One of the Hutton report’s 27 recommendations in its March 2011 final report was that there should be new legislation to adopt a common legal framework across the public service pension schemes.
The Public Service Pensions Bill was published on 13 September 2012. It is the most significant piece of legislation to affect public service pensions in over 40 years and is forecast to save £65 billion over the next 50 years. Unsurprisingly the Bill has already prompted reaction from public sector unions. This Speedbrief sets out the key points contained in the Bill.
What does the Bill cover?
The Bill sets out a common framework for pension arrangements for the civil service, judiciary, local government, teachers, NHS, fire services, armed forces and members of the police. The Bill also makes provision for a number of other public service pension arrangements to be closed. These include pension schemes provided by such public bodies as the Arts and Humanities Research Council, the Law Commission of England and Wales and the United Kingdom Atomic Energy Authority. The “Great Offices of State” pensions (currently available to the Prime Minister, Commons Speaker and Lord Chancellor) will also be closed for new office holders.
Future service benefit structure to be set out in regulations
Although the actual design and benefit structure applicable to the individual public service schemes will be set out in regulations, the Bill confirms that any defined benefits under the new schemes must be provided on a CARE basis. The schemes must also provide members with a normal pension age which is aligned to their state pension age or age 65 (whichever is higher). How the increase to members’ state pension age is reflected in the individual schemes remains a matter for scheme regulations. Significantly, the normal pension age within the pension schemes for fire, police and armed forces will be age 60.
Closure of the current schemes
The Bill provides that the existing schemes will be closed to future accrual with effect from 5 April 2015 (or 1 April 2014 in the case of the LGPS). It also addresses certain transitional issues.
In particular, the Bill enables schemes to provide that members who are a certain number of years from their normal pension age on 1 April 2012 will not see any change in when they can retire, or any decrease in the amount of pension they receive on retirement. In addition, the benefits which they will have accrued in the current scheme will continue to be linked to his/her final salary when they eventually leave continuous service.
One of Lord Hutton’s key recommendations was a scheme-specific mechanism to ensure costs are kept below specified levels. The basis for such an “employer cost cap” is set out in the Bill, with the intention being that HM Treasury will make regulations to amend schemes where necessary to keep costs within the set margins.
The Bill further envisages HM Treasury issuing directions as to how valuations are undertaken by the schemes, including when setting the employer cost cap. This is likely to prompt reaction from individual LGPS funds, for example, which have not previously had such oversight from HM Treasury when completing their triennial actuarial valuations.
The Bill also sets out new provisions for the overall governance and regulation of the public service pension schemes.
Each scheme will have its own manager with responsibility for scheme administration, together with a pension board to assist the manager. The remit of the pension boards will be to ensure compliance with legislation, codes of practice and regulatory issues. Although further detail will be provided, the intention appears to be that such boards will fulfil a trustee-like function in respect of the public service schemes.
Until now, there has not been a body responsible for the overall regulation of all public service pension schemes. The Bill, however, extends the Pension Regulator’s remit to public service schemes. Accordingly, the Pensions Regulator will be able to issue codes of practice in respect of the public service schemes and require scheme managers to implement internal controls procedures in respect of the administration and management of the schemes. Importantly, the pension board members will be subject to similar duties of knowledge and understanding as trustees are in private sector occupational pension schemes.
Access to public service schemes
The Bill contains provision which will enable public service schemes to allow non-public service workers to participate in the scheme. This is connected with the review of Fair Deal and increasing scope for private sector contractors to be admitted to the public service schemes. Again, the detail and terms on which this will be permitted will be a matter for individual scheme regulations.
A settlement for a generation?
The Government has indicated that the reforms to public service pension schemes constitute a settlement for a generation. As a result there is a protected period of 25 years from 1 April 2015 during which changes cannot be made, for example, to benefit accrual or contribution rates unless there is consultation with affected persons with a view to reaching agreement on the changes. Importantly, this procedure does not apply where changes are needed to keep the schemes within the employer cost cap.
There is a very significant Bill which will put Lord Hutton’s recommendations onto a statutory footing. The Bill will now work its way through Parliament before being enacted sometime during 2013. Individual schemes will then issue the regulations specifying benefit structures and governance arrangements ahead of the commencement date for the new schemes – being 6 April 2015 (or 1 April 2014 for the LGPS). It is safe to say that reform of the public service schemes will continue to hit the headlines for many months, and years, to come.