Public Service Pensions Update | October 2021

Autumn Budget | Highlights

The Chancellor announced the following in his Autumn Budget on Wednesday 27 October 2021:

Provisions to introduce the pensions tax easements needed to implement the McCloud remedy

The government will introduce legislation in the Finance Bill 2021-22 with regulations to ensure the pensions tax framework applies as intended to the public service pension reforms (the McCloud case) remedy. The McCloud remedy is set out in the Public Service Pensions and Judicial Offices Bill which will have retrospective effect from 1 April 2015. Tax legislation will also apply to this retrospectively. This easement will take effect from 6 April 2022. The taxation of public service pension reform remedy tax information and impact note provides more information.

Top-up for low earners in net pay arrangements

The government will introduce a system in 2025-26 to make top-up payments in respect of contributions made on and from 2024-25 directly to low-earning individuals saving in a pension scheme using a Net Pay Arrangement. The aim is to better align outcomes with equivalent pension scheme savers who use relief at source. It is understood this might benefit an estimated 1.2 million individuals by an average of £53 a year. The government has published a response to the Call for Evidence on pensions tax relief administration providing further details.

Increase in normal minimum pension age to 57

The government will legislate in the Finance Bill 2021-22 to raise the normal minimum pension age from 55 to 57 from 6 April 2028. This will increase the earliest age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge.

Scheme Pays

The government will introduce legislation to extend Scheme Pays reporting and payment deadlines with effect from 6 April 2022. Individuals will be able to ask their pension scheme to settle their annual allowance charge of £2,000 or more from a previous tax year by reducing their future pension benefits. The Pension Scheme Pays reporting: information and notice deadlines tax information and impact note provides more information. 

Cost Control Mechanism Reforms | HM Treasury responds to consultation and issues Directions

HM Treasury has responded to its consultation on the reform of the public service pension schemes cost control mechanism and has issued Directions. The outcome of the consultation is that the government has decided to proceed with the three reforms proposed in the consultation as follows:

• Reformed scheme only design: the mechanism will adopt a reformed scheme only design, to remove any allowance for legacy schemes in the mechanism so it only considers past and future service in the reformed schemes;
• Widening the corridor: the cost corridor will be widened from +/-2% to +/-3% of pensionable pay; and
• An economic check: an economic check will be introduced linked to expected long-term GDP so that a breach of the mechanism (and therefore benefit changes) would only be implemented if it would still have occurred had long-term economic assumptions been considered.

HM Treasury has published the Public Service Pensions (Valuations and Employer Cost Cap) (Amendment) Directions 2021 effective from 8 October 2021. The Directions and the consultation follow the government's decision in 2019 to pause the cost cap mechanism in the wake of the Court of Appeal's decision in McCloud, and should enable public service pension schemes to conclude actuarial valuations affected by the pause.

Cost Control Mechanism Reforms | LGPS Scheme Advisory Board (SAB) response

Following the publication of HM Treasury's Directions on the cost cap mechanism, SAB published an update on 15 October 2021 on its approach to the paused 2016 scheme management process, and in particular the status and the method for the inclusion of McCloud costs in that process.

This is set out in SAB's letter to the Ministry of Housing, Communities and Local Government (MHCLG) on 18 August 2021 which has now been publicised. SAB agreed to spread McCloud costs over a 10 year period (rather than the four used by HM Treasury) resulting in an outcome of 19.4% against a target cost of 19.5%.

SAB has agreed not to recommend any benefit changes to the LGPS, as this would require backdating any changes to April 2019. Notwithstanding this, SAB has decided to review the scheme's Tier 3 ill health provisions and contribution rates for the lowest paid members with a view to making recommendations separately from the cost management process.

SAB has also asked MHCLG to consider making funds available to LGPS administering authorities to administer the McCloud remedy in line with similar arrangements provided by the Home Office to Fire Authorities.

LGPS | Government department renamed

The government department responsible for the LGPS has been restructured and renamed. Following in the footsteps of the Department for Transport, Local Government and the Regions, the Office of the Deputy Prime Minister, and the Department for Communities and Local Government which have all been renamed, it was announced on 19 September 2021 that the Ministry of Housing, Communities and Local Government is now to be known as the Department for Housing, Levelling Up and the Communities (DLUHC).

Pensions Ombudsman | Various

NHS Pension Scheme – Dr N - PO-18811 – taxation on a member's Pension Commencement Lump Sum

The Pensions Ombudsman has upheld a complaint by a member of the NHS Pension Scheme against NHS Business Services Authority (NHS BSA) and Primary Care Support England (PCSE) concerning the taxation of a member's pension commencement lump sum (PCLS). The member successfully argued that the tax on his PCLS could have been avoided, or significantly reduced, if PCSE had acted promptly on his requests to update his pension pay figures and NHS BSA had given him complete and accurate information in respect of a Lifetime Allowance (LTA) charge on his PCLS.

The ombudsman concluded that PCSE had acted negligently in failing to update the member's most recent salary information for two months after this information was received despite repeated attempts by the member to ensure that his records were updated. PCSE was aware that a delay could adversely affect the member's tax position but still failed to act promptly. PCSE was held to be partially liable for the member's tax charge as if it had acted promptly to update its records, the member would not have been subject to a tax charge on his PCLS.

As regards NHS BSA, the ombudsman concluded that it breached its duty of care to the member in failing to advise that the PCLS payment would not benefit from any Enhanced Protection and would therefore be subject to an LTA charge. Although NHS BSA had no legal duty to advise the member on his personal tax position, the member had specifically requested information on whether he would have to pay an LTA charge. Against this background, and coupled with the fact that the member had no other means of discovering whether he would be subject to an LTA charge, NHS BSA was under a duty to ensure its answers were accurate and complete. In failing to advise that the PCLS would incur an LTA charge, it breached this duty. The member would have mitigated his tax liability to avoid an LTA charge if he had been provided with complete and accurate information, and therefore NHS BSA was held jointly liable in respect of the LTA charge.

Local Government Pension Scheme – Mrs Y - CAS-36970-Y1Z9 – flexible retirement

The Pensions Ombudsman has rejected a complaint by a member of the Local Government Pension Scheme concerning flexible retirement. The member argued that she had been misinformed when choosing to take flexible retirement and claimed that she had not been provided with a benefit quotation showing that she was only entitled to actuarially reduced benefits. She also made a number of complaints about the calculation and payment of her benefits.

The ombudsman concluded that the member had failed to evidence that she had been advised that her benefits would not be actuarially reduced. Although there was some uncertainty as to whether the member had received the benefit quotation before retirement, she had ample opportunity to request his quotation but failed to do so.

In addition, while the member's original working hours had been wrongly recorded, this was irrelevant as her contributions were calculated in accordance with pensionable pay rather than hours worked.

Although there were some instances of maladministration, including delays in the internal dispute resolution procedure process and communications wrongly setting out the date of the member's death, an apology was regarded by the ombudsman to be adequate redress.

The Police Pension Scheme 1987 – Mr Y - PO-26238 – withdrawal of deferred police pension

The Pensions Ombudsman has partially upheld a complaint by a member of the Police Pension Scheme 1987 concerning the decision to withdraw his deferred pension, where the member argued that the National Crime Agency (the NCA) was not a "police force" for the purposes of Regulation K4 Police Pensions Regulations 1987 and therefore was not entitled to withdraw his deferred pension.

Under Regulation K4 of the 1987 Regulations, a police authority may exercise its discretion to withdraw the pension of a pensioner who is serving as a regular policeman in any police force. The member was employed by the NCA which was a police force under Section 11 Police Pensions Act 1987. Under Regulation A6 of the 1987 Regulations, a "specified NCA officer" is a regular policeman. This includes, under Schedule A to the 1987 Regulations, an individual such as the member that has by statutory transfer moved from being a Serious Organised Crime Agency officer to an NCA officer. Therefore, the NCA was entitled to withdraw the member's pension.

The ombudsman considered the reasonableness of the decision to withdraw the member's deferred pension. There was no issue of age discrimination as evidence indicated consistency of treatment of officers. The decision was ultimately considered reasonable as the NCA had followed the appropriate procedure in giving the member the opportunity to provide exceptional circumstances as to why his pension should not be withdrawn and had properly explained the legislative framework that it would apply to the member.

However, the ombudsman considered that the NCA had unreasonably delayed in providing the member with a summary of his pension benefits so ordered the NCA to pay £500 to reflect the significant non-financial injustice caused to him.

House of Commons Library briefing papers | New

The House of Commons Library has published a briefing paper on LGPS investments. The briefing paper considers the LGPS investment framework, LGPS investment regulations, investment pools and infrastructure, and climate change.

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