall not give way. I have given way on various occasions and there are other hon. Members who wish to speak.

The Government must not only answer the question about contributions, but convince the representatives of the public sector—not only the civil servants—that what we have heard today is not just a temporary expedient to see the Government through until the next election but that it is a genuine and permanent change of heart on their behalf.

10.30 am
Sir William Clark (Croydon, South)

I am delighted that the debate is taking place. The right hon. Member for Swansea, West (Mr. Williams) did not, for one moment during his long speech, say anything about policy or the impact of index linking on the economy. All he said was that if a Labour Government—God forbid—ever returned to office, it would continue with index linking. I can well understand why he did not respond when he was asked if he would continue with index-linked bonds, saying only that the mechanisms would be dealt with at the appropriate time. It is a typical Socialist approach to all our economic evils to say about a problem "Let us defer it and carry on as we are." The Labour Government got us into this mess before we took over in 1979.

I regret that the right hon. Gentleman set out from the start not to talk about the Scott report and index linking but to make a personal attack on the Prime Minister. It was disgraceful. It shows the paucity of the Labour Party's policies. However, there is one issue and probably one issue alone on which the Labour Party can achieve complete unanimity, and that is an attack upon the Prime Minister. If they go into policy matters, they start falling apart. I congratulate the right hon. Gentleman on his adroitness in managing to keep members of his own party together, sparse as they are.

It was also completely and utterly unjustified for the right hon. Gentleman to criticise the Government for not having arranged a debate on the Scott report since February 1981. Few of my hon. Friends will recollect the Labour Party pushing the Leader of the House to have a debate on the matter. In fact, whenever it was raised Labour Members were remarkably silent. If they were so keen to have the Scott report brought out in the open and to commit the Government to making their position clear, or to have a Supply Day debate, why did they not press the Leader of the House? The right hon. Gentleman knows jolly well why they did not. They obviously do not want to commit themselves.

It would not be a bad idea to return to what we should be talking about today—the Scott report. It will be recollected that under the previous Conservative Government, a committee set up by my right hon. Friend the Member for Sidcup (Mr. Heath), thought that the ad hoc arrangement for inflation-proof pensions that there had been with the Civil Service and the public sector—an annual increase of 3 per cent. or 4 per cent. after argument and discussion—should be regularised. I accept that the committee had a point at that time. The committee's report was subsequently followed in 1971 by legislation. Inflation was then running at about 5 or 6 per cent. —bad, but not as bad as we have seen since.

The one error that was made by that committee was that it did not look forward and put a limit on indexation. With inflation at 5 per cent., on a decision to index-link, people would receive 5 per cent. One might think that civil servants and the public sector are underpaid, and I shall return to that point. With hindsight, one might have said that with a going rate of 5 per cent. pensions should be indexed up to a maximum of 6 per cent. Everyone then would have been extremely happy. That did not happen.

Consequently, if we look at the increases that have occurred in the public sector—I agree that it does not only apply to civil servants—we see that in 1971–72, for example, index linking was 9.5 per cent. That cost the taxpayer, irrespective of funds there may have been in the public sector, an extra £40 million—not very much. In 1974–75 pensions went up by 26.1 per cent. at a cost to the taxpayer of an additional £180 million. In 1982–83 it is envisaged that they will increase by 11 per cent., despite the fact that the going rate is 7.3 per cent. The extra cost to the taxpayer will be £500 million to £600 million.

I fully agree that not only civil servants are affected, but also local authorities, teachers, firemen, National Health Service workers and, indeed, Members of Parliament. What I am saying applies to each and every one of those, including Members of Parliament. Over 1.6 million people are receiving pensions in the public sector. However, that does not include the nationalised industries, which have a remarkable and important effect upon our economy.

Mr. Chris Patten (Bath)

My hon. Friend always does his homework and gets his figures right before making a speech. Can he say how much less public service pensioners would be getting now if they had been limited to 6 per cent. a year? On average, what would be the pensions for the Armed Forces, the police or the Civil Service if there had been that 6 per cent. limit?

Sir William Clark

Thinking aloud, I would have thought that on lower pensions the amount would be small. It would, of course, be much more on higher pensions. I regret that I cannot give my hon. Friend that figure. Perhaps he should ask my hon. Friend the Minister, who has research facilities that are not available to me, rather than put the burden on me.

Under the 1980 Act British Rail pensions are indexed. They received a 16.6 per cent. increase in 1980 at a cost of only some £6.6 million. Pensions in the British Steel Corporation, the mining industry and British Airways are all indexed. I shall return to that. If we compare nationalised industries with the private sector we see that the private sector is fully funded. We accept that some pensions in the public sector are partly funded and some are pay-as-you-go, while in the private sector pensions are fully funded.

In the private sector most private pension schemes have an escalation clause to account for inflation. The amount varies from pension fund to pension fund but it is probably no more than 3 per cent. In the private sector, at the end of a company's financial year, the company will look at its profitability for that year. It will say: "The pension scheme has an inbuilt 2 per cent. increase. We have had a good year. Let us put another £1 million or £2 million into the pension fund." Therefore, instead of a 2 per cent. uplift, pensioners will receive a 4 per cent., 5 per cent. or 6 per cent. uplift. However, it is not a commitment.

