Pensions Bulletin 2021/06
Our viewpoint
11 February 2021
- Public sector pensions age discrimination resolution – all eligible members to get a choice at retirement
- PPF proposes further weakening of its valuation basis
- NHS Pension Scheme consultation – flexible accrual option off the table
- Irish/UK cross-border schemes to continue
Public sector pensions age discrimination resolution – all eligible members to get a choice at retirement
In response to the consultation launched in July 2020 (see Pensions Bulletin 2020/30), the Government has decided that the best way for affected members of public sector pension schemes to exercise their choice between receiving legacy (final salary) and reformed (career average revalued earnings) scheme benefits is through a mechanism at the point that benefits are put into payment.
Following the December 2018 Court of Appeal ruling in McCloud and Sargeant, the Government had to extend in scope and nature the transitional protections introduced when the main public sector schemes were reformed in 2015. A complex proposal was put forward last summer in which all those who were in pensionable service on or before 31 March 2012 who remained in service on 1 April 2015 (or left and rejoined after 1 April 2015 and met the criteria for continuous service) were to be given a choice between legacy or reformed pension scheme benefits in respect of service between 1 April 2015 and 31 March 2022 (the “remedy period”). The essence of the consultation was whether this choice should be exercised immediately or at the point that benefits are put into payment (“deferred choice underpin”).
The Government has now settled on the “deferred choice underpin”. This was supported by a significant majority of the responses, primarily because members will have greater certainty about their benefit entitlement and personal circumstances at this point of decision.
The response (which is accompanied by easier to digest guidance on its contents), also:
- Confirms that the legacy schemes will close on 31 March 2022, with any members in pensionable service at that date joining the relevant reformed scheme
- Promises guidance around the treatment of members who may have taken different decisions about their scheme benefits since 2015 if not for the discriminatory transitional arrangements
The intention is for the necessary legislation to be introduced in mid-2021 and be in place by 1 October 2023 at the latest and to also be extended to the Police Pension Scheme, NHS 2015 Pension Scheme and other affected public service pension schemes.
The original transitional measures put in place in 2015, across all the main public service pension schemes, enabled members within 10 years of their Normal Pension Ages to stay in their legacy schemes. The Court of Appeal later found this provision to be discriminatory against younger judges and firefighters – and the Government also accepted that the judgment had implications for the other schemes, including the Police Pension Scheme.
Comment
The design of the reformed pension schemes was intended to make public service pensions more affordable and sustainable. However, not all members will be better off drawing remedy period benefits from the legacy schemes. It is therefore important that they have a choice. Furthermore, allowing this decision to be made at the points benefits are put into payment eliminates the need for members to make assumptions about future circumstances.
Whether these changes filter through to occupational pension schemes modelled in public sector scheme style remains to be seen. And of course, the associated costs are still likely to be of concern.
PPF proposes further weakening of its valuation basis
The PPF is proposing changes to the assumptions used in various valuations. For most pension schemes this will weaken the basis overall, with the intention of bringing it in line with current pricing in the bulk annuity market. Similar adjustments were implemented in 2018 following the PPF’s previous review of market pricing (see Pensions Bulletin 2018/33).
The proposed changes are as follows:
- To move from the “S2” to the “S3” Self-Administered Pension Scheme (SAPS) mortality tables
- To move the mortality improvement projection model from CMI 2016 to CMI 2019
- A reduction of up to 0.4% to the pensioner post 97 discount rates and an increase of up to 0.3% to the non-pensioner pre-retirement post 97 discount rates so that they better reflect current CPI pricing
- Amendments to the formula used to calculate the wind-up expenses which will serve to increase the estimated wind-up expenses for smaller schemes and reduce it for larger schemes, also applying an overall cap to expenses of £3 million
The new assumptions will cover valuations carried out under sections 143 (PPF entry) and 179 (PPF levy) of the Pensions Act 2004, and certain other valuations for PPF purposes. The intention is that, taken together, they should typically err on the side of understating the liabilities in order to reduce the risk of taking schemes into the PPF that could have bought out better benefits in the market.
