PURPOSE OF REPORT

To provide members of the Fire and Rescue Authority (the Authority) with an update on the legal challenge to the implementation of the firefighter pension scheme reforms which were effected in 2015. The successful legal challenge was brought by the Fire Brigades Union (FBU) on behalf of its members on the grounds of direct age discrimination. The outcome has implications across all public sector pension schemes. 

EXECUTIVE SUMMARY

Following a lengthy legal process, the Court of Appeal ruled in favour of the claimants and the judgment issued on the 18 December 2018 confirmed that the age discrimination inherent within the 2015 pension reforms had not been justified. The case is referred to as the McCloud/Sargeant Judgment (the Judgment).

During June 2019 the Supreme Court refused the UK Government a right of appeal and the matter is now going through the employment tribunal process to determine remedy. The UK Government has confirmed that the outcome will be applicable across all UK public sector pension schemes and individual members are not required to submit claims for remedy.

To support the process of determining appropriate remedy, HM Treasury issued a consultation document on 16 July 2020. The document set out a range of options for addressing the discrimination across all public sector schemes. The submission deadline for the consultation was 11 October 2020 and the Authority response is attached at Appendix A.

OBSERVATIONS FROM THE EXECUTIVE PANEL OR AUDIT COMMITTEE

This report has not previously been considered by either the Executive Panel or the Audit Committee. The consultation responses were considered by the Chair and Deputy Chair of the Authority and the Chair of the Local Pension Board.

RECOMMENDATIONS 

Members are requested to note the:

(i)           background to the McCloud/ Sargeant Judgment;

(ii)          current position with regards to remedy;

(iii)         financial implications of the remedy; and

(iv)         consultation response submitted on behalf of the Authority.

BACKGROUND

Following Lord Hutton’s 2011 review of public sector pensions, the Public Service Pensions Act (2013) provided the legal framework to reform public sector pension schemes. Reforms included restricting existing final salary schemes, extending retirement ages and introducing career average schemes. 

During 2015 all main public service pensions, including the firefighters’ scheme, were reformed to provide defined benefits on a career-average basis and extend the normal retirement age of members. To effect these changes the pension scheme regulations were amended.

The amended regulations also provided protection for members of existing final salary schemes. This protection was age related and members reaching the normal pension age of 55 by 31 March 2022 were afforded full protection with other members receiving protection on a tapered basis depending on their age. This protection was known as transitional protection and members who did not qualify for protection were moved directly into the new 2015 Firefighters Pension Scheme.

Legal challenge to the age protection

Two legal claims were combined and taken through the legal process; one against the judges’ pension scheme (the McCloud case) and the other against the firefighters’ pension scheme (the Sargeant case). The basis of the legal challenge was that the transitional arrangements were discriminatory on the basis of age, sex and race.

In December 2018, the Court of Appeal determined that the transitional protection gave rise to unlawful age discrimination. The Supreme Court refused the Government’s application for permission to appeal, meaning that the Court of Appeal decision stands.

In July 2019, the UK Government confirmed its intention to work with the Employment Tribunal to effect remedy across all public sector schemes. This removed the need for further litigation by members of other public sector schemes similarly affected by the Judgment.

An Employment Tribunal case management hearing was held in December 2019 to set out the procedural steps to appropriately implement the Court of Appeal decision.

Case Management Hearing

The Court of Appeal found that the transitional provisions in the firefighters’ pension schemes resulted in direct age discrimination between:

a) those who were members of the old scheme (the Firefighters’ Pension Scheme 1992) (“FPS”) and were fully transitionally protected by remaining in that Scheme after 31 March 2015 as a result of being an active member under the 1992 Scheme on 31 March 2012,
b) those who were members of the FPS as at 31 March 2012 and were not treated as fully transitionally protected and moved to the new Firefighters’ Pension Schemes after 31 March 2015.

Following the hearing, the Employment Tribunal gