Thursday 04 February 2021
The government has announced its response to the consultation held in July 2020 - ‘Public service pension schemes: changes to the transitional arrangements to the 2015 schemes’.
We are working through the detail of HM Treasury’s response and will provide a comprehensive update to members. However, the headline points are set out below:
The government states that it will implement the deferred choice underpin (DCU) rather than immediate choice. This will give eligible scheme members a choice at the point their pension becomes payable, whether they wish to receive benefits from their legacy scheme or benefits equivalent to those that would have been available under their reformed schemes in relation to their service between 1 April 2015 and 31 March 2022. In the meantime, eligible members will be deemed to have been members of their legacy schemes for any period of service between those dates. The implementation of the DCU option is welcomed in the FDA as in our response to the consultation we stated: “That only the deferred choice underpin can allow members to make an informed decision and ensure that members are not in a position of detriment.”
The government confirms that the legacy schemes will close on 31 March 2022. From 1 April 2022, all those who remain in service will do so as members of the reformed schemes that were introduced in 2015 (Alpha Scheme within the civil service). Benefits built up in the legacy schemes will be protected. In principle, we agreed with this in our response. However, we raised issues regarding other by-analogue legacy schemes stating in response that “will require deep dive analysis before a blanket move approach can be adopted. Additionally, our member survey clearly indicated that there would be significant disquiet about an automatic move … As indicated earlier, a more in-depth Equality Impact Assessment would be required beyond the scope of the McCloud remedy to determine if future detriment was likely”.
The government will bring forward new primary legislation, when parliamentary time allows, to provide requisite powers to deliver these changes to public service pension schemes.
Cost control mechanism and 2020 valuations update
Members will recall in July, alongside the launch of the consultation, it was announced that the pause to the cost control mechanism would be lifted, and the cost control element of the 2016 valuations process completed. Additionally, that the Government Actuary (GA) would proceed with the review to assess whether the mechanism is operating as intended.
The Government has not changed its position, that the cost of the McCloud remedy will be taken into account in the completion of the 2016 valuations and as such will be classed as a member cost. They state that early estimates indicate that some schemes could breach the ceiling. Under normal statutory procedures, any ceiling breaches would lead to a reduction in member benefits in order to bring costs back to target. However, given the GA review is ongoing, the government states “it would be inappropriate to reduce member benefits based on a mechanism that may not be working as intended.”
This means any ceiling breaches that occur during the completion of the 2016 valuations will not be implemented, and benefit levels will not be reduced. However, should any floor breaches occur, they will be honoured, and member benefits increased in order to bring costs back to target. These decisions will only apply to the cost control element of the 2016 valuations. At this point in time, it is unclear what this will mean in practice but the FDA will be meeting with HM Treasury and the Cabinet Office to agree the outcomes and implement scheme benefits in line with the Scheme Advisory Board of which the FDA is a member.
Given the GA review, the government state that future cost control policy for future valuations will be set out once the GA’s review of the mechanism has concluded and any recommendations have been fully considered by the government.
The 2020 valuations were due to implemented from April 2023, however, due to a number of interactions with the wider pension landscape they have announced in these exceptional circumstances that any changes to employer contribution rates resulting from the 2020 valuations will therefore be delayed from April 2023 to April 2024.