Public service schemes will offer deferred benefits choice to remedy age discrimination
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All members of public service pension schemes will be able to choose at the point of retirement if they want to receive final salary or career average benefits for the period 2015-2022, the Treasury has said, having been ordered by the courts to remedy age discrimination in those schemes.
The choice only concerns the period from April 2015 to the end of March 2022, as the government has also said that all members will now have to join the new scheme, closing the legacy scheme from that date.
The issue of which benefits should be paid arose because the government, when changing public sector schemes to career average in 2015, offered older members the option to remain in the final salary scheme.
Firefighters and judges subsequently took the government to court, saying it discriminates against younger members. The courts ruled that the government had acted illegally in protecting older members only and had to remedy the situation.
Firefighters and judges subsequently took the government to court, saying it discriminates against younger members. The courts ruled that the government had acted illegally in protecting older members only and had to remedy the situation.
Between July and October 2020, the government therefore consulted on two options, an immediate choice or a deferred choice underpin. In its response published on Thursday, HM Treasury said the vast majority of the respondents favoured the deferred choice.
This option means members only need to decide at the point of retirement which scheme to receive benefits from, allowing them to base their choice on their actual work history, as some members will be better off in the old scheme while others would fare better with a career average pension.
This option means members only need to decide at the point of retirement which scheme to receive benefits from, allowing them to base their choice on their actual work history, as some members will be better off in the old scheme while others would fare better with a career average pension.
The deferred choice “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”, said Steve Barclay, chief secretary to the Treasury.
He added that “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”.
The administrative work will nonetheless be considerable, as schemes will have to calculate members’ benefits on both bases so they can make an informed choice.
Until they make a decision shortly before retirement, members “will be deemed to have accrued benefits in their legacy schemes, rather than reformed schemes, for the remedy period, until they make that choice”, the Treasury said.
"Those who have already retired and/or received a pension award will be offered a choice as soon as practicable after necessary legislative and process changes can be made. The position they choose will be applied retrospectively back to the date the award was made,” it added. The consultation response was accompanied by a leaflet for members.
The government also confirmed the legacy scheme will close in March 2022. It did not contemplate moving all affected members back to the legacy scheme, saying this would not be fair.
“Whilst the courts found that the transitional protection arrangements in introducing the reforms were unlawfully discriminatory, the reforms themselves are not,” said Barclay, adding: “Public service workers will continue to receive some of the best pension scheme benefits available in the UK, but that provision is more sustainable for the long term and more affordable for the taxpayer.”
Unions and industry welcome decision
The move has been well received; Prospect, the union of white-collar workers, said in a tweet that it welcomes the Treasury “confirming that age discrimination arising from McCloud & Sargeant in public sector pensions will be remedied with a Deferred Choice Underpin”.
Catherine McFadyen, a partner at consultancy Hymans Robertson, also said she was pleased that the government has "heeded the comments of respondents, including ourselves, who called for members to be allowed to make a benefit choice at retirement", rather than being forced to make an immediate decision based on assumptions.
"The deferred choice approach provides greater security for members and avoids the administrative challenge of carrying out an immediate options exercise for 3m members," she said.
"It would be a huge challenge to implement these changes alongside revisiting any benefits changes as a result of the 2016 cost control valuations and we would urge [the] Treasury to complete the cost management process as soon as possible.“
Catherine McFadyen, a partner at consultancy Hymans Robertson, also said she was pleased that the government has "heeded the comments of respondents, including ourselves, who called for members to be allowed to make a benefit choice at retirement", rather than being forced to make an immediate decision based on assumptions.
"The deferred choice approach provides greater security for members and avoids the administrative challenge of carrying out an immediate options exercise for 3m members," she said.
"It would be a huge challenge to implement these changes alongside revisiting any benefits changes as a result of the 2016 cost control valuations and we would urge [the] Treasury to complete the cost management process as soon as possible.“
