Earlier this year the UK government launched three consultations on proposals to remove age discrimination identified in a Court of Appeal ruling in December 2018 concerning the Judicial and Firefighters' pension schemes. As the consultations draw to a close and we await the government's response, we have set out the key issues under consideration below.
Background
Following the recommendations given by Lord Hutton in 2011, the UK's public service pension schemes were radically reformed in 2015 to protect against unsustainable increases in cost with the introduction of new schemes, with career average design and increased normal pension ages.
As part of these reforms, transitional protection was provided to protect and give certainty to those within 10 years of retirement by allowing them to remain in their previous schemes. In December 2018 the Court of Appeal found that these transitional protections unlawfully discriminated against younger members of the judicial and firefighters’ pension schemes in particular, as transitional protection was only offered to older scheme members. The Courts required that this unlawful discrimination be remedied by the government.
Although the judgement concerned only members of the judicial and firefighters' pension schemes, the government confirmed in July 2019 that the difference in treatment arising from transitional protection would be remedied across all the main public sector schemes.
Public Service Pension Schemes
The first of the consultations, launched by HM Treasury on 16 July 2020, covers the main public sector schemes including the NHS, Teachers, Firefighters, Police, Civil Service in Great Britain, UK Armed Forces, and the Civil Service (Others) scheme. As part of the 2015 reforms, transitional protection was provided by allowing members of these schemes within 10 years of retirement to remain in their existing pension schemes.
The government is now proposing to provide members who were in service on or before 31 March 2012 and in service on or after 1 April 2015 with the option to choose between their old (mostly final salary) and new (career average) pension scheme benefits for service between 1 April 2015 and 31 March 2022. A reformed, career average benefit structure will apply to all members from April 2022.
There are 2 different proposals:
- An immediate choice exercise: The choice will be made as soon as practicable.
- A deferred choice underpin: Members would remain in, or be returned to, the old schemes for service between 2015 and 2022. The decision would be deferred until the point at which a member retires (or when they take their pension benefits).
The government sought views on that proposal and on which of the two possible approaches should be taken to making this choice, and how each of these approaches might work.
Local Government Pension Scheme in England & Wales ("LGPS")
A separate consultation was launched in July 2020 by the Ministry of Housing, Communities and Local Government setting out the proposals for the Local Government Pension Scheme in England & Wales ("LGPS"). The transitional protection for older members of the LGPS operated through a statutory 'underpin' which ensures that the career average pension payable under the reformed LGPS is at least at high as the member would have been due under the final salary scheme.
For these schemes, the proposal is to extend the underpin to all affected members by removing the condition that required a member to have been within ten years of their normal pension age on 1st April 2012 to be eligible for underpin protection. A reformed, career average benefit structure will apply to all members from April 2022.
Separate consultation exercises are being undertaken by the relevant devolved authorities relating to the issues as they affect the local government pension schemes in Scotland and in Northern Ireland.
Judicial Pension Schemes
Proposals for addressing the discrimination in the Judicial Pension Scheme are set out by the Ministry of Justice ("MoJ") in a separate consultation launched on 16 July 2020. At the time of the 2015 reforms, older Judges closest to retirement were entitled to remain in their legacy scheme (tax-unregistered final salary schemes) whilst younger judges were moved to a new tax-registered career average scheme with a lower accrual rate. The proposal is that judges in scope are given a choice whether to have retrospectively accrued benefits from 1 April 2015 in one of the legacy schemes or in the new scheme.
The options exercise would follow the introduction of a reformed pension scheme that MoJ intends to introduce for all Judges from 1 April 2022, which is the subject of a separate consultation.
What's next?
With the estimated cost of implementation reportedly being £17 billion the outcome of the consultations will be eagerly awaited not only by the public sector employees potentially affected by the proposals but also by public sector employers and contractors who, along with the taxpayer, may find themselves footing the bill.
Although unlikely to affect many individuals, the tax implications of the options for addressing discrimination, particularly in respect of the deferred choice underpin proposal for the public service pension schemes, will be of interest to both affected members and schemes as the potential complexities associated with these tax implications should not be underestimated.
The LGPS and public service pension schemes consultations closed on 8 and 11 October 2020 respectively (with the Scottish and Northern Irish equivalent consultations closing towards the end of October and middle of November) and the judicial pension schemes consultation closes on 16 October 2020. We will provide a further update once the government responds.
If you would like to discuss anything in this blog, please get in touch with your usual contact at Brodies.
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