Back in 2016, Andy Haldane, the Bank of England Chief Economist, stunned advisers by claiming they had “no clue” about pensions. At the risk of re-opening an old wound, on reading the government’s recently published proposals to remedy age discrimination issues in public service pension schemes, I couldn’t help wondering whether Mr Haldane was perhaps confusing general pensions law with the complexities of individual occupational schemes. Because it seems to me that the difficulty arises when individual scheme rules need to be overlaid on pensions legislation. And while you can be an expert on pensions law, you can’t be an expert on every individual scheme.
This is never more true than in dealing with public service pensions. Here scheme evolution has resulted in a convoluted hotch-potch of regulations and equally convoluted remedies intended to rectify elements of the evolutionary process which have been ruled unlawful. The complexities are frankly bewildering. Rectifying the age discrimination issues arising out of the “transitional protections” given to older workers as part of Public Service pensions reform in 2015 was always going to be complex, but the proposals have the effect of underlining how important financial advice is going to be for many of those impacted:
Scope of the proposal
Broadly, the proposals give individuals with pensionable public service both on/before 31 March 2012 and on/after 1 April 2015 the choice of whether to choose legacy, (usually) final salary scheme benefits or reformed scheme career average benefits for the remedy period of 1 April 2015 to 31 March 2022. Members with certain breaks in service of less than 5 years will also be in scope. In other words, older individuals covered by the unlawful transitional protections as well as their younger colleagues who were moved to the reformed schemes will have some difficult decisions to make going forward.
Eligible deferred, active and pensioner members of all schemes in Great Britain are in scope with the exception of the Judicial Pension Schemes and the Local Government Pension Schemes all of which are subject to separate consultation.
Going forward, all members, regardless of prior protection status will be moved to the reformed career average schemes for accrual from 1 April 2022. Until that time, the hotch-potch will remain and will be overlaid by the measures eventually agreed upon to end the discrimination.
Approaches being proposed
Two possible methods of allowing eligible individuals the irrevocable choice between legacy and reformed scheme benefits over the remedy period have been proposed. There are pros and cons of each for schemes and members alike. Either:
- they could be asked to choose between legacy and reformed benefits soon after the remedy implementation date in 2022 (immediate choice), OR
- they could be asked to choose at the point pension benefits are claimed under the “deferred choice underpin” (DCU). Until that point they would be deemed to have accrued benefits in the relevant legacy scheme over the remedy period.
Under the immediate choice approach, members achieve resolution and certainty at an early date but would be basing their decision in large part on assumptions related to pay, earnings growth and likely retirement date. So there is a real risk that they would not choose the scheme which ultimately would turn out to be best for them. Conversely, the DCU option means members potentially waiting many years for resolution and certainty, but on the other hand would need to rely less on assumptions leading, in turn, to a higher likelihood of good outcomes.
In either case members will need to reach a decision on what is “best” for them. It goes without saying that this will mean making an assessment of eventual benefits under both accrual options for the remedy period. The consultation suggests that schemes could provide online modellers to help members with this assessment, but even the most financially literate are likely to need professional advice i.e. to determine the right values for input, and weighing up the projection outputs against the other merits and demerits of legacy vs reformed scheme accrual.
Conditions for, and calculation of ancillary benefits such as survivor and ill-health pensions typically vary between legacy schemes and reformed schemes. Members with a good understanding may therefore decide to choose the scheme which is less financially beneficial to them personally (based on known factors or assumptions as the case may be), but which offers higher survivor and/or ill-health pensions. On the face of it, that may seem fairly straightforward, but the factors which should feed into the decision on what is “best” don’t end there.
Taxation and contributions
Retrospective “compensation” was realistically only ever going to create a taxation minefield for members. Admittedly, a decision on the preferred approach will help. But regardless of the approach, members will potentially have to grapple with:
- Retrospective re-assessment of pension input and corresponding possibility of a new/increased annual allowance charge or tax refund.
- Changed Lifetime Allowance (LTA) projections. LTA impacts only get a brief mention in the consultation document, but based on what we currently know, IP16 valuations could become retrospectively incorrect and FP16 could be lost if benefit accrual above the relevant percentage occurs.
- Additional contributions/refund of contributions where legacy scheme and reformed scheme contributions were at different rates over the remedy period. Tax relief / tax refunds and rate of relief on those new or excess contributions.
- Any compensation the government offers against annual allowance charges in relation to the remedy period. Note: depending on the eventual approach taken, this may not apply.
- The desirability of paying any tax charge having regard to improved benefits received.
- Implications of the 4-year statutory time limit for collection of tax.
Of course I’m only really scratching the surface here. The list of factors that members will need to evaluate is seemingly endless and outcomes could well be poor without professional help. Around 3 million individuals are in scope of these consultation proposals. Those seeking professional help have never needed their adviser to be “clued up” on key public sector pension scheme rules more.