Reforms to the NHS Pension Scheme made in 2015 are now being reconsidered in the light of a landmark legal judgement on age discrimination
While legal cases concerning pensions can sometimes be arcane, they often have significant effects on pension scheme members’ benefits. So it is proving with recent age discrimination disputes, which have implications for a broad range of public sector pension schemes – including the NHS Pension Scheme.
The issue currently in focus is the reforms to the NHS Pension Scheme introduced in 2015. These saw some members of the 1995 and 2008 sections of the scheme, which combine aspects of final salary and career average revalued formulas for working out members’ pensions, into the 2015 section, which only relies on the latter. The reforms also included an increase in normal retirement ages.
However, anyone who was within 10 years of retirement on 31 December 2012 was given the option of remaining in their legacy section, rather than joining the 2015 section. In addition, members who narrowly missed out on this protection were given a form of it on a tapered benefit. This applied to all those who were between 10 years and 13 years and five months of their normal retirement date on 31 March 2012; their move to the new scheme was delayed on a tapered basis, ranging from periods from a few months to a number of years.
What happens next?
In other words, these reforms appear to fall foul of legal rulings about age discrimination in that they affect people of different ages in different ways. The Government has therefore begun consulting on the best way for the NHS Pension Scheme to withdraw aspects of the reforms that amount to age discrimination – the consultation period closes on 11 October. N.B. The consultation period in Northern Ireland closes on 18 November.
The proposal under consideration is that with effect from April 2022, all members will move into the 2015 section of the NHS Pension Scheme, irrespective of whether they were previously offered protection. By then, of course, individuals who were within 10 years of their normal retirement date on 31 March 2012 will have reached that date; in theory, they will therefore be unaffected by this proposal, but for those choosing to stay in the scheme beyond their normal retirement date, it may be that the 2015 section, in which members accrue benefits more quickly, is a better option.
In practice, the Government is suggesting that for the period between 2015 and 2022 – known as the remedy period – all members of the NHS Pension Scheme affected by the reforms will be given the choice of staying in their legacy 1995 or 2008 section of the scheme, or opting for their service to count towards 2015 section membership.
The Government is also seeking views on how this choice might work. One option is simply to ask members to make their choice as soon as is practical. The alternative is known as a “deferred choice underpin”. Under this method, members would remain in (or be returned to) their legacy section; then, at the point their benefits become payable, on retirement or otherwise, they would then be able to choose to receive benefits from the 2015 section for the relevant period. They would naturally choose the more generous arrangement.
Knock-on effects to consider
Many scheme members will need to recalculate their annual allowance position for the remedy period should they choose to move their benefits. It is even possible that some members will have exceeded the annual allowance when their benefits are calculated in a different way. Or a previous breach of the allowance may now be cancelled out.
Where additional tax is due, the statutory period for altering tax charges (four years before current tax year), will mean they may need to pay additional tax charges between 2017/18 and 2021/22.
Where a refund is due to an individual, HMRC does not apply the above time limit, and it is, therefore, likely to be beneficial for individuals to recalculate this back to 2015/16 to see if they are due refunds during this period.
Where retrospective tax charges fall due, members have the option of using the Scheme Pays facility in order to meet the charge.
It is important to remember that this is a consultation at this stage with the final outcome not yet confirmed.
More details of the consultation can be found on the Government’s website. And once the consultation is completed and the proposals are finalised, we will look at what they mean in practice in more detail in this newsletter.
Content correct at time of writing and is intended for general information only and should not be construed as advice.