Further (Mc)Clouds on the horizon in public sector pensions

Doug Mullen considers the likely impact of a pensions legal challenge being brought by the Fire Brigades Union (FBU) and the British Medical Association (BMA).

The FBU and the BMA have been given permission to go ahead with their legal challenge to the Government's proposal that the costs of remedying the age discrimination in the Fire Fighters' and NHS Pension Schemes should be borne by members of those schemes. As other schemes are proposing to take a similar approach on remedy, it seems likely that the result of this challenge will affect those schemes too.

The courts ruled in the McCloud case that transitional protections for older scheme members against changes to benefits in 2015 amounted to unjustified discrimination against younger members. The Government is proposing to address this by giving all affected members a choice at retirement about whether they get the current scheme benefits or the legacy scheme benefits for the period between 2015 and 2022. Inevitably, given that the aim of the original changes to benefits was to reduce costs, giving members this choice will increase costs.

One of the changes made in 2015 was to try to limit the costs that employers (and the taxpayer) had to pay to fund public sector pensions. Cost control mechanisms were introduced in each scheme. A target cost was set and, if employee costs were more than 2% above this target (the cost ceiling), then employee benefits would be reduced or employee contributions increased to meet the target. However, if those costs were more than 2% below the target (the cost floor), then employee contributions would be reduced or benefits improved.

Initially, the last public sector scheme valuations showed that the cost floor had been breached, so that members would benefit from reduced contributions or increased benefits. However, the Government then worked on the costs of the McCloud remedy which showed that the cost floor had not been breached after all - and in most cases that the cost ceiling had been breached instead. The Government is proposing to waive the breach of the cost ceiling.

That has resulted in the current legal challenge with the FBU and BMA arguing that the McCloud remedy costs shouldn't be factored into employee costs in the cost control mechanism. It remains to be seen what the courts will decide but the PR battle is also joined with the FBU arguing that its members shouldn't pay for putting right the Government's discriminatory protections and the Government is arguing that as those members are benefitting from the improved benefits given by the remedy, they should pay for it - and shouldn't get a further increase in benefits.

Ultimately, if the challenge is successful, either the taxpayer or the employer (in the case of the Local Government Pension Scheme) will end up footing the bill. That in turn will either result in less money available to fund services and perhaps less money for future pay rises or, if funding of services and pay is to be unaffected, then rising taxes could be a consequence. In the current climate, none of those options seem likely to play out well in the court of public opinion.

Doug Mullen is a partner at Anthony Collins Solicitors.