§ Question again proposed, That this House do now adjourn.—[Mr. Garel-Jones.]
§ Sir William Clark
Before the debate on steel, I was endeavouring to point out that the indexation of pensions or bonds was so important to our future economy that it would be disastrous if we continued along the present road. I offered several options for the Government to consider. The first was that the contribution should increase substantially, to about 33 per cent., but that would produce an anomaly between a man aged 25 and a man aged 45. My second suggestion was that we might return to the old system of arranging the increase in pensions each year or every other year. If we do that, we must pay more to existing pensioners and I suggest that it might be one point about the rate of inflation, guaranteed for two years, with a review, on the understanding that it would depend upon what the country could afford.
§ Mr. Wrigglesworth
Did the hon. Member for Croydon, South (Sir William Clark) suggest that the contribution should be increased to 33 per cent.? If so, on what basis did he calculate it?
§ Sir William Clark
It would be wrong for me to repeat what I said earlier. My information is that, with inflation at about 7 or 8 per cent., the contribution from the employer and the employee must be about 33 per cent.
The third option is to say that the maximum will be equal to the average in the private sector, which is about 2½ per cent. However, if that is believed to be too niggardly, it could be increased to 3½ per cent. , which may mean that the Government must give one year's pension tax-free as compensation. The Government may also continue to inflation-proof the pension to up to 50 per cent. of the present retirement pension and then to index at about 3 per cent.
I understand that those who enjoy the benefits of the public sector are annoyed that their future will change, but I put the reverse of the coin. Many people in the private sector are incensed because they do not enjoy the same advantages. It is no good us hoping that they can enjoy them, because the number of index-linked bonds available is inadequate. Employment in the public sector is so attractive that it acts against the private sector. Index-linked pensions are an albatross around the neck of the taxpayer. Index-linked bonds are an even greater albatross that the country cannot afford.
Indexed bonds merely put off the evil day when the taxpayer has to pay. Indexation of pensions is unfair, unjust and uneconomic. I hope that the Government will have the resolution to grasp the nettle. It has been with us since 1971 and it is obvious that indexation does not work. It is unfair and we must do something about it.
§ Mr. Charles R. Morris (Manchester, Openshaw)
I preface my contribution by endorsing the appreciation that has been expressed on both sides of the House to Sir Bernard Scott and his committee for the obviously detailed work which they have put into the preparation of the report which is the subject of our debate this morning. I was equally encouraged by the measured and conciliatory opening speech that we have listened to from the Minister in presenting the Government's views on the report. The 674 Minister's speech, in my view, was a very able exercise in taking the heat out of what has become a politically embarrassing issue for the Government.
When one talks of political heat in the context of public service pensions, one has to remember the individual who made a major contribution to generating it. It was, in fact, the Prime Minister. The hon. Member for Croydon South (Sir W. Clark) belaboured my right hon. Friend the Member for Swansea, West (Mr. Williams), who quite rightly reminded the House of some of the statements made by the Prime Minister on the subject of public sector pensions and index linking. If the hon. Gentleman feels that there are so many advantages attached to working in the Civil Service and the public sector, one is bound to pose the question why he did not follow the advantages that he sees so clearly.
§ Sir William Clark
The right hon. Gentleman's comment cannot be germane to the argument that I was advancing. I have been quite happy in the career that I have followed. There are attractions in working in the public sector but it does not necessarily follow that everyone wants to work in it. I would not want to work in it.
§ Mr. Morris
Quite rightly, the hon. Gentleman is conceding my point. People exercise a choice and it is a fact that civil servants and public servants go to work in the national interest in the Civil Service and in the public sector because of the attractions of stability of employment and because of the pension entitlements which go with these posts. Those are precisely the reasons why people become civil servants and public servants.
The Scott report is, I believe, an unusual report. In its recommendations and conclusions it vindicates everybody other than the person who established the inquiry, the Prime Minister. The report performs a useful service, I believe, in demonstrating, contrary to public conception, that the 5.6 million public service employees covered by the Pension Increase Act 1971 contribute about twice as much to the cost of their pensions as their counterparts in the private sector.
I believe that the Scott report might have proved more readable and certainly more enlightening had the report inquired why the Pensions Increase Act 1971 and index linking of public sector pensions reached the statute book in the first place. I would argue that the increasing of public service pensions has more to do with frightened Ministers in 1971 than it has anything to do with the demands of Civil Service trade unions, civil servants or public servants generally.
Let me elucidate, that point. What actually happened before 1971 was that the national staff side of the national Whitley council—every public sector and every Civil Service union from the Police Federation to every organisation representing public servants—organised an annual campaign to increase public sector retirement pensions. Then one able and erudite civil servant, who subsequently became a permanent secretary and who has since retired, argued at that time with Ministers that they could obviate this annual political embarrassment by conceding the indexing of public sector pensions. That is precisely what happened. Ministers not only seized the solution to their political embarrassment put forward by the able civil servant at that time and accepted his views but they enshrined indexing in legislation. Looking at the 675 whole question of the indexing of public sector pensions, which is now enshrined in legislation, I cannot see any future Government ever being able to muster a majority to change that legislation. Certainly any change in the present situation will require legislation.
Turning to the Scott report itself, I looked at appendix 2 very closely. This purports to catalogue the multiplicity of different pension schemes and systems in the public sector generally. But apart from two unusual schemes of pension enhancements—pensions generally—which are not included in that appendix, the first of the three areas to which I would like to draw attention is the rather generous pension arrangements which certain boards of public institutions and public industries have organised for themselves.
If we look closely at the pension arrangements enjoyed by the boards of some publicly owned industries, we see that they have arranged for themselves what is known as the Inland Revenue memorandum No. 12 provisions. Those who know pension arrangements closely will realise that the Inland Revenue memorandum No. 12 provisions provide two-thirds of salary on retirement after as little as 10 years' service. Here we are having a major debate about civil servants who have retirement pensions of £32 a week yet the boards of members of certain publicly owned industries have arranged for themselves two-thirds of their salary after as little as 10 years' service.
Then there is the rather unusual and fascinating arrangement enjoyed by senior officers of the Armed Forces and in the Ministry of Defence. They have a very novel arrangement for enhancement of retirement pensions. I suggest to the Minister that he consults his right hon. Friend the Secretary of State for Defence and inquires why some senior officers are promoted in rank during the last year of their service before retirement. It is illuminating to find out just how many senior officers are promoted during their last year of service. It is an exercise in increasing their service pay to enhance their retirement pension. I invite those who are concerned about civil servants receiving pensions of £32 a week to have a look at some of the other senior civil servants who are enjoying something appreciably more.
We all see businessmen going from the private sector into the public sector. The hon. Member for Croydon, South was going on about pension arrangements in the private sector. He had better start looking around the board rooms. If he does, he will see the pension arrangements that managing directors have arranged for themselves.
The House has seen evidence of this when businessmen leave the private sector to take responsibilities in the public sector. For instance, the Government and the taxpayer had to pay more than £1 million to buy out Mr. MacGregor's private pension entitlements so that he could become chairman of the British Steel Corporation. Arrangements of that kind should at least be borne in mind in examining the position of individual civil and public servants.
Paragraph 18 of the Scott report recommended that the analogues from the public sector should henceforth not be used as comparisons because of the danger of circularity—that is, the pensions and pay of other public sector workers generating increases for civil servants in the immediate employment of the Government. I recognise that danger, but I do not believe that the Scott recommendation will make one iota of difference. I am not 676 sure that Sir Bernard Scott and his colleagues have read the Priestley report of 1955, which in paragraphs 146 and 147 describes the areas from which the analogues are to be drawn. It does not differentiate between the public sector and the private sector, but says that Civil Service pensions and pay should be based on fair comparisons with the rates of pay enjoyed by comparable groups working for good employers in the private sector. If one excludes the public sector, the unions will therefore rightly provide comparisons with other good employers in the private sector, so the argument about circularity is irrelevant to the question of the analogues.
I believe that the Scott recommendation ignores the principle of fair comparisons laid down in the Priestley report, although I agree with Scott that there should perhaps be greater surveillance of public sector pensions and the method of determining them. I believe that the Labour Government were right to establish the Civil Service pay research board to monitor the work of the pay research unit in making the comparisons. The Minister should consider establishing some form of surveillance of pension arrangements for the civil and public services generally. I do not suggest for one moment that anything untoward is going on, but I am concerned to establish public confidence in the system. I believe that that would not only be in the public interest but in the interests of the civil and public servants, to whom this country owes a great deal of gratitude.
§ Mr. R. A. McCrindle (Brentwood and Ongar)
Some people, both within and outside the House, seem to think that index linking is a new idea. Nothing could be further from the truth. The first evidence of it was 62 years ago. Equally, some people, both within and outside the House, seem to believe that index linking has always been restricted to the public sector. That is not true either. For a very long time, it was possible in the private sector to obtain a pension that took careful note of the vagaries of inflation. The only reason why that has been less so in recent years is that it has been impossible for the private sector to obtain a return on investment equal to the going rate of inflation.
In the 1920s and 1930s and up to 1971 there were separate Bills to increase public service pensions and, by and large, increases were small. Therefore, to a greater extent than has been the case since 1971, there were comparatively few complaints. Such complaints as there were came from the Government of the day because of the political embarrassment caused to them. I therefore doubt whether many Governments, actual or prospective, would enjoy the thought of a return to the situation that prevailed before the change was made in 1971. Also in the private sector there was progressive "dynamisation" of pensions after they came into payment. That, too, was possible because it was possible to obtain an adequate return on investment.
The House must therefore consider what has changed to cause the whole subject to become highly charged with emotion. There have been three changes. First, public service pension increases have become institutionalised. Many hon. Members object to that because they feel that they can no longer control the increases through parliamentary discussion. Secondly, since 1971 inflation has been rampant during the periods of office of both Governments. As a result, the private sector has been 677 unable to equal the public sector in index-linked increases. Therefore, to nobody's surprise, the public sector has seemed to have such an advantage that an understandable feeling of envy has been created within the army of private occupational pensioners. Thirdly, the taxpayer is now clearly seen to have to foot the bill for public sector increases and he believes that as a result two nations have developed in pension terms.
In those circumstances, it is right to focus our attention on whether we can produce fairer results so that all retirement pensioners, whether they worked for the public sector or for private enterprise, believe that they are treated fairly. If in the process of moving towards a fairer system we can reduce public expenditure and thus the inflation that lies at the heart of this whole problem, we shall be making great progress. Where we risk going adrift is in assuming that we must deprive those who have index-linked pensions in the interests of those who do not.
I make a strong plea that we should move to ensure that all retired people, whether they worked in the public or the private sector, should receive index-linked pensions of one kind or another. If we do not do that, we run the risk of forgetting that all Governments have a responsibility to maintain the standard of living of retired people. They are the most vulnerable section of our society and Governments would violate their responsibility if they did not accept that duty.
There are two broad ways in which that duty can be discharged by Governments. They can either contain inflation—the ideal index linking is nil per cent. annual inflation rate—or, if they cannot or in some cases are unwilling to do so, they must compensate retired people for their failure to achieve that objective.
In all those circumstances, it is not surprising that this has become a matter of great controversy, and that the Government should have set up an inquiry to allay the public anxiety that sprang from the prospect of having one's index-linked pension withdrawn—if one already has it—and trying to achieve proper protection against inflation if one has retired from the private sector.
It is not surprising that the Scott committee refrained from condemning the index-linked pension system and recommended that it should be extended to the private sector. There was no reason for the Scott committee to do that. Its terms of reference did not contain a request for it to make a statement on the principle of inflation proofing. However, such was the evidence that the Scott committee took that it felt that it had to uphold the principle of the index linking of pensions. It argued not only for its maintenance, but for its extension to the private sector, because the committee believed that it was the Government's duty to maintain the standard of living of those on retirement income.
§ Sir William Clark
How will the Government get money from the taxpayer to immunise all pensioners against the vagaries of inflation?
§ Mr. McCrindle
I shall come to that. My hon. Friend the Member for Croydon, South (Sir W. Clark) should remember what I have already said, that if the Government can achieve a nil rate of inflation, or something close to it, that is the ideal level of index linking. If Governments fail to do that, for whatever reason—for example, international factors—I do not believe that they can run 678 away from their responsibility and say "We cannot control inflation." It lies within the power of Governments to move in that direction.
If my hon. Friend the Member for Croydon, South wants proof of that, surely the performance of the Government that we support is positive proof. 'We inherited rapidly rising inflation which, because of the policies that have been pursued, has fallen from 22 per cent. to 7 per cent. and, as he said, is heading towards 5 per cent. next year. That shows that if the Government have the will, they have the means, but if they fail there remains a responsibility upon the Government not to take it out on retired people whose income must be protected. They are the most vulnerable section of society.
Some people speak as if index linking relates only to the Pensions (Increase) Act 1971. That is not so. When the 1975 Act is fully operative index linking will be extended to all people who are not contracted out. In 1995 all public service pensioner; and all those in the second national scheme will be all right, but not occupational pensioners.
I turn to the principal point upon which I believe my hon. Friend the Member for Croydon, South and I disagree. Scott recommended that index-linked bonds should be generally available to the private sector. I am delighted that shortly after that recommendation was made the Government seemed to agree by introducing in 1981—long before any response to the Scott report was forthcoming—the first tranche of index-linked bonds, available originally only to pension schemes and insurance companies. That shows that the Government understand that they have a responsibility, and that ideally that responsibility is discharged by reducing inflation, but if they cannot or will not achieve that a move in the direction of index-linked bonds should automatically follow.
I believe that we are on the way to a degree of index linking for all, and that that would be an end to the inequities of which people complain. People will then say, understandably, "At what cost?" That brings me to the point made by my hon. Friend the Member for Croydon, South in his intervention. People would say "Is it rot adding to inflation? Is there not some vicious spiral that means we shall never come to grips with inflation?" That obliges us to analyse the system of contributions and rewards within the public sector and assess what help is needed and can be produced for the private sector.
There has been a great deal of exaggeration about the contributions made by public service pensioners and of the high pensions that such pensioners receive. I have a note that shows that the average pension for the Armed Forces is £33.80, the National Health Service £36.40 and local government £25.70 per week. It is possible to fasten on to the high pensions, but they are the exception and not the rule and do not undermine the principle of index linking. We have to ensure that contributions made by public servants towards their pensions are correct. Scott seemed to conclude that they should be between 3 and 8.5 per cent. In 1980 they were between 3.8 and 7.9 per cent. An adjustment is needed but not a radical change.
I am in favour of higher contributions when they can be justified, but I do not pretend that by any actuarial valuation we shall conclude that there will be a need to increase vastly the contributions of those in the public service.
Some suggest that the expense could be minimised by having a cut-off point. People see that differently. I am prepared to suggest—I hope the Minister will comment on 679 this—that there is an argument for a cut-off point at a rate of inflation above which no public service pension will be indexed, because if the country stands on the verge of hyperinflation—that means many different things to different people—there is an argument that everyone, including public service pensioners, must rally round to defeat it. I made that point during an Adjournment debate on this subject on 5 February. The Minister could not reply then. I hope that he will do so today.
The ideal assistance for the private sector is the keeping down of inflation. If that is achieved, no help is needed from the Government to achieve a return on investment which would allow private sector pensions to be index-linked. It is because the return on investment has been impossible that help is needed. If someone could tell me where I could have obtained a return of 29 per cent. on my investment in 1978 I should have been delighted. It simply was not possible.
If the inflation rate increases, by Government action or inaction, to a point beyond which it is reasonable to expect a return on one's investment, the Government are right to move towards issuing index-linked bonds. Only that can iron out the unfairness. As my hon. Friend the Member for Croydon, South said, there is a degree of two-nation philosophy. There is a feeling of resentment and sometimes envy by the private sector. The only way to iron it out is either by containing inflation at such a level that the private sector can provide for itself, or by the Government assisting if they fail to control the level of inflation.
§ Sir William Clark
I take my hon. Friend's point about keeping inflation down, but does he agree that all that the Government of the day would do would be to push the responsibility for the inflation element in an index-linked bond on to future taxpayers?
§ Mr. McCrindle
If that were so, it would happen only if they failed in the first part of the duty to which I have referred. My hon. Friend cannot have it both ways. If the Government bring down inflation, there will be no need for index-linked bonds to be available to the private sector. If they do not succeed, they cannot cry off and shed their responsibility.
I accept in large measure the Scott report recommendations. It is a much maligned document which speaks much good sense. It says, first, that we must keep inflation down so that no index linking is needed and therefore no unfairness follows. Secondly, it says that we should extend the principle of index linking to the private sector by index-linked bonds.
I press the Opposition Front Bench to say whether the Labour Party believes that index linking is good, not only for the public sector, but for the private sector. If the Opposition believe that, do they believe that it should be made possible by Government action?
I accept that we must re-examine contributions and cutoff points, but good pensions have to be paid for. There is no escaping that fundamental consideration. There is no better time to examine the situation than the period that we are now moving into when there is a falling inflation rate.
I repeat an argument that is often glossed over. It is that many in receipt of index-linked pensions, which do not 680 exactly allow a life of luxury, were employed in areas of the public sector where pay is traditionally low. A sense of balance is essential.
I hope that my hon. Friends will forgive me if I ask them not to forget the political dimension. I have marvelled at the ability of some of my hon. Friends to suggest that we should move towards the termination .of index linking, sometimes reneging on promises, without considering the 7½ million public service pensioners and their families. To disregard the voting intentions of 10 million people is blind folly.
Index linking is here to stay. The question is, how do we extend it and pay for it? As we move towards a lower inflation rate, I believe that we can do both.
§ Mr. Ian Wrigglesworth (Thornaby)
I agreed with the general thrust of the remarks by the hon. Member for Brentwood and Ongar (Mr. McCrindle), but reliance on the type of political interest that he advocated in the latter part of his speech has damaged debate on the subject. I am pleased that the hon. Gentleman is putting pressure on his colleagues, because political interests, particularly in the recent past, have done much damage. I hope that the hon. Gentleman will not advocate political interest too strongly.
The House should examine what means the country has, working under its elected representatives, to create the best possible administration. It is in the country's interest that civil servants carrying out the wishes of the House should be employed under the best possible terms and conditions of service.
I should like to think that the debate and the Minister's speech will help remove a sore which has been running for too long—the whole index-linked pensions issue. Some rich paradoxes have been involved in the debate over the last decade. First, although the whole index linking measure was introduced by a Conservative Government in 1971, Conservatives since have been responsible for much of the antagonism over index-linked pensions. Secondly, the Prime Minister and some of her colleagues have been vociferous in their criticism of index linking in the past, yet the Minister states today that index linking should stay.
The hon. Member for Croydon, South (Sir W. Clark) has said that the Government stance involves depriving those who have to satisfy those who have not. That is usually a criticism made of the Opposition Front Bench. That is a rich paradox.
The Minister's statement takes us a considerable way forward. I hope that it will lay to rest some of the arguments over index linking in recent years. As the right hon. Member for Swansea, West (Mr. Williams) said, we should make it clear that the Minister is saying that the Conservative Government are in favour of index-linked pensions. I hope that that will ring out from the House loud and clear to all Conservative supporters and to all in the media who have attacked index linking. Let us have it on the record that the Conservative Government are in favour of index-linked pensions.
We are dealing with one of those awful features of modern British politics which one could call "oppositionitis". When parties go into opposition they pick up the rhetoric of opposition and then they have to reverse when they come to Government and look at the facts.
The committee was expected by some to be the means of ending index-linked pensions. When the facts were 681 studied, not by people with an axe to grind for the Civil Service or other parts of the public sector, it was decided to support the retention of index-linked pensions.
I speak for my colleagues when I say that we stand fully behind the Scott report when it says in its summary and conclusion:It is a highly desirable social objective that the standard of living of those in retirement should be protected.That should apply not only to the public sector, but to the private sector. I hope that that message will go from the House to the private sector, although today we are debating the public sector.
The Government's proposals will help to sustain public confidence in the Civil Service. I hope that the House will agree that a change to a contributory scheme will help to stem some of the past criticism.
In an intervention I spoke of the cost of changing to a contributory scheme. I hope that the Minister will come back to the House on that. The only reservation that we should have about such a change is if it costs the taxpayer a considerable amount or if it costs the workers—the future pensioners—a considerable amount in contributions. I hope that the Government can give the figures.
I hope that the House will agree in principle that changing to a contributory scheme is desirable. I worked in the Post Office when it became a public corporation and there was a switch from a non-contributory to a contributory pension scheme. One benefit for the staff is that their market value is increased.
The gross pay of a member of staff increases, so, to the outside world, his salary is increased. So if a civil servant applies for another job, his gross pay will have been increased by the pension contribution which is to be deducted. So civil servants will benefit if that change takes place.
One of the questions that the Minister did not answer, and on which he was pressed, was what would happen to contributions—not only in the Civil Service but in other spheres where index linking takes place. I am sure that all civil servants will want to know what is to happen. The Minister said—it raises immediate suspicions; he said it with some pleasure—that a 1 per cent. increase in contributions meant a £200 million accrual to the Treasury. That course would be most attractive to the Chancellor of the Exchequer, and knowing how much Chancellors like to get money in the coffers, I imagine that civil servants would be afraid that he might be tempted to increase contributions with the resultant benefit that the Minister describes.
In other spheres—there has been some debate on the subject—perhaps contributions should be increased. Contributions in some of the other index-linked schemes outside the Civil Service vary. Again, it would be interesting if the Minister said something on that matter, although I realise that his ministerial colleagues are responsible for teachers, police, and other parts of the Civil Service which have index-linked pensions.
There is one matter that I hope will become the subject of debate to a considerably greater degree than has occurred in the past, and that is the funding of pension schemes. In some other countries pensions are arranged on the basis of pay-as-you-go. I have considerable anxiety about the impact that pension funds are having on the capital markets of this country. Moreover, at times an unnecessary burden is put on existing employees in funding pension schemes, and that burden might lessen 682 were there a change to a pay-as-you-go basis. I hope that some investigations will take place, particularly in large nationalised industries, into a switch from a funded scheme, with the enormous funds that exist, to a pay-as-you-go system.
The transferability of pensions has also been mentioned. I hope that the Government will take a lead in this respect, because it is one of the most important factors affecting mobility of labour, and, in particular, mobility of people from the Civil Service to the private sector and back again. I should like much greater transfer of people into and out of public service. However, one of the great difficulties is the disparity in the terms and conditions of service and, above all, the difference in pension arrangements. I hope that the Government will give considerable thought to this subject to see whether greater transferability can be introduced.
That brings me to the private sector, where a considerable amount needs to be done to improve the pension arrangements that now exist. Index linking in public sector pension provision is not so much a reflection of the generosity that exists in the public sector as a reflection on the the poverty of the arrangements in the private sector. We should say that loud and clear. In some firms, the occupational pension schemes are good, but :in many they are abysmally bad. It is not good enough for employees in the private sector who are paying half or less of the contributions towards their pensions that public servants pay to complain about public sector pensions, if they are not also pressing for substantial increases in their own contributions and substantial improvements in their own pension schemes. I hope, therefore, that the message will go out loud and clear that we want an improvement in private sector pension schemes.
As has been said in the debate, part of the reason why this has become a less controversial subject is the decline in inflation and the introduction of index-linked bonds The criticism of the scale of the index-linked bonds—meaning that it is not possible for pension funds to improve schemes for their employees in the private sector—is not valid. I do not imagine that any fund manager would expect to have only index-linked bonds in his fund. It would be an extraordinary portfolio if it consisted of only one type of index-linked Government stock. However, I hope that provision will be expanded to make it possible for better provision to be made in the private sector.
I want to say a word about inflation and the impact that it has had. In 1971, when the scheme was introduced, it was the Government who decided to go for linking to the price index. The unions said that it should be linked to earnings. In all equity, that is probably what should happen, but at this stage, it would be wrong to make the change. Surely, the comparison between different sections of the community is the comparison with incomes, not necessarily the comparison with prices. In equity—a case could be made for it—the wealth-creating part of the community and the income it receives are surely what pensioners' incomes should be linked to.
That would get over the criticism made in the Scott report about the difficulties that the Government might have, should there be a crisis with sustained high inflation which made it impossible—purely in a mathematical sense—to continue the scheme. It would also be impossible in such circumstances to continue all the other index-linked income in terms of benefits. That is a horrific thought to contemplate, and the country would be in a 683 severe crisis if that were to happen. It is paradoxical that, in 1971, the unions were pressing for the index to be linked to pay, and not to prices.
I hope that today's debate and the Minister's statement will lead to the whole controversy over index-linked pensions being laid to rest. I hope that the House will have further debates on this subject because we shall face a substantial problem in the future arising from demographic changes. Britain will face an enormous burden in paying pensions to the ageing population. That is not just a problem for pensions, but for geriatric care and in other spheres as well. It is a major problem that will face future Governments and pension managers. The work force and the community must realise that if we are to have the sort of pensions that I and most hon. Members believe the community deserves, they will have to pay a substantial high price for them.
Other countries have already accepted that that should be the case and pay a much greater contribution towards their pension provision than we do. It is part of an educative process. Today's debate and the Scott report will help that. I hope that this will be the end of the great controversy over index-linked pensions and the beginning of the introduction of a pension provision for all sections of the community that will not give rise to the feeling of disenchantment and unfairness that has arisen in the past.
§ Mr. Nigel Forman (Carshalton)
I must be brief because I have a constituency engagement, but I am grateful to you, Mr. Deputy Speaker, for calling me.
The Scott report undoubtedly raises some important matters to which, as the hon. Member for Thornaby (Mr. Wrigglesworth) has said, the House will have to return. Not the least of the reasons why the Scott report is so important is the number of employees involved who find themselves with inflation-proof pensions of one kind or another. That must be stressed. It is prudent and right that those 5½ million or so people should be dealt with as fairly as possible while at the same time being fair to the rest of the community, particularly the taxpayers, as my hon. Friend the Member for Croydon, South (Sir W. Clark) said earlier.
The issue has undoubtedly given rise to a good deal of public concern, especially in the private sector and among the self-employed, where such benefits are not normally available. The disparities which have been brought out in the Scott report and, indeed, in the Megaw report which is also relevant, need no further emphasis from me. No one denies the existence and importance of the problems. The question is how best to deal with them.
To some extent the problems have been caused by the way in which comparability worked over the latter period during which it was in effect—both the general idea of comparability, which, as we saw, was often circular and indeed flawed in that respect, and also particular aspects of it. To mention only two, public sector comparisons were included in comparability exercises and small firms were insufficiently represented in those comparisons. I hope that the Minister now, or on some future occasion, will be able to tell the House something about the Government's attitude to those two aspects, both of which were touched on in the Megaw report.
684 There is also the underlying problem, as so many hon. Members have mentioned, of the background of inflation, which leads either to ever-rising contributions in an attempt to fund such pensions or an ever-increasing burden upon taxpayers and the private sector to do it another way or perhaps by a mixture of both methods. Clearly, whichever way it is done, the number one aspect of this matter is that the whole problem becomes more manageable as we get on top of the problem of inflation.
It is also well to remember that the whole idea of comparability was introduced into this realm by the Priestley commission in the early 1950s at a time when the inflation rate was—I checked—anything between 1.7 per cent. a year and 3.5 per cent. a year. Indeed, inflation was not significantly higher in the 1960s when so many of the present schemes were first introduced, running at perhaps 5 per cent. or 6 per cent. a year. It is against that background that we must view the then conventional wisdom, which is now somewhat dented in today's conventional wisdom. It is understandable that feelings of injustice and resentment should increase during the recent years of high inflation and deep recession. Therefore, it is important to see the problem against that background.
I should like to endorse some of the remarks that have been made about solutions. I agree with those of my hon. Friends who have stressed that the conquering of inflation is the answer to the problem and to coping with it adequately. However, some increase in contributions will be necessary by public sector employees. I note that in the Armed Forces and the police the total effective contributions are higher than the average contributions for the Civil Service. Therefore, it would be appropriate to move towards the 11 per cent. or 12 per cent. mark that is applicable in both those cases.
§ Mr. Wrigglesworth
Surely the hon. Gentleman recognises that those in the Armed Forces and the police have substantially better pensions and that is why they pay higher contributions.
§ Mr. Forman
I recognise that we must look at both sides of the account but most hon. Members would agree that the idea of increasing contributions in real terms should be considered.
The Minister referred to transparency. It would aid public understanding if we were to change to a system that gave gross pay with contributions as clear deductions from pay received. That would do much to improve public understanding and to increase public support for what is, after all, a widespread system. It would put public sector employees on the same footing as everyone else. I am also attracted by the idea—although I am not quite sure how it would work—of a cut-off point, or upper limit to public sector pension receipts. We could deal with the extreme cases and say that the pension concerned should not be higher than the current pay for the equivalent job. That anomaly could be dealt with. At any rate, we could say that the pension should not be higher than a stated rate of hyperinflation.
All those changes would be marginal and involve a modest reform of the system rather than a root and branch change. That must be the right approach. However, the Government should pay more attention to what Megaw calledan informed collective bargaining system685 with his various ideas for a pay information board and so on. That is wholly consistent with what we said in our manifesto in 1979. We said:There should also be more open and informed discussion of the Government's economic objectives …so that there is wider understanding of the consequences of unrealistic bargaining and industrial action.That applies to both the public and private sectors. We have a good pretext for returning to the subject because it is a matter that should concern the Government more in their wider economic policy.
In conclusion, these problems will diminish as we reduce inflation still further. I pay tribute to the Government's achievement in that respect. I hope that the Government will also pay attention to the vexed and important question of the transferability of occupational pensions in the private sector. Such transferability is long overdue and, as many hon. Members have said, the present situation hinders labour mobility. In addition, there is a strong argument in terms of equity and we should do something about transferability.
With those few provisos, I welcome what the Minister has said and I hope that the Government will proceed on that basis.
§ Mr. K. J. Woolmer (Batley and Morley)
I declare an interest as the parliamentary adviser to the Inland Revenue Staff Federation. In addition, I apologise to the Minister if, for reasons that he will understand, I have to leave the Chamber before the final speeches in this important debate.
First, I shall address my remarks to the specific question of public sector pensions. Secondly, I shall express some thoughts about the broader question that has gradually come to dominate the debate. It is clear that pensions are a vital part of people's lives and are regarded as such by those in both the public and private sectors.
If pensions fail to keep up with inflation—whether we call that indexing pensions or not—in stark terms it means that pensioners suffer falling living standards. Instead of talking about indexing or otherwise, we should reduce the argument to whether we want pensioners to suffer falling living standards or to sustain their already reduced living standards which result from retirement.
My next general observation is that pensioners cannot fight to protect themselves once they have retired, as people at work can do. If we in Parliament and through Governments do not take steps to set up pension systems that help to protect pensioners, they cannot protect themselves by industrial action. Inflation has to be brought well down if pensioners are not to have the fear of falling living standards, and I say that as an Opposition Member. Many people tend to think that inflation does not matter, but it does. People in work need to remind themselves that while in work they can battle for pay rises, but that once people have retired that option is no longer open to them.
If someone is unemployed, he is unable to think about getting a pension on top of the State pension. If the battle to beat inflation is being won at the cost of 4 million unemployed, we must remember that the 4 million unemployed will not be able to look forward to a high occupational pension, index-linked or not, because they have no jobs. The important question is not whether we want a low rate of inflation—obviously everyone 686 does—but how it can be achieved at an acceptable cost in terms of unemployment and the effect on the people concerned.
My right hon. Friend the Member for Swansea, West (Mr. Williams) rightly said that we must not forget the context in which the debate on index linking got going again about two years ago. There was the enormous personal involvement of the Prime Minister in an attack upon the Civil Service. When we come to the difficult question of negotiating and developing the changes towards which the Government are moving, it must be done only in an atmosphere of trust. It must be seen to be not another attack on the Civil Service but an attempt to get openness and fairness into the system. I think that that has been the broad trend of the contributions from both sides of the House today. That was not the atmosphere M which the Scott committee began its deliberations. Now, thank goodness, many months afterwards, we are able to make a calmer assessment of the position.
It should be made clear that the Scott report said that civil servants contribute about 8 per cent. of their pay towards their pensions and benefits. That is double the figure for other employees. The committee said that protecting pensions against inflation is a good and proper thing and that it should be the aim of Governments. It said that public sector pensions are better protected but that the answer is not to destroy the protection of public sector pensioners; it is to improve the position of private sector pensioners. Those were the broad conclusions of the committee.
It should be remembered that public sector pensioners—certainly civil servants—pay about 50 per cent. of the cost of their pension schemes, and that is significantly more than the average in the private sector. Secondly, the level of pensions obtained by public sector workers when they retire is very modest. Thirdly, any changes to be brought forward must be seen not as attacks on the Civil Service but as agreed and fair to all concerned. Any changes should be brought about by proper negotiation and not rushed through for any purpose. We must achieve a fair and reasonable arrangement.
If contributions were to be made explicit, with both pay and contributions rising, that must not be attacked as if large pay rises were being given to public sector workers and civil servants. It must not be used as another whipping boy to attack public sector workers. I noted the Minister' s remarks that it was to be the subject of consultation and discussion rather than a quick decision. I remind the House of the atmosphere in which the Scott committee first sat. It would not be surprising if public sector workers were afraid that making their contributions explicit, accompanied by an apparently significant pay rise, would be misinterpreted and used to attack them.
If contributions are to be raised—I use the word "if" advisedly because the report shows evidence that contributions in many sectors are already ample—I hope that in the negotiations the Minister will remember that there is an enormous variation in the percentage of the costs borne by different public sector workers. During the past two years they have borne the brunt of the Government's attempt, through what is virtually a pay policy, to reduce inflation by holding down public sector pay. It appears that there will be a third year of reduced living standards for civil servants and public sector workers. They will not take kindly to any suggestion that 687 their living standards should be further eroded by an attempt to claw back money for a new system of pension contributions.
In the brief time remaining to me, I shall return to the question of all pensions, whether public or private. My right hon. Friend the Member for Manchester, Openshaw (Mr. Morris) said that, ironically, many of those most vociferous in business circles, and sometimes in politics, were often those who ensured that they received a good pension. It ill becomes those at the top with good pension schemes, often negotiated by themselves, to criticise those who seek simply to protect themselves against inflation.
We are discussing the fairness of the public sector compared with the private sector. A report was published this week by the Occupational Pensions Board, Command No. 8649. I trust that it will be the subject of a full debate in the House. The Minister's written statement earlier this week was wholly inadequate and gives little comfort to those in the private sector. In no way will those employed in the private sector regard as fair the protection of the pensions of those employed in the public sector while pensions in the private sector remain in a state of chaos, unfair and, frankly, not understood by employees. They do not protect people against inflation. They are grossly unfair to the point of indecency for those who seek to change jobs. They are usually so complex that the average person simply does not understand his pension rights and how they will be affected by inflation during the 30 or 40 years that he must work before he retires.
The report of the Occupational Pensions Board, which is an essential other side of the coin to today's debate, points out all the inadequacies but lamely and tamely ends by saying that it does not recommend legislation but believes that we should seek to pressurise and advise the private sector pension schemes to make improvements.
We may resolve the details of getting a more open and fair system in the public sector as a result of the Scott report, but we shall not get public acceptance of that fairness unless we deal with the private sector schemes over the next few years. Without that, in two or three years, if there is another bout of inflation, people in the private sector will feel the same grievance and there will be the same whipping up of discontent by politicians and the media. We shall not solve anything, but there will be further problems.
I ask the Minister to give three assurances. The first is about public sector pensions. Will he give the assurance that he did not give in his speech—that the Government are committed to maintaining index linking? Secondly, will he give an assurance that the changes in openness to which he has alluded and any review of the adequacy of contributions will be done with the objective of having a fairer, open system rather than one that is seen to penalise the civil servants in an atmosphere of criticism of them?
Thirdly, although the Minister himself cannot give me the assurance that I seek, will he draw to the attention of the Secretary of State for Social Services the vital relationship between the report of the Occupational Pensions Board and private sector pensions and the need for the House to debate fully that side of the coin so that those in the private sector who legitimately wish their pension schemes to be improved can be protected and can feel that they will get a fair deal, just as the public sector workers want a fair deal?
§ Mr. Chris Patten (Bath)
The House always listens to the hon. Member for Batley and Morley (Mr. Woolmer) with much respect and interest. I always think of him as the acceptable face of the Labour Party. I do not want to damage irredeemably his chances in Batley and Morley, but I must tell him that we always listen to his commonsense and intelligent speeches with considerable interest. His speech was typical of the debate so far.
The debate was opened by a good speech by my hon. Friend the Minister of State. My compliment to him may be lethal, but I shall make it for what it is worth. His contribution to the debate was outstanding. I listened with interest to the speeches made by my hon. Friends the Members for Carshalton (Mr. Forman) and Brentwood and Ongar (Mr. McCrindle)—the latter as sensible and informed as his contributions to such discussions invariably are.
One of the distinguishing characteristics of the debate was the bipartisan argument by the right hon. Member for Swansea, West (Mr. Williams). I think that we can excuse all the adjectives. The right hon. Gentleman had 20 months to think of them. I understand his frustration at not being able to deliver them before. However, by and large he seemed to say that the Labour Front Bench endorsed my hon. Friend's speech and his sentiments. It will be extremely welcome to my hon. Friend and the rest of us that the Labour Party is right behind the Treasury line.
The other distinguishing characteristic of the debate was the conversion of my hon. Friend the Member for Croydon, South (Sir W. Clark) to the principle of index linking. I am sorry that he is not here to hear my glittering tribute to him. Although he had reservations about how far it should run, he put himself squarely behind the principle of index linking, which shows an intellectual flexibility that perhaps we should all at times follow. We may sometimes tend to be too ideologically hidebound.
Even though the House is not packed today, few issues in past years have raised the political temperature as much as the question of public service pensions and index linking. The heat generated is the result of our economic decline over the past decade or two and of the fourfold increase in prices over the past decade. Economic failure on that scale has profound social and political consequences.
Civil servants have for long been the butt of music hall jokes and at times the butt, too, of ill-natured resentment. Those who man the bureaucracy that the rest of us will should not perhaps expect to win popularity contests, but it is disturbing that the relationship between the workers in the State and in the private sectors grows increasingly and damagingly bitter. They glower at each other over the barricades of comparability studies, index-linked pensions and relative—I repeat, "relative"—job security.
My hon. Friend the Member for Croydon, South talked about job security in the Civil Service. In my constituency over the past three or four years, I have seen a 10 per cent. cut in the number of civil servants, and admittedly more in the private sector. I hope that in the future we shall not see too many more jobs lost in the private sector. That is the job security I am after.
The situation is made worse by attacks on the notion of public service. Although there are not many militants in the Civil Service, those militants working for the State have been seeing it as the best way to prosecute the class 689 war. They have tried to politicise the idea of public service. The aim is made easier by the crude way in which the dependence of the public sector on the wealth-creating private sector is occasionally portrayed. Sir Bernard Scott knows a great deal more about wealth creation in the private sector than the rest of us put together.
It is unfortunate when people talk of the State as a gigantic incubus on the rest of society, as though its services provided no benefits and were a brake on progress. In a mixed economy, one must establish financial and philosophical limits on the State's activities, but much of what the State does is what we determine that it should do to improve the quality of our lives individually and collectively. Much of what it does also makes our economy more efficient, not less.
During the Falklands campaign, some of my constituents for the first time discovered what the Ministry of Defence civil servants in the city of Bath did. I hope that that magnificent work will have put to flight some of the prejudices about their activities.
I am a Tory, not a nineteenth century Liberal—a term that has come into recent use thanks to my right hon. Friend the Secretary of State for Defence—and as such I have no hang-ups about the role of the State. There is no antithesis between the State and the individual. That is another reason, apart from the fact that I am reluctant to see the community divided unnecessarily, why I do not care for some of the criticism, that has occasionally bordered on abuse, of civil servants. That has more to do with Poujadism than Conservatism.
It is important to set the argument about indexing in that broader context before I deal with some misconceptions and suggest some improvements. The first misconception, referred to by my hon. Friend the Member for Brentwood and Ongar, is that indexing replaced something that was satisfactory. That is not true, as can be seen from the Second Reading debate on the Pensions (Increase) Act 1971.
I am sorry that my hon. Friend the Member for Croydon, South, who has returned to his place, missed the glittering compliment that I paid to him earlier—
§ Mr. Patten
—but he can read it in Hansard. I shall try to manoeuvre my peroration so that I can repeat the compliment.
The Second Reading debate began with a speech by the Parliamentary Secretary to the late and lamented Civil Service Department. He described the Bill as providinga far-reaching and overdue reform".The Bill put pensions on an equitable footing, thus ending anomaly and inequity. The Parliamentary Secretary went on:To those whose first reaction is that we are doing too much, I would at this stage say that the Government believe in being a good employer.That is an admirable sentiment. He went on to say that a good pension system is one of the compensations of public service. Again, I agree with that. He said that the Bill spared public pensionersthe crueller burden of … lobbying to preserve their living standards.He said that it would halt the downward escalator in public pensions.
The Parliamentary Secretary, who is now Secretary of State for Transport, was followed by the then Financial Secretary to the Treasury, who said that the Bill would 690 honour the pledge given by the Conservative Party in Opposition two years before. Long-delayed justice was just around the corner. He said that the Bill was a major milestone in the long and chequered history of public service pensions. He concluded:Our citizens will gladly shoulder the cost of meeting this obligation to those whose lives have been given to the public service."—[Official Report, 25 May 1971; Vol. 818, c. 239℃93.]When the Minister, who is now the Secretary of State for Industry, sat down, the House proceeded, without a Division on the Bill to debate the imposition of purchase tax on yoghurt.
The previous system of adjusting public service pensions was arbitrary, anomalous and unfair. It encouraged the least attractive pressure group politics and we should have nothing to do with it in future.
Another misconception is that we are talking only about the Civil Service. The figures were given in the February debate on that subject and again today by my hon. Friend the Minister of those who are affected, including the Armed Forces, nurses, firemen, postmen and policemen—even the policemen who heckled my right hon. Friend the Home Secretary the other day. The vast majority of those public servants receive modest pensions. Only a few public servants receive king's ransom pensions. I am surprised that some of my hon. Friends say that we should consider limiting high pensions. It does not square with what they say about high tax rates and reward for effort. There are some surprising egalitarians on this issue. A more reasonable target for their ire would be the remarkable rapidity with which some highly paid public servants land Victoria plum jobs not unrelated to their activities in the public service within a short time of retiring. Another target are former Commissioners of Police of the Metropolis who have hardly retired before they are writing their memoirs in the Sunday newspapers about sensitive matters that have just been their responsibility in the public domain. I shall not go any further down that rather alluring path. I merely offer those as more sensible targets for the concern and consternation of the House.
The most important misconception of all when discussing this issue is that it is indexing that is responsible for the increased cost of public service pensions. It is inflation that is responsible. When we consider the rise in prices since the 1970s it is inconceivable, as my hon. Friend the Minister said during the February debate, that we should not have increased pensions substantially in the intervening decade. The problem arises from inflation and not indexing.
Against that background the Scott report is right to reject the idea of abandoning indexing. It is equally right to say that we must examine the contributions made both directly and indirectly to ensure that they reflect as closely as possible the costs and benefits of public service pensions. I am delighted with 'what my hon. Friend had to say about that at the beginning of the debate.
The remarks set out in the Megaw report on this subject are exceptionally wise. It is clearly unfair to everybody,, not least civil servants, when we do not know precisely what contribution they are making to their pensions. I am delighted that my hon. Friend has entered into a commitment on that I am sure that the Minister will want to make a statement to a much fuller House, but I am sure also that we shall want at some stage to hear from him a 691 recommitment of the Government to the central recommendations of the Scott report on future indexing in the public service.
If we were ever to contemplate going further—on this issue I rather agree with my hon. Friend the Member for Brentwood and Ongar—I think that only one limitation would be reasonable, and that would be to relate the inflation rate against which we were prepared to protect and guarantee pensions to the inflation rate which is assumed by the Government Actuary in making his valuation.
When looking to the future and not retrospectively, it does not seem unreasonable that the Government Actuary's views about the coming inflation rate might at least be related, if we felt obliged to impose a limit, to the inflation rate against which we were prepared to protect. That is surely the only way in which we can ever work towards a limitation. But on balance, I think that the present arrangement is more or less satisfactory.
§ Mr. Nicholas Baker (Dorset, South)
Perhaps my hon. Friend has misrepresented the argument that pensions at the top level might be traded off against egalitarianism. I have doubts about how that would work but it is derived from the idea that in a society which is undergoing inflation and economic decline we should try, God help us, to spread the misery equally. Against that background there is perhaps some justification and an element of fairness in saying that pensioners at the highest level should take a share as well.
§ Mr. Patten
My hon. Friend will appreciate that those in receipt of larger pensions pay tax. I do not see how my hon. Friend's proposition is any different from that which one hears periodically from Labour Members whenever the judges, senior civil servants and senior public officials are awarded a pay increase. It is suggested that it is wrong that someone should be given an increase of, say, 4 per cent. when he is already earning £30,000. It is difficult to argue that those with talent and ability should, in addition to meeting the burden of the tax system, make the further gestures that my hon. Friend has suggested in the interests of fairness. I am rather in favour of fairness—in politics it would be difficult to get elected if one were not—but I think that my hon. Friend presses the point a little too far.
My final point relates to an earlier comment of my hon. Friend the Member for Carshalton (Mr. Forman). I believe that we should take advantage of the Scott and Megaw reports to try to rescue the whole notion of public service in this country. We need new institutional arrangements for public sector pay which will inspire confidence because they are seen to be stable and fair. Changes on that front, plus a new commitment on indexed pensions, could be seen as part of a wider bargain covering no-strike agreements for some core workers in the public sector as well as enforceable arbitration in some areas.
In recent years, all Governments after two or three years of office have seen the existing pay bargaining machinery in the public sector come rattling down around their ears. With a little imagination and political generosity, the Government now have the opportunity to pick up the whole shambles and to set it down on more secure and sensible foundations. I can think of no one better able to do that than my hon. Friend the Minister of State.
692 I repeat that I should like to see public sector pensions form part of a new settlement on pay and related matters in the public sector. It used to be recognised as one of the obligations that the State felt towards those who worked for it, often for less than the market would bear, that public service pensions should be indexed. It was a sign that we regarded the public service as more than a job category and I do not believe that it is wholly romantic to wish to return to that state of affairs. The only alternative seems to be, rather alarmingly, to play into the hands of the militants and to destroy the idea of public service once and for all, which would be damaging for all of us.
§ Mr. Richard Wainwright (Colne Valley)
The dabate has included admirable speeches, such as that of the hon. Member for Bath (Mr. Patten) and has benefited greatly from being one of the very rare occasions when the House can debate the conditions of employment throughout the whole public service. All too often, the government of the country and the procedures of the House are muddled due to the deliberate and woeful fragmentation of pay determination procedures throughout the public service. Thus, there is discrimination between, for example, the settlement for police and the settlement proposed for the Health Service workers. The Liberal Party has long campaigned, and pressed in its evidence to Megaw, for a common set of pay determination procedures throughout the public service or, at any rate, throughout the centrally organised public service.
I am glad that the debate has not continued in the very low key that the Minister—naturally, in order to spare the Prime Minister embarrassment—tried to adopt at the beginning. In doing so, he was led to make absurdly complacent remarks about the possibilities for inflation rates in the future, as though the present most welcome reducing rate would continue almost indefinitely. As we all know, because that reduction is simply the result of a deliberately contrived and savage deflation, not of any improvement in our structures and economic framework, the signs are ominous that, after falling for a while next year, the rate of inflation will accelerate. So much capacity has been put out of action and there has been so much contraction on the supply side that, as soon as there is a recovery in demand, there will be shortages of both materials and skills. Moreover, the unions are naturally waiting for the right climate to take their revenge for the way in which they have been treated in the past three years. It is, therefore, most unwise to suggest that the problem of pensions and inflation has become much smaller because, it is alleged, we can look forward to very low rates of inflation in the future. We are enjoying only a temporary drop in the inflation rate.
I am sorry that a Minister of the standing of the hon. Member for Brentford and Isleworth (Mr. Hayhoe) should have obeyed what appears to be the stern command from Downing Street that every Minister must take part in the campaign to scare the British people about the alleged burden of the Welfare State. The Minister referred to the ever-growing burden of the elderly. We should count our blessings. One is that, whereas for about 30 years we have had an explosive growth in the elderly population, who have to be properly looked after, this year we are entering a period when a sparse generation, born after the First World War, enters retirement. We can look forward to fewer people entering retirement for about the next 20 693 years. It is time that the Government stopped trying to scare the British people with talk of an ever-increasing burden. I acknowledge, thankfully, that old people live longer, and will no doubt continue to do so while we maintain our admirable National Health Service.
The Scott report and Megaw's comments on it are welcomed by the Liberal Party. I am delighted that the Minister spoke favourably about the proposal to make Civil Service pensions contributory, because the present system obscures public understanding and is responsible, as has been pointed out, for a great deal of misunderstanding that could have been avoided.
I should like to refer to one or two details. Megaw fell from its general standard of making rigorous proposals when it dealt with the vexed question of the Government Actuary's computations. Megaw says that the Government Actuaryshould be required to discuss his assumptions with the actuarial profession outside government and with economic and commercial opinion.Those are admirable sentiments but they seem to be hopelessly vague. They could be satisfied by the most routine, dismissive conversations if the Government Actuary so wished.
The Liberal Party would like to see a standing commission as independent as the judiciary—preferably appointed by an electoral college than by the Government—as the arbitration court for all aspects of public service pay. We believe that the Government Actuary should have to expose and defend his proposals before such an independent standing commission. With the greatest respect to the Government Actuary's integrity and professional skill, it seems that his calculations and prophesies have gone astray recently. We should like to tighten up the Megaw committee's proposal, and ensure that in future the Government Actuary's work is subject to the most rigorous examination.
It is important to bring the private sector to the same standard of protection against inflation.
That brings us to the question of the inequitable freezing of private pensions and their woeful lack of transferability. The Minister was weak on that point. As Conservative Members have said, it is hypocrisy for the Government simply to admonish those responsible for private sector pension schemes and to say that they must get on, establish transferability and get rid of the disgraceful incidence of pensions being frozen at a nugatory sum, which bears no relation to our inflated currency in a person's late middle life.
A view held widely in the pensions industry and among actuaries is that the necessary reform must be assisted by the Government. It is no good expecting the private sector, the pension and insurance companies, to enact this urgent reform without Government assistance to cut the many Gordian knots. For years some of the best brains in the actuarial profession, with a strong professional sense of duty, have been engaged in trying to improve transferability and to get rid of the disgraceful inequities. They have come up against Gordian knots which only the Government can cut.
I hope that the Minister will acknowledge that, in his admirable wish to bring the private sector more closely into line with the public pension system, the Government must stand ready to assist the industry to solve the vexed questions of transferability and inadequate frozen pensions.
694 With those qualifications, I welcome the Minister's statement. I hope that the Government firm up their attitude to making the Civil Service pension scheme contributory. When that is done, the British public, with their sense of fairness, will acknowledge that conditions for civil servants are nothing more than they deserve.
Sir Brandon Whys Williams (Kensington)
The House should congratulate Sir Bernard Scott on his report. It is courageous and perceptive and raises a number of points of which we must take note. It compares extremely favourably with the Brimelow report which followed a few months later and which is relatively spineless and lacking in grasp of the underlying moral principles involved.
The public are concerned about the provision for retirement as a whole, and particularly about occupational pension schemes. The provisions under the occupational pension schemes must be considered in the context of the transfer of resources between social groups. The major difficulty is the depreciation of the currency.
I warmly congratulate my right hon. Friends on their success in bringing down the rate at which the paper currency is depreciating to about 5 per cent. and, we hope, to even less in the coining year; but we must recognise that the pound is still falling at about twice the real rate of interest. It is not possible to make long-term contracts on the basis of the paper currency without using some other form of guarantee to protect the parties to the contracts.
A person starting employment today and joining an occupational pension scheme may still be enjoying the benefit of that contract in 60 years' time. Even the mast ambitious person, hoping to stabilise our paper currency, must realise that other guarantees are needed because of the long span of time over which the contracts stretch.
Inflation is certainly a serious matter, but there are other problems. There is no doubt that the public are concerned about the supervision and operation of the trustees of private and nationalised industry funds who have enormous resources and great power over the economy as investors. They also have substantial obligations to the beneficiaries which are not always clearly defined.
In the private sector, the members feel that they are paying good money into the scheme and getting bad money out. They a:-e uncertain about the rights to uprating after the award of the pension and concerned about the lack of protection for early leavers. That has been a particular hobby of mine since my maiden speech in the House in 1968 on the subject of the transferability of pension rights.
In the public sector, it is obvious that the lack of clarity as to which schemes are contributory and which are noncontributory and the amount that the employers—that is, I suppose, the taxpayers—and the employees put in and whether the systems are based on conventional funding principles—on repartition or on some other basis—causes great anxiety and confusion, as we saw from the reaction of the police to the perfectly proper suggestion that they should contribute more to their retirement provision. Moreover, the application of the retail prices index Io public sector pensions is having a divisive and dangerous effect. It has created a sort of Shangri-la, in which public sector pensioners are able to draw apart from the rest of society and live in a protected world which seems to have little to do with reality or with the difficulties that are faced by the rest of the population. I shall come back to indexation and the type of index in a moment.
695 It is important for the Government to establish the principles on which occupational pension schemes are founded in both the public and private sectors, so as to minimise the need for discretion in the operation of these schemes in future, and to make them proof against inflation in a manner which is realistic and not impossible of achievement in the long run.
I shall summarise briefly the four types of retirement benefit. First, there are the national insurance pensions and supplementary benefits for those of pension age. They constitute a basic income guarantee on which many people depend in retirement, because their occupational pension provision is so small.
Secondly, there is the obligatory savings element in private and public sector schemes, which produces the money purchase annuity. I am anxious to distinguish between the obligatory contributions that employers and employees make and the provision of discretionary and fringe benefits which are also important in retirement provision.
Thirdly, there are personal savings of all kinds, some of them flowing into tax-assisted systems, such as building societies, and other investment funds which have tax advantages. They are particularly important for the self-employed.
Fourthly, there are employers' special terms of contract, particularly the final salary bonus inducement, which is often confused with employers' other statutory obligations to employees, with fatal results.
We need to decide what are the appropriate tax concessions that the Government should promote to assist retirement provision, and what are the statutory obligations of the various parties in the private sector.
On national insurance benefits and supplementary benefits, the time has come to recognise that national insurance has become a complete farce. There is no relationship between entitlement to benefits and the contributions record. National insurance and supplementary benefits for people of retirement age should be amalgamated and turned into a basic income guarantee—what I call "the BIG idea"—without counting contributions or applying earnings rules. We should underwrite the living standards of elderly people by a rudimentary redistribution of income from workers to the old to provide them with a secure minumum standard of life.
There is an obligatory savings element in the public and private occupational schemes. A statutory deferment of pay is made to provide an earnings-related retirement income, or, in some cases, a lump sum is payable at a defined age as part of the options in the scheme.
If we accept that the occupational pension entitlement is a form of deferred pay, what are the principles on which that pay is to be administered during the period in which it is withheld from the employee for his own ultimate benefit? I have come to the clear conclusion that the Social Security Pensions Act 1975 does not provide a satisfactory basis for the control of such funds and will have to be significantly revised as soon as possible.
In the public and private sector schemes, the employee's and employer's statutory contributions should be clearly identifiable. The personal entitlement as it accrues should be possible to determine and be seen to be secure. Hence, the private scheme should be fully funded 696 with regard to the career earnings-related contributions of the employees. Employers who contract out must be prepared to give that guarantee.
I realise that that will not be possible immediately in many schemes which are not fully funded. However, I feel a sense of considerable anxiety, particularly in the current economic situation, because there are many occupational pension schemes which cannot at present meet their commitments. The trustees should be advised to correct that deficiency as quickly as possible. I emphasise that the money purchase element in the build-up of the employee's entitlement can legitimately be separated from the fringe benefits or final salary commitment which the employer normally includes in private schemes according, to a great extent, to his own discretion.
I know that it is difficult for private schemes to give clarity and certainty to the employees, but it is not impossible, and we should hasten to that objective. We must distinguish between the obligatory savings element and the discretionary bonus which is included in almost all occupational schemes. The rules that we apply to the different elements can, quite properly, differ.
The advantage of the transparency of occupational pension schemes is the easy handling of transfers between one fund and another. I have said many times that the preservation of the employee's benefit in the hands of the trustees of his previous employer is not enough. We must allow employees moving between one employment and another to remove their entitlement entirely from the first employer's fund. They should be able, if they wish, to add it to their new employer's fund, or alternatively, to transfer it to one of the tax-approved self-employment schemes, which should be freely accessible to anyone who wishes to put his employment savings into retirement provision on a reasonable basis.
Early retirement is a subject which every scheme will now have to tackle and to which it will have to decide its attitude for future years. For that matter, late retirement must be considered too. I do not insist that we should look only at early retirement. The way in which these options are dealt with in occupational schemes must be founded on actuarial principles, not on the discretion of the employer or the trust's management.
In the public sector the so-called non-contributory schemes should be opened up to scrutiny and the employee's contribution clearly defined. I warmly welcome my hon. Friend's suggestion that all the public sector schemes should be put on a contributory basis. The finance of such schemes should be transparent and comprehensible. There is no such thing as a free lunch, and there is no such thing as a non-contributory pension scheme. There are only schemes where it is impossible to determine precisely what element of pay is being retained for the employee's ultimate benefit and what is being handed to him as the years go by. I am sure that transparency will be welcomed by the public service, and I hope that the Government will press on as quickly as possible with clarifying the mutual obligations of the taxpayers and the employees in all public sector schemes.
I shall touch briefly on some of the topical issues that are important in relation to the management of occupational pension funds. First, it is important that they should be put on to a unisex basis. It is not right that there should be separate treatment of men and women in such schemes. However, one immediately runs into the problem of the different longevity of the sexes. Men and 697 women may have precisely the same earnings records and work for precisely the same number of years—perhaps for the same employer—yet, on the date of awarding their pension benefit when they retire, the employer will obviously have different commitments, because the female may reasonably be expected to live for some years longer than the male employee.
That problem can be, and often is, remedied—perhaps unconsciously—by awarding a benefit to the employee's surviving spouse. For the most part, men will leave widows behind, but retired women are relatively unlikely to leave widowers behind. Therefore, what one sex gains on the swings it loses on the roundabouts. An adjustment on these lines is possible in actuarial terms that would put pensions on a unisex basis. I strongly recommend that that should be insisted upon.
I turn to the age of retirement. I am sorry that I was forced to leave the Social Services Select Committee just as it was beginning to consider the drafts of its important report, which is expected within a few weeks. Where early retirement is a feature, the occupational fund should adjust its payments and honour its obligations on a strictly actuarial basis. A discretionary element should not normally come into it. The actuarial basis is fair to the employee and is also fair to the other employees who have claims on the same fund. In the meantime, the nation as a whole should be responsible for maintaining a basic income guarantee for those who, for one reason or another, are obliged to accept early retirement. We owe them a minimum income in retirement if they are forced to withdraw early from employment because of personal circumstances or the economic circumstances of today just as we owe it to those who remain in work until the normal retirement age.
Indexation is by far the most important of the topical issues that represent problems for the occupational pension movement. We tend to use the word "indexation" without discriminating between the different types of index that can be applied. There are malignant and benign indices. A malignant index is one which is likely, over the passage of time, to destroy one or other of the partners to the transaction. Either the borrower or the lender is likely to be destroyed by the application of a malignant index. The retail prices index is malignant, because it is beyond the control of the parties and may vary unpredictably in the course of time. For example, we do not know what will happen to energy prices and we cannot predict what a future Government might do to the RPI through changes in taxation. It is a false protection to either of the parties to adopt indexation on the basis of the RPI, because no one can undertake to fulfil such obligations over the course of time. Not even the taxpayer can safely undertake to do that.
Therefore, we must look for a benign index that is fair to both parties and is likely to remain so over the passage of time. The public sector should now abandon indexation through the RPI for its pensioners and adopt the gross national product instead. The resources available to honour the taxpayers' commitment to those in the public sector who are now in retirement are found in the national economy and its achievements. We cannot, and should not, offer more than that. Pensioners should not be put into a separate preserve outside the rest of the community; they should travel along with the rest of us, sharing the 698 economy's ups and downs. That would end the widespread resentment about the way in which public sector pensioners now appear to belong to a privileged caste.
Scott was right to say that we must seek to bring the private sector schemes up to the level of the State schemes and not try to reduce the State schemes to what private schemes can manage. Private schemes cannot and should not be asked to meet the RPI, but they must have a realistic target—a benign index—for the relationship between the employees and the fund over the passage of time.
The minimum guarantee—that is, the money purchase or career earnings record of the employee—should also be related to the GNP in the private sector. If the trust fund is prudent—investment is now possible in Government-indexed stocks—that commitment is possible. What I say about the RPI applies also to my opinion about the Government's issues of indexed stocks. I think it is a most unwise commitment for the taxpayer to make. The taxpayer should undertake to give a share of the economy to the investor year by year which is related to its performance. There, too, the Government ought to be issuing GNP-related stocks, not RPI-related stocks; but that is a separate issue.
With regard to personal saving schemes, it is a good thing that indexed Government bonds are available, for example, to assist n the provision of schemes for the self-employed. They make it possible for the private sector to give reliable guarantees over time, and they should be encouraged. Those who wish to leave an occupational scheme and to put their accrued assets into a self-employed type scheme should have no restrictions on their doing so, provided that the elementary precaution is taken of preventing tax frauds and insincere investment stunts simply to take advantage of the tax concessions.
As to the employer's special terms of contract, it seems to me that in regard to the final salary bonus inducement and the other fringe benefits in private sector schemes, particularly for very senior employees of all kinds, there should be some sort of statutory protection for the employee over the passage of time. The employee must know what his rights are if the fund is operated in a way which does not seem to him to be in accordance with fair play. In private or occupational schemes it is the fund's performance which should be the measure of the employer's responsibility.
In the public sector, the final salary component of the occupational pensioner's entitlement should once again be the GNP; but in the private sector all the employer can offer is a guarantee that the fund will be managed properly and prudently and that the employees will have the benefit of its performance, whatever it may be.
I have sought briefly to look for the moral principles underlying the relationships between the parties. The relationships between the different age groups in a property-owning democracy should be founded on mutual respect for property rights and the acceptance of established moral obligations. Once the basic rules have been laid down and have become the foundation of normal practice, the room for discretionary interference by employers, trustees, beneficiaries and, most particularly, by politicians, should be reduced to vanishing point.
§ Mr. Deputy Speaker(Mr. Bernard Weatherill)
Order. This has been an interesting and valuable debate and I am anxious that everyone who wishes to take part should be able to do so. I remind the House that the debate 699 has to end at 2.30 pm and that the Minister will wish to reply at about 2.15 pm. I hope that the two remaining speakers will bear that in mind.
§ Mr. Alfred Dubs (Battersea, South)
I declare an interest as parliamentary adviser to the Society of Civil and Public Servants.
One theme that has run through the debate has been that pensioners do not cause inflation and that they are not responsible for the roots of the inflation that we have had in recent years. Therefore, I agree with the view of those hon. Members who have advocated that we should move in the direction of inflation proofing of all pensions, preferably by index linking.
I was interested in the comment of the hon. Member for Kensington (Sir B. Rhys Williams) that linkage should preferably be with GNP rather than with RPI. If we move to the position suggested by some Conservative Members of having zero inflation—which I believe to be most unlikely—and if that were to coincide with a small rate of economic growth, clearly pensioners would become increasingly disadvantaged relative to earners if the linkage with the RPI remained.
In fairness to pensioners, we should say that if there was economic growth and a low rate of inflation their pensions should reflect the rate of economic growth. On the other hand, if we had no economic growth but a fairly high rate of inflation, it would be wrong for any pensioner to have a lower living standard. I am uncertain about whether we should move towards GNP or RPI. I should like the relationship to be with whichever was the more favourable to pensioners.
§ Mr. Dubs
I must tell Conservative Members that that policy applied to basic pensions for many years until the Government reneged on it.
On a more encouraging note, I listened carefully to what the Minister said and took comfort from his views on index linking of pensions in the public sector. Although he hedged it about a little, I hope that his views represented a clear statement of Government policy and that index linking of public sector pensions will no longer be a matter of party political controversy.
The Minister made a rather puzzling statement when he said that pensions represented a transfer of income between generations. I am bound to take issue with that. The level of pensions as determined represents a transfer of resources within one generation rather than a transfer of income between generations. If we decided today that all pensions should be increased, that would represent a transfer of resources from earners to pensioners rather than a transfer of income between generations. However, that may be more a theoretical rather than a practical point.
The Minister asked for comments about making Civil Service pensions positively and explicitly contributory. There is much to be said for that. It would increase the public's understanding of the way in which Civil Service pensions operate, provided that the transfer from the present arrangement to the possible new arrangement is 700 not to the disadvantage of civil servants and does not encourage the press or public to feel that civil servants pay has thereby been increased.
I wish to make two specific points. The first, mentioned by previous speakers, is the difficulty of transferring from job to job from the private to the public sector, and vice versa, because of the different nature of pension arrangements pertaining to the two sectors. Many years ago the transfer from the private sector to the public sector meant a loss of accrued pension rights of 16 years down to six years. That reflected the different nature of the two pension schemes. It was, therefore, welcome to find that when I moved from the public sector to the House—which has a public sector scheme—the transition was easy.
One point that has come out clearly in the debate is that additional to anything that we do about public sector pensions is the need to examine transferability and the whole range of pensions. There is a serious impediment to job transfer in the loss that one must suffer when moving between the private and public sectors, although not within the public sector itself. I agree with the views of other hon. Members that it may be too difficult for the private sector schemes to adjust accordingly. I look to a lead from the Government on how increased mobility can be achieved.
Another difficulty about some private sector schemes compared with public sector schemes is that if an individual in a private sector scheme loses his job he has no protection for his pension against inflation between the date of losing his job and the date when his retirement would have begun and he would have received his pension. There is another form of linkage in most public sector and private sector schemes while one is working, in that the pension is linked to the salary in the last few years of work. Therefore, with increasing unemployment there is an element of unfairness to members of private sector schemes. If they lose their jobs, they suffer harshly.
I should have thought that it would be right to ask the Government to listen to the debate not only as regards public sector pensions but as regards the overlap between the public sector and the private sector, the difficulties of mobility and the other problems.
Another matter that has not been referred to is part-time employees. The Minister said that there was a range of different public sector pension schemes. Some—I refer particularly to the one covering local government employees—do not allow part-time employees to participate in superannuation or pension schemes. That is an anomaly which should be put right.
At least 10 years ago there was an agreement in principle that public sector workers who were part-time employees should move towards being covered by pension schemes. It took until the autumn of 1980 for the detailed regulations to be drafted. They were ready to be signed by the Secretary of State for the Environment. They would have allowed part-time employees who worked for at least 15 hours a week to join the scheme covering local government workers. There was a provision to backdate entry to April 1974.
In July 1980 the Association of County Councils wrote to the Secretary of State asking him to delay implementing the regulation covering part-time employees on the ground of cost. The association is represented on the United Kingdom steering committee for superannuation, which is the employers' side of the joint consultative machinery. The Secretary of State took note of the views of the association, although the steering committee all along had 701 been in favour of covering part-time employees. The Secretary of State said that he would delay the decision until the Government had decided their attitude to the Scott report. Now that we have had a statement from the Minister about the Government's attitude to that report, it is right that we should ask for a further statement about the Government's intentions on part-time employees in the public sector who are not covered by a pension scheme.
§ Mr. John G. Blackburn (Dudley, West)
I declare an interest, in that I am the parliamentary adviser to the National Association of Retired Police Officers, which covers the gamut of chief constables to constables across England and Wales.
I welcome the opportunity that has been presented to the House to debate the report, particularly because most of the prompting over the past 18 months has come from Conservative Members. On this occasion my gallant colleague, my hon. Friend the Member for Croydon, South (Sir W. Clark) has led the battle for the debate today.
I pay a warm and generous tribute to my hon. Friend the Minister. He has given the House and pensioners throughout the country a clear understanding of the Government's intentions on the Scott report. The Minister has honourably said that he is prepared to consider further representations before coming to a final decision. There is broad acceptance of the fact that the disparity of treatment between the public and private sectors should be harmonised by improving the private sector arrangements.
The second finding of the Scott report, the conclusion of which is at paragraph 41 on page 9, is that when considering a pension scheme it is foolish to be influenced by short-term considerations, especially at a time of high inflation. The current arrangements were started by the Pensions (Increase) Act 1971, the passing of which, my history masters tell me, was acquiesced in by all parties. The theme behind the debate was to bring us into line with most Western countries, especially in three aspects—to link public service pensions with prices, pay or position. That was part of the theme that the hon. Member for Battersea, South (Mr. Dubs) admirably presented.
The right hon. Member for Swansea, West (Mr. Williams) made a good speech. He pointed out that the candidates in the 1979 general election were asked about their views on pension arrangements. My response was that index linking for public sector pensions should not be interfered with, although the funding deserved attention. I hold to that view.
We have not gone as far as we should over equality and fairness of contributions in the public sector. We have had contributions to the debate of a high order on pension arrangements and contributions, but we have heard nothing of life expectancy that they have to sustain. I question the introduction of statutory instrument 1151 on 10 August. It increased male police officers' pension contributions from 7 per cent. to 11 per cent. and female officers' contributions from 5 per cent. to 8 per cent. A police officer entering the service on 1 September this year, who never gained promotion and who never had a pay award, would, at present rates, contribute £32,000 for a pension that on average should sustain him for seven years after thirty years' service.
702 I accept that there must be a cut-off point. Again, the Front Bench should consider that; and perhaps when the matter is debated in the future, there will be positive proposals.
The House is not crowded today, but those hon. Members who are here have played an important part in creating a social history for pensions. The Scott report will have a much wider impact than on the Civil Service. From my research, I know that about 10 million people have a direct interest either as pensioners or as potential recipients. Paragraph 41 of the report contains the key to the successful introduction and continuation of pensions. It has been stressed many times that the great benefits that can be received must be achieved within manageable proportions of inflation. Inflation destroys nations and society like an invading army. The greatest blessing that a Government could give Britain is low inflation. It would be a great blessing to pensioners, the sick, the disabled and to those on fixed incomes. With all the power at my command, although very little time, I urge the Government to accept the findings of the Scott report and to hold fast to the principle that was established in the Pensions (Increase) Act 1971. It was a covenant of honour made between the House and the British pensioner. To that end, it must be honoured. I support the Scott report and commend it to the House.
§ 2.3 pm
§ Mr. Alan Williams
I did not wish to intervene again because I left the Minister in no doubt about my views. However, I must congratulate Sir Bernard Scott on producing an independent report that has led to a shift of policy affecting more than 7 million people. However, his independence may ensure that he will never again serve on a public body set up by the Government.
I realise that not all points can be covered today and that the Minister may wish to write to individual hon. Members, especially about local government. There is also anxiety about the part-time worker. If the Minister can answer now, I should be glad, but if not, perhaps he will write to me.
In my initial speech I said that we would look for an assurance from the Government—I think that we had it virtually in the Minister's opening remarks—that they accept the continuation of indexed pensions. I ask the hon. Gentleman to say when he will introduce his propositions for new contribution levels if he has such propositions in mind.
During the debate I have been asked whether a Labour Government would favour the encouragement of the private sector in matching the provision of index-linked pensions. We would, and we would be glad to have discussions with the providing organisations to ascertain what could be done to facilitate such an approach.
§ Sir William Clark
Does that mean that a Labour Government would continue or accelerate the issue of index-linked bonds?
§ Mr. Williams
I am not the Shadow Chancellor of the Exchequer and it is not my remit to make a positive statement. As I have said, we would have discussions to determine the appropriate assistance that could be provided. The mechanisms that we would implement would depend on the prevailing circumstances.
We have heard emotional speeches about the moral duty of Governments to preserve the standard of living of 703 those least able to protect themselves. Following that, there has been discussion of a cut-off point. When assistance is most needed, when inflation is at its highest, it seems anomalous that, at that very time, the moral obligation will be abandoned.
The hon. Member for Croydon, South (Sir W. Clark), whose contribution I enjoyed, said that if a cut-off point had been set at 6 per cent. it would not have made a great deal of difference. I realise that the hon. Gentleman talked about 6 per cent. hypothetically and that he will not want to be held to that figure. As we know, the average pension for a civil servant is £32. In year 1, when inflation was 22 per cent. , the average civil servant pensioner would have lost 16 per cent. of his income if there had been a 6 per cent. cut-off point. In year 2, when inflation was 15 per cent., he would have lost 9 per cent. In year 3, when inflation was 10 per cent., he would have lost 4 per cent. During that period someone who is now in receipt of £32 a week would have lost nearly one-third of that purchasing power.
§ Sir William Clark
Even if there were a cut-off point of 5 or 6 per cent., the pensioner would still draw the State retirement pension, which has been indexed.
§ Mr. Williams
The hon. Gentleman must bear in mind that there are those who are drawing pensions which, when combined, do not provide a luxurious standard of living. For such pensioners a cut in their income has an incisive effect upon their standard of living. As for the possiblity of cuts in gross sums at the higher levels, we can understand the public relations disadvantages of some of the increases that we have seen.
The Minister will probably confirm what he said in an Adjournment debate. I expect that he will say that as few people are involved very little money would be saved, although embarrassment would be avoided.
I must re-emphasise the blame that I laid in my opening speech on the Prime Minister. The right hon. Lady is determined to blame civil servants for the consequences of the inflation which her policies generated. In his introductory speech the Minister had to eat the Prime Minister's words. They were every bit as indigestible today as they were when first uttered.
§ 2.8 pm
§ Mr. Hayhoe
I have listened to every word in what has been generally a balanced and constructive debate. I am grateful to all who have contributed to what has been acknowledged on both sides of the House to be a complicated subject of considerable importance. I am sorry that the right hon. Member for Swansea, West (Mr. Williams), in both his opening and his closing speech spoilt his broad contribution by the petty and spiteful tirade that he directed against my right hon. Friend the Prime Minister. Even if not doing so physically, he must have been looking over his shoulder while making those remarks. Given the present state of his party, I suppose that one can make some allowances for that sort of contribution. It seems that it has to be made by Labour Members. Being in a charitable mood, it is probably better if I draw a veil over the extravagant language that he used.
I asked for hon. Members' views on the suggestion that the Civil Service pension scheme should be made contributory. So far as I could judge, it received a general 704 welcome from all who spoke, and I am grateful for what has been said. I think that it is also generally accepted that there should be no net increase in public expenditure and that, all other things being equal, the change in itself should be neutral as well. Of course it is far too early to lay down details of how and when this could be done, and there will have to be discussions with the Civil Service unions. I am advised that the administrative costs of a contributory scheme would not be expected to be particularly high. Therefore, I do not believe that administrative cost will be the determinant.
If we went down this route, there would have to be a better understanding by the general public of the pension arrangements for civil servants. The right hon. Member for Manchester, Openshaw (Mr. Morris) saw as a valuable aspect of such a change the openness and public confidence that would flow from it. The hon. Members for Bately and Morley (Mr. Woolmer) and for Battersea, South (Mr. Dubs) referred to the dangers of misunderstanding and misrepresentation, and I accept that those dangers exist. I wish that one were in a position to ensure that there would be no misunderstanding or misrepresentation in the media and by commentators, but, alas, that is not within our power. Indeed, I do not really wish that it were, as I believe that the advantages of a free press are greater than those of any such Government control. Nevertheless, if we take this course it is important that those of us who know the facts should do all that we can to avoid giving any grounds for such misunderstanding and misrepresentation and that if it is occurs we should do our best to damp it down.
The Government's general attitude to index linking in pensions, gilt-edged and other areas, was mentioned particularly by my hon. Friend the Member for Croydon, South (Sir W. Clark). As he knows, the Government's position on this will have been set out in the memoranda produced by the Treasury for the Select Committee in July this year. I also recall the debates on the Finance Bill, but I do not think that it is appropriate for me to try to build on that today, particularly as I have many other things to say.
The genuine costs of the present index-linked pension scheme were also mentioned in the debate. My hon. Friend the Member for Croydon, South said that the actuarial advice that he had received suggested that the combined employee-employer contribution would need to be about 33 per cent. of total income to produce a viable scheme. I can only say that my information is somewhat different. I understand that the chief executive of Target Life has spoken in broad terms of a 20 per cent. combined contribution over 30 years as the basis for a fully indexed pension of two-thirds of final pay and I believe that the Government Actuary's calculations put him in the same parish as the chief executive of Target Life. The Government Actuary's calculations were published and debated with the actuarial profession in October 1981 and I understand that there was broad endorsement by the profession of the basis used by the Government Actuary. The market price of indexed gilts now provides additional evidence to the effect that the 3 per cent. real rate of return assumed by the Government Actuary is perfectly reasonable in the light of experience.
Megaw suggested that the Government Actuary should discuss his assumptions with outside advisers, and the hon. Member for Colne Valley (Mr. Wainwright) suggested that we should have a new committee or standing 705 conference. I am not sure about going that far, or whether such an institutionalised arrangement is necessary. However, I assure him that the Government believe, as does the Government Actuary, that it is right and proper for such discussions with outside advisers to take place. All those who are interested want the process to be a transparent one where there is understanding, and public confidence flowing from that understanding.
I have been asked by the right hon. Member for Swansea, West and others to give a categorical assurance and commitment about index linking in the future. I made it clear that the Government's priority is to get contributions right, and there is further work to be done there. Benefits and methods and levels of financing must be considered together within the context of inflation trends. It is foolish either to seek or to give an open-ended, wholly unqualified commitment. I did not do so in my earlier speech and I cannot do so now. The right hon. Member for Manchester, Openshaw (Mr. Morris) in an intervention during the speech of the right hon. Member for Swansea, West made it clear that any such commitment did not mean anything. As he so rightly said, in context of future roar-away inflation any such commitment would mean little.
I prefer to rest on the words I have used. They were carefully chosen, and I noted how the House responded. My hon. Friend the Member for Croydon, South made suggestions about limiting increases. He suggested—I accept it as such—that a 6 per cent. year-on-year figure would perhaps have been appropriate. That was referred to again by the right hon. Member for Swansea, West. I have had that suggestion looked at carefully. A pension of £10 a week in 1972 becomes a pension of £41.50 a week in November 1982 as a result of the operation of the 1971 Act. That is a little above the average, but if that pension of £10 a week in 1972 had been subject to a 6 per cent. limit each year the total would be now £19—under half of what it is. I do not believe that that would have been either acceptable or sustainable in the House.
§ Sir William Clark
I accept that, and I am grateful for the fact that the figures have been worked out. My point is that that pensioner is collecting the retirement pension which is index linked at the same time, but the private sector pensioner will be getting probably £14 a week only, not £19.
§ Mr. Hayhoe
I was going to make that point if my hon. Friend had not interrupted me. In addition to the public service pension, the pensioner would receive the national retirement pension, which is fully index linked.
§ Mr. Chris Patten
My hon. Friend is talking about the level of pension that would be received by a nurse or somebody in that sort of professional group. The 6 per cent. limitation would more or less halve the pensions of nurses.
§ Mr. Hayhoe
That would be so if the limitation were in place. If the limitation had been operating, pressures would have made the figures unsustainable. Our brief exchange has been useful in putting the matter in balance.
Hon. Members have suggested that there should be a cut-off point for higher pensions. What my hon. Friend the Member for Bath (Mr. Patten) said about taxation is always ignored when considering the problem. Figures in the press of massive increases, sometimes involving 706 thousands of pounds, never include the information that after tax the sum is reduced. We must take that into account.
I dealt with the cut-off suggestion in our debate in February. I said: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.—[Official Report, 5 February 1982; Vol. 17, c. 718. ]
The cut-off idea does not seem to be particularly helpful.
My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) asked whether it was right to talk of depriving someone of something to make others feel better. Like him, in politics I have always been against levelling down but in favour of levelling up.
My hon. Friend the Member for Kensington (Sir B. Rhys Williams) made an interesting and thoughtful speech. He said that he favoured a benign index which would be morally more appropriate than the prices index which has been used since the 1971 Act. He suggested that GNP should be used. I do not have the GNP figures, but they do not differ much front the figures for GDP. If such an index had been used in the last decade a pension linked to his benign index would have increased not four times, but by more than five times. He is the only hon. Gentleman in the debate to propose a significant betterment, but he will recognise that we have to consider whether we could afford that.
§ Mr. Hayhoe
That is the theme that I have reiterated. We must get the contributions right.
The hon. Member for Battersea, South referred to part-time employees in local government. I am aware of the position. My right hon. Friend the Secretary of State for the Environment deferred decisions about regulations at the beginning of last year. Since then NALGO, the principal union involved, has campaigned. The hon. Gentleman asks whether there is a possibility of a move in that respect. I cannot say: it falls outside my departmental responsibilities. I give no undertaking, but I shall draw the hon. Gentlemen's remarks to the attention of my right hon. Friend.
My hon. Friend the Member for Dudley, West (Mr. Blackburn) referred to the police. He said that, in considering these matters, one should take account of life expectancy. He is quite correct. Clearly, any actuarial calculation should take account of the life expectancy of the people involved. He gave a figure for the life expectancy of retired policemen of seven years. Perhaps I have misunderstood him, but I cannot believe this is true. My advice is that actuarial calculations are based on a life expectancy for a retired policeman of over 20 years. That puts his figures into a very different light.
In my view, the additional contribution which the police have been asked to make to their pensions is fully justified for the fast accrual system that they have, and it is part of the process of getting pension contributions right. It has been done for the Armed Forces, and has been and is being done for some of the printing workers in HMSO.
707 We are moving in that direction for some of the forestry workers. There are whole sections of the public services where this should be done, and I think that it will be accepted by all concerned that it is the right way to proceed.
The crucial importance of dealing with inflation has dominated this debate. There can be no question that the more we succeed in that battle, the easier becomes effective indexation within the public service and the comparisons that are drawn between public service schemes and private schemes.
I stress again that private sector schemes often have a lower contribution rate than public service schemes. We must consider the matter in the round—the benefits, the contributions, and the terms of the arrangement.
I accept, as I said earlier, that private schemes pose particular problems and unfairnesses for early leavers. The House will appreciate, and the hon. Members who raised the matter will understand, that this is not one of my departmental responsibilities. My right hon. Friend the Secretary of State for Social Services answered fully a question on the matter earlier this week, and I have little doubt that his attention will be drawn to what has been said in this debate. Concern about the plight of early leavers is shared by the whole House, and, if we can find a practical method of making progress in this respect, I am sure that it will be welcomed on all sides.
The other theme of the debate was the concept of public service. It was mentioned more than once in appropriate terms, and rightly so. The country will be the loser if public service and public and civil servants are subjected to continued unfair criticism, and if their real and crucial contribution to our national life is derided or undervalued. I am glad that this debate has given an opportunity for Parliament to reiterate what it has said in the past about those people who are given the task by Parliament of carrying out its wishes and decisions, for that is what our public and civil servants are there to do. I am also glad that the House today has recognised the dignity and worthwhile nature of public service as part of our national life. I am delighted with the fact that it has been stressed so many times during the course of what, in my view, has been a useful and important debate.
§ I beg to ask leave to withdraw the motion.
§ Motion, by leave, withdrawn.