18 Sep Public sector pensions
Public sector pension members have had to deal with several changes to their pensions over the last 10 years, through the introduction of career average schemes and also pension legislation changes. Now it appears that another change could be on the horizon.
This is due to age discrimination resulting from the ‘transitional protection’ that scheme members had when most public sector schemes changed from a ‘final salary’ to a ‘career average’ basis in 2014/15. This age discrimination was highlighted in two court cases relating to how members of two public sector schemes were compulsorily transferred to less generous new schemes in 2015 – scheme members within 10 years of retirement age were permitted to remain in the previous final salary-linked schemes whereas other members’ future benefits were accrued in the new career average schemes.
Since younger members’ total pension benefits in retirement were likely to be less, all else being equal, than those of their older colleagues due to their age, the court ruled that younger members of the schemes were being discriminated against based on their age.
‘Transitional protection’ was offered to members of all the main public sector pension schemes and following this ruling, the government has said that it will look to remove differences in treatment across all public sector schemes. This includes those for the NHS, civil service, local government, teachers, police, armed forces, judiciary and fire and rescue workers. This has the potential to cost taxpayers billions of pounds to ensure that younger scheme members are not discriminated against.
The 2014/15 changes to public sector schemes followed the 2011 Hutton report, which set out recommendations to the government on pension arrangements that would be sustainable and affordable in the long term, and fair to both the public service workforce and the taxpayer. After several years of negotiations between unions and the government, the changes and transitional protections were agreed and came into force when the schemes changed. Now it would seem that these changes may have to be altered or effectively delayed. However, this does not alter the fact that most public sector schemes are expensive for the taxpayer and not sustainable over the long term in their previous format.
HM Treasury has introduced a consultation period for its proposal to remove the age discrimination judged to have arisen from the transitional arrangements across the public sector. It isn’t possible to say whether every affected member would be better off in the old scheme or not. Eligible members will therefore be given the choice as to whether they would like their previous scheme benefits or new scheme benefits for the remedy period, which for most is from 1st April 2015 to 31st March 2022.
The Treasury is seeking views on whether members should have to make this choice during a one- or two-year period after 31st March 2022 or when they take their benefits on retirement. The latter would basically be some sort of underpin so that the member can choose which option gives them the better benefits.
Eligible members will be those who joined the schemes on or before 31st March 2012 and were still members on 1st April 2015, whether active, deferred (having left service but not drawn benefits) or retired. However, the Treasury is also looking at proposals for members who joined after this period. It’s also proposed that all active members will be in the career average schemes from 1st April 2022.
On the face of it, this is good news for members of these schemes as they are likely to have a choice of receiving the best benefits in the remedial period. However, there is obviously a long term impact on taxpayers at a time when there are increasing demands on the government’s finances. How this will be funded is up to the Chancellor but it could have an impact on taxes, pension legislation or even the state pension. Members may also have to bear some of these costs as the cost control element of the actuarial valuations for the schemes will now include the costs of these changes which increase member benefits and are therefore a member cost. This may result in higher future contributions for members and/or lower benefits in the future.
There’s also going to be a need for each scheme to provide detailed information, presented in a clear and understandable way, to its members so that they can each make an informed decision. Support needs to be in place to help members make the right decision for themselves. Ideally, any decision should also be made in the context of their overall financial situation and as part of a comprehensive financial plan but unfortunately, not everyone will have access to these services.
This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.