First, a quick recap
Back in 2010 one of the first actions of the coalition government was to set up a review into public service pension schemes, which was chaired by Lord Hutton of Furness. As a direct result a number of key reforms were pushed through the public sector, including that, from 2015, pension benefits would be based on career average earnings, and not on final salary. At the same time the government agreed that scheme members within ten years of retirement on 1 April 2012 would be protected from the change. That did not sit well with our judges and firefighters who took the government to court on the grounds of age discrimination, in so far as younger members were being treated less favourably than older members, and they won.
You can find a full timeline of the events right here
Wind forward to 4 February 2021, when the government published the results of its public consultation on how to remove discrimination.
The future of public service pensions
In its July 2020 consultation the government put forward that the best way to remove age discrimination was that, from 1 April 2022, all public sector scheme members would be moved to the new reformed 2015 pension scheme, regardless of whether they were previously offered protection and allowed to stay in their legacy pension scheme.
For the period between 1 April 2015 and 31 March 2022, the so-called ‘remedy period’, all affected members would be given the choice of accruing pension benefits in their legacy scheme, or in the new 2015 scheme.
Two different ways of implementing this proposal were put forward:
1. Immediate Choice
Members will need to make an irrevocable decision of accruing benefits in either their legacy or the new 2015 pension scheme.
2. Deferred Choice Underpin
Members would stay in their legacy scheme but could opt at retirement for the alternative scheme if this would produce a larger pension.
As was widely expected, and strongly petitioned for, on 4 February, the government confirmed it will offer the Deferred Choice Underpin (DCU) to affected scheme members.
What is Deferred Choice Underpin?
As the name suggests, a member’s decision is deferred to the point at which the member retires (or takes pension benefits), rather than having to decide right away, which was the premise of the Immediate Choice option. The Immediate Choice option would have required a number of assumptions to be made about their earnings or retirement age for example. With DCU the decision is not made until retirement and so allows members to make an informed decision that is best suited to them, based on actual figures, and not on assumptions.
Who is in the scope of these changes?
If you were a scheme member who was serving on or before 31 March 2012 and still serving on or after 1 April 2015, then yes, you will be in scope. This includes members who are currently active, deferred or retired, and those with a qualifying break in service of less than 5 years. Individuals who have chosen to opt out of the scheme, but may since have changed their mind, are also in scope.
Who is out of scope?
The Court of Appeal ruled unlawful discrimination between older and younger members in service on or before 31 March 2012, so any member who joined the scheme after 31 March 2012 is out of scope.
When will the changes be introduced?
Although still to be legislated, the government will make provisions for the deferred choice to be implemented for all scheme members by 1 October 2023. Where possible, schemes that can begin implementation sooner will be permitted to do so.
What if I plan to retire before 1 October 2023?
Where affected members retire before October 2023, the choice will be offered as soon as practicable once benefits become payable. For some cases, particularly those who are already in receipt of benefits, this may, by necessity, be subsequent to the legislative changes.
Will there be any tax issues?
Many members will see no change to their tax position over the remedy period. For some members, the pension changes will cause their tax position to change, which could result in further tax charges for the member or, for the majority of members, becoming entitled to a reimbursement of tax previously paid.
In some cases, the pension changes may mean that individuals will have to pay new or higher annual allowance charges, but typically only where their projected pension at retirement has increased. Adjustments to lifetime allowance charges may also be required, where retired members’ accrual changes.
Some members may also face changes in their contributions in respect of the remedy period, which may also affect their income tax position.
Where a member has already retired, a member’s total pension income may also change, and tax will be payable on any increase in pension.
The value of investments can fall as well as rise and is not guaranteed.