Public Service Pensions Update | March 2021

In this edition, we look at developments ranging from the latest on the exit payments cap and scheme changes following McCloud, to the Pensions Regulator's consultation on a single new code of practice.

If you would like to discuss any of the developments in this newsletter, please contact one of the experts listed below.

Update | Cap on public service exit pay

In our last newsletter, we reported that the government had decided to revoke the £95,000 cap on exit payments introduced by The Restriction of Public Sector Exit Payments Regulations 2020 (the Exit Payments Regulations). We also reported that HM Treasury (HMT) directions had been published to disapply the Exit Payments Regulations until they could be revoked.

The Restriction of Public Sector Exit Payments (Revocation) Regulations 2021 have now been made. They revoke the Exit Payments Regulations with effect from 19 March 2021. They also require authorities to pay the difference between: (i) any capped exit payment made between 4 November 2020 and 19 March 2021 (although the HMT directions mean no capped payment should have been made after 12 February 2021); and (ii) the exit payment they would have made if the cap had not applied, plus interest.

The Local Government Pension Scheme Advisory Board (LGPS SAB) has updated its guides for administering authorities and employers. It has also published a letter from the Ministry for Housing, Communities and Local Government (MHCLG) which confirms that:

• the letter from Luke Hall MP of 28 October 2020 regarding the implementation of the Exit Payments Regulations is withdrawn;
• MHCLG considers its September 2020 consultation on reforming local government exit pay to be closed, and "[t]here will be no further changes made to Local Government pensions or redundancy terms without a further, separate consultation";
• It is going to issue guidance on the payments that employers need to make under the new, revocation, regulations.

Update | Scheme changes following McCloud

In our last newsletter, we reported that HMT had published a consultation response on the proposals for remedying, in most public service pension schemes, the unlawful discrimination identified by the Court of Appeal in the McCloud case.

At that point, MHCLG and the Ministry of Justice (MoJ) had still to publish the responses in their separate consultations on changes to the LGPS and judicial pension schemes, where different considerations apply.

The MoJ has since published its consultation response. This confirms that, "[s]ubject to parliamentary timetables and approval, judges in scope of McCloud will be given a choice of either" old judicial or 2015 judicial pension scheme "membership in respect of the period between 1 April 2015 and 31 March 2022" through a one-off options exercise.

The plan is for the options exercise to be run after a reformed judicial scheme has been introduced in April 2022. All future service will be in the reformed scheme and, at the same time as it published the response discussed above, the MoJ published a second consultation response confirming the key features of this new scheme.

In all cases, remedying the discrimination will raise pensions tax questions. The spring 2021 tax policies and consultations command paper confirms that the government has identified "several aspects of the pension tax framework that do not work as intended … and need updating". It notes: "For example, the current framework does not straightforwardly permit individuals to ask their pension scheme to settle annual allowance charges from previous tax years by reducing their future pension benefits (‘Scheme Pays’)." The paper confirms that, to address this, the government is going to make "technical updates to pension tax rules to remove such anomalies".

New guidance | Policies on review of LGPS employer contributions, exit payments and deferred debt agreements

In our July 2019 newsletter, we reported that MHCLG was consulting on changes to the local valuation cycle and management of employer risk.

MHCLG has issued two partial responses. The first, in February 2020, related to exit credits and the second, in August 2020, related to employer contributions and flexibility on exit payments.

It has now released guidance for administering authorities on preparing and maintaining policies on review of employer contributions, employer exit payments and deferred debt agreements. The guidance (which will also be of interest to employers) sets out "high level principles and points which the government believes should be considered by administering authorities" in relation to these new powers.

The LGPS SAB has published a second guidance note to be read and used in conjunction with MHCLG's.

The notes are essential reading for LGPS administering authorities and employers.

Administration | Pensions increases and revaluation

In our January 2021 newsletter, we reported that HMT had published the 2021 pensions increase multiplier tables to help scheme administrators apply the correct annual increase to public service pensions. The Pensions Increase (Review) Order 2021 has now been made, as has the 2021 revaluation order.

