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Agenda item

Agenda item

Minutes:

The Director of People and Development presented the report.  In April 2015 a new firefighters pension scheme commenced replacing the 1992 and 2006 schemes.  The Government’s original proposals were to address the rising cost of the legacy schemes to the public purse, ensuring sustainability whilst still providing appropriate pensions. The main changes were an alteration from a final salary to a career average scheme with an increased normal pension age and the introduction of a cost control mechanism. It was always clear that the structure of the 1992 scheme was superior to the 2015 scheme, although the contribution rates were higher. 

 

As part of the 2015 reforms, those within 10 years of retirement remained in the legacy scheme with tapered protection being given for individuals within a further 4 years of their retirement date. The protection was given following negotiations with the FBU and was intended to give protection and certainty to people who were close to retirement. After introduction the FBU undertook court proceedings arguing that the transition protection was age discriminatory.  In December 2018 the Court of Appeal found that the transition protection unlawfully discriminated against younger members of the judicial (who also undertook court action) and firefighters. The Courts required that this unlawful discrimination be remedied by the Government.

 

The Home Office therefore had issued a consultation document on proposals to address this adverse discriminatory finding by the High Court in respect of the Firefighters pension schemes.  It was noted that the consultation would end on 11 October 2020 and that it included a number of unfunded schemes and was not limited to the firefighter schemes (with Police, Teachers and NHS schemes being included but the Local Government Pension Scheme was subject to a separate consultation).  

 

The consultation proposals applied to all members of the 2015 scheme who were in employment before 31 March 2012 and also on or after 1 April 2015 including those with a qualifying break in service of less than 5 years. An individual would not be required to submit a legal claim. Any new entrant after 31 March 2012 was excluded. Until the 2015 scheme was live they were placed in 2006 scheme.  

 

The Government proposed that all eligible members would be given the choice of which set of scheme benefits was better for them for the period 1/4/2015 to 31/3/2022.

 

The basis for this option was dependent on an individual’s personal circumstances (in particular their earnings progression); overall in the public sector many members were likely to be better off in the reformed schemes. The Government was proposing to therefore allow individuals to have a choice rather than move everyone back into their legacy scheme. In Fire Service terms except in very unusual circumstances, it was highly unlikely that the 2015 benefits were better than their 1992 benefits over this period, but it became more likely comparing the 2006 with 2015 scheme benefits.    

 

The consultation requested comments on 24 questions.  Extending the transitional protection arrangements until 1/4/2022 to all staff seemed the logical and sensible route.  The caveat to this was that the necessary ICT solutions and other administrative activity might not be completed by then. 

 

The Director of People and development urged Members to respond to the key questions which were:

 

Funding of the remedy

The following points were noted:

 

·        The costs associated with this remedy would be significant, and would include system development, additional pension administration (out with any existing contractual arrangement) and considerable in?house service guidance and administration. This was on top of an ever increasing administrative burden driven by pension regulation;

·        The need for a remedy was the Government concluding with the FBU a transition commitment which gave rise to the discriminatory effect. In effect the new schemes were a government initiative which had to be implemented.  As Pension Scheme Manager, the Authority had no choice but to administer the scheme in accordance with the statutory instruments. It was noted that the LGA currently had a hearing listed at the Court of Appeal arguing that the Government should be liable for any costs arising from and this was not a burden that should fall on Fire Authorities;

·        In short “How would the costs of remedy be covered?”

 

Which option (immediate / deferred choice)

The main question posed in the consultation was should individuals make an immediate choice (asap after April 2022) or be allowed to make their choice when they retire.

 

In this context removing the discrimination was achieved by allowing every individual the same timeframe for protection and then removing the protection hence April 2022 (and was accepted by the government as the need). A more contentious alternative would have been to withdraw the protection when the outcome of the court case was known or the claim made. The Government’s wish not to allow an individual to be disadvantaged by being withdrawn from a better scheme was also accepted.

 

However, the proposal seemed overly complicated, risk averse and would cause greater problems than the alternative of making an option soon after 1/4/22 as to which scheme was considered appropriate.

 

Whilst the workload associated with the pension options should not be underestimated, this would need to be undertaken at some point but an organisation could plan to resource it as a one?off rather than over 30+ years. So whilst making a single choice would peak that workload, the alternative of allowing a deferred option was far greater in extent requiring repeated complicated calculations on “what ifs” and gave rise to other issues and complications, such as the retention of knowledge. An immediate choice would put the issue to bed and provide certainty going forward and was in line with other pension issues and allowed appropriate contributions to be collected and appropriate tax obligations to be met.  It would also make the Authority’s task of workforce planning more straightforward.

 

Currently if an employee joined an organisation then they had 12 months to decide whether to transfer in pension benefits. Sometime later in their career individuals sometimes requested to review that decision as their circumstances had changed and the informed decision they made on entry was no longer the right one for them. Inevitably by the nature of the situation this would increase the cost to the pension fund and were normally declined. This proposal would therefore cause resentment with other employees. As would the ongoing requirement for recalculations would be an extra obligation.

 

Similarly individuals could take advantage of the situation and opt to remain in the “cheaper” fund and make their real election at retirement, this would require significant adjustments in retrospective contributions to be made and after a 4 year period income tax to the revenue account would be lost and if overpaid contributions had been made the proposals suggest the employer (i.e. LFRS) would pay interest but not if the individuals have underpaid (and this would give rise to claims of unfair treatment). Especially, as almost all 1992 employees should opt for a return to the legacy scheme.

 

In this respect it was noted that different definitions of pensionable pay and contribution rates existed across the schemes.

 

Similarly it was suggested that those that had withdrawn from the pension schemes should be allowed to re-join and it was felt that this should only be allowed when justification was advanced.

 

Calculating tapering retrospectively would also be especially difficult. 

 

The proposal to allow an individual to make the choice at the end of their career was providing an unfair advantage over other individuals and no justification could be seen for this approach except to prevent any challenge by allowing the use of hindsight, which seemed unfair to other employees and depending on the outcome would impact on the cost control mechanism and the viability of the schemes as a whole.

 

A deferred option would mean these issues continued for 30 + years, with the maintenance of two pension records for those effected.

 

The Director of People and Development’s recommendation was that an immediate option should be nominated.

 

Potential additional discrimination being created

Within the documentation seen was a suggestion that any person with “tapering” protection should have this maintained beyond 2022. This would appear to be extending the discrimination that had caused the problem in the first place and far from reducing the scope for claims it would create new claims in the mistaken belief that discrimination would occur if you changed the offer, ignoring that it was the High Court that has deemed the protection offered as unlawful and had to be removed. 

 

Currently in the 1992 scheme an individual’s pension entitlement was limited to 30 years’ service and if they achieved this before age 50 they were given a contributions holiday but after 50 had to recommence payment. The proposal was to allow staff to opt for 1992 scheme until 30 years and then join the 2015 scheme. Not only was this proposal flawed if implemented it would give rise to more claims of mal-administration.   

 

Other examples existed which the Director of People and Development felt should be included in at least one of the two proposed responses which were:

 

Taxation

The consultation proposed that if a deferred option was adopted then the Government would meet the tax obligation and any tax owed over the four year timeframe would be lost, this was not the case under the immediate option which would give rise to grievances if not claims.

 

The issue of annual allowance would also be fundamentally different if an individual remained in the reformed scheme until retirement and then opted for 1992 as opposed to reverting to the 1992 scheme immediately. Scheme pay obligations would also arise differently and if used would impact on an individual’s final pension. Taxation issues also arose in respect of tapering. It was suggested that this detail be picked up in the response to the consultation by the Director of People and Development.

 

Communication

Pension entitlements had become more complicated by the existence of multiple schemes and also Government changes (such as taxation, minimum and normal retirement ages, annual allowance and other changes effecting individuals) irrespective of the transition issue. Appropriate consistent and simplified communications was therefore a key imperative.

 

One of these legal pension requirements was to provide clear accurate annual benefit statements. If an individual had had an option in 2022 then this task (although more challenging than before) was manageable but if each year the calculation had to be undertaken for two scenarios and included a statement, conveying the import would be not only administratively challenging but providing clear information would also be difficult. This would in turn encourage claims for being misled. Experience showed that even the current requirement caused confusion. Often it was necessary to assist individuals in understanding what their options were.  In the current situation this could be done within the confines of not providing advice, these proposals made that more difficult and officers would probably need to err on the side of caution.  

Clear consistent pension advice and documentation was needed to prevent misunderstandings.  

 

Financial Implications

There were no direct financial implications arising from the report however whatever remedy that applied would have a significant impact on the Service in terms of i) employer contributions; ii) any recalculation of benefits would increase the Authority’s liability, iii) interest payments to employees if overpaid would negatively impact on the Authority; iv) additional costs would be incurred by our pension administrator that would be outside the contractual arrangement and would need to be funded; v) the complex nature of the remedy would require revised technical solutions that would need to be funded within the sector increasing costs; vi) the cost of future administration would increase significantly; vii) developments in the pension field limit the options for provision of a cost effective administrative service.

