Public Service Pensions Update | June 2021
Published on 23rd Jun 2021
This month, we look at the recent High Court decision on Local Government Pension Scheme (LGPS) exit credits, along with a number of other developments.
Exit credits | High court ruling on retroactive changes to the LGPS
The High Court has ruled that regulation 1 of the Local Government Pension Scheme (Amendment) Regulations 2020 is lawful. Regulation 1 gives retroactive effect to the amendments made to regulation 64 of the Local Government Pension Scheme Regulations 2013. These amendments replaced an employer's automatic right to an exit credit in the event of surplus when employers, most frequently admitted bodies, exit the LGPS, with an administering authority discretion to determine the amount of an exit credit (which can be zero). The amendments were made on 20 March 2020 but were intended to be retrospective to 14 May 2018 when employer exit credits were introduced into the scheme.
The amendments did not apply to LGPS employer exit credits paid out between 14 May 2018 and 20 March 2020, but did apply to exit credits which potentially became payable between 14 May 2018 and 20 March 2020 but were not paid.
Enterprise Managed Service Limited and another v Secretary of State for the Ministry of Housing, Communities and Local Government and others related to an exit credit which had potentially become payable during that period, but which the administering authority in that case had not paid to the exiting employer. The claimants applied for a judicial review of regulation 1. Among other things, they argued that the retroactivity infringed their property rights under the European Convention of Human Rights, by interfering with rights which they had enjoyed under the legislation as it previously stood.
The court ruled that the retroactive effect was lawful and went on to give some guidance on the exercise of the administering authority discretion in exit credit cases. The guidance indicates that the existence of contractually agreed terms between admitted bodies and contract-awarding local authorities concerning pensions risk - so-called "pass through" arrangements - are not a barrier to an administering authority exercising its discretion to pay an exit credit to an exiting employer.
LGPS administering authorities and LGPS employers, in particular admitted bodies, should take note of this judgment. The 2020 regulations were introduced to fix a problem, in particular so that admission bodies would not benefit from a windfall where the admission agreement was entered into before the introduction of exit credits in May 2018 in circumstances where contractually agreed pass through arrangements meant that the pensions risk was carried by the local authority rather than the admission body. The decision, and guidance in the judgment, will be relevant to the power of an LGPS administering authority to pay an exit credit in any case where an exit credit potentially became payable between 14 May 2018 and 20 March 2020 but has not yet been paid, and all employer exits after 20 March 2020.
Funding | Costs control mechanism
The Government Actuary's Department (GAD) has published its review of the costs control mechanism. The report compares the way the mechanism is working in practice with its original objectives and makes recommendations for change. The accompanying ministerial statement is here.
The review does not consider the second, and separate, cost control mechanism for the LGPS (England and Wales) which is operated by the LGPS Scheme Advisory Board.
Public Accounts Committee | Report on public service pensions
The House of Commons Committee of Public Accounts has published its report on public service pensions. The report expresses concerns, and makes recommendations to HM Treasury, in a number of areas:
- whether public service pensions are working as well as they could for employers and employees;
- impact of public service pensions policy on the delivery of some frontline services;
- working with employers and schemes to make sure that employees have the information they need to understand the value of their pensions (and what they are giving up if they opt out);
- understanding where significant gaps in average pensions exist between different groups;
- progress in evaluating the 2011-2015 reforms; and
- the fact that it has already been necessary to revisit some key aspects of the 2011-2015 reforms.
On the last point, the report says that "HM Treasury should have foreseen the age discrimination issue that gave rise to the 2018 McCloud judgment, and putting things right will take many decades to resolve. …Separately, HM Treasury is concerned that the cost control mechanism—designed to share costs of pensions fairly between employees and employers—is not sufficiently protecting the taxpayer and members. The Government Actuary’s Department says that the cost control mechanism is likely to be triggered very frequently, rather than only as a result of ‘extraordinary, unpredictable events’ as HM Treasury intended. This undermines the usefulness and stability of the mechanism and will impact employees and employers alike. HM Treasury was advised at the time of the reforms of both the age discrimination problem and that the cost control mechanism could easily be triggered".
The Committee recommends that HM Treasury "prioritise work to quickly resolve the challenges presented by the McCloud judgment and cost control mechanism" and "write to us with an update in six months’ time".
Update | McCloud
In addition to the entry above, funds might be interested to read the "Response to McCloud" House of Commons Library briefing paper linked in the last section of this newsletter, and to note that the Home Office has updated its informal, non-statutory, guidance on processing "immediate detriment" cases in relation to the Police pension schemes. This guidance applies, pending legislation to address the discrimination identified in the McCloud case, to members "who become eligible to retire (for any reason, including ill health) and draw their pension and want to have all their benefits paid from their legacy scheme (i.e. do not accept 2015 scheme benefits)". The note also includes guidance on members who are already in receipt of pension.
Investment | Climate change risk governance and reporting
In our May 2021 newsletter, we reported that Pensions Age had carried an article confirming that the Ministry for Housing, Communities and Local Government (MHCLG) plans to consult on regulations to introduce climate change risk governance and reporting requirements for the LGPS “later this year with the view to introduc[ing] the requirements from 2022/23“.
We also flagged an Insight which discussed a consultation, by the Department for Work and Pensions (DWP), on requirements that are expected to start to apply to the largest private sector schemes from October this year.
The DWP has now published a response to that consultation, together with updated draft regulations and statutory guidance. You can read more about the consultation response in our Insight.
Underpayment of benefits | High court ruling
The High Court has handed down its judgment in a rectification claim relating to the Axminster Carpets Group Retirement Plan (Punter Southall Governance Services Limited v Jonathan Hazlett (2021)).
The judgment relates to a private sector scheme, but considers limitation periods for past underpayments and benefit forfeiture provisions, and funds might be interested to read our Insight.
Response and new regulations | NHS Pension Scheme
In our February 2021 newsletter, we reported that the Department of Health and Social Care (DHSC) was consulting on a series of amendments to the NHS Pension Schemes and the NHS Injury Benefits Scheme in England and Wales, including a change to survivor benefits to give the widower or male surviving civil partner of a female member the same survivor pension as a widow.
The DHSC has now published its consultation response and the National Health Service Pension Schemes and Injury Benefits (Amendment) Regulations 2021 regulations have been made and will come into force on 1 July 2021.
Pensions Ombudsman | Various
The Pensions Ombudsman has:
- partly upheld a complaint by a member of the LGPS who was told that his deferred member ill health pension would be backdated to the date his incapacity started, when the regulations did not allow it to start before the date he applied for it. The decision also confirms the importance of making sure that the information provided to members about taking pension on ill health grounds is up to date, and promptly processing changes of address;
- upheld a complaint by a member of the NHS pension scheme in relation to removal of special class status;
- upheld a complaint by a member of the LGPS in relation to a series of administrative delays and problems; and
- not upheld a complaint by a member of the Principal Civil Service pension scheme (Northern Ireland) in relation to her application for ill health early retirement.
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: