Official Report: Minutes of Evidence

The Chairperson (Mr McKay): I welcome Blathnaid Smyth and Stephen Ball from corporate human resources in the Department. If you would like to make an opening statement to outline where we are at and how urgent this is, we will go to questions after that.

Mrs Blathnaid Smyth (Department of Finance and Personnel): OK, that is great. I thank the Committee for the opportunity to provide an update on the issue at this meeting. If the Committee permits me to do so, I will address the concerns raised in the Committee's correspondence of 22 October, concerning timescales for its scrutiny of the legislative consent motion (LCM). A formal written response to that correspondence has been prepared and is in the process of being issued. In the interim, I will attempt to provide some clarification and outline the approach that the Department intends to take to facilitate the Committee's scrutiny of the LCM in line with the provisions of Standing Order 42A. I will be happy to take any questions after that.

The Committee noted its concern at the timescale set out in the Department's letter of 21 October. At that time, we had been advised that the laying of the amendments in Westminster was imminent and that they would require a decision by Report stage in the House of Commons, which would be on 17 November. The current position is that they have not laid the amendments yet. They may lay them at Report stage on 17 November. It is only at that stage that we can lay the memorandum and give the Committee 15 days before it is debated so that the Committee can provide a report if it wishes to do so.

The policy is still very much in development. It emanates from the consultation carried out by Treasury on freedom and choice in pensions. We had been advised in correspondence that, if we were seeking LCMs, there could be further issues to be addressed.

We received correspondence from the Chief Secretary to the Treasury (CST) on 11 September. At that time, considerable liaison was needed with other Departments. This legislation will amend the Pensions Act in GB and is Department for Work and Pensions (DWP) legislation. It will be taken forward in DSD legislation here. We are specifically concerned with the public sector pensions aspect.

The ban on transfers from defined benefit schemes to defined contribution schemes could pose a significant risk to the public sector schemes. So, while DSD may take forward an LCM for other aspects of this legislation to do with giving advice to people, we are very keen to proceed to ensure that this aspect is legislated for by April because of the financial risk to the public sector schemes and, ultimately, to the public purse.

The Department accepts the need to consult the Committee at an early stage on a policy where an LCM may be considered. In this case, we advise that the policy, although targeted on the impacts of transfers from public service schemes, operates within the context of that broader freedom of choice in pensions. The DFP priority has been the protection of the integrity of the public service schemes and their members in the event of there being a significant run on the defined contribution arrangements under that broader policy.

Departmental officials have engaged with Treasury officials and other Departments on the scope of the impacts of the broader policy to define the area where the LCM is engaged. There was consideration that a composite LCM with DSD might be the way to take this forward.

As I said, the necessary amending clauses are still being refined in Treasury. This gives us an indicator of the preparatory work required to get to this point. As I said also, those have not been laid.

I hope that this provides some clarification on the timescales. In our letter, we said that it would be normal for the decision to be taken on the motion by report stage. However, the amendments are only going to be laid at that stage, so if an LCM does not to pass here, it would go to the House of Lords, where our provisions would be stripped from their Bills if needs be.

The Chairperson (Mr McKay): You said that you received correspondence on 11 September, but the Committee was not informed about this until 22 October. Why was there that gap, given the urgency of the matter?

Mrs Smyth: That gap was to do with liaising with the other Department. The letter said that they were still formulating areas and highlighted that an LCM could be required in this area, but we had to decide on the best way forward and whether it was for DSD to take forward the composite LCM.

The Chairperson (Mr McKay): When did you receive notification formally from Westminster on the LCM?

Mr Stephen Ball (Department of Finance and Personnel): That would have been CST's letter on the 11 September. The Minister replied, agreeing in principle, on 23 October.

The Chairperson (Mr McKay): Did that include draft amendments?

Mr Ball: No, we still do not have the actual amendments. We have draft amendments, but the latest notification from Treasury is that, as Blathnaid pointed out, the amendments will not be laid until 17 November. They are still being finalised. We do not, at this stage, have the final set of amendments.

The Chairperson (Mr McKay): So, at the moment, you are not in a position to do anything, essentially, until —

Mrs Smyth: No, we cannot lay the memorandum.

Mr Ball: We cannot lay the memorandum. The legislative programme secretary's advice is that we should not lay the memorandum until we have, as near as possible, the final clauses, some of which the memorandum will refer to.

