Treasury slammed for McCloud errors, but members will foot the bill

The report criticised not only the Treasury’s failure to foresee the consequences of the reforms, but also its handling of the mistakes once they had become apparent, slamming its response to the McCloud remedy and its plan for affected scheme members to foot the bill for “its own mistake — a mistake which could have been avoided by listening to advice and which will take many decades to resolve”.

Unfortunately the 2015 changes were complex, and trying to unscramble them in the way the Court of Appeal’s judgement requires can only be described as a nightmare for all concerned

Penny Cogher, Irwin Mitchell

The committee saw “evidence of public service pensions issues affecting delivery of frontline services, and independent schools opting out of pension schemes because of increasing costs”, while the Treasury still lacked the data required to properly evaluate the impact of its reforms, or judge whether they were meeting policy objectives.

It further warned that the Treasury seems “unconcerned about the drop in enrolment by some workers”, and saw “a danger of a perfect storm where some young people believe they cannot afford pension contributions because of high costs of living and retire with a reduced public sector pension as a result”. 

Meg Hillier MP, chair of the Public Accounts Committee, said: “The Treasury’s £17bn mistake on pensions reform is a ripple compared to the tsunami of costs to the public purse if government fails to address the growing number of young people unable to afford to plan for a proper pension.”

“Its lack of curiosity about why nearly a quarter of a million workers are not joining these pension schemes is a concern. Pension planning must be long term; mistakes and poor planning have an impact for decades,” she continued. 

“Short-term cost savings can become long-term costs to individuals with lower retirement incomes and the taxpayer who may end up supporting them.”

A litany of failings

In its report, the PAC accused the Treasury of failing to balance the need to make public sector pensions affordable to the taxpayer with its other policy objectives, such as ensuring public sector workers have a decent income in retirement, and ensuring pensions play a role in recruitment and retention of staff.

Failure to properly account for the last of these has hit healthcare and education schemes and workers, it said. For example, increases to employers’ pension contributions in 2019-20, that were not fully funded by the Treasury, hurt employer budgets.

Around 200 independent schools are now looking to withdraw from the Teachers’ Pension Scheme over concerns about increasing contributions, and the committee warned that more may follow.

“There is also evidence that pensions can affect staff choices about their work, which impacts frontline services. For example, the interaction between the NHS Pension Scheme rules and the tax system means a large number of doctors have reduced their working hours, opted out of the scheme, or retired early,” it added.

Other issues identified by the committee included the Treasury’s continuing failure to explore, explain and manage “pension gaps” that have emerged along gender lines and between other groups, which it warned could lead to further McCloud-like legal challenges in future.

On McCloud itself, the committee found that the Treasury should have foreseen the age discrimination arising from the reforms, and its failure to do so will take “many decades” to resolve.

“HM Treasury wants members to pay to put this right — at an estimated cost of £17bn — despite this being its own mistake,” the committee noted, while warning that the cost control mechanism, put in place to share pension costs fairly between employers and employees, is not up to the job.

The Treasury has been approached for comment.

‘Unscrambling’ the reforms a ‘nightmare for all concerned’

Squire Patton Boggs partner Kirsty Bartlett told Pensions Expert: “Addressing the McCloud judgment will inevitably erode the reduction in future service benefit costs that was anticipated from the 2014-15 reforms, as well as increasing the complexity and cost of administration.”

“HMT pausing the cost cap mechanism, so the impact of McCloud was allowed for, was a clear signal that members would be expected to contribute towards the cost,” she said.

“Given the additional pressures on the public purse arising from the pandemic, I’m not surprised that HMT expects members and employers to share the cost.”

Irwin Mitchell partner Penny Cogher explained that, despite the possibility of a legal challenge emerging early on, “the Treasury is like an oil tanker. It sets its course years in advance of making the change — for good reason — to allow employers and employees to learn about and get ready for the changes.” 

“However this means that the Treasury is always behind the curve when making its pension changes  — they are out of date before they are introduced,” she said.

“Unfortunately the 2015 changes were complex, and trying to unscramble them in the way the Court of Appeal’s judgment requires can only be described as a nightmare for all concerned.”

Time to ‘go Dutch’?

Cogher pointed to a number of areas, not covered by the committee’s report, that introduce yet more complexity and a perception of unfair treatment between schemes and scheme members.

For instance, the way the McCloud judgment interacts with the tax system makes it almost impossible for anyone other than a specialist actuary to be certain what benefits an individual member is to receive and how they should be planning for their retirement, she said, and added: “This can’t be right. The system should not be so complex that it is incapable of being understood or challenged by an individual member as being wrong.”

“I wonder if now is the time for the Treasury to be brave and go Dutch and look at converting, through an Act of Parliament, all affected public sector pensions from 2015 onwards for all members to collective money purchase benefits,” she said. 

“There is some precedence for this with the Royal Mail pension scheme which seems to be working. While the Netherlands are forever tweaking their [collective defined contribution] schemes, which they introduced when their defined benefit schemes started to fail, overall they seem to be a success.”

Steven Cameron, pensions director at Aegon, said: “As well as looking at public sector pensions specifically, scrutiny needs to be given to how these compare over time with pensions typically available in the private sector, particularly if their nature and generosity continue to diverge”.

Independent pensions consultant John Ralfe, meanwhile, took to Twitter to say: “The answer is simple. Move all future public sector pensions to [defined contribution].”