What is the background to the remedy for transitional protections? Is this also what is referred to as the McCloud remedy?
In 2015 the Department of Finance introduced reforms to public service pensions, meaning most public sector workers were moved into new pension schemes from 1 April 2015. Most civil servants were moved into the alpha pension scheme. In December 2018, the Court of Appeal in England and Wales ruled that the ‘transitional protection’ offered to some members of the judges’ and firefighters’ schemes, as part of the reforms, gave rise to unlawful discrimination. This also became known as the McCloud remedy after one of the named litigants.
As ‘transitional protection’ was offered to members of all the main public service pension schemes, including the devolved schemes here, the difference in treatment will need to be removed across all those schemes for members with relevant service.
The discrimination that has been identified in the public service schemes arises between the different treatment between members in these categories:
- those individuals who were members of pre-2015 public service schemes as at 31 March 2012 and were fully transitionally protected by remaining in that scheme after 1 April 2015 (as a result of being 10 years within their normal pension age); and
- those who were members of the pre-2015 schemes as at 31 March 2012 and were not treated as fully transitionally protected and moved to new post-2015 arrangements on or after 1 April 2015.
For the civil service the pre-2015 schemes are; classic, classic plus, premium and nuvos and the post-2015 scheme is alpha.
The 2015 public service pension schemes reforms included a policy of transitional protection. This meant members closest to retirement stayed in their legacy scheme as they had the least amount of time to prepare for the changes.
The Court of Appeal in England and Wales later found this policy to be discriminatory against younger members in some schemes and would require to be remedied.
The devolved public service pension schemes contain the same transitional protections and must be similarly remedied.
The Department of Finance consulted between August and November 2020 to gather views on proposals to remove the discrimination. In February 2021, it announced the implementation of a ‘deferred choice underpin’ which will allow eligible members a choice when they retire, of which pension scheme benefits they would prefer to take for the remedy period.
To address the discrimination identified by the courts, eligible members who were moved to the reformed pension scheme in 2015 (or later if they had tapered protection) will be moved back into their legacy pension scheme for service in the period during which the discrimination occurred, between 1 April 2015 and 31 March 2022 (the remedy period).
When members, or members who were originally protected, near retirement, they will receive a choice of which pension scheme benefits they would prefer to take for that period (the remedy period). This is called a ‘deferred choice underpin’ (DCU).
The choice will be between the member’s legacy pension scheme benefits and their reformed pension scheme benefits.
By deferring the choice until shortly before retirement, it allows individuals to make their choice of which pension scheme benefits are better for them, based on facts and known circumstances as opposed to assumptions on their future career, health, retirement and other factors. The level of both pension scheme benefits will be known at retirement.
For those pensioners who are already receiving benefits relating to the period of discrimination between 2015 and 2022 there will be an immediate choice as soon as practicable once the necessary provisions are in place.
What was the other proposal set out in the consultation and why didn’t the Department of Finance choose that approach?
The other proposal set out in the consultation was called an ‘immediate choice’ which would allow members to choose which pension scheme benefits they would prefer to take for the remedy period between 2015 and 2022 soon after the point at which schemes implemented the changes.
While this approach would have resolved the issue sooner and provided individuals with more certainty around pension benefits, it would have placed higher risk on the member. This is because they would be basing their choice around assumptions on their future careers, health, retirement and other factors, rather than the facts and known circumstances that will apply at the point of retirement. This would have meant some members may have been much more likely to have chosen the scheme benefits that did not turn out to be best for them.
The legacy schemes within the Civil Service Pension (NI) Scheme is classic, classic plus, premium and nuvos. The reformed scheme is alpha, and this was introduced on 1 April 2015.
All public service pension schemes have different arrangements, however, the main changes between the legacy and reformed schemes for most schemes included a change to career-average pension schemes from final salary and an increase in normal pension age.
The change to career-average means members’ pensions are now calculated on their average salary throughout their career as opposed to their final salary.
The reformed schemes were designed to make public service pensions more affordable and sustainable for the future, while still ensuring public servants received appropriate pension provision at retirement.
The reforms created a fairer system. The move from (mostly) final salary to career average pension means members accrue their pension at a typically higher annual rate based on their average salary. Although some members are better off in legacy schemes, the reformed schemes are more beneficial for others, particularly many lower paid members.
Why are members being asked to make a choice between their legacy and reformed pension scheme benefits?
The differences between the legacy and reformed pension schemes mean the set of benefits that is best for members depends on personal circumstances and preferences. This is why the remedy is providing members with a choice, to ensure they can choose which scheme benefits are better for them.
Schemes will provide information to members setting out their entitlement under both options, so members will have a clear understanding of the benefits available to them.
Why is the period when members will be receiving a choice of which pension scheme benefits they would prefer only between 2015 and 2022?
Members will receive a choice for the period between 2015 and 2022 because 1 April 2015 is the date when the reforms were introduced, and 31 March 2022 will be the point at which the legacy schemes will be closed to future accrual.
Why isn’t the Department just returning everyone to their old schemes?
It is not appropriate to simply place all members into their legacy scheme without allowing them to access their reformed scheme benefits, because some members are better off in the reformed schemes.
What detail will scheme regulations contain?
The powers in the PSPJO Bill allow the devolved NI schemes to make scheme regulations which can be used for the various purposes listed throughout the Bill. These include for example the process by which a member can make a choice or “election” to receive new scheme benefits, for interest to be paid to a member or scheme on any amounts owed to or by the scheme, to make provision for pension credit members, to make provision for members to receive remediable service statements, to provide for members who have made additional voluntary contributions and for members who have already benefited from an immediate detriment remedy.
Where it is particularly important that scheme regulations are consistent, the Bill will require them to be made in line with Directions given by the Department of Finance. The powers to make scheme regulations are explained in the Delegated Powers Memorandum produced alongside the Bill.