The PPF estimates that, based on section 179 calculations as at 30 September 2020 for an average scheme, these changes would lead to an aggregate improvement in the funding ratios for schemes in the PPF 7800 index (which tracks the aggregate section 179 funding position of schemes eligible for PPF protection) of around 4% to 97.6%. They would also move 261 schemes from deficit to surplus and reduce the combined deficits of those pension schemes in deficit as at 30 September 2020 by just under £50 billion to £204 billion.
Consultation closes on 18 March 2021, with the PPF Board intending to publish both its decisions on the assumptions and a summary of the responses by 29 April and introduce these changes for valuations with an effective date on or after 1 May 2021.
Comment
The restructuring of the expenses formula will cost an extra 1% of liabilities up to £5m, which will have a proportionately bigger impact on smaller schemes. At the other extreme the £3 million cap will most benefit the largest schemes.
The PPF basis remains only a very broad approximation of buyout pricing, but the overall reduction in the strength of the basis is consistent with our experience of recent buyin pricing.
NHS Pension Scheme consultation – flexible accrual option off the table
The Government has now published its response to the September 2019 consultation on introducing new flexibility within the NHS Pension Scheme to enable NHS clinicians to control the amount of their annual pension savings (see Pensions Bulletin 2019/35).
The consultation took place because of the concern that NHS clinicians might have to resort to declining work or reducing responsibilities to avoid triggering the taper mechanism applying to the £40,000 annual allowance. At the time, the taper was triggered by a member’s threshold earnings (net income) exceeding £110,000 and adjusted income (net income plus annual pension growth) exceeding £150,000 – with the annual allowance reducing to £10,000 once the adjusted income reached £210,000.
The flexible accrual proposals made would have enabled eligible members to choose to pay lower contributions for a lower accrual rate at the start of each scheme year, but fine tune the accrual rate towards the end of the year by paying the contribution arrears once they were clearer on their likely total earnings for the year.
However, at the March 2020 Budget, the threshold earnings and adjusted income thresholds were both increased by £90,000 to £200,000 and £240,000 respectively (see Pensions Bulletin 2020/11). This meant that noone with earnings below £200,000 is now at risk of the taper, thus alleviating the concerns about taking on extra work for the majority of those NHS clinicians affected. The Government's review concluded that raising the thresholds was the quickest and most effective way to solve the issue and so removed the need for in-scheme flexibility. The flexible accrual facility (and the consequential proposal to allow recycling of employer contributions into pay) will therefore no longer be introduced.
The response also concluded that the Scheme Pays mechanism currently used (so those with an annual allowance charge can meet it out of pension reductions) will continue unchanged, but with improved transparency. The Government also found that Scheme Pays is a proportionate way of dealing with an annual allowance charge that arises from large increases in pay (so there will be no move towards allowing the pension growth occasioned by substantial “one-off” pay increases to be gradually phased in).
A “ready reckoner” – which will allow members to input their pay and pension details to get a view on whether their prospective NHS commitments may lead to an annual allowance tax charge – was also made available via the NHS Employer’s website in autumn 2020.
Comment
The response document highlights the concerns many respondents had about the inequity and potential divisiveness of the proposals to introduce the flexibilities with limited scope. This tax-based solution is not only effective in addressing this issue across all members of the NHS Pension Scheme – indeed across all members of UK pension schemes! – but also does not increase the complexity of the NHS pension arrangements.
Irish/UK cross-border schemes to continue
The Pensions Authority of Ireland has announced that as a result of regulations made by the Irish Parliament, Irish social and labour law will apply to UK members of occupational pension schemes based in Ireland instead of UK social and labour law.
It has also said that such schemes can continue to accept contributions in respect of UK members so long as they received authorisation and approval under Irish law to accept contributions in respect of EU members (including the UK) and this has not been revoked.
Comment
This is welcome news for these schemes, but it remains unclear whether the Irish authorities will accept any new schemes with UK members. We wait to hear from the UK Pensions Regulator how UK-based schemes with Irish members will be treated.