The various potential routes for the government to respond to the McCloud judgment will mean some members lose out, writes Moira Warner.
On 27 June the government was denied permission to appeal earlier rulings that transitional protections afforded to older members of the firefighters' and judicial pension schemes were discriminatory on the grounds of age.
These transitional provisions, which exist in all the main public service pension schemes, allowed those closest to retirement to remain in their existing final salary scheme while younger members were moved to career average arrangements. They formed part of a package of reforms introduced in 2015 that were intended to ensure public sector pensions were sustainable over the longer term.
The government has now confirmed it will remedy the discriminatory treatment across the sector thereby extinguishing the flames of worker discontent that have been fanned by these cases.
But pension equality issues are rarely straightforward and the jubilant rhetoric of the Fire Brigades Union could be in danger of overshadowing reality, as not all younger firefighters will have lost out as a result of the discrimination. So it's worth taking a closer look at the impacts.
The government has confirmed that the Employment Tribunal will determine the remedy for the firefighters and judicial pension schemes. Stakeholders will be engaged to help shape tribunal proposals and in relation to the fix needed in other public sector schemes. The complexity of the issues can't be underestimated and the process could take a year or more.
As the discriminatory provisions were implemented from 1 April 2015 (2014 for the Local Government Pension Scheme in England and Wales), the remedy is likely to apply with retrospective effect from that date and will involve "levelling up". In other words, the benefits of unprotected members will need to be raised rather than the benefits of protected members being lowered.
This doesn't mean that scheme reforms will be binned or that all unprotected members will be entitled to compensation. For some, the career average schemes to which unprotected members were moved have provided higher pensions. Accrual is typically at a faster rate than under the old final salary schemes and they also typically offer inflation-busting revaluation while the member remains in service. On the flipside is the increase in schemes' normal pension ages (NPA) - but there's no change for many including firefighters formerly in the 2006 scheme whose NPA remains at age 60. The upshot is that reform has created both winners and losers.
We've taken a look at a number of scenarios to see which types of members may have been better off in the career average scheme. In the table below, column C shows the NPA which would have applied to the member under their old final salary scheme. Column F shows the benefits that individuals would have accrued if they'd stayed in their final salary scheme between the effective date of the changes and their retirement at that NPA. Column G shows the benefits the same individual would have built up in career average, over the same period and adjusted for early retirement in line with scheme practice as necessary.
The results show that career average can be advantageous for those with low pay growth whereas it can be disadvantageous for those who've suffered the biggest increase in their NPA.
A "one size fits all" remedy therefore risks creating new winners and losers. What's more, the extent to which any particular individual has lost out (or gained) won't be known until they eventually claim their benefits. So a fair way of determining any compensation would be on the basis of individual calculations undertaken at that point. But that would also create continuing uncertainty for members and a significant administrative burden for schemes.
Where compensation is due, it may not result in benefits exactly in line with those of protected members. The challenges in backdating benefit entitlements/pensions in payment over a lengthy period can't be underestimated. Any compensation in the form of increased member entitlements will cause a surge in pension input, potential loss of lifetime allowance protections, and the revision of benefit crystallisation event valuations. Each of these brings with it potential for member tax charges with little if any mitigation opportunities. Consequential changes to ill-health and survivor benefits may also be required. The government will need to explore ways of overcoming these challenges and cash compensation may be a possible option.
Who ultimately picks up the annual £4bn remedy bill is another factor which shouldn't be overlooked. An "employer cost cap" was introduced under the reformed schemes to protect the taxpayer against unforeseen changes in scheme member costs. This requires that where such costs increase or decrease beyond a specified margin, steps must be taken to adjust either members' benefits or contributions to bring costs back within tolerance. HM Treasury determines the costs to be taken into account for this purpose. So the estimated remedy bill could be considered within the cap with two key possible outcomes.
Improvements to member benefits required under the cap and which were suspended by the government in January may not now happen and the wider membership might end up paying more or getting less. Those who've fought so hard to achieve equality of treatment may find the government seeks to give with one hand and take with the other.
Moira Warner is senior business development manager at Royal London
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