Two trade unions are seeking permission to launch a judicial review of the government’s decision to delay benefit top-ups due to members under the cost floor arrangement in public sector pension schemes.
A valuation of public sector pensions in 2018 found that some public sector employers were not spending enough on pensions, meaning benefits should be uplifted for members of those schemes.
But in January 2019, Elizabeth Truss, then chief secretary to the Treasury, announced that the government was halting the increases due to the “potentially significant but uncertain impact” of a discrimination court case brought by firefighters and judges, known as the McCloud case.
This delay is “robbing” civil servants of contributions worth 2 per cent of salary every month by “making them pay more for their pension than the independent valuation says that they should”, according to the Public and Commercial Services Union, which represents around 200,000 current and former civil servants.
For the benefit of millions of public sector workers it is vital that all the different elements of this tangled web are resolved as soon as possible, so that public servants can plan for their future with confidence and certainty
Sir Steve Webb, LCP
The PCS and the Fire Brigades Union will be jointly seeking legal action on this matter, according to a statement from the PCS. A judicial review is a type of court proceeding in which a judge reviews the lawfulness of a decision or action made by a public body.
While the government delayed pension increases due under the ‘cost cap’ mechanism – a protection for taxpayers and employees from unexpected changes in pension costs introduced in 2015 – it has pressed ahead with a reduction in the discount rate used for unfunded public sector pensions, forcing greater contributions in response to affordability concerns.
Unions unhappy with govt response
In an update published on its website on February 12, the PCS said its officials had been told the government intended to “ask parliament in a few weeks’ time to give them the authority to make civil servants carry on paying pension contributions at the current rate”.
Mark Serwotka, PCS general secretary, said: “If you think about it, every month you get your pay check, 2 per cent that you are giving the government should be in your pay packet.
“It’s completely unfair and we’ve told the government that they need to give you that money as soon as possible. But at the moment they’re not listening.”
The union is launching a national campaign on pay, pensions and redundancy rights, which includes a call for the government to cut pension contributions by 2 per cent immediately and guarantee that moving forward it will implement remedies in response to the legal challenge won by judges and firefighters.
The Treasury has been approached for comment.
Public schemes are a ‘tangled web’
The government’s delay in implementing these changes has stemmed from its string of losses in the McCloud discrimination case.
The first judgment was handed down in December 2018, when the Court of Appeal ruled that the government had discriminated on the grounds of age, race and equal pay by protecting certain groups from cuts to their pension accrual basis.
In June 2019, the Supreme Court then refused the government’s application to appeal the court case, which marked the end of the legal process.
The government confirmed in July that the ruling would apply to all public sector schemes, with an initial estimate that remedying the discrimination will add about £4bn a year in liabilitiesacross the board.
According to Sir Steve Webb, partner at LCP: “The funding of public sector pensions has become an Alice-in-Wonderland world, in which schemes are deemed to be simultaneously ‘too generous’ and ‘not generous enough’.
“This complexity has been compounded by recent court judgments, which have thrown the whole reform process up in the air. The government moved quickly to implement the contribution increases implied by the cost cap, but has dragged its heels on the other side of the deal and this seems to have triggered the PCS action.”
Sir Steve added: “For the benefit of millions of public sector workers it is vital that all the different elements of this tangled web are resolved as soon as possible, so that public servants can plan for their future with confidence and certainty.”
Govt caught between a ‘rock and a hard place’
Richard Warden, actuary and partner at consultancy Hymans Robertson, explained that if the unions are successful in their judicial review, benefits could be improved or employee contributions could be cut for a short period, before being reversed at a later date once the McCloud remedy has been announced.
“This would be extremely difficult to administer,” he noted.
Employee contributions in the civil service scheme currently range from 4.6 to 8.05 per cent, depending on salary, according to David Robbins, senior consultant at Willis Towers Watson.
“So a 2 per cent reduction would be a meaningful chunk of the £817m normal employee contributions collected by the civil service scheme in 2018-19, even before extrapolating to the other public sector schemes. Under the pay-as-you-go structure, this would feed into government borrowing,” he said.
Govt to consult on McCloud solution as new members could be worse off
The government has warned that changes ordered by the courts to rectify a landmark discrimination case could make some members worse off.
Mr Robbins noted that the government seems likely to “argue that the costs of improving benefits in response to last year’s court defeat on transitional protection should form part of the cost cap – so the cost of improving some members’ benefits will be passed to active members as a whole”.
The government “hasn’t said how that effect compares with the benefit improvements or employee contribution cuts that would otherwise have been due under the cost cap mechanism – but at least some of any contribution cut secured through this action might have to be clawed back later”, he added.
Mr Warden said: “Ultimately, the government is caught between a rock and a hard place. Legislation forces it to undertake regular cost cap valuations, and take action to keep costs within a predetermined ‘envelope’.
“However, the government also has to comply with court rulings. The decision to postpone the outcome of the original cost cap valuations gave it some breathing space to focus on the McCloud remedy, but this would be under threat from a judicial review.”