 

Human Resources Implications

Pension arrangements were a fundamental part of the contractual arrangements that had become more specialised. The complexities of the proposals and extent added to the demands on the Human Resources function and if the deferred option was selected by Government this would continue for 30 years. Maintaining the required knowledge and expertise would be very problematic.  The complexity would result in considerable more questions over pension entitlement and uncertainty from employees and would negatively impact on morale.  The retrospective nature of the proposals and the need for complicated administration moving forward was likely to result in administrative errors (maybe significant).  The proposals would increase individual’s tax liability and exposure to scheme pays which was not normally seen as positive by the individual.  The sum total of activity and lack of a technical solution meant that timelines were extremely tight and must be considered a risk. The revised pension arrangements would maintain firefighter pension provision as excellent which was beneficial in workforce terms.

 

Equality and Diversity Implications

The discriminatory effect would be resolved by returning everybody into the legacy scheme until 1/4/22 but the Government believed this was unfair and had proposed a series of measures. The measures proposed however establish new grounds for discriminatory impact and should be avoided as outlined in the body of the report.

 

It was noted that the Local Pensions Partnership as our pension administrators would be responding in respect of their position as would the Director of People and Development as the designated Pension Scheme Manager for the Authority in respect of the consultation covering the detailed questions.

 

In response to comments made by County Councillor O’Toole in terms of the detailed consultation questions and the need for a fairer and less complicated system, the Director of People and Development confirmed that he had included the key questions in the report and a link to the consultation questions and he provided Members with further information including a number of examples:

 

·        It had been suggested that for those individuals offered transition protection, to take away the entitlement for them to retire whenever they wanted under the 1992 scheme beyond 2022 (which was possible) meant they would be potentially given better protection than others and also it meant those who had to retire or had retired did not have that option;

·        In the 1992 scheme if an individual who had accrued 30 years contribution (which equated to 40/60ths) remained in the Service longer they still had to pay contributions and not get any benefit from it (if aged over 50, if under 50 and had 30 years’ service they received a pensions holiday);

·        One suggestion was for individuals to transfer into the 2015 scheme once 30 years’ service had been accrued; but that was unfair on everyone else;

·        Also there was the option to make a decision on retirement.  This meant one officer could transfer back into the 1992 scheme and another officer could stay in the 2015 until retirement, when they then retired the taxation arrangements meant they would be treated differently;

·        There was an issue with individuals in the 2006 going into the 2015 scheme.  For Police and Fire it was difficult to foresee any situation where it was better to remain in the 2015 scheme unless there was very little service or an individual died in service, hence it was very unlikely for someone to be better off in that scheme;

·        Also people who had left the scheme would now be given another option to re-join which put them in a much better position than those who had remained in the scheme;

·        LPP were saying it would be more costly; and

·        There was the need for greater resources to manage the relationship with LPP and deal with a sequence of questions from firefighters.

 

The Director of People and Development asked that Members respond to the consultation in relation to the impact on administration, costs and the negative effect on terms and conditions.

 

County Councillor O’Toole thought it was an ideal situation for individuals to have a choice to either make a decision now or leave it until retirement.  For example, anyone with a personal pension plan if they retired early they had the option to take the money straight away or wait until retirement age; the option was there.  In response, the Director of People and Development advised that when you joined a new organisation you had 12 months under the current schemes to transfer your pension pot into the new scheme.  If this was an open ended issue it would be more difficult to clarify pension liabilities and it was unfair on people who had made the decision earlier and their life events had changed.  In addition he confirmed that retirement options were already enshrined in the 1992, 2006 and 2015 schemes.  This would allow individuals to not pay the contributions and get the benefits and we would not get the interest on the unfunded element; whereas if an individual had opted to join earlier they would be disadvantaged by that.  Therefore, the person that opted to stay in the 1992 scheme would be disadvantaged.  In an ideal world it would be good to make life decisions at the end but it is much more administratively costly to do as that information would require maintaining over 20 – 30 years which would require re-calculation every year.

 

It was agreed that the Director of People and Development provide Members with the consultation questions together with proposed responses for consideration.  Members would then submit comments to the Chairman for his final agreement of a response on behalf of the Authority to the Home Office.

           

RESOLVED:  That the Director of People and Development issue the consultation questions and draft responses to the Committee Members for consideration and comment to the Chairman for the Chairman to agree a response.

Supporting documents: