Public Sector Pensions Reform
The next item of business is a statement by John Swinney on public sector pensions reform.
14:35
The Cabinet Secretary for Finance, Employment and Sustainable Growth (John Swinney)
I welcome this opportunity to make a statement to the Parliament on public sector pensions. This is an issue of real and immediate concern to a large number of people in Scotland, particularly to the thousands of public sector workers who deliver devolved services and their dependents.
Although we are discussing pension arrangements for staff delivering devolved services, many of the issues at stake are reserved to the United Kingdom Government. The stance of the UK Government has been set out previously and was reinforced in the speech given by the Chief Secretary to the Treasury to the Institute for Public Policy Research last Friday.
The purpose of this statement is to set out to the Parliament the Scottish Government’s views on the UK Government’s proposed reforms, given that they will have a significant impact on many staff delivering devolved services in Scotland and that this Administration does not have responsibility for such decisions. This is a long-term issue that affects the livelihood and wellbeing of nurses, teachers, police officers, social workers, firefighters and many others in Scotland—around 500,000 people. Those individuals work hard to deliver health, education and other services, upon which their fellow citizens depend. It is absolutely right, therefore, that the Scottish Parliament should hear a statement on the matter.
The Scottish Government does not believe that the United Kingdom Government’s proposals represent the correct course to address the issue of public pensions. We believe that the UK Government must reconsider its proposals before seeking to impose significant changes on public service staff at this time, and in the manner and at the pace that have been signalled by the chief secretary.
Last October, the United Kingdom Government decided—without consulting the devolved Administrations—to adopt a policy of increasing employee contributions to public service schemes by an average of 3.2 per cent of pay by April 2014. The increased contributions would be staged over a three-year period commencing 1 April 2012. That, alongside the £1 billion of savings that were already planned by the previous UK Government through cap-and-share schemes for pension contributions, is expected to deliver annual UK savings of £2.8 billion from 2014-15 from pay-as-you-go pension schemes such as those for nurses, teachers and police officers. The policy is also expected to deliver a further £900 million a year from the funded local government scheme.
The UK Government asked the devolved Administrations to agree to that approach in principle by January of this year to enable detailed preparations to take their course. We made it clear to the UK Government that we required to undertake dialogue with the other political parties in the Parliament and with stakeholders before we gave any agreement to a proposal with such long-term implications. In the intervening period, the UK Government opened negotiations with the Trades Union Congress and other relevant trade unions. It was therefore something of a surprise that the UK Government position was reinforced by the chief secretary last Friday before those discussions, which were aimed at finding a solution, had come to a conclusion.
It is important to consider the financial impact of the UK Government’s proposals on the individuals who will be affected. We are particularly concerned about the burden that the policy will place on lower-paid workers, thereby undoing the benefits that we are achieving through encouraging a move to the Scottish living wage across the public sector. The real danger of a flawed approach to employee contributions might be to motivate opting out from schemes, which will be bad for the individual and bad for society.
Although the UK Government has indicated that it will rule out contribution increases for people earning £15,000 or less, it has signalled an increase of up to 1.5 per cent of pay for those earning between £15,000 and £18,000. That comes on top of other changes that the UK Government has decided to make to pensions, using its reserved powers. They include indexing public sector pensions to the consumer prices index rather than the retail prices index, which change alone is expected to reduce the value of public sector pensions by around 15 per cent.
At a time of a public sector pay freeze, rising inflation, increases in national insurance contributions, higher VAT and significant rises in fuel prices, and at a time when consumer confidence is low and we need to kick-start the economy, we believe that it is wrong to require employees to increase their pension contributions. We think that it is a short-term policy primarily geared towards deficit reduction that will have significant and negative implications for the long-term retirement provision of some of the lowest-paid individuals in our society.
The debate on public sector pensions is a long-term debate that must be founded on careful analysis. We believe that public sector pensions must be affordable, sustainable and fair. Lord Hutton’s independent review of public service pensions looked carefully at the case for reform. In his interim conclusions last October, he said that, despite recent scheme reforms, including in Scotland between 2006 and 2009, further reform is needed to recognise increasing longevity and associated costs. However, he also said that public sector pensions are far from gold-plated. In Scotland, average annual pensions for civil servants are around £4,200, or £80 a week; for local government workers they are around £4,750, or £90 a week; and the average for national health service workers, including for general practitioners and hospital consultants, stands at around £7,000 annually.
Lord Hutton’s final report, published at the end of March, made a number of further, more detailed recommendations about pension scheme design, costs and governance. We recognise that a case has been made for further reform and that the issue is not unique to Scotland. We will not shirk consideration of that case, assessing it against our tests of affordability, sustainability and fairness. We will do so in full consultation with the people most affected—public sector staff and their representatives—but we must do that while taking into account the real and immediate financial pressures faced by members of the public at this time.
In setting out the Scottish Government’s position on pension reform, I must be clear about the constraints on our ability to develop and apply our own solutions in Scotland. The civil service pension scheme is entirely reserved and we have no control over its provisions. In terms of legislation, changes to the teachers and NHS pension schemes require the active support of Her Majesty’s Treasury. So, without the UK Government’s agreement, we cannot make changes to pension rules for many of the key staff in Scotland who deliver the services for which we are rightly held to account.
Regulations about the local government pension scheme, which is a funded scheme, and the police and firefighters schemes, which are pay-as-you-go schemes, are within our control. In the past, however, the details of the police and firefighters schemes have been agreed on a UK-wide basis. In terms of funding, HM Treasury has made it clear that if we do not introduce increases to employee contribution rates as specified by them, they will reduce Scotland’s block grant by a corresponding amount in respect of pension scheme costs met by the Treasury from annually managed expenditure budgets.
While the individual mechanisms vary, the consequences would be the same. Leaving contribution rates unchanged would result in pressures on those departmental expenditure limit budgets out of which employer contributions are paid for all schemes that we have responsibility for: the NHS, teachers, local government, the police and the fire service. To give some idea of the amounts at issue, by 2014 the teachers and NHS pension schemes in Scotland are projected to generate an additional £230 million a year in extra employee contributions if the Treasury’s policy is applied.
Taking together all the changes to schemes that could have an effect on our budget, higher employee contributions in line with the Treasury’s policy would generate £400 million a year in additional revenue. If we were not to introduce the increases to employee contribution rates, we may need to find £400 million per year to replace that funding. That would lead to even more pressure on public services and public sector jobs in Scotland.
Given the assumptions that have been made by the UK Government on the effect on the public finances of increased pension contributions, we have very limited power to act differently from the UK. The fact is that HM Treasury is able, once again, to exercise control over Scotland’s resources. By taking its current course, the UK Government is also making it difficult for us to pursue our approach of discussing how to achieve a fair balance of costs in the short term and in the longer term—for example, by using cost-sharing arrangements—and of ensuring proper consideration of, and consultation on, these far-reaching changes.
We are clear that we need an open and constructive dialogue about how to take the issue forward. Last week, the First Minister and I discussed the issue with the president of the Convention of Scottish Local Authorities, who made clear the opposition of Scottish local government to the proposals. I have also discussed the matter with the Scottish Trades Union Congress and other relevant trade unions, which share the same view.
As a Government, we are calling on the UK Government to reconsider its policy on contribution rates alongside Lord Hutton’s longer-term recommendations and within the context of the current constraints on public sector pay and rising costs for householders. We are also pressing for a more appropriate timetable for consideration of the issue. We believe that the UK Government has not taken account of uniquely Scottish factors and the importance that we and this Parliament place on thorough consultation. Pension reform requires consent to be built. We do not believe that that has been achieved, and we urge the United Kingdom Government to take a different course.
My statement has been designed to help inform the public discussion that needs to take place on the vital issue of public sector pensions. I hope that the UK Government, and the Treasury in particular, will take careful note of the views that are expressed in the Parliament, as they represent the will of people in Scotland.
