My Lords, an amendment has been put forward to Clause 80 by the noble Lord, Lord Davies of Brixton, which concerns the employer cost cap. The noble Lord seeks to amend this clause to prevent the increase in value of schemes associated with the McCloud remedy being accounted for in the cost-control element of the 2016 valuations. I thank the noble Lord for bringing this to the attention of the House and am grateful to him for his prior engagement on the policy.
I can confirm that the Government have received pre-action protocol letters on behalf of some trade unions which have indicated that they may issue judicial review proceedings to challenge the Government’s decision to include the costs of remedy in the cost-control mechanism at the 2016 valuations. As the House will expect, and as the noble Lord, Lord Ponsonby, acknowledged, I cannot comment on the specifics of live or threatened litigation.
I acknowledge and appreciate the support the noble Baroness, Lady Janke, has given in general to the changes we have made to the cost-control mechanism—but there is more I want to say. I will talk through the general background, to reassure the noble Lord, Lord Davies, of the reasons for the Government’s decision. I will start by commenting on the policy rationale, starting with amending directions.
In Grand Committee, I brought to your Lordships’ attention that the Treasury had published amending directions on 7 October 2021 that will allow schemes to complete the cost-control element of the 2016 valuation process. These amending directions confirm that the increase in value of schemes associated with the McCloud remedy will be taken into account in the completion of the cost-control element of the 2016 valuations. The Government believe this is right, given that addressing the discrimination identified in the Court of Appeal’s judgment by giving members a choice of scheme benefits for the remedy period involves increasing the value of members’ pensions.
The cost-control mechanism was designed to assess costs arising from a change in value of schemes to members. Failure to capture the value of the remedy could have meant that members’ benefits may have changed going forwards, based on an incomplete and inaccurate assessment of the value of these pension schemes. This would represent an unacceptable risk to taxpayers, contrary to the objectives of the mechanism.
Turning to some specific detail on ceiling breaches, the Government have previously announced their intention to waive any ceiling breaches that arise from the 2016 valuations, and this is implemented by the current version of Clause 80. However, any floor breaches that occur will be honoured. This means that no member will see a reduction to their benefits as a result of the 2016 valuations. This decision, and the completion of the 2016 valuations, should provide certainty to scheme members over their benefits.
I will attempt at this stage to answer the point raised by my noble friend Lord Hodgson of Astley Abbotts and the noble Lord, Lord Ponsonby, about the use of directions. The Government acknowledge the key interest of the House in the scrutiny of secondary and tertiary legislation. The DPRRC considered this Bill and chose not to bring forward any comments for the attention of the House. The Government have powers under Section 12 of the PSPA 2013 to set out in Her Majesty’s Treasury’s directions what costs must be taken into account as part of the cost-control valuations. More broadly, I acknowledge the points my noble friend made; I have no doubt that Hansard will be read and I will say simply that his points are noted.
I will now say a few words about the amendment itself. The amendment seeks to amend the Treasury’s powers, set out in Section 12 of the Public Service Pensions Act 2013, to make directions which set the employer cost cap. Section 12 grants the Treasury a wide power to specify in directions which costs should be taken into account as part of the cost-control mechanism.
The amendment put forward by the noble Lord seeks to amend subsection (4) by omitting paragraph (c). I understand that the noble Lord’s intention is to remove the Treasury’s power to specify that the costs of remedy, or any other costs associated with the legacy schemes, should be accounted for in the mechanism.
This amendment may not have what I understand to be the noble Lord’s intended effect of preventing the increased value associated with the McCloud remedy
from being included in the mechanism at the 2016 valuations. Subsection (4) sets out the type of costs that Treasury directions may specify for inclusion in the cost-control mechanism, but it is not intended to be an exhaustive list; rather, it provides some illustrative examples of how the wide power in subsection (3) may be exercised. I also note that the 2021 amending directions came into effect on 8 October 2021, as I mentioned earlier, under the existing powers. The noble Lord’s amendment as drafted would have no effect on the 2021 amending directions.
I want to attempt to answer some questions that were raised by the noble Lord, Lord Davies, supported, I think, by the noble Baroness, Lady Janke. There was some debate about why members are being made to pay for, as they put it, mistakes made by the Government. When the cost-control mechanism was established, it was agreed that it would consider only costs that affect the value of a scheme to members. Addressing the discrimination identified in the McCloud and Sargeant judgments by giving members a choice of scheme benefits for the remedy period involves increasing the value of schemes to members. The costs associated with this should therefore be taken into account as part of the cost-control element of the 2016 valuations process. However, any ceiling breaches that occur will be waived, no member will see a reduction in benefits as a result of the 2016 valuations, and any floor breaches that occur will be honoured.
The noble Lord, Lord Davies, asked when we will introduce amendments to reform the cost-control mechanism. I hope I can provide some reassurance by saying that the Government published our response to the consultation on the CCM on 4 October, we are currently working through our options and we will legislate for changes to the mechanism when parliamentary time allows. While a precise date has not been set—I am sorry I cannot give that date—the aim is to implement any changes in time for the 2020 valuations. As should now be clear, the Government have no intention of tabling an amendment in the House of Lords to implement these reforms. Instead, the package of amendments being introduced in this House are technical amendments that ensure the consistent application and legal operability of measures in the Bill.
I hope that, with these explanations, I have provided the noble Lord, Lord Davies, in particular, with some helpful reassurances on the policy rationale and the powers used, and I ask him to withdraw his amendment.