The changes likely to be required in public sector pension schemes following the McCloud judgement could have significant financial consequences for public sector outsourcing contractors, Aon says.
The recent ruling against the government confirmed the protections put in place for some public sector scheme members when pension benefits were changed in 2015 amounted to unlawful age discrimination.
In particular, the case found the government had forced younger members of the judges' and firefighters' schemes to less generous ones, while the oldest workers were able to continue accruing benefits in the older, more generous schemes as "transitional protection".
Following the Court of Appeal's ruling, benefit changes which compensate the members affected by the discrimination are likely to be required.
Despite no decisions having been made yet regarding the timeline and cost, there has been speculation the ruling could cost billions of pounds - with Aon urging organisations who employ staff through the public sector pension schemes to prepare for cost pressures and a period of uncertainty.
Aon stated contractors who plan on exiting the local government pension scheme (LGPS) soon were also likely to face uncertainty on any exit payments due.
Principal consultant Madalena Cain said the judgement could cause "real issues" for organisations using the LGPS "whether they are companies providing outsourced services or others, such as charities and universities".
Because of the nature of the LGPS, there is high chance there will be a distinctive difference in experience across employers depending on which employees are eligible for membership and whether any arrangements are in place to share pension risk with public sector bodies.
Cain continued: "Unlike other public sector schemes, the LGPS is a funded arrangement where the cost of any benefit improvements would be passed onto participating employers - and at a time when pension costs are already high.
"As well as the financial ambiguity, employers may well have to support their staff through another period of significant change and uncertainty. If the 2015 public sector pension scheme changes are unwound to any extent, cost management may well require a further round of changes."
This comes after the government was again denied leave to appeal the case in June before revealing the ruling that the 2015 changes were unlawful will now apply to all public sector schemes.
The McCloud case
In 2015 the government introduced reforms to public sector pensions, resulting in many public sector workers being moved into new pension schemes.
In December 2018, the Court of Appeal ruled that the "transitional protection" offered to some members of the judges and firefighters schemes, as part of the reforms, amounted to unlawful discrimination.
On 15 July 2019 the government issued a statement and confirmed that as "transitional protection" was offered to members of all the main public service pension schemes, the difference in treatment will need to be remedied across all those schemes, including the civil service pension schemes.
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