Baroness Neville-Rolfe (Con)

My Lords, Amendment 217 would require the Secretary of State to conduct and publish a review of public sector pensions. I am very grateful to my noble friend Lady Noakes for her support and am only sorry that she has other commitments this evening. I have always worried about the cost and sustainability of such pensions. I am a beneficiary of a modest one myself from my years in the Civil Service, and it is generously uprated every year. Interestingly, there is a lacuna in the work the Government are undertaking on pensions. We have the Pension Schemes Bill, which we are busy scrutinising and which addresses problems with local government pensions and value for money in private schemes; we have the Pensions Commission review, led by this House’s eminent pensions expert, the noble Baroness, Lady Drake; and we have another independent review of the state pension age in progress. I expect that that review, like the one I conducted some years ago, will recommend an increase in the pension age in due course, and ways to encourage people to stay in employment for longer—for many good reasons. However, there is a glaring gap. As far as I can see, none of these initiatives will address the sustainability of unfunded public sector pensions, their accounting treatment, or how best to tackle the issue of intergenerational unfairness that is an almost inevitable result of the fiscal unsustainability of these schemes. They include pension provision for some of the most important public services: the NHS pension scheme, the teachers’ pension scheme, the Civil Service pension scheme, the Armed Forces’ pension scheme, the police pension scheme and the firefighters’ pension scheme. The numbers are big. There are over 3 million active members in the NHS, teachers’, Civil Service and Armed Forces schemes, 2.2 million deferred members and 2.8 million pensioners. That is a total of 8 million individuals. As populations grow older, the proportion receiving gold-plated defined benefit pensions will grow if nothing is done. This is a virtually forgotten area of inquiry, perhaps because all of the policymakers and public sector trade unions are beneficiaries. However, since I tabled my amendment, there has been a useful report on the subject by Policy Exchange. I have also discussed the problem with the Centre for Policy Studies and with the economist Neil Record. I am glad that my noble friend Lord Moynihan of Chelsea is speaking today, as he has addressed this subject in his book, Return to Growth. As we will no doubt hear, he is very passionate about the unfairness that this represents. Most people are aware that Britain has a huge national debt, which already sits at £2.9 trillion—97% of GDP—and is growing. However, as Neil Record has argued, there is a second national debt, the public sector pension debt, reflecting the cost of public sector workers’ defined benefit pensions. This is kept out of the limelight but, on government figures, the past five years’ average public sector pension liability as a percentage of GDP is 74%. That is on a scale that approaches the order of magnitude of the actual national debt. At the heart of the problem is the fact that this is a very long-term issue, like the actual national debt, with reform virtually impossible to reconcile with the electoral cycle. I need to explain some of the complexities. On the surface, things look fine. In 2025-26, according to PESA 2025, there was a total of £58.6 billion-worth of public sector pensions being paid to about 3.5 million pensioners—that is a CPS estimate. This compares to a total of employer and employee contributions of £57.3 billion, which has dramatically risen in recent years. So, apparently, all is well. But I am afraid that is not the case. The sums paid in pension contributions by employees do not go towards their pensions but to pay the pensions of those already retired. There are no savings to pay future retirees. I know that the figures in the OBR’s Fiscal Risks and Sustainability report of July 2025 are lower than Mr Record’s, but it is partly a question of how you do the calculations. Estimates on longevity and long-term public sector salaries are particularly difficult to predict. My main point today is that, on any credible estimate, the numbers are frighteningly large. Something must be done. Moreover, the situation is getting worse, as commitments grow over time. It is unfortunate and regrettable that the scale of the problem is not properly reflected in the national accounts, although this is very difficult to unravel, even for those who are reasonably financially literate. It is hidden by a combination of the accounting conventions and the moves in interest and gilt rates, which have made things look temporarily much healthier than they are. One of the most important variables in pensions is the interest rate applied to notionally invested contributions. Higher interest rates result, according to standard accounting conventions, in lower pension costs, and, of course, vice versa. However, when the facts are unravelled, even if no new pension commitments are made from this point—that is, if all the current schemes were closed to new accruals—existing public sector pension payments will continue to rise until the early 2060s, which, on best estimates, will by then amount to some £130 billion a year, with no capping mechanism of any sort. You will struggle to find any acknowledgement of this in our national accounts. The Government use a long-standing convention called SCAPE—superannuation contributions adjusted for past experience. I will not go into the detail, but it is uniquely vulnerable to manipulation and, according to informed opinion, has been manipulated with the use of artificial rather than market-based interest rates. I have also discovered an allegation that there has been a surprising adjustment in the NHS arrangements—the largest of the public sector pension schemes. So, when employer contribution rates were raised, as they certainly needed to be, from 14.3% to 20.6%, the then Government decided to finance the gap of 6.3%—allegedly temporarily—by paying that amount directly from the Treasury rather than charging the NHS employing organisations. In 2024-25, the gap rose to 9.4%, or £6.6 billion per annum, which the Government have now decided to fund permanently. Although there is no overall impact on the public finances, this sets a poor precedent of obscurity in an already obscure system. So, can the Minister kindly let us know the justification for this decision to fund this gap permanently?