Public service pensions - the 2015 reforms

Reforms to public service pensions introduced under the Labour Government had the aim of improving financial sustainability and reflecting changes in life expectancy, working practices and the private sector, including increases in the pension age for new entrants only.

The 2011-15 reforms

In June 2010, the Coalition Government established an Independent Public Service Pensions Commission, chaired by former Labour Secretary of State for Work and Pensions, Lord Hutton of Furness, to look at “the long-term affordability of public sector pensions, while protecting accrued rights.” It also announced its intention to switch from the RPI to the CPI as the measure of prices for increasing public service pensions in payment (June 2010 Budget, para 1.42-3).

The Commission’s interim report published in October 2010 recommended an increase in member contribution rates as the most effective way to make short-term savings and said there was a strong case for doing so - “to better meet the real costs of providing these pensions, the value of which has risen in recent years with most of these extra costs falling to taxpayers” (chapter 8). In response, the Government announced that it would increase member contribution rates by an average of 3.2 per cent across public service schemes by 2014/15, except for the armed forces. (HM Treasury, Spending Review 2010, October 2010, para 1.94)

In its final report, published in March 2011, the Commission recommended replacing the existing schemes with new ones, with pension entitlement based on career average earnings rather than final salary, and increases in the pension age: i.e. linking the normal pension age to the State Pension age in all schemes except those for the ‘uniformed services’ (armed forces, police and firefighters), which would have a pension age of 60.

The Government accepted the Commission’s recommendations as the basis for negotiation with the trade unions. It announced final proposed agreements for reform of most public service schemes over the period March to October 2012. It then legislated in the Public Service Pensions Act 2013 for a framework for the new schemes to be introduced for future service from 2015 (2014 for local government). Key features of the new schemes are that they provide pension benefits based on career average revalued earnings rather than final salary, and that individuals have a normal pension age linked to their State Pension age, except for the schemes for firefighters, police and armed forces, which are to have a normal pension age of 60.

Impact of the 2011-2015 reforms

A report published by the National Audit Office in March 2021 said gross expenditure on public service pensions was expected to fall from a peak of 2.1% of GDP in 2022-23, to around 1.5% of GDP from 2064-65 onwards, reflecting both the 2011-2015 reforms and reductions in the public sector workforce. However, uncertainty around these projections had been increased by both COVID and Brexit (NAO, Public service pensions, HC 1242, March 2021, para 2.2-3).

In terms of how the costs were met, the NAO found that:

• Public service employees were contributing substantially more – both individually and in total - to their pensions as a result of the 2011-2015 reforms. There was some evidence to suggest that those in lower age and income groups were more likely to opt out as they viewed contributions as unaffordable (Ibid, para 19).
• While the taxpayer’s proportion of total pension funding remained similar to 10 years ago, employer contributions had risen significantly in 2019-20, largely as a result of a change to the discount rate the government usedto estimate the current cost of future benefits to be paid out (Ibid, para 14).

McCloud

There was protection for accrued rights and transitional protection arrangements to enable those ‘closest to retirement’ to remain in their existing schemes either until retirement, or for a limited period, depending on their date of birth. In December 2018, the Court of Appeal ruled in McCloud v Ministry of Justice that the ‘transitional protection’ offered to some members as part of the reforms amounted to unlawful discrimination.

In July 2019, having been denied leave to appeal, the Government accepted that the difference in treatment would be remedied across public service pension schemes, regardless of whether individuals had made a claim (HCWS 1275 15 July 2019).

In July 2020, the Government launched consultation on its proposal to remedy the McCloud discrimination. In its response in February 2021, the Government said that:

‘Eligible members’ (those in service on 1 April 2021 and 1 April 2015, or with a gap of service of less than five years) will be given a choice of legacy or reformed pension scheme benefits in respect of their service during the period between 1 April 2015 and 31 March 2022 (the remedy period). This choice would be made at retirement, or just before benefits come into payment. In the meantime, members will be deemed to have accrued benefits in their legacy schemes for the remedy period.

From April 2022, all active scheme members would be transferred to the reformed schemes for future service. This was because the Government remained of the view that the reformed schemes offered “generous pension provision and address the objectives of affordability and sustainability.” Although the transitional arrangements had been found to be discriminatory, the schemes themselves had not.

The Government intends to bring forward new primary legislation for these purposes when parliamentary time allows. The Queen’s Speech on 11 May 2021 included a Public Service Pensions and Judicial Offices Bill.

This briefing paper discusses the background to the 2015 reforms, including the negotiations and the legislation to implement them. The consultation on the remedy to the discrimination identified in McCloud and the decision to move all active scheme members to the 2015 schemes from 2022 is discussed in more detail in Public service pensions: response to McCloud, Commons Library Briefing Paper CBP 9177, July 2021. Also relevant are: Public service pensions - facts and figures, Commons Library Briefing Paper 8478 (May 2021); Public service pensions: employer contributions, Commons Library Briefing Paper CBP 7539.