Asked by Lord Davies of Brixton To ask His Majesty’s Government
what assessment they have made of the impact of the annual
allowance, used for the purposes of tax relief on occupational
pensions, on (1) the employment, and (2) the retention, of members
of public service pension schemes. Viscount Younger of Leckie (Con)
My Lords, the Government greatly value the work of all public
sector staff, be they NHS workers, teachers or police officers.
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Asked by
To ask His Majesty’s Government what assessment they have made of
the impact of the annual allowance, used for the purposes of tax
relief on occupational pensions, on (1) the employment, and (2)
the retention, of members of public service pension schemes.
(Con)
My Lords, the Government greatly value the work of all public
sector staff, be they NHS workers, teachers or police officers.
Public sector pension schemes are mainly defined
benefit schemes and are among the most generous available.
The annual allowance affects only the highest-earning pension
savers, and the Government estimate that 99% of pension savers
make annual contributions below £40,000—the level of the standard
annual allowance.
(Lab)
My Lords, I thank the Minister for his reply, but it is worth
reminding ourselves that the last Prime Minister promised to stem
the exodus of doctors from the NHS. The Prime Minister before
that promised to fix the pension tax relief rules, and the new
Chancellor, no less, has called the situation a “national
scandal”. Of course, the annual allowance is a general problem
that can affect people across all defined
benefit pension schemes, not least senior nurses—this goes
back to the previous Question. But does the Minister understand
that, given the 10% increase in the CPI this September and given
the rules of the NHS scheme, some GPs will be faced with
additional tax bills into six figures this coming year? Does he
understand the extent of the scandal and that tinkering with the
rules will not be enough? Radical action is required.
(Con)
I recognise some of what the noble Lord has mentioned. In
recognition of the impact that pension tax has on senior
clinicians in the NHS, and to improve staff retention, which was
part of the subject of the last Question, the Government
announced changes to the NHS pension scheme on 22 September.
These include changing the pension rules regarding inflation,
encouraging NHS trusts to offer so-called pension recycling—the
noble Lord will know more about this than me—and implementing
permanent retirement flexibilities to allow experienced staff to
return to service or stay in service longer.
(LD)
My Lords, could the Minister go back and look at this, and take
it very seriously? We are in a situation where, with £1 of
additional income, an individual at a senior level can face
something like £30,000 in additional tax liability—and that is
just in year 1. This applies to medics who have worked on the
battlefield in places like Afghanistan and in our emergency
rooms. They have begged to be allowed to work unpaid so that they
do not trigger the impact of the pension allowance cliff edge.
This is a problem of bad legislation and a lack of flexibility
within the schemes, both of which could be rectified with some
decent attention.
(Con)
I note what the noble Baroness has said, but, on her point about
flexibility, one of the actions that we have taken is extending
partial retirement; for example, by allowing more NHS staff to
take part of their pension while continuing to work and build
further pension rights. We have also extended flexibilities
enacted in response to the pandemic by suspending the 16-hour
rule, which requires some pension scheme members to work no more
than 16 hours per week if they return to NHS employment. So I
reassure the noble Baroness that we have taken action, and I am
sure that there is more that we can do.
(Con)
My Lords, I urge my noble friend to go back to the department and
look again at the tinkering that has happened to the NHS pension
scheme—this will not sort out the problem. The fundamental issue
is the way that the annual and lifetime allowances deter extra
work and drive early retirement. Although the Government have
made commendable efforts to make some adjustments, those
underlying problems persist. My noble friend said that this
affects only the highest earners, but of course, within the NHS,
these are often the most valuable members of staff, whom we need
to keep.
(Con)
Indeed. The subject of the question was to do with higher
earners, but I will broaden my response a little. Public service
pensions are a key part of the overall renumeration in the public
sector and I acknowledge that it is important to get this right
for retention. Reference has been made to nurses. A typical NHS
nurse will retire after 30 years with a pension worth over
£24,000 per year in today’s money. This compares quite favourably
to a private sector employee with similar earnings receiving less
than £10,000. As I have said, there is more to do, and we will
keep this under review.
(Lab)
My Lords, it is no good the Minister trying to persuade us that
this is an attractive package. We know that senior doctors are
retiring early, and we should be pragmatic about this. These
people represent a very expensive investment—they are assets, and
we should sweat our assets. They should not be leaving at the age
of 58, 59 or 60, when realistically they should continue into
their mid-60s or later, yielding their skills to our society.
(Con)
Indeed, it is very important that we look after those at the
senior end of the NHS; much has been made of that in the previous
Question and this one. As the noble Lord has alluded to, tax
relief offered on pension contributions is expensive, costing the
Exchequer £67.3 billion in 2020-21, with around 58% relieved at
the higher and additional rates. As I mentioned earlier, there
are a number of other aspects on which we have taken action, and
perhaps there is more to do to be sure that we can retain our
very best doctors and senior clinicians.