Consultation response | GMP indexation

In our October 2020 newsletter, we reported that HMT was consulting on three options for ensuring that public service pension scheme members reaching their state pension age on or after 6 April 2016 continue to have their pension payments fully indexed and equalised. The three options were:

• Extending full indexation by public service pension schemes to cover members reaching state pension age before 6 April 2024. This would give time to give more thought to Guaranteed Minimum Pension (GMP) conversion as a long-term solution and implement it if it is the right solution.
• Extending full indexation by public service pension schemes to cover members reaching state pension age up to and beyond 5 April 2024, perhaps up to March 2030. This would allow even more time.
• Discounting GMP conversion as a long-term policy solution and making full GMP indexation the permanent solution for public service pension schemes.

HMT has now published its consultation response. It has chosen the third option, with the result that public service pension schemes will be directed to provide full indexation to people with a GMP who reach State Pension age after 5 April 2021.

Consultation response | Judicial mandatory retirement age

In our July 2020 newsletter, we reported that the MoJ was consulting on changes to the mandatory retirement age for judicial office holders. The MoJ has now published the consultation response. The mandatory retirement age will be increased from 70 to 75.

Member contributions | Civil Service pension schemes

The Principal Civil Service Pension Scheme (Amendment) Scheme 2021, setting the member contributions rates applicable for the 1974 scheme year ending on 31st March 2022, has been presented to Parliament. For the 2015 scheme, member contributions are confirmed by amending regulations and the related report.

Pensions Tax | Budget 2021

For all public service pension schemes, the main pensions announcement in the Budget 2021 was that the lifetime allowance will not increase in line with the Consumer Prices Index as projected. Instead, it will remain at the current level of £1,073,100 until 5 April 2026 (the end of the 2025-26 tax year).

In real terms this, combined with the fact that the Annual Allowance (£40,000 subject to the taper) remains unchanged, will reduce the amount of tax-relieved pension savings that people can make.

Administering and employing authorities should think about how best to communicate the freeze in the Lifetime Allowance to all members, so that they can factor this into their retirement planning, and remind members how benefits in excess of the lifetime allowance will be taxed when benefits are paid. Members with benefits which are projected to be worth in excess of £1 million, may wish to take financial advice on whether they are eligible to apply for Individual Protection.

We discuss the other pensions-related announcements made by the chancellor in our Insight.

The Pensions Regulator | Single code of practice and new powers

The Pensions Regulator has opened a consultation on a new code of practice to replace ten of its fifteen existing codes (including the one relating to the governance and administration of public service pension schemes) and incorporate changes introduced by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018. Areas where new and or more detailed content is being consulted upon include: effective systems of governance; a new requirement to complete an "own risk assessment" within 12 months from the date the new code comes into force and at regular intervals after that; cyber security; stewardship of assets; and climate change.

The consultation is open until 26 May 2021.

The Pensions Regulator is also consulting on a draft policy setting out how it will approach the new criminal offences under the Pension Schemes Act 2021, and Department for Work and Pensions consulting on regulations which will provide more detail around the new contribution notice and information gathering powers being introduced by the Act.

Pensions Ombudsman | Various

The Pensions Ombudsman has:

• Partly upheld a complaint by a member of private sector pension scheme in relation to his request to transfer to a QROPS (qualifying recognised overseas pension scheme);
• Rejected a complaint by a member of the NHS pension scheme who was still suffering from the same medical condition that she should have been awarded an ill health retirement pension;
• Partly upheld a complaint against the NHS business service authority in relation to delays in administering a pension; and
• Dismissed a complaint by a member of the NHS pension scheme who lost Special Class Status.

House of Commons Library briefing papers | New and updated

The House of Commons library has published or updated the following briefing papers, which might be of interest to public service pension schemes and employers:

• State Pensions 2021: FAQs;
• Pensions tax relief – the annual and lifetime allowances;
• Public sector exit payment cap;
• Personal service companies and IR35;
• Pre-pack administrations;
• Spring Budget 2021, a summary.

This newsletter covers developments relating to public service pensions in England and Wales, with a focus on the Local Government Pension Scheme.