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Independent Public Service Pensions Commission

In June 2010, the Coalition Government set up the Independent Public Service Pensions Commission, chaired by former Labour Work and Pensions Secretary, Lord Hutton of Furness, to conduct a “fundamental, structural review of public service pension provision by Budget 2011 (HM Treasury, Budget 2010, HC 61, June 2010, para 1.42).

 In its final report published in March 2011, the Commission recommended replacing the existing final salary schemes with a new career average schemes and, when everything is ready, move existing members to the new schemes for future service. This was “the fairest way of spreading the effect of change across the generations” and “the quickest way of ending the in-built bias against those public service employees whose pay stays low over their career, inherent in final salary schemes.” To mitigate the risks of the costs associated with rising life expectancy, the Commission recommended linking the normal pension age to the State Pension age, except in the schemes for the uniformed services which should have a pension age of 60 (Independent Public Service Pensions Commission – final report, March 2011, foreword).

2015 reforms

The Coalition Government accepted the Commission’s recommendations as the basis for negotiation with the trade unions and 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). Key features of the new schemes are that:

  • They provide pension benefits based on career average revalued earnings (CARE) rather than final salary (s8); and
  • Individuals have a normal pension age linked to their State Pension age, except for the schemes for firefighters, police and armed forces, which have a normal pension age of 60 (s10).

The Government estimates that in combination with other changes made by the Coalition Government (the switch from the RPI to the CPI for annual increases and increases in member contribution rates) the 2013 Act reforms have reduced “the forecast cost of public service pensions to the taxpayer by approximately £400 billion over 50 years.”  It also argues the change from final salary to career average design has “made schemes fairer for most workers on low and middle incomes” and that the change to normal pension age “reflected improvements in life expectancy and the need to rebalance working lives with the average number of years spent in retirement.” (HM Treasury consultation, July 2020, para 1.9).

Transitional arrangements

The Commission said that age discrimination legislation meant it was “not possible in practice to provide protection from change for members who are already above a certain age.” Furthermore, it argued that this should not be needed: particularly, if the ‘final salary link’ was retained (with benefits in the ‘legacy’ schemes based on salary at the time of leaving public service rather than at the point of reform), existing members in their 50s would experience fairly limited change in the benefit they would otherwise have expected to build up by normal pension age (Final report, March 2011, para 7.34).

However, on 2 November 2011, the then Chief Secretary to the Treasury, Danny Alexander, said there would be age-related transitional protection:

I have listened to the argument that those closest to retirement should not have to face any change at all. That is the approach that has been taken over the years in relation to increases to the state pension age, and I think it is fair to apply that here too […] no one within 10 years of retirement will see any change in when they can retire or any decrease in the amount of pension they receive (HC Deb 2 November 2011 c928).

Under section 18 of the 2013 Act, the legacy schemes were required to close for future service from 1 April 2015, with exceptions to be provided for in regulations. In most schemes, this meant that members within 10 years of Normal Pension Age stayed in their existing schemes (known as “transitional protection”) and members between 10 and 13.5 or 14 years of Normal Pension Age could stay in their existing schemes for a period ranging from a few months to several years after 2015 (known as “tapered protection”).

McCloud

Judges and firefighters made claims (McCloud and Sargeant respectively) in the Employment Tribunals on the grounds that the transitional protection offered to older members constituted unjustified direct age discrimination and indirect race and sex discrimination. In particular, they argued that younger members were treated less favourably than older members who were given transitional protection. In December 2018, the Court of Appeal ruled in McCloud v Ministry of Justice that the transitional provisions in the judges’ and firefighters’ pension schemes gave rise to unlawful age discrimination. 

Consultation on remedy

In July 2019, having been denied leave to appeal, the Government accepted that the difference in treatment would be remedied across public service pension schemes, regardless of whether individuals had made a claim (HCWS 1275 15 July 2019).

In July 2020, the Government launched consultation on its proposal to address the unlawful discrimination arising from the transitional arrangements (HCWS 380, 16 July 2020). It proposed giving eligible 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). The main question for the consultation was when that choice would be made. 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 or not they originally received transitional protection. ‘Eligible members’ are those in service on or before 31 March 2012 and still serving on or after 1 April 2015, including those who are currently active, deferred or retired, and those with a qualifying break in service of less than 5 years. (HM Treasury, Public service pensions – response to consultation, Feb 2021).

In its response to the consultation in February 2021, the Government said it would proceed with the deferred choice underpin. This meant that members would make a decision, shortly before their benefits came into payment, about whether to have built up benefits in the relevant legacy or reformed scheme for the ‘remedy period’ (1 April 2015 to 1 April 2022).  In the meantime, they would be deemed to have built up benefits for that period in the relevant legacy scheme. Most respondents to the consultation had supported this option, primarily because members would have greater certainty on their benefit entitlements at the point that they made the decision.

In recognition of the administrative challenges implementing the remedy would represent for schemes, the Government decided to give them until October 2023 to fully deliver the retrospective changes needed for the remedy period (i.e. move affected members of the reformed schemes back to their legacy schemes for the remedy period, and resolve the cases of members who have retired or died since April 2015). The remedy period would still end on 31 March 2022 and all members would build up benefits in the reformed schemes from that date (Response to consultation, February 2021, para 2.76-9).

Meeting the costs

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. This equates to approximately £17 billion for the remedy period.”  It is not yet clear to what extent the cost of the remedy will be met by members or the taxpayer. As HM Treasury officials explained to the Public Accounts Committee in April 2021, the costs “will be included in the 2016 valuation and will be borne by member costs going up.” The cost control mechanism then has to be applied. The Government has said it will waive ceilings where target costs are exceeded as it does not want “members to be in a worse position than they would have been prior to the McCloud remedy being implemented.” This means “it is ultimately members who will pay these costs, and this process will be managed through the cost control mechanism.” Trade unions and professional bodies representing public service pension scheme members have argued that members should not have to cover the cost of the remedy, which resulted from the Government’s actions, and that benefit improvements originally expected from the 2016 valuations should be honoured.

This is discussed in more detail in Public service pensions: cost control mechanism, Commons Library Briefing Paper, CBP 6971, August 2021.

Future service from April 2022

The Government said it still believed that “the reformed schemes initially introduced in 2015 provide an appropriate level of public service pension provision.” It would legislate to close the legacy schemes to future service from April 2022. From that date all members would build up benefits in the relevant reformed scheme. This would ensure that all active members were treated equally in respect of the pension scheme designs offered for future service and would all be in the reformed schemes from that date. The final salary link for members with prior service in final salary schemes would be retained (meaning that benefits in the legacy final salary schemes would be based on pensionable pay on or near their retirement rather than at the point they move to a reformed scheme).

Legislation

The Public Service Pensions and Judicial Offices Bill [HL] Bill 44 2021-22 contains measures to address the discrimination identified in McCloud. The Bill was introduced into the House of Lords on 19 July and scheduled to have its Second Reading on 7 September. The House of Lords Library has produced a briefing paper for Second Reading.

Further reading

Related Commons Library Briefing Papers include: Public service pensions: facts and figures, CBP 8478, May 2021; Public service pensions – the 2015 reforms, CBP 5768, July 2021; Public service pension increases, CBP 5434, April 2021; Judges pension schemes, CBP 8540, April 2021; Local Government Pension Scheme – response to McCloud, CBP 9257, June 2021.


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