Public Service Pensions Update | February 2021

Written on 24 Feb 2021

Welcome to the latest edition of our Public Service Pensions Update

In this edition, we discuss the reversal of the cap on public service exit pay, the latest McCloud developments and consultations and changes in areas including climate change risk and the normal minimum pension age.

If you would like to discuss any of the developments in this newsletter, please contact one of the experts listed below.

Revoked | Cap on public service exit pay

In previous newsletters, we have reported the introduction of a £95,000 cap on exit payments by The Restriction of Public Sector Exit Payments Regulations 2020 and legal challenges to that introduction.

On 12 February 2021, HM Treasury (HMT) published a guidance note in which it confirmed that "[a]fter extensive review of the application of the cap, the Government has concluded that" it "may have had unintended consequences and the Regulations should be revoked. HMT Directions have been published that disapply the cap until the Regulations have been revoked".

The guidance says that individuals who were affected by the cap between 4 November 2020 and 12 February 2021 should ask their former employer to pay the amount they would have received had the cap not been in place, and that "[e]mployers are encouraged to pay to any former employees to whom the cap was applied the additional sums that would have paid but for the cap".

However, as noted by the Local Government Pension Scheme Advisory Board (LGPS SAB), the HMT directions only seem to apply from 12 February 2021. To help funds, LGPS SAB has posted a link to and its commentary on legal advice relating to pre-12 February 2021 leavers and cash alternative payments. It has also updated its administering authority and employer guides once, and is in the process of updating them again.

We suspect that the cap is gone but not forgotten. The HMT guidance confirms that "it is still vital that exit payments deliver value for the taxpayer and employers should always consider whether exit payments are fair and proportionate. HM Treasury will bring forward proposals at pace to tackle unjustified exit payments".

Consultation response | Scheme changes following McCloud

In our July 2020 newsletter, we reported that HMT had published a consultation setting out the government's proposals for remedying, in most public service pension schemes, the unlawful discrimination identified by the Court of Appeal in the McCloud case. The Ministry for Housing, Communities and Local Government and the Ministry of Justice were consulting on changes to the LGPS and judicial pension schemes, where different considerations apply.

HMT has now published the response in its consultation. This confirms that the discrimination identified in the McCloud decision will be addressed by offering members who were in service on or before 31 March 2012 a deferred choice underpin. The underpin will allow members to choose at retirement (rather than immediately) between receiving legacy scheme, or reformed scheme, benefits for the period 1 April 2015 to 31 March 2022. Active membership of the legacy schemes will cease on 31 March 2022, with only the reformed schemes being open to accrual after that date. Primary legislation will follow "when Parliamentary time allows". A guidance note published by the Home Office and Police Advisory Board for England and Wales suggests that this could be mid-2021.

The responses in the consultations relating to the LGPS and Judicial pension schemes will follow.

Costs cap | No ceiling

In the same newsletter, we reported that, at the same time as the McCloud-related consultations (discussed above) were launched, the government confirmed that "the pause of the cost control mechanism will be lifted and the cost control element of the 2016 valuations process will be completed: the costs of addressing the discrimination identified in the McCloud judgment … will be included in this process".

At the same time as releasing the consultation response, the chief secretary to the Treasury confirmed that, although the increased value of schemes to members as a result of the McCloud remedy will lead to higher costs than would otherwise have been expected, benefit levels will not be reduced if there are ceiling breaches. In contrast, if there are floor breaches, then member benefits will be increased in order to bring costs back to target. Cost control policy for post-2016 valuations will be set out once the Government Actuary's "review of the mechanism has concluded and any recommendations have been fully considered by the government".

Any changes to unfunded scheme employer contribution rates resulting from the 2020 valuations will also be delayed from April 2023 to April 2024.

Consultations | NHS Pension Scheme

In our September 2019 newsletter, we reported that Department of Health and Social Care (DHSC) was consulting on a number of options that would help senior clinicians to manage their exposure to annual allowance charges and (if they wish) their build up to the lifetime allowance.

The options included allowing clinicians to choose "before the start of each scheme year a personal accrual level in 10% increments and pay correspondingly fewer employee contributions" and to "fine tune their pension growth towards the end of the scheme year by updating their chosen accrual level when they are clearer on total earnings. For example, go from 50%:50% to 60%:60%".

The DHSC has now published its response. Amongst other things, this confirms that the change to the tapered annual allowance announced at Budget in March 2020 was the "quickest and most effective way to solve the issue" and delivered a tax solution which was a "simpler alternative to flexibility". As a result, the department "does not intend to proceed with proposals to introduce pension scheme flexibility for senior clinicians".

The department is also consulting on a series of amendments to the NHS Pension Schemes and the NHS Injury Benefits Scheme in England and Wales, including the survivor benefit change that we flagged in our July 2020 newsletter. The consultation is open until 8 April 2021.

Open consultation | Increase in the minimum pension age

In our September 2020 newsletter, we reported that the government still intends to legislate to increase the normal minimum pension age from 55 to 57 on 6 April 2028.

HMT has now published a consultation on this change. This confirms that there will be no impact on existing protected pension ages and that the increase will not apply to members of the armed forces, police and fire services.

HMT is asking for views on the implementation of the rise and (slightly different) protections for members, but not on the question of whether the minimum pension age should be increased. If you would like to respond, the consultation is open until 22 April 2021. The government then plans to publish draft legislation this summer and to legislate for the change in the next Finance Bill.

Pension Schemes Act 2021 | Climate risk governance and reporting duties

In our January 2021 newsletter, we reported that the Pension Schemes Bill had completed the parliamentary process and was waiting for Royal Assent.

Royal Assent was granted on 11 February 2021, with the result that there is now a Pension Schemes Act 2021. Although most of the provisions in the Act have still to be given a commencement date, it does seem clear that larger private sector occupational pension schemes will be subject to new climate risk governance and reporting duties from 1 October 2021. 

LGPS administering and employing authorities might like to read our Insight on the new climate risk duties and consider responding to the consultation. The reason for this is that the UK Taskforce's November 2020 Roadmap for introducing mandatory climate-related disclosure requirements across the economy says that the Ministry of Housing, Communities and Local Government "intends to consult in 2021 on implementation in the Local Government Pension Scheme by 2023".

For those interested in responding, the consultation will be open until 10 March 2021.

EU-UK trade | Data protection

In our last newsletter, we considered the impact of the EU-UK Trade and Co-operation agreement on data protection.

The European Commission has now published draft adequacy decisions. Although publication of the drafts is only the first step in the adequacy process, if the European Commission does finally conclude that the UK is adequate, it will mean that transfers of personal data from the EU to the UK can continue to be made without any further safeguards being necessary.  We discuss this further in our Insight.

House of Commons Library briefing papers | New and updated

The House of Commons library has published or updated the following briefing papers, which might be of interest to public service pension schemes and employers:

This newsletter covers developments relating to public service pensions in England and Wales, with a focus on the Local Government Pension Scheme.