The Chairperson (Mr McKay): To clarify: those should pass later this month. What, then, is the procedure for the Assembly and the Minister?

Mr Ball: Once the clauses are available, the memorandum will be laid in the Assembly. I think it will be referred to the Committee for Finance and Personnel to give you the opportunity to scrutinise it and report if you wish to do so. Following that, the Minister's intention will be to move the motion in the Assembly.

The Chairperson (Mr McKay): Would the Committee have the necessary 15 working days?

Mr Ball: Our understanding is that that will be the case.

The Chairperson (Mr McKay): Given that the LCM will restrict freedom of choice for members of unfunded public service pension schemes, what are the risks of any legal challenges forthcoming to the proposals?

Mrs Smyth: On the unfunded schemes, we are not aware of any risk at this point.

The Chairperson (Mr McKay): No risk at all?

Mr Ball: We have been speaking with HM Treasury on equality impacts. That is still being explored.

Mrs Smyth: And with DSO.

Mr Ball: Yes, with DSO as well.

The Chairperson (Mr McKay): Have you had any correspondence with any of the trade unions in regard to this? Are there any concerns?

Mr Ball: We have been discussing this with trade unions through our interdepartmental groups, where we liaise with unions. I think that, generally, the feeling is that they agree in principle with safeguarding the schemes. There could be detrimental impacts for members if there were a run on any of the schemes. It could impact on the cost-control mechanisms for the schemes, which means that the remaining members would possibly be faced with higher contributions. Modifications to the schemes might be required.

Mrs Smyth: Concern was also expressed about the funded schemes.

The Chairperson (Mr McKay): The paper also states that Treasury, and Revenue and Customs, estimate that an annual cost of £200 million would be incurred if 1% of those reaching retirement age were to transfer out in order to access their pension savings flexibly. Has the Department done any forecast or tests about what the costs might be here?

Mrs Smyth: That analysis has not been carried out yet.

The Chairperson (Mr McKay): Do you have a rough idea of what the cost might be?

Mr Ball: I do not think that we have. It could be viewed by some as an attractive option. No current controls would be able to stem the flow, unless we take the same action that has been taken for the GB schemes.

The Chairperson (Mr McKay): How many public sector workers here are we talking about?

Mr Ball: I am not sure of the exact numbers, but it extends across all public service schemes, with the exception of the local government scheme, where considerations are being made. The transfer will potentially be allowed to go ahead there. The ban effects only the unfunded schemes, where there is a direct link to expenditure from the public purse.

Mrs Smyth: You are talking about over 200,000 people.

The Chairperson (Mr McKay): You referred to the Department for Social Development. Have any views been forthcoming from other Departments on the scheme changes?

Mrs Smyth: On this policy?

The Chairperson (Mr McKay): Yes.

Mrs Smyth: Just through the Executive paper. As you will be aware, an Executive paper was distributed on 21 October. The Executive agreed, in principle, that our Minister could take it forward.

Mr McCartney: The Department's paper says that this is in the interests of scheme members here in the North. How is that the case?

Mrs Smyth: When a transfer value is calculated in a funded scheme, that would be deducted from the scheme; it would be a draw on the scheme. Although unfunded schemes do not have a fund, they have valuations. This could lead to a severe deficit in the scheme, which would impact on the taxpayer and scheme members because it could breach cost controls. When cost controls are breached, you have to look at employer and employee contributions and employee benefits. If there were a great run on unfunded schemes, it could, ultimately, affect the members of those schemes.

Mr McCartney: The paper talks about 1% of people across the whole scheme opting out. What is that percentage based on? Is there an attraction for people to opt out?

Mrs Smyth: There is. The attraction is because of the new rules on the more defined contribution schemes that are coming out of the freedom of choice of pensions policy. People do not have to buy an annuity, so they can draw down from their pension, and the tax is less than it was in the past. There is an attraction, and there could be a proactive campaign to attract people from their public sector schemes into direct contribution schemes.

Mr McCartney: Will someone in the scheme feel that their rights are being impinged by this LCM?

Mrs Smyth: Possibly. I could not really answer that. As a member of the scheme, I would have to work out whether that applies to me. It is a possibility.

Mr McCartney: So, will an equality impact assessment be carried out on the LCM?

Mr Ball: Yes. We are speaking to Treasury about the work it has done. We will be supplementing that by doing our own work here.

Mr McCartney: But it does not have a process for —

Mr Ball: No, but we are engaging with Treasury on the issues it might have identified. We are also engaging with our own equality department on what steps we will take. That will likely involve an assessment.