(Lab)
My Lords, as the Minister just said, the pension tax relief is
about £67.3 billion, the majority of which goes to higher and
additional rate taxpayers. Could he explain the steps that the
Government have taken to eliminate the regressive effects of the
tax breaks for the richest?
(Con)
This is a familiar angle from the noble Lord, and I have already
mentioned a number of the steps we have taken. He will know that
individuals can be subject to different tax treatments depending
on the type of income they are receiving and whether they are
employed, self-employed or working through a company structure. I
reassure him that it is very important that we find the best way
to reward those at the very top, particularly our senior
clinicians, otherwise they might move abroad. We must also look
at those at the other end of the scale, particularly at this very
difficult time.
(Lab)
My Lords, following on from the Minister’s response to my noble
friend, the Prime Minister and the Chancellor assured us the
other day that those with the broadest shoulders would be asked
to bear the greatest burden. Therefore, will the Government look
again at the question of higher rate tax relief and the amount of
money that has been lost in that, and at whether significant
savings might be made through that—leaving aside the problem
identified earlier?
(Con)
I can certainly take back that message. As the House is aware, we
have the Autumn Statement coming up on 17 November. Although I am
the first not to second-guess what might be in that, I am certain
that the Chancellor and the Prime Minister will be looking at all
aspects, and particularly in this respect.
(Lab)
The Minister says that his department is doing its best, but it
has been estimated that 10% of the workforce in these areas would
stay on if something were to be done about the annual allowance.
Some people cannot wait to leave; they are not willing to work
for nothing. I do not know of an HR manager in the UK who would
not give their eye teeth for 10% retention. Can the Minister
please put pressure on his department to do something about
that?
(Con)
Again, I will take the message back to the department. I reassure
the noble Baroness that we are taking action to support NHS
staff, including those at the top end. The Department of Health
and Social Care has commissioned NHS England to develop a
long-term workforce plan. This will look at all aspects,
including pay at the senior end, as well as the other aspects
that have cropped up this afternoon in terms of how we can reward
and keep our very best senior people.
(Lab)
Is it still the case, as it was when I was at the DSS from 1999
to 2001, that when Ministers were given any information whatever
about pensions— any options, anything at all—they were always
given a 30-year timeframe? That meant that there were no
surprises of the detailed decisions that might be taken. Along
with this Question and the one that is going to follow, there is
probably a good case for looking at how our pensions are funded,
both private and public, in this country.
(Con)
I do not think that there was a question there—but, again, it is
a matter that I shall reflect on and certainly pass back to the
department.
Defined Benefit Pension
Funds
Question
3.15pm
Asked by
To ask His Majesty’s Government what assessment they have made of
(1) the extent of Liability Driven Investment strategies in the
management of defined benefit pension
funds, and (2) the consequences that may arise for (a) His
Majesty’s Government’s ability to issue new gilts, and (b) the
management of inflation.
The Parliamentary Secretary, Treasury () (Con)
Defined benefit pensions use liability-driven investment
strategies to protect themselves from adverse interest rate and
inflation movements. The Pensions Regulator estimates that 60%
of defined benefit pension
funds have LDIs. The Debt Management Office’s gilt operations are
running smoothly, with good levels of demand; its 2022-23
financing remit will be revised alongside the Autumn Statement on
17 November.
(Con)
My Lords, I welcome my noble friend back to the Front Bench. If
the pension funds were entering into those risky strategies with
a view to eliminating their exposure to interest rate changes, it
did not quite work, did it? The Government need to sell gilts to
borrow money for their activities. The Bank of England needs to
sell gilts to start to reverse quantitative easing and to bear
down on inflation. Both those activities were threatened by the
sudden discovery of what can only be described as risky and dodgy
investment strategies at private pension schemes a few weeks ago.
So what I and other noble Lords would like to hear from my noble
friend is that those financial positions have now been reversed
out of by the pension funds—that they are not pursuing those
strategies—so that this does not happen again, and the Government
and the Bank can continue with their vital activities.
(Con)
My Lords, LDI strategies can be used as a risk-management
strategy for pension funds, and I would expect them to continue
to do so. There were specific circumstances which the Bank
stepped in to address. But my noble friend is right that it is
important that we reflect on what happened to those particular
funds in that period and make sure that the Bank of England and
the Financial Policy Committee have the right oversight to ensure
ongoing stability in these markets.
(LD)
My Lords, a key focus of the IORP directive, which was transposed
into the Pensions Act 2004, was to prohibit borrowing so that
assets are retained for the payment of pensions and not put at
risk of being drained away to third parties. With that
prohibition on borrowing, how has that been circumvented,
permitting repos and investing in funds that break both the
principle and detail of that provision? Is it not dishonest to
describe LDI as de-risking when it introduced leverage and
derivative exposures of some £1.4 trillion, which is nearly the
same as the total pension fund assets?
