The government has finally published its proposals for resolving the legal minefield it created by changes to a wide range of public sector pension schemes under which workers were unlawfully transferred from their existing schemes (“legacy schemes”) to new, and, for some, less generous schemes (“2015 schemes”). The changes affected millions of public sector workers including teachers, fire-fighters, doctors, local government workers and police officers.
The transition provisions which had the effect of forcing some workers out of legacy pension schemes were declared unlawful by the lower courts and this was upheld by the Court of Appeal in The Lord Chancellor & Anor v McCloud & Ors  EWCA Civ 2844. This was on the basis that applying forced transfer to some but not all scheme members amounted to unjustifiable age discrimination because older workers (in those cases Judges and fire-fighters) were allowed to remain in the legacy schemes whilst younger workers were forced into the 2015 schemes. We discuss this case and the background to this in more detail in Police Pension Podcast Episode 2 available here or on most podcast platforms.
The essence of the proposals set out in the consultation document is that all legacy schemes for affected public sector workers will come to an end on 1 April 2022. This means that any worker who is still in a legacy scheme or was forcibly transitioned out of a legacy scheme will not be able to accrue new pension rights under that legacy scheme from 1 April 2022. The schemes will, in effect, be frozen at that date and just operate to pay out benefits once the worker retires. However, the proposal is that workers who have been unlawfully transferred out of a legacy scheme into a 2015 scheme will have the choice of transferring back into their legacy scheme and thus get the benefits of that scheme up to the close date of 1 April 2022.
The consultation document states “Depending on a person’s circumstances, many scheme members are likely to be better off in the reformed schemes rather than the legacy schemes”. Whilst that may be true in some cases, the extra costs of allowing workers to opt back into legacy schemes for the period 2015 to 2022 is put at £17billion, which suggests that opting back into the legacy scheme will be beneficial for most workers who were unlawfully ejected from the schemes. Taking the example of the police pension scheme which is representative of the 2015 schemes, as we explained in our second podcast, one way to look at the “value” of the pension scheme is to estimate the cumulative value of all the benefits across police officers generally, and then determine the value in relation to the pay of officers generally. A 2020 House of Commons Briefing Paper refers to government estimates which suggested that the value of the 1987 scheme represented 33% of the pay of the average police officer, the 2006 scheme represented benefits equal to 29% of the pay of the average police officer and the 2015 scheme represented benefits equal to 24% of pay. The officers were making contributions out of their salaries of between 9% and 15% – but even with the changes made in 2006, being a member of the pension scheme made financial sense for virtually all officers. However, the reality is that ultimately an individual will have to decide on their own individual basis, as the benefits of being in one scheme versus another depend partly on that individual’s earnings and projected or actual career trajectory.
On the question of transferring people back into the earlier pension schemes (if they choose that option), the proposals accept that there are numerous complex problems in transferring workers back. One problem is that member contribution rates in older scheme can be higher, and so a transfer produces an immediate requirement for the worker to make up a shortfall of contributions over a 7 year period – which could run into thousands of pounds. The consultation document proposes this should be payable over an undefined extended period by, in effect, a loan from the pension fund. That would, we assume, follow the model of the pension scheme “loaning” money to the pensioner as occurs when the pension scheme pays a tax charge where a member is deemed to have exceeded his or her permitted annual contributions.
Another problem identified is differences between ill-health retirement provisions. The consultation document recognises that some workers may have been prevented from exercising ill-health retirement rights under a legacy scheme because those rights did not apply under a 2015 scheme. The document says:
“Any member who was refused an IHR pension in one scheme may be eligible for IHR in their alternative scheme. This is a result of differing scheme rules and eligibility requirements. In particular, the later pension age in the reformed schemes may have led to some members being refused IHR because medical advisers deemed the member able to recover and return to work in the extended time period to the later pension age. Conversely, the later pension age also means that IHR –where granted under the reformed scheme –can be more valuable because the enhancements in respect of potential lost service are calculated to a later age in the reformed schemes. IHR cases involve members, employers, medical assessors and scheme administrators. Therefore, in order to reconsider a case, member consent would be required because of the likely need to share medical records and evidence”
So, for example, police officers determined to be permanently disabled and who have been denied their right to take their own decision to retire under the 1987 police pension scheme and claim a B3 ill-health pension may be in line for compensation.
Finally, there is a significant question about when a person will have to make their choice as to whether to opt back into a legacy scheme. There are two possible approaches: an immediate choice (which in fact is not an immediate choice at all, but a choice to be made in the year or two after implementation in 2022), or a “deferred choice underpin” i.e. to defer the decision until the point at which a member retires. This latter option would involve deeming all members to have accrued benefits in the legacy scheme, rather than the new scheme, for the so called remedy period (1 April 2015-31 March 2022).
New legislation is being proposed to bring forward these rights and, as always, the devil will be in the detail.
In the meantime there is an unresolved question as to whether managers of public sector pension schemes nonetheless have a duty to put local changes into effect to restore the rights of legacy scheme members, notwithstanding the lack of legislation. This is because the provisions of the Equality Act 2010 apply to such schemes and the duty to apply equality rights overrides the duty to comply with scheme rules. The provision in the Equality Act 2010 exempting public bodies from doing so under statutory pension schemes under Schedule 22 of that Act has never been brought into effect, and so the duty on scheme managers not to operate discriminatory provisions takes precedence over the terms of the particular scheme. We deal with this in more detail in Chapter 2 of the Police Pension Guide, also available here.
Whatever happens, the next stages in this complex legal and financial minefield will be far from straightforward, but at least the process of sorting out the mess has started. The consultation runs until 11 October 2020.
David Lock QC and Samantha Broadfoot QC advise both public bodies and pensioners on a wide range issues concerning public sector pension schemes.