Mr McCartney: Should the gap have been spotted before the legislation was framed?

Mrs Smyth: In Treasury policy?

Mr McCartney: Yes. If someone was paying into the scheme on the basis that they could opt out when —

Mr Ball: It does not really affect their opportunity to opt out of the scheme. It is trying to identify risk. Some members will want to stay in the scheme and not transfer to the defined contribution scheme. There would be a risk to them. The Department's line is to protect the integrity of the scheme overall. It would also be in line with the initiative for public service pensions, which is that people should be saving towards their retirement and that the scheme provides a good option to achieve that.

Mr D Bradley: When is it possible for people for opt out? Can they do that now?

Mrs Smyth: To opt out of public service pensions?

Mr D Bradley: Yes.

Mrs Smyth: They can do that at any time.

Mr D Bradley: To what extent is that happening?

Mrs Smyth: It is negligible at the moment.

Mr D Bradley: So, as Raymond said, was this a loophole in the defined contribution policy that was not seen at the time and is now trying to be covered over?

Mrs Smyth: The freedom of choice of pensions is a new policy that they are introducing. I suppose that this is looking to address any impact on defined benefit public service schemes emanating from that future policy for defined contribution schemes.

Mr D Bradley: When will the equality impact assessment be carried out?

Mr Ball: We are looking at that now and will be publishing it shortly.

Mr D Bradley: Will that be within the next, what?

Mr Ball: Within the next few weeks?

Mrs Smyth: Yes. They have done an equality assessment of the provisions of the Pensions Bill in Westminster, and we will have it screened here through our equality.

Mr D Bradley: In the next month?

Mr Ball: Yes.

Mr McCartney: Is that a screening process, or a full EQIA?

Mrs Smyth: It would have to be screened first.

The Chairperson (Mr McKay): Are there any other LCMs in the pipeline?

Mrs Smyth: Yes, there has been a submission to our Minister on an LCM for the Small Business, Enterprise and Employment Bill. That is to do with redundancy clawback, and it relates to people in the public sector who earn over £100,000 a year. If they were made redundant, and took up another post in the public sector in a very short timescale, there would be provision to claw back all or some of the redundancy paid out at the time.

The Chairperson (Mr McKay): Is that the only one you are aware of?

Mrs Smyth: That is the only one, although we received a letter yesterday on this LCM. As I said, we are still developing the policy. We will have to address it as it raised the issue of cash equivalent transfer values for funded schemes.

The Chairperson (Mr McKay): What is the timescale for the clawback LCM?

Mrs Smyth: It was submitted just yesterday. It will be relatively soon, because it is something that we would like to see addressed by April 2015 as well.

Mr Cree: The paper states that there is legal competence in amending the scheme and that that, therefore, is the main drive in introducing the LCM. Will you develop that a bit more? What particular aspects of legal competence are there?

Mrs Smyth: Is that in the Executive paper?

Mr Cree: It is the DFP paper.

Mr Ball: I think that it is intended to highlight that DFP would have an interest in the protection of the public funds associated with the unfunded schemes. Therefore there would be legal competence in taking forward the LCM.

Mr Cree: So, it is to protect the lack of money.

Mr Ball: It is to protect the available funds for those unfunded schemes and account for any impacts if people decided to transfer out to the defined contribution schemes.

Mr Cree: So, if fees were not simply funded out of revenue, to use an old-fashioned expression that I still understand very well, and if there had been some other investment fund, such as a local government scheme, for example, it would not have been a problem.

Mr Ball: The policy intention is that the local government scheme members would be allowed to transfer out in some circumstances. The rationale of that is, because that fund exists, it is more feasible to liquidise the assets associated with it if the vast majority of people decide to transfer out. As Blathnaid pointed out, there are still some issues associated with that which are being considered to protect the scheme in the event of there being a massive group decision to transfer out.

Mr Cree: There could, of course, at any stage, be an injection of money to protect the unfunded scheme anyhow.

Mr Ball: It is a possibility, but, as Blathnaid tried to point out, there is a cost-cap mechanism associated with the schemes. That could be affected by any significant draw on the available funds, which could mean that members who choose to stay in the scheme could face higher contributions or amendments to the benefits that they might have.

Mr Cree: Pick up the deficit, yes.

The Chairperson (Mr McKay): Stephen and Blathnaid, thank you, again.