If the company has a disastrous year, perhaps as a result of the world recession, it will accelerate its demise if it is under a legal obligation to change the index from 2 per cent. to whatever the going rate of inflation may be. That shows the gross disparity between the public and private pension schemes.

Job security in the public sector has been greatly underestimated. The Clegg committee did not take that sufficiently into account. One need only look at the facts. Throughout the public sector, including the nationalised industries, there has, in the past year or so, been one redundancy for every 15 in the private sector. That shows the job security in the public sector. I could give other examples, but I do not wish to reopen the issue. However, hon. Members will remember that Dr. Clift was suspended for four and a half years, on full pay, while receiving full entitlement to his index-linked pension. Such things could not happen in the private sector. Let us consider the Crown Agents and the amount of money that has been lost. I think that it was this week that the Minister said that no action would be taken and that there would be no diminution of the pension rights of the civil servants involved.

I am trying to show that those in the public sector enjoy privileges that are not available in the private sector. As has been said, another advantage of the public sector is the transferability of pensions. Employees can move round in the public sector without any loss of pension rights. However, it would be extremely difficult to obtain transferability in the private sector. It is all very well to say that fund managers must cope. However, how does the new pension fund take over responsibility for a man of 45 who has paid into a firm for 15 or 20 years and who then moves to another firm when he is almost at his maximum earning ability?

It is easy to say that what is done in the public sector should be done in the private sector, but unless we nationalise the private sector it will be impossible to obtain parity of treatment. We used to hear a lot about comparability and it used to be said that those in the public sector earn less than those in the private sector. That is rubbish. A man earns roughly the same whether he works in the private or public sector, but he has more job security if he works in the public sector.

I must declare an interest, because I am a consultant to Commercial Union. I am assured that if the private sector were to give index-linked pensions there would have to be a premium, or contribution, of almost 33 per cent. of the total wage bill. It would be nice to be able to afford 33 per cent. , but it is to whistle in the dark to think that the private sector can do so.

Mr. Alan Williams

Obviously, we are interested in the hon. Gentleman's remarks and recognise his expertise. However, how has the admittedly fairly small company, Target Life, been able to offer this facility?

Sir William Clark

I understand that Target Life offers fully indexed pensions to the self-employed. That does not involve such great amounts. However, I shall return to that point later, because it involves indexed bonds.

Mr. McCrindle

My hon. Friend has predicted that it would require an increase of about 33 per cent. in contributions for a private pension scheme to be fully inflation-proof. What rate of inflation has he assumed?

Sir William Clark

I speak from memory, but I think that the figure was based on an assumption of 8 or 9 per cent. However, it is not the accuracy of the figure of 33 per cent. that is important so much as the principle of the matter. Contributions would have to be substantially increased to provide index-linked pensions. My hon. Friend is right to say that everything depends on the rate of inflation.

Britain is becoming a country of two nations. I am not against those in the public sector, but they are enjoying benefits that those in the private sector, who produce the wealth, do not enjoy. All hon. Members want fairness in our pension arrangements and, therefore, this question must be considered.

I understand that the Government Actuary has not allowed his figures to be subjected to public scrutiny—the scrutiny of other actuaries. I also understand that his basis was a constant 3 per cent. return on investment. However, history tells us that 1 per cent. would be good. Therefore, there is a fallacy. Indeed, the Scott report contains another tremendous fallacy, because it bent over backwards to justify index-linked pensions in the public sector.

In 1982–83, indexation in the public sector will cost the taxpayer £500 million or £600 million. There is an anomaly about the public sector. Last year, working civil servants received a 4 per cent. increase in salary. It could be said that their standard of living was reduced, but the pensioners will receive an increase of 11 per cent. We have got things out of proportion. We cannot possibly immunise any section of the community against the vagaries of economic circumstances.

It has been said that we should issue index-linked bonds to private pension schemes. That sounds all right, but it is rubbish because there are only £4 billion-worth of index-linked bonds in existence. The private pension schemes and the self-employed pension funds amount to about £130 billion. That is roughly the size of the national debt. Therefore, to say that index-linked bonds are the panacea is ridiculous. They are an economic disaster. I hope that my right hon. and hon. Friends will realise what we are doing.

I shall do some simple arithmetic. If a 10-year bond of 100 units is issued at 2 per cent. interest per year, but inflation proofed, the person who earns it will receive 2 per cent. one year, a little more next year, and so on. But at the end of 10 years the Government will need to pay back 259 units. With a constant 10 per cent. inflation over 10 years, borrowing £100 today and repaying it in 10 years' time means repaying 259 units. That is splendid—provided that in the 10 years we have somehow accumulated the difference of 159 units in order to pay. But that is not what is happening in our national accounts. We are charging the 2 per cent. to the national funds. In this hypothesis we should not only be charging the 2 per cent. ; we should be charging the inflation element in the year in question. But we are not doing that.