Finally, let me address the issue of the industrial action that some, but not all, of the trade unions involved have proposed. The Scottish Government does not believe that there is a case for industrial action to be taken while negotiations are on-going. Such action will only damage the delivery of the public services on which our citizens depend. I urge those who are thinking about taking industrial action to encourage participation in dialogue with the UK Government in an attempt to reach a positive resolution to this important issue.
I intend to allow 20 minutes for questions, after which we will move on to the next item of business.
I thank the cabinet secretary for the copy of his statement and assure him that we will join him in opposing the approach that the UK Government has taken on public sector pensions and in calling for a change in its proposals. No one is saying that pensions should not be reviewed, but it is a fact that the huge hikes in contributions would mean that public sector workers, who already face a pay freeze and job cuts, would once again pay the price of the coalition’s cuts, which are too deep and too fast.
It is the cabinet secretary’s responsibility to find a different way in Scotland. That is what the Scottish Parliament is for, and the cabinet secretary can find a different way in a number of areas. Simply passing the pain from Westminster when he can act to avoid the same mistakes here will not wash.
Will the cabinet secretary therefore reassure me that he will enter into further negotiations with the trade unions before he makes any changes, and that he will not repeat the mistakes that the UK Government has made in failing to consult properly? In particular, is it not the case that there would be no reduction in funding through the Barnett formula for the Scottish Government if he decided not to make the changes for employees in the local government scheme? Indeed, is there not a risk that increasing contributions in that way might cause financial problems for that scheme if employees left it as a result? Given that we agree entirely that the UK Government is taking the wrong approach on the issue, surely the cabinet secretary will also agree that we should not simply follow its lead.
I can certainly assure Mr Baker that the Scottish Government will undertake a thorough and comprehensive process of discussion and dialogue on the issue with our local authority partners, stakeholders, including the relevant trade unions, and other political parties.
Mr Baker may not be familiar with the details of everything that has happened. Before the election, the Government was presented with the requirement to give responses that would affect long-term pension contributions. One of my reasons for not doing so was that I thought that all the political parties—none of us knew the outcome of the election at that stage—had to have the opportunity to make an input into those discussions. I assure Mr Baker of the importance that I attach to building consensus and consent on such issues.
On the specific issue of the local government scheme, any scheme will be affected by employees opting out. Opting out of pension provision is a bad thing for individuals. The significant and serious financial pressures that individuals who are employed in the public sector are dealing with as a result of the combination of wage freezes and increases in VAT and prices, particularly fuel prices, are among the issues that I am raising with members. Of course people will be concerned about their financial arrangements and the implications that go with them. The local government scheme is different in that it is driven by an actuarial valuation of its health, which must take into account the scheme’s financial strength and its ability to fulfil its commitments to all the relevant policy holders and pensioners. It is important in that valuation that the contribution that can be made from the public purse to the local government pension scheme is sustainable, as it is not just employee contributions that go into it; employer contributions go into it into the bargain.
Those are the issues that we would have to wrestle with in discussions with local government and the trade unions.
I, too, thank the cabinet secretary for the advance copy of his statement. I will focus on what he has actually asked the UK Government to do. He has asked it to reconsider its policy on an increase in contribution rates, so we know that the Scottish Government does not want the average rate to be 3.2 per cent, but what does it think the rate should be? Will it argue that the rate should be 0 per cent, or somewhere between 0 and 3.2 per cent? We deserve to know.
The cabinet secretary has asked the UK Government for what he calls “a more appropriate timetable”. Can he be specific about what he means by that? Given that the commission was set up last year and that the contribution increases are to start in April 2012 and be phased in over a three-year period, what does he mean by “a more appropriate timetable”?
To all those questions, I say that the measures should be a product of negotiation and not a product of the United Kingdom Government setting out its position and asserting it, as in the situation that we faced in December, when the UK Government required the devolved Administrations to sign up to agreements. In my view, that is not how to do business with devolved Administrations or public sector employees. The measures must be the product of negotiation between the Government and the relevant trade unions and other stakeholders. That relates to levels of contribution and the timing of contributions.
