The government published a consultation document (CP 253, HCWS380) in July 2020 outlining proposals regarding public service pensions. I have today laid in Parliament the government’s response to the consultation: ‘Public service pension schemes: changes to the transitional arrangements to the 2015 schemes. Government response to consultation’ (CP 373).
The main public service pension schemes were reformed in 2015 to make them fairer – especially for lower earners – and more affordable for the taxpayer. Public service pensions continue to be among the best in the workplace, providing a generous level of pension provision for public servants. Following negotiations with trade unions and other member representative bodies, the government agreed that those closer to retirement should be either fully or partially protected from the changes and allowed to remain in their legacy schemes, known as ‘transitional protection’. In December 2018 this transitional protection was found by the Court of Appeal to discriminate unlawfully against younger judges and firefighters who were members of the legacy schemes before 1 April 2012 but did not benefit from transitional protection. The reformed schemes themselves are not discriminatory. As set out in the July 2019 written statement (HCWS1725), the government accepted that the ruling reads across to other public service pension schemes, affecting around 3 million public servants.
In July 2020 I launched a consultation, seeking views on proposals to address this. More than 3,000 responses to the consultation were received, and the Treasury also conducted engagement sessions with a wide range of stakeholders. I am grateful for the many responses to the consultation we received from public servants, employers, administrators, financial advisers, trade unions and member representative bodies. They were insightful and crucial for further developing the government’s proposals, understanding the impacts of the proposals, and coming to informed decisions.
Having considered the responses to the consultation, the government is today announcing that it will implement the deferred choice underpin (DCU). This will give eligible scheme members a choice at the point their pension becomes payable, whether they wish to receive benefits from their legacy scheme or benefits equivalent to those that would have been available under their reformed schemes in relation to their service between 1 April 2015 and 31 March 2022. In the meantime, eligible members will be deemed to have been members of their legacy schemes for any period of service between those dates.
In implementing the DCU, rather than an immediate choice exercise, we have recognised that members will have more certainty around their personal circumstances at the point they need to make their choice. This approach considerably reduces the need for members to make assumptions around their future career, their retirement, health and dependants, which would increase the risk of members, particularly younger members, making an incorrect decision. I strongly believe that the DCU is the correct approach given its key advantage of providing members with greater certainty about their choice of pension benefits.
I am also confirming that the legacy schemes will close on 31 March 2022. From 1 April 2022, all those who remain in service will do so as members of the reformed schemes that were introduced in 2015. Benefits built up in the legacy schemes will be protected.
The reasons for closing the legacy schemes and moving to the reformed schemes are as valid now as they were when the reforms were introduced: the schemes should continue to provide guaranteed pension benefits to public servants, but do so on a fairer basis, and in a way that ensures that they are affordable and sustainable into the future. Public service pensions continue to reward public servants generously for their dedicated service.
The government will bring forward new primary legislation, when parliamentary time allows, to provide requisite powers to deliver these changes to public service pension schemes.
Cost control mechanism and 2020 valuations update
Alongside the launch of the consultation in July 2020, I announced that the pause to the cost control mechanism – which was introduced as a consequence of the uncertainty regarding the value of schemes to members resulting from the court judgments – would be lifted, and the cost control element of the 2016 valuations process completed. I also announced that the Government Actuary (GA) would proceed with the review to assess whether the mechanism is operating as intended.
As I previously set out, the increased value of schemes to members as a result of the McCloud remedy will be taken into account in the completion of the 2016 valuations. Given that this will lead to higher costs than would otherwise have been expected, early estimates indicate that some schemes could breach the ceiling. If normal statutory procedure were followed, any ceiling breaches would lead to a reduction in member benefits in order to bring costs back to target. The GA review is ongoing, and I have decided that it would be inappropriate to reduce member benefits based on a mechanism that may not be working as intended.
This means any ceiling breaches that do occur during the completion of the 2016 valuations will therefore not be implemented, and benefit levels will not be reduced. However, I have also decided that should any floor breaches occur, they will be honoured, and member benefits increased in order to bring costs back to target. These decisions apply only to the cost control element of the 2016 valuations. Future cost control policy for future valuations will be set out once the GA’s review of the mechanism has concluded and any recommendations have been fully considered by the government.
Changes in the employer contribution rates resulting from the 2020 valuations process were due to be implemented from April 2023 for the majority of unfunded public service pension schemes. These valuations have already begun, and require intensive work across schemes, departments and the Government Actuary’s Department (GAD) over several years.
Due to interactions with wider pension policies, in particular the implementation of the McCloud remedy reforms, completion of the 2016 valuation process and the review of the cost control mechanism, work would need to be undertaken in unprecedentedly short timescales to amend employer contribution rates in April 2023.
Any changes to employer contribution rates resulting from the 2020 valuations will therefore be delayed from April 2023 to April 2024. This is an exceptional but necessary decision taken in light of the wider public service pensions landscape.
Today’s announcements set out the steps the government will take to ensure that members of public service pension schemes are treated equally – taking an approach which is fair for members as well as other taxpayers.
Copies of the government’s response document to the consultation (CP 373) are available in the Vote Office and Printed Paper Office, and it is published on gov.uk.
This statement has also been made in the House of Lords