- Firefighters landmark victory on public sector pensions will mean huge extra costs for taxpayers.
- Millions of public sector workers will have to be compensated, costing around £4billion a year.
- Massive indictment of Government handling of pension reform as it ignored advice that warned against discriminating in favour of older workers.
- Further reform of public sector pensions seems inevitable to control cost but risks industrial unrest.
The Government has lost its Appeal to the Supreme Court against rulings that its changes to Firefighters and Judge’s pensions in 2015 were unlawful, because they unfairly favoured older workers. This judgment is a massive blow to the Government and its handling of public sector pension reform.
Enormous extra costs to taxpayers: Millions of public sector workers – including civil servants, teachers, NHS and police – had similar pension reforms to the firefighters in 2015, with similar protections for older members. The ruling means that younger members will now be put back on the terms they enjoyed before the April 2015 reforms and their benefits backdated under the old scheme rules, until measures are introduced to change future benefits for all members. This is expected to add an extra £4billion to the annual cost of public pensions and will be an enormously complex exercise.
Public pension schemes moved from final salary to Career Average in 2015: Lord Hutton’s 2011 Review aimed to balance the costs and risks more fairly between scheme members and employers and taxpayers. He recommended replacing final salary pensions with new career average schemes for the future and increasing pension ages in line with the rise in State Pension Age. All members would keep their accrued rights under the old final salary scheme rules. The new arrangements were considered to be fairer as they would result in a more equal distribution of benefits across scheme members, rather than favouring the longest-serving ‘high-flyer’ members (more often men), over younger, lower-paid, part-time or female workers. His recommendations were adopted in the 2013 Public Service Pensions Act.
Government ignored Hutton Review advice against protecting older members: He also specifically advised against transitional protections for older workers, saying they may be discriminatory and, in any case, were not needed because those closest to retirement were least affected by the reforms. The Government ignored this. Active members who were within ten years of normal pension age in April 2012 were fully protected and remained on their existing terms until retirement. Those between ten and around 13.5 years from normal pension age were given tapered protection to keep some of their old terms for a time, but youngest members were given no protection other than keeping their accrued rights.
Government guilty of discrimination by protecting older members against pension changes: By trying to protect older members, purely on the basis of their age rather than length of service or other criteria, Government was guilty of direct age discrimination, as well as indirect gender and ethnicity discrimination because it is only more recently that public sector employment has made major strides in increasing employment of women and minority groups.
Major failure of public sector pension reform policy: Ironically, the Government may have believed that transitional protections for more older workers would placate union opposition to the changes. However, the Firefighters’ union took the Government to Court claiming discrimination. Teh Government’s defence case tried to argue there were good reasons for those transitional arrangements but these arguments were weak, amounting to a belief that this was ‘a moral decision’ and ‘it felt right’ to protect older members. The Court said this defence was not good enough and was not a valid rationale for such discrimination.
Past pension failures and scandals have had similar roots: This latest problem may be another example of pensions policymakers who do not recognise the ramifications of their reforms, which may seem to make sense for some groups, but have damaging knock-on consequences that are not adequately appreciated until too late. In the past 20 years, I have been involved in pension scandals that stemmed from such failures. For example, the flawed protections for final salary occupational pensions and Guaranteed Minimum Pensions that were supposed to protect workers if their scheme failed, lack of warning over State Earnings Related Pensions Scheme (SERPS) changes and the furore following changes to women’s State Pension Age, all stem from policymakers focussing on one aspect of policy, while ignoring the side-effects and consequences for other people.
Government may need to consider further root and branch reforms of public sector pensions: The Treasury may need to find ways to protect the public purse and control public sector pensions costs better. This will presumably necessitate another round of reforms, which is not a welcome prospect. Such pension changes have proved contentious in the past, causing deep anger and sometimes strike action.
We are far from having solved the problems of funding public sector pension promises: As interest rates have fallen following the Bank of England’s Quantitative Easing policy, the anticipated costs of future unfunded public sector pension liabilities has risen sharply, and this judgment will increase that pressure further. There remains pressure to control rising costs for public sector pensions at a time when private pensions are becoming much less generous.
A question…Could closing DB scheme to new members be discriminating against younger workers? One might now ask whether employers who close their Defined Benefit pension scheme to new members, but allow existing members to continue on the old terms, might also be challenged on the basis of indirect age discrimination. In many firms, workers who still belong to a DB scheme will be older while the younger members who newly join the firm will be on much less generous terms in an alternative scheme. This is an important consideration which many employers may wish to contemplate rather urgently.