I cannot imagine that Mr Brown is anything other than seized of the perspective, as I am, that members of the public are facing acute pressure on their household income. In part, that is because of a wage freeze that we have applied. I have explained to the Parliament the rationale for that and said that it cannot be for just one year and that it is likely to have to be for two. That places financial pressure on individuals and is coupled to the increasing costs with which all our constituents are wrestling. My advice, guidance and stance would be that the United Kingdom should enter into a process of negotiation that is fruitful and that engages the relevant stakeholders to address the questions.
Many members wish to ask the cabinet secretary a question, so from here on the questions and answers should be brief. I point out that this is time for questions, so I do not expect statements from members. If you have a question for the cabinet secretary, ask it without the preamble.
Thank you for that warning, Presiding Officer.
The cabinet secretary mentioned the change from the use of the retail prices index to the consumer prices index in the calculation of pensions and the suppression that that will cause to their value. Does he agree that that is because the CPI does not adequately reflect the cost of living and that, moreover, the Treasury must already know that, because it uses the RPI whenever it wants to justify an increase in taxation?
Mr Hepburn makes a fair point. The shift that is being undertaken in that respect affects the value and effectiveness of the relevant pensions for public sector employees, so it is a material factor in the sustainability of the pensions that individuals receive.
The cabinet secretary will be aware that the NHS scheme is in surplus. What discussions has he had with the Treasury on that, given that an increase in contributions is tantamount to increasing taxation for health service workers at a time of pay restraint? Will he outline what power he has to act differently from the UK Government in respect of the various public sector schemes?
The First Minister made representations to the Treasury directly at the joint ministerial committee the other week, and I did so at a meeting with the Chief Secretary to the Treasury earlier this week.
I have no discretion whatever on civil service pensions. On NHS and teachers schemes, we would require—as I said in my statement—the active co-operation of Her Majesty’s Treasury in making relevant regulations. We have devolved competence in relation to local government personnel, the police and the fire service, although there are budgetary implications on which we must seek clarity, and the police scheme is generally addressed on a UK-wide basis.
Would the cabinet secretary care to comment on the deeply unfair and unequal situation pertaining to the women—as many as 40,000—who were born in 1953 and 1954? They have twice had the goalposts moved on their state pension age, just at the point when they are planning for retirement. Will the cabinet secretary ensure that he highlights the plight of those women in any representations that he makes to the UK Government on pensions reform?
That is a fair point, which highlights the importance of ensuring that there is effective and adequate consultation on all these questions. We are dealing with very serious issues that affect the livelihoods of individuals and, unless all the questions and unintended consequences that can arise from decision making in that area are given proper consideration, we will not do justice to individuals who have faithfully contributed to pension schemes in the expectation of having a sustainable income in their retirement.
Jean Urquhart (Highlands and Islands) (SNP)
This increase comes against a backdrop of rises in fuel prices, energy and heating costs, inflation and national insurance contributions and—more significantly—a public sector pay freeze. The Treasury really could not have picked a worse time to introduce the change. What effect does the cabinet secretary think that it could have on an already fragile economy?
I made the point in my statement that the Scottish Government does not believe that this is the correct moment to undertake such an increase in contribution rates. Jean Urquhart sets out the reason for that in referring to the various pressures with which individuals are wrestling. Those pressures are seriously affecting household income, which has a spillover effect on the condition of the economy.
We are concerned about retail sales figures, which have been disappointing of late—indeed, I was asked about them in committee just last week. Is it any wonder that retail sales are under some pressure, given the pressures on household income? I do not think that this is the moment to add to that, when we are trying to encourage economic recovery.
I thank the finance secretary for the advance copy of his statement. He says that he views the UK changes as “short-term policy”. Does that not fly in the face of his own independent budget review, which stated that the
“projected costs of pensions are an issue of major significance”
that dwarfs much of the rest of the budget? The review recommended that the finance secretary should recognise that change is unavoidable and Mr Swinney says that he will not shirk consideration of the case, but was the rest of his statement not just that: full-on shirk?
Mr Rennie is fairly carving out a niche for himself in this Parliament; that is about all the justice that I can do to that particular remark. If he had paid the slightest bit of attention to my statement, to my decision to commission the independent budget review or to the current pressures on household income, he might have thought of a more sensible question to ask.
My statement made it clear that, while this Government accepts the case for pension reform, we do not believe that it would be helpful to economic recovery to undermine household income by a significant margin.
Mr Rennie is following in the distinguished footsteps of his predecessor by endlessly muttering during the answers that he is getting to the questions that he has already asked—usually badly, I have to say. I suspect that he is careering in the same direction as his predecessor.
The minister’s statement referred to police and firefighters’ pensions. I am sure he will agree that our emergency services do a remarkable job in supporting our communities. However, he will be aware of his Government’s plans to reorganise those services. What discussions has he had with the Fire Brigades Union Scotland and the Scottish Police Federation about the proposed pension changes and how the Scottish Government’s reorganisation of those services might affect such matters?
I have certainly not had any discussions personally with the Fire Brigades Union Scotland and the Scottish Police Federation but, as I am sure that Mr Pentland will be aware, Mr MacAskill, the Cabinet Secretary for Justice, has regular dialogue with the Scottish Police Federation and Roseanna Cunningham, the Minister for Community Safety and Legal Affairs, has regular dialogue with the Fire Brigades Union. I assure Mr Pentland that in any agenda for reform of the structure of Scottish police or fire authorities, the issues around pensions about which he is concerned would be a fundamental part of the discussion.
It is important to recall—this point follows on from the question from my colleague Christina McKelvie—that individuals have entered into pension schemes in good faith and that must be respected in any of our decision making.
I declare an interest as a member of the local government pension scheme. The cabinet secretary spoke of the need for re-engagement between those who are currently considering strike action and the UK Government. Does he agree that the recent remarks made by the Chief Secretary to the Treasury were at best naive and at worst inflammatory? Does he agree that perhaps Mr Alexander would benefit from a period of sombre reflection before he re-engages constructively with stakeholders?
What is important is that there is a process of substantive dialogue on this question. I am grateful to Mr McDonald for giving me the opportunity to reiterate that the Government’s position is absolutely crystal clear: there is no justification for industrial action on this question. What is important is that there is meaningful and substantive dialogue. That is what the United Kingdom Government must take forward. I certainly encourage that to take its course.
I welcome the reference to Scottish Labour’s living wage in the cabinet secretary’s statement.
Will he clarify how the proposals will affect low-paid workers? Has he carried out his own assessment of how many council workers are likely to opt out of the local pension scheme? If so, what impact will the changes have on pension schemes across the public sector and what are the implications, when they reach retirement age, for those who opt out?
The opt-out level is a difficult calculation to make, but I think that opting out is a real and substantive danger for many people, given the sums of money that would be involved in additional contributions.
Margaret McCulloch asked what the implications in retirement are. I think we know what the implications are. We probably all know people who have not been in a position in a period of their working life to make adequate pension provision and, therefore, suffer in their retirement.
On the impact on people on low wages, clearly the UK Government has set out a staged approach. The latest proposal that I have seen is for people earning less than £15,000 to face no increase in contribution but those earning between £15,000 and £18,000 to pay 1.5 per cent. I point out that when the United Kingdom Government was setting out its approach to pay constraint, which is similar to the position that we have adopted, the threshold was set at £21,000. There are a substantial number of people earning more than £15,000 but less than £21,000 who would be caught by the requirement to increase contributions. Clearly, the conditions that might give rise to a danger of opt-out are to be avoided.
David Stewart (Highlands and Islands) (Lab)
Further to Jamie Hepburn’s point, is the cabinet secretary aware that the Public and Commercial Services union has initiated a judicial review of the UK Government’s switch from using RPI to CPI in its calculations, which will cost public sector workers an average of 15 per cent of their pension benefits? Does the Scottish Government have a view on that switch and has it made representations on it to Westminster?
I am aware of the judicial review to which David Stewart referred. It is on a matter that is among the concerns that the Scottish Government has about the whole approach that is being taken. I return to my central point: there is a case for pension reform—the Government does not deny that—but what we have to ensure is that we take forward the agenda on the basis of negotiation and consent, which is the right way to proceed on these matters.