Public service pensions - transition protection ruled unlawful
Court of Appeal rules that protection for accrued right and transitional protection arrangements could give rise to unlawful discrimination.
As part of Government’s effort to reduce the cost of public service pensions to the taxpayer, reforms were proposed to replace existing pensions schemes with new, less generous, ones. The new schemes became active in 2015 (2014 for local government) and are based on career average earnings rather than final salary and link the pension age to the state pension (apart from armed forces, police and firefighters (age 60)). More details can be found in the full report listed in the House of Commons library.
Protection for accrued rights and transitional protection arrangements were put in place. The latter was to enable those ‘closest to retirement’ to remain in their existing schemes either until retirement, or for a limited period, depending on their date of birth. However, two employment tribunal cases were brought against the Government in relation to possible (age) discrimination relating to the transitional protection.
The first case was brought by McCloud and other members of the Judicial Pension Scheme in November 2016. Another case was brought by Sargeant and other members of the Firefighters’ Pension Scheme in January 2017.
These two cases were appealed to the Employment Appeal Tribunal and subsequently to the Court of Appeal. In December 2018, the Court of Appeal ruled that the transitional protections gave rise to unlawful discrimination. The Government sought permission to appeal this decision to the Supreme Court but this request was refused in June 2019.
As per the written statement by the Chief Secretary to the Treasury (Elizabeth Truss at the time) of 15 July, the Government will ‘respect the Court’s decision and will engage fully with the Employment Tribunal to agree how the discrimination will be remedied’.
Whilst the court ruling is in relation to the transitional protection within the judges’ and firefighters' pension schemes, similar protections were offered to members of all the main public service pension schemes. The Government believes that the differences in treatment will need to be remedied across all those schemes.
This will include schemes for the NHS, civil service, local government, teachers, police, armed forces, judiciary and fire and rescue workers.
Government’s initial estimates of the cost of remedying the discrimination will add around £4 billion per annum to scheme liabilities from 2015. That is a lot of money, although put into context, the additional liability would only be 0.2% of the total public sector pension liability, which stands at £1,865 billion (2017-18 Whole of Government Accounts). However, the impact on individual pensions could be material.
The Local Government Association has commissioned the Government Actuary’s Department (GAD) to assess the potential financial impact on the Local Government Pension Scheme (LGPS). The June report from GAD can be found here. The GAD estimate that the increase in liabilities will be between 0.1% and 3.2% depending on two different scenarios – whether earnings increase in line with CPI only or in line with CPI plus 1.5%.
There are other variables to consider, such as age profile of the membership (the younger the age profile, the more costly), future increases in salaries, promotional salary increases and withdrawal rates etc. This means that individual entities and pension funds will need to obtain valuation reports from their actuaries regarding the impact of the McCloud ruling as the impact could be substantial for some pension schemes.
Unlawful age discrimination
The Government was refused the right to appeal the McCloud ruling and given that the court ruling clarified that a liability was owed under anti-discrimination laws, this should be taken into account when estimating IAS 19 liabilities for 2018/19 year ends.
Individual entities will need to obtain evidence on whether or not the ruling will have a material impact on their balance sheet pension liabilities, and if so, need to take this into account. Pension liabilities will increase as a result of increased past service costs.
An example of the McCloud ruling having no material impact on the pension liability can be found in Kent County Council’s annual financial statements (p. 28) whereas Leeds County Council (p. V) and Nottingham City Council (p.150) are examples of cases where adjustments have been made in annual statements.
If the McCloud ruling is material, disclosures in the financial statements should include a clear description of the issue, the accounting treatment adopted and the judgements involved.
The estimates for the increase in pension liabilities are exactly that, estimates. It is therefore necessary to disclose the significant assumptions and uncertainties that underpin those estimates.
Henning Diederichs, Technical Manager, Financial Reporting Faculty