§ Lords amendment: No. 10.
§ Phil Hope
Lords amendment No. 10 would rectify a possible gap in the powers to establish arrangements for the funding of fire and rescue service pensions. My colleague, Lord Rooker, made it clear when moving the amendment in the other place that the White Paper, "Our Fire and Rescue Service", committed us tointroduce alternative arrangements for local authority funding of service pensions, in consultation with the fire and rescue authorities".In 2001, a joint Treasury, Home Office and Department for Transport, Local Government and the Regions working group reviewed the current finance arrangements for funding police and firefighter pensions and recommended that a new pension account system should be developed. We announced our intent to pursue that option in the 2004–05 fire and rescue national framework, which was published on 16 July.
The underlying principle of the scheme is that Government would pay current pensions and that employers and employees would make contributions to the Government to meet future pension liabilities. In practical terms, authorities would pay pensions from a separate pension account to which employers and employees both contribute. Normally, a payment would be made by the Government to the fire and rescue authorities to balance the account at the end of the year. Provision for those payments could be made under clause 33(2)(e).
An authority's pensions account could be in surplus at the end of the year—the contribution that it and its employees made to future liabilities exceeded the authority's existing pensions payments. Therefore, to ensure that the system works fairly and consistently and to protect the national taxpayer and other authorities, we need to ensure that a balancing payment can be made 447 to central Government. New clause 33(2)(ea), proposed under Lords amendment No. 10, would permit such payments to be made.
Lords amendments No. 15 and 16 amend clause 61, so that all the provisions in schedules 1 and 2, which amend or repeal pension legislation, extend to Scotland. Lords amendment No. 17 amends the reference to the Pensions (Increase) Act 1971, in schedule 1, so that it applies to Scottish fire authorities in the same way as it does to English and Welsh fire and rescue authorities. Pensions are a reserved matter in relation to Scotland.
§ Mr. Hammond
I think that the Minister will find that Lord Evans, and not Lord Rooker, moved the relevant amendment in the other place.
The Minister will forgive me for being slightly suspicious and sceptical of any provision enabling money to be paid to the Secretary of State that is inserted late into arrangements for the operation of a pension fund set up for the benefit of employees. We remember the Chancellor's attempt to get himself paid from pension funds, with his £5 billion annual pension smash-and-grab raid. We want to be sure that this is not another smash-and-grab raid on employees' pensions funds.
When Lord Evans moved the amendment in the other place, he said:However, it is possible that an authority's pension account will be in surplus at the end of the year—in other words, that the contribution that it and its employees make to future liabilities will exceed its existing pension payments. Therefore, to ensure that the system works in a fair and consistent way, we need to ensure that a balancing payment could be made to central government."—[Official Report, House of Lords, 24 May 2004; Vol. 661, c. GC 414.]I had always worked on the assumption that if employees and employers over-contributed to future liabilities, the benefit of that over-contribution would accrue to future contributors, who would need to contribute a little less.
I hope the Minister does not think that I am labouring the point, but this is a fairly unusual provision. It also seems unusual that the Treasury, which presumably has some oversight of the provisions when they are drafted, should have missed a tiny clause providing for payments to be made to the Secretary of State. Can the Minister elaborate on how, when and where it was decided that the provision, which was not included in the original drafting, was necessary? Who spotted the need for it, and in what circumstances do the Government expect that such payments will be made?
What auditing will there be of the pension arrangements? If payments are to be made out of a pension fund to the Secretary of State from contributions that have been made or partly been made by employers and employees, it will be reassuring to know that proper independent auditing of the pension fund accounts is taking place to ensure that the Secretary of State does not have a slush fund that he could get his hands on. The matter should be dealt with properly at arm's length.
The Minister said that amendments Nos. 15 and 16 add to schedule 1 new statutes that extend the scope of the provisions to Scotland. However, he did not make 448 clear to the House whether the Government determined that the change was required because of the other change that had been made through amendment No. 10 or whether it was simply an omission or error in the original drafting. Were statutes that should have been specified in schedule 1 omitted? If it is the latter, that is again an example of the dangers of rushed legislation. If the additional provisions in schedule 1 arise from the changes made by amendment No. 10, that is a different matter, and I accept that they are consequential on the amendment. Will the Minister clarify that?
§ John McDonnell (Hayes and Harlington) (Lab)
I am relieved by the Minister's explanation of the provision for making payments to the Secretary of State. For one minute, I thought that we were going to pay the Secretary of State's pension and that this was a new incentive scheme for Ministers on some form of productivity deal.
May we clarify who will make the decision on the payments and on what criteria, how that decision will be independently assessed and verified and what role the House will play in determining or verifying the payment? Is this a standard clause as used in other public sector pension schemes that have been introduced by legislation in recent years?
§ Richard Younger-Ross
The points made by the hon. Members for Runnymede and Weybridge (Mr. Hammond) and for Hayes and Harlington (John McDonnell) were extremely valid. If the fire service and fire officers are to have any faith in their pension schemes, those questions put need to be answered. I shall say no more because the points have been concisely made.
§ Phil Hope
I understand the concerns that hon. Members have expressed, so I am pleased to say that I can clarify matters and give them the reassurances that they want to hear.
A pension account is simply an account held specifically for receiving pension contributions and making pension payments. A pension fund—that is what we are not talking about—is something in which pension contributions are invested to pay for future pension liabilities. Let me say a little more about this so that the House can be clear about the matter.
The firefighters' pension scheme is currently financed in the same way as police pensions—on a pay-as-you-go basis. There are no pension funds. Individual fire and rescue authorities administer the scheme locally, and they meet the cost of pension outgoings, such as pension awards, lump-sum payments and outgoing transfer values, from their revenue accounts.
There are two main problems with the current arrangements. First, volatility exists because of significant fluctuations in the number of firefighters retiring or transferring out of an authority's employment in any given year. Indeed, many fire and rescue authorities cited one-off pension payments as a major factor behind this year's high increases in council tax precepts. Secondly, there is a problem with transparency. The high proportion of expenditure by fire and rescue authorities on pension payments 449 obscures the actual level of available resources for operational work. As pension costs increase over time, the proportion of an authority's expenditure on pension payments will also increase.
The option of allowing fire and rescue authorities to pay pensions from a separate pension account to which both employers and employees contribute, with a payment from central Government to balance the account at the end of the year, would alleviate those problems. However, it would be possible for an authority to end up with its pension account in surplus at the end of a particular year, so to protect the national taxpayer any such balance should be able to travel in the opposite direction.
Early indications from the Local Government Association and fire and rescue authorities show that they would welcome changing the financial arrangements. I make it clear that the Secretary of State would recoup only audited surpluses from fire and rescue authorities' pension accounts. That would happen after all pension payments and awards for a year had been made. I hope that my clarification of the technical points satisfies hon. Members.
§ Mr. Hammond
I am slightly confused, although perhaps there is just a linguistic problem. The Minister carefully set out the distinction between a pension fund and a pension account and said that payments will be made to the Secretary of State from a pension account. However, Lords amendment No. 10 refers to "a fund". Is he saying that the fund to which the amendment refers is not a fund, but an account?
§ Phil Hope
I think that I am. The hon. Gentleman will be pleased to know that I asked similar questions during my discussions about the amendments, which is why I am able to give him such reassurances.
I was asked whether the consequential amendments were tabled due to an error. There was an oversight, so we are dealing with that now. Given my explanations and reassurances, I hope that hon. Members will agree to the amendment.
§ Lords amendment agreed to [Special Entry].