The government will give members of public sector pensions the choice of which scheme they want to be in, in response to an age discrimination case arising from a 2015 review.
In a response published on Thursday to the ‘Public service pension schemes: changes to the transitional arrangements to the 2015 schemes’ consultation, which received hundreds of replies from individual members, trades unions and other organisations, the government stated its conclusion was in line with majority opinion.
There were two proposed remedies to the McCloud problem, the age discrimination case arising from a 2015 review of public sector pensions that moved most members to a new, reformed pension scheme, while allowing those within 10 years of retirement to stay within the legacy scheme.
This having been found by courts to be discriminatory against younger workers, the government was committed to remedying the situation by extending a choice to members as to which of the schemes they would like to be in, and so which benefits they would like to receive with respect to the remedy period covering their service between April 1, 2015 and March 31, 2022.
As set out in the response to the consultation, this option was deemed preferable to moving everyone back into the legacy scheme, “even though this would remove the unlawful discrimination identified”, as many members might have found themselves better off in the reformed scheme.
One solution was an immediate choice, a self-explanatory route that would have seen affected members choose immediately which of the two schemes to be in. The other option, the one chosen by the government, was the deferred choice underpin, under which members may opt at retirement for whichever scheme would have produced the larger pension.
In his foreword to the response, Steve Barclay, chief secretary to the Treasury, wrote: “The significant majority of responses backed the introduction of a deferred choice underpin as the way to remedy the identified discrimination. This approach will enable eligible members, when they retire with a pension, to choose whether the legacy or reformed schemes would be better for them.
“Respondents offered strong and convincing arguments to support this view, which are set out within this consultation response. It is clear to me that the deferred choice underpin will provide greater certainty for members and is also the right approach for schemes and the government,” he continued.
“It avoids the need for members to make assumptions around things such as their future public service career and retirement age, which would increase the risk of making an incorrect decision, particularly for younger members. It also results in a more manageable administrative challenge for schemes as the overall task will be spread over decades, rather than just a few years.”
Govt should ‘not attempt to pass costs’ to members
The decision was widely praised by industry figures and experts. Former pensions minister Ros Altmann said: “The deferred choice option is best for members as it gives them the best opportunity to get the best of both schemes for their own circumstances.
“The deferral also gives schemes more time to deal with this, but there will be difficulties in making assessments going back over many years.”
Garry Graham, deputy general secretary of the union Prospect, said the “public servants who have suffered from unlawful age discrimination as a result of government pension reforms deserve a fair remedy, and we welcome the Treasury’s decision today as a big step towards securing that outcome”.
But he added: “It is now essential that the government commits to funding the cost of rectifying this discrimination, and does not attempt to pass the costs on to pension scheme members.”
However, the solution will be expensive and difficult to implement.
Tom Selby, senior analyst at AJ Bell, warned that McCloud will “reportedly cost an eye-watering £17bn to put right”.
Furthermore, he noted that the Treasury “says those costs will ‘feed into employer contribution rates’, meaning pension costs for public sector employers are almost certainly going to go up, placing a drain on resources at the worst possible time”.
Benjamin Mercer writes for FTAdviser's sister title Pensions Expert
