Storm clouds are gathering for public sector pensions

The Government has been refused permission to appeal a decision ruling that transitional arrangements in public sector pension schemes are discriminatory.

This could add £4 billion to public sector pension scheme liabilities and result in further contribution rate rises, as well as the possibility of scheme re-design and trade union opposition.

The Government must feel like the gods are conspiring against them right now! As if Brexit and a leadership contest were not enough, the Supreme Court has refused permission to appeal the outcome of the McCloud case. When the public-sector schemes moved from providing benefits based on final salary to benefits based on career-average earnings, transitional arrangements were put in place to protect workers closer to retirement, and therefore with less time to make alternative arrangements. The Court of Appeal decided in the McCloud case that the transitional arrangements for judges and firefighters were indirectly discriminatory against younger employees, as well as on the grounds of sex and race.

This decision now stands, and so the pension schemes will have to honour the transition measures for all members. This decision will also impact the other public-sector schemes. It is estimated that the Local Government Pension Schemes’ liabilities will increase by 1%, and other unfunded public-sector schemes maybe more, as they must honour improved pension provision.

The Supreme Court’s decision has not come as a huge shock as the Government was anticipating this direction of travel, and so in January announced that it would be pausing the cost cap mechanism in the absence of any certainty as to pension costs and funding. The Government has said that it is impossible to assess the value of the current pension arrangements until there is more certainty and the results of the schemes’ four-yearly valuation are received.

We bring rather pessimistic advice to the end of this article. In light of this decision, employers can expect to see a rise in pension costs and should start the budgeting process so as to prepare for this scenario! Depending on the flavour of government over the next few years, we may also see further steps taken to re-design the public-sector schemes to make them more affordable. This, in turn, is likely to provoke opposition from trade unions, which, if the last round of changes is anything to go by, could lead to strikes affecting employers participating in the public-sector schemes.

Further information

If you would like further information on this briefing, or for any pension enquiries, please contact Doug Mullen.