Civil Service Pension Scheme members will be allowed to choose between two systems for calculating their entitlements – covering up to seven years of contributions – as part of measures to fix unlawful reforms, the government has announced.
The decision comes in the official Treasury response to a consultation on ways to remove age discrimination that was built into public-sector pensions reforms introduced in 2015 but declared unlawful by the Court of Appeal in 2018. The discrimination resulted from transitional protection measures designed to help older scheme members who were closer to retirement from losing out under the changes.
Civil service unions welcomed the move, but pointed out that pension scheme members were still losing out because of a pause in scheme valuations introduced in the wake of the McCloud judgment – as the case is known – that would have seen contributions reduced.
The government’s McCloud remedy means all eligible public-sector pension scheme members will be able to choose between the “legacy” system for calculating benefits and the reformed system for the period between April 2015 and March 2022. But they must have been members of legacy public-sector schemes or have been eligible to be members before April 2012 and have been in service after March 2015.
In a written statement to parliament, chief secretary to the Treasury Steve Barclay said the “deferred choice underpin” would allow eligible public-sector workers to make their own decisions on which system their benefits were calculated under at the point their pension became payable.
“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,” Barclay said.
“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.”
Legacy public-sector pension schemes will close on 31 March 2022, Barclay told parliament. From the following day, staff who remain in service will do so as members of the reformed schemes introduced in 2015.
“Benefits built up in the legacy schemes will be protected,” he said.
The government will legislate for the McCloud remedy when parliamentary time allows, Barclay added.
Although the McCloud judgement was focused on discrimination caused to members of the judiciary and firefighters, ministers agreed that the principles underpinning the case applied to three million public-sector workers.
In January 2019, then-chief secretary to the Treasury Liz Truss told parliament the judgement could have a £4bn-a-year impact on public-sector pension finances. She said the decision meant it was “not now possible to assess the value of the current public-service pension arrangements with any clarity”.
Civil service unions have argued that the pause in valuations effectively denied members a 2% cut in contributions that was expected to be triggered under the cost-cap “floor” mechanism incorporated in the 2015 reforms following the 2016 valuation.
In his announcement yesterday, Barclay said that the paused 2016 valuation of public sector pension schemes will now be completed with the McCloud remedy factored in. He said the value of the remedy will lead to higher costs than would otherwise have been the case, but that any cost-cap “ceiling” breaches that did result from the 2016 valuation will not see a reduction in member benefits.
“This means any ceiling breaches that do occur during the completion of the 2016 valuations will therefore not be implemented,” he said.
“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.”
Barclay said the decision will only apply to the 2016 valuation, with cost-control policy for future valuations set to be the subject of an ongoing Government Actuary review.
Ministers "still interfering" with valuation
PCS general secretary Mark Serwotka said that despite the government’s decision to give pension scheme members the DCU option, minsters are still interfering with the last pension valuation by insisting that the costs of the discrimination will be borne by members.
“It cannot be right that they insist on setting aside the reductions to the employee contribution arising from the 2016 scheme valuation to offset the cost of losing in court,” he said.
“We will protect our members from any further manipulation of the cost cap mechanism and further legal action may be necessary.”
Garry Graham, deputy general secretary of the Prospect union, said the DCU will allow scheme members to make informed choices about their pensions at the appropriate time. But he said the Treasury now needs to press on and publish the necessary directions for scheme valuations to take place promptly.
“We are opposing the simple rollover of member pension contributions and pressing for a reduction in members pension contributions under the cost-sharing mechanism as agreed as a key part of the pensions package as soon as possible,” he said.
“Initial valuations showed a drop in employee driven costs as a result of pay restraint and reductions in mortality improvement. Particularly against the backdrop of the government’s announcement on pay, there has never been a more important time to take this work forward at pace.”
Lucille Thirlby, assistant general secretary of the FDA union, said the organisation fundamentally disagrees with the government’s position that the cost of the McCloud remedy will be classed as a member cost.
“The cost cap pause meant that Civil Service Pension Scheme members never realised the benefit improvements that would have been applied as a result of the breach of the cost cap floor from the 2016 valuation,” she said.
“We therefore welcome the fact that the 2016 valuation process can now be completed and should the results of the valuations identify ceiling breaches, the impact of these will be waived.”