(Con)
My Lords, the Government do not agree with the noble Baroness’s
assessment of the situation. Along with the Bank of England and
the Financial Policy Committee, we keep a close eye on
identifying and addressing systemic risks to improve UK financial
stability. In 2018, the committee specifically looked at UK
pension schemes’ resilience to an instantaneous 100 basis point
rise in yields across maturities. The movements that we saw a few
weeks ago were greater than that. As the FPC has also noted, it
may not be reasonable to expect market participants to insure
against all extreme market outcomes, because there can be
negative effects to that as well.
(Lab)
My Lords, I declare an interest as a fellow of the Institute of
Actuaries. I am afraid that there will be an alliance of
regulators and providers who will say, “Nothing to see here, we
can move on”. There are questions to be answered about what
damage has been done and about what we can do to ensure that it
does not happen again. There is so much hidden in the investment
policies of pension funds. Can the Government give an assurance
that there will be a proper investigation of what happened, with
an independent element?
(Con)
My Lords, the Pensions Regulator and other regulators have said
that they will want to look at what has happened and learn
lessons. I also understand that the Work and Pensions Committee
in the Commons is looking at this issue, including any changes to
the Pensions Regulator, for example, that may need to be made.
The Government look forward to reading the results of its
findings.
(Con)
My Lords, is the potential booby-trap in LDIs not the liquidity
mismatch between the time it takes to sell the assets of pension
funds and the demands of the hedge, which requires the margins to
be met on the same day in cash? Is that not a strong argument for
the liquidity buffer to be increased? Does it not also pose the
question: to what extent did QE force people more and more into
these assets?
(Con)
My noble friend is absolutely right about the liquidity mismatch.
My understanding is that there was a certain amount of
flexibility shown in that; none the less, the Bank of England’s
intervention was directed to address that specific problem. As
for the QE policy, my noble friend will not be surprised to hear
me say that that is for the Bank of England and I will not
comment further on it.
(Con)
My Lords, obviously the shadow banking system, which includes
insurers and pension funds, is not subject to the same rules as
traditional banks, especially when it comes to holding cash
reserves against market shocks. Does the Minister agree with Sir
, Deputy Governor of the Bank of England, when he
wrote to the Treasury Select Committee in the other place
recently to say that it is incredibly important that there should
be more international checks and balances on non-banks?
(Con)
My noble friend is absolutely right that there can be risks to
financial stability from non-banking actors in the financial
system and that they are not subject to the same regulations. He
is also right that addressing some of these risks cannot be just
through domestic action but must also be international action,
and that is something the UK is advocating for.
(Lab)
My Lords, I welcome the noble Baroness, the Minister now, back to
her seat and look forward to many one-to-ones. Financial
regulators in a number of European countries have taken steps to
increase surveillance of derivative-linked funds used by UK
pension schemes. That is an attempt to promote international
financial stability following the post mini-Budget market
turmoil. Having witnessed recent events, does it remain the
Government’s intention to water down UK regulators focused on
stability by introducing a statutory requirement to prioritise
competitiveness?
(Con)
I thank the noble Lord, and all noble Lords for their welcome
back, but I have to disagree with the noble Lord’s interpretation
of the provisions in the forthcoming financial services Bill.
Financial stability will remain at the core of our system, but I
do not think it is wrong to also recognise the importance of
competitiveness in that system.
(LD)
My Lords, the Minister, whom I welcome, said that the Government
had handed off to a committee of the House of Commons the
responsibility for looking at whether reform of the Pensions
Regulator was required. Surely, the Government should be looking
at whether reform is required because, very clearly, we have a
regulator that neither recognised the embedded risk of strategies
that it was allowing pension funds to pursue, nor understood the
broader implications. This suggests that change is urgent.
(Con)
If that was the impression the noble Baroness had of my Answer,
it was not the one I meant to leave with noble Lords. The
regulators, including the Financial Policy Committee, the
Pensions Regulator and others, will want to look at and reflect
on the lessons that can be learned from the events of recent
weeks. In pointing to the Commons committee’s work, I merely
sought to address the noble Lord’s point about a different or
more independent set of eyes also looking at this.
(Con)
My Lords, can it be true that the Bank of England’s own pension
fund had more than 80% of its assets invested in these highly
risky derivative products, which depended on keeping interest
rates down? Given that the Bank of England intervened to buy
bonds to keep interest rates down, was there not a conflict of
interest there? Also, was it not apparent to everyone, if these
are the facts, that the system of regulation has failed—failed
absolutely —and needs to be looked at again?
(Con)
My Lords, I do not know how the Bank of England’s own pension
scheme is invested. As my noble friend pointed out, the
particular issue around these schemes was liquidity; the Bank of
England stepped in to address that issue, which I believe has now
been resolved. None the less, we will look at the lessons that
can be learned. I pointed to an exercise undertaken in 2018 to
stress-test UK pension schemes’ resilience, but the movements we
saw in the past few weeks went beyond the bounds of those
scenarios. We should reflect on that and see whether anything
needs to change as a result.
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