Anyone at the stroke of a pen could cut the public sector borrowing requirement. This year it is supposed to be about £9.5 billion. It will probably be less than that. That is based on £15 billion being paid in interest on the national debt.

If the right hon. Member for Swansea, West wants index-linked pensions throughout the private sector, I can suggest what his mechanism should be—to swap the whole of the national debt for index-linked bonds, and reduce at a stroke the £15 billion interest charge to £2.6 billion.

Mr. Richard Wainwright

The hon. Gentleman is dealing with an enormously important point of national accounting. I remind him that last summer, in the Select Committee on the Treasury and Civil Service, in answer to that very question, the Chancellor of the Exchequer pointed to the very small type in the Red Book which shows that an estimated annual instalment of the inflationproof payment is included in the Estimates.

Sir William Clark

The question was also posed in the House of Commons during the Budget debate. There is a note at the top of the page in the Red Book about interest including inflation elements, but lower down the inflation-proof element is deducted. Perhaps the hon. Gentleman and I could deal with that point on another occasion.

I was trying to help the right hon. Gentleman with the mechanism and I was saying that at a stroke we could reduce the public sector borrowing requirement. If we could replace the £15 billion by £2.6 billion, that would be a saving of £12.4 billion and it would produce a Budget surplus.

One can well imagine what fun there would be if the right hon. Member for Bristol, South-East (Mr. Benn) ever took control of Britain's finances. The present system is hopelessly bad housekeeping. I have said so repeatedly and I shall continue to say it.

Index-linked pensions have retarded and will continue to retard the process of privatisation. No industrialist can possibly take over part of our nationalised industry and at the same time take over the responsibility for the index-linked pensions built into it.

The National Freight Corporation was sold recently to the employees of that company for £53.5 million. I welcomed that privatisation; I was delighted by it. But as politicians we should consider what is involved. As soon as the Government received their £53.5 million on behalf of the taxpayer, they had to pay back £48.7 million to set up a pension fund for the National Freight Corporation. There were a few expenses relating to the issue, and so on, and the taxpayer received only £4.6 million from the transaction.

In the prospectus of the National Freight Corporation, the small print shows that that the Government retain the responsibility for the index-linked pensions of the corporation. I was told that the first year's cost was £5.3 million. Therefore, having made £4.6 million profit, we have already had to spend £5.3 million on the index-linked pensions which could be taken over by the corporation, even though it is a co-operative. If we have to pay £5.3 million this year, what shall we have to pay next year? The Department concerned was kind enough to tell me that the actuarial liability for the index-linked pensions was £74 million.

One wonders what will happen with the privatisation of British Airways. The example I have just given of the National Freight Corporation shows how essential it is for the Government to grasp the nettle. They must do something about it. Naturally, I congratulate the Government on having been able to reduce inflation to 7.3 per cent. We can look forward to inflation of 5 per cent. in the spring of next year because we have prudent financial management, but prudent financial management cannot be guaranteed in the future. If it could be, I should be very happy.

I have no doubt that the Conservative Party will be returned to office at the next general election but who knows what will happen in six or 10 years' time? At some time there will be a change of Government, although I think it will be a long way ahead. We remember the enormous overseas debts incurred by the last Labour Government. What would happen if there were to be another profligate Labour Government? Once an index-linked bond has been issued and the inflation rate has gone up to 15 or 20 per cent., no incoming Government, however good, can do anything about it.

The Government should look seriously at some means of getting out of the commitment that has been made, but it would have to be done honourably. There are various ways in which it could be done. We could endeavour to get back to the old system, which works extremely well in the private sector. If productivity and the national finances were good this year, we could increase all public pensions by whatever percentage seemed appropriate. We might say that as the inflation rate is now about 7 per cent. and is falling, we shall guarantee a figure of 8 per cent. for the next two years, but that after two years we reserve the right to go back to the old system.

Another possibility would be to fix a maximum figure. Then, if inflation were to go down to 5 per cent. in the spring, we could go back to a figure of 6 per cent. The Government Actuary and the financial pundits could work out the cost of one year's pension tax-free. It would take the responsibility off the taxpayer.

Mr. McCrindle

May I try to establish that my hon. Friend, in this most interesting speech, is beginning to accept that to terminate index linking as such is virtually impossible, and that all we can do is to interfere with the present method of index linking? That is what he appears to be suggesting when he says that we should explore various avenues. That is not ending index linking.

Sir William Clark

I accept that, but I did say that there must be fairness. People in the public sector have been made promises that in my view the country cannot afford. Somehow that responsibility has to be overcome. I have tried to suggest some avenues through which one could get back to a realistic position. My second suggestion was to fix a maximum inflation escalation clause of 3.5 per cent. in the public sector, but that would cost a great deal.

I have suggested that we should give one year's pension, tax free, to everyone in the public sector in return for the 3½ per cent. concession. With the lower pensions—and this may be more attractive—we might continue inflating indexation until we reached a figure of 50 per cent. of whatever the retirement pension was at that time, and after that to inflate by only 3½ or 3 per cent. I should have thought—

It being Eleven o'clock, Mr. SPEAKER interrupted the proceedings, pursuant to Standing Order No. 5 (Friday sittings).

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