Published Tuesday, July 21, 2020 Djuna Thurley
This notes looks at the reforms to public service pensions introduced in 2015 under the Public Service Pensions Act 2013 and the implications of the Court of Appeal's decision that the transitional arrangements were discriminatory on grounds of age
Reforms to public service pensions introduced under the Labour Government had the aim of improving financial sustainability and reflecting changes in life expectancy, working practices and the private sector, including increases in the pension age for new entrants only.
In June 2010, the Coalition Government established an Independent Public Service Pensions Commission, chaired by former Labour Secretary of State for Work and Pensions, Lord Hutton of Furness, to look at “the long-term affordability of public sector pensions, while protecting accrued rights.” In its final report, published in March 2011, the Commission recommended replacing the existing schemes with new ones, with pension entitlement based on career average earnings rather than final salary, and increases in the pension age: i.e. linking the normal pension age to the State Pension age in all schemes except those for the ‘uniformed services’ (armed forces, police and firefighters), which would have a pension age of 60.
The Government accepted the Commission’s recommendations as the basis for negotiation with the trade unions. It announced final proposed agreements for reform of most public service schemes over the period March to October 2012. It then legislated in the Public Service Pensions Act 2013 for a framework for the new schemes to be introduced for future service from 2015 (2014 for local government). Section 10 provided for normal pension age linked to the State Pension age, except for the schemes for firefighters, police and armed forces, which are to have a normal pension age of 60. For more detail, see Library Briefing Paper CBP-6581 Public service pension age – 2015 onwards (November 2018).
Impact of legal challenges
There was protection for accrued rights and transitional protection arrangements to enable those ‘closest to retirement’ to remain in their existing schemes either until retirement, or for a limited period, depending on their date of birth. In December 2018, the Court of Appeal ruled in McCloud v Ministry of Justice that the ‘transitional protection’ offered to some members as part of the reforms amounted to unlawful discrimination. The matter was remitted to the Employment Tribunal, to determine a remedy for the claimants.
In July 2019, having been denied leave to appeal, the Government said the difference in treatment would be remedied across public service pension schemes (HCWS 1275 15 July 2019). In July 2020, it launched a consultation on its proposal to address unlawful discrimination arising from the transitional arrangements. It would give members a choice as to whether they accrue benefits in the relevant reform or legacy scheme for the ‘remedy period’ (1 April 2015 to 31 March 2022). There were two options: an immediate choice exercise, where the choice would be made as soon as possible after the policy is implemented; or a deferred choice underpin, where the choice would be made at retirement, or when benefits are drawn and, up until that point, members would be treated as having been in their legacy scheme during the remedy period. The choice would be offered to all affected members, whether they originally received transitional protection or not. The proposals apply to all members who were in a relevant public service pension scheme on or before 31 March 2012 and remained in a relevant pension scheme on or after 1 April 2015 (HCWS 380, 16 July 2020; Public service pension scheme consultation: changes to the transitional arrangements to the 2015 schemes, July 2020).
The Government also proposed that from 1 April 2022, all members who are not already in the reformed schemes and who were still accruing benefits in legacy schemes, would be placed into the 2015 reformed pension schemes.
The Government estimates that “removing unlawful discrimination back to 2015 will cost on average around £2.5 billion for each year of the remedy period in additional future pension payments to members of those schemes in scope of this consultation.” It said this counted as a ‘member cost’ and, as such, would be considered as part of the completion of the cost control element of the 2016 valuations process. Current employer contribution rates would not be affected (HCWS 380, 16 July 2020; Update of the Cost Control Element of the 2016 valuations, 16 July 2020). The ‘cost control mechanism’ was introduced as part of the 2013 reforms, to provide ‘backstop’ protection to the taxpayer in case of unexpected increases in member costs. It provides that, if valuations show the cost of a scheme to have risen or fallen outside of a target rate, steps must be taken to bring costs back to target. Although initial results of the first post-reform valuations indicated that members should get “improved pension benefits for employment over the period April 2019 to March 2023”, discussions on how to implement this were put on hold pending the agreement of McCloud/Sargeant remedies. (HC Deb 6 September 2018 c13WS; HCWS 1286, 30 January 2019). The Fire Brigades Union and the Public and Commercial Services union said the Government, rather than scheme members, should pay to put right the discrimination (FBU circular, 17 July 2020; PCS, 16 July 2020).
Other relevant Library Briefing Papers include CBP-8478 Public service pensions -facts and figures (December 2019), CBP 6971 Public service pensions: cost control mechanism and CBP 8540 Judges pension schemes (July 2020).
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