Govt proposes £17bn public sector pension remedy

Govt proposes £17bn public sector pension remedy

Government plans to rectify a pension discrimination issue highlighted by two landmark court cases is expected to cost taxpayers £17bn.

The Treasury today (July 16) published a consultation looking at how it will implement the McCloud and Sargeant judgments to remove discrimination between pension scheme members. 

The issue concerns public sector pension scheme members who were enrolled into newer schemes while older scheme members' defined benefit pension accruals were protected from a downgrade.

The courts ruled by doing this the government was discriminating against younger members based on age.

Although the rulings concerned judges and firefighters today's consultation set out plans to allow eligible members of the NHS, teachers, firefighters, police, armed forces and civil service pension schemes to choose whether to receive benefits from the legacy or reformed schemes for the period between April 2015 and March 2022. 

Changes to judges' pensions and local government pension schemes will be consulted on separately due to changes in pension protections.

Under the legacy schemes, pensions were based on years of service and final salary, whereas under the new schemes it was based on years of service and career average salary.

The Treasury suggested this particular remedy after it recognised that some members would receive better benefits in one scheme or the other, but was unable to come up with an overarching approach.

The Treasury is also looking at proposals for members who join the schemes after this period.

It suggested all active members be placed in the reformed schemes from April 2022. 

Around 3m individuals could be affected, with the proposed changes expected to cost the exchequer £17bn.

Taxpayer's hit with bill

Tom Selby, senior analyst at AJ Bell, said this means each member could be due almost £6,000, at a time when public finances are already stretched due to Covid-19.

Mr Selby said: “In the middle of a pandemic and with the Brexit transition period fast coming to a close, a £17bn public sector pensions bill is probably among the last things the government needed.

“However, it was left with little choice after a 2018 Court of Appeal ruling determined transitional protections given to members within 10 years of receiving their pension - negotiated as part of radical reforms to public sector pensions introduced in 2015 - constituted age discrimination.

“This is a colossal and entirely avoidable own goal borne of the government’s desire to appease trade unions when the reforms were introduced.”

Ian Browne, retirement planning expert at Quilter, agreed that correcting the 'mistake' could "not have come at a worse time” for the government. 

Mr Browne said: “We all know pensions are costly but that bill just got much higher and puts yet more pressure on the chancellor to find some spare pennies, to be specific £17bn worth. 

“Where that is going to come from is anyone’s guess but it seems sensible that if the triple lock wasn’t on the chopping block before it might be now. Let’s face it, if the government can’t control the costs of public sector pensions then they will likely look at other areas of pension costs and seek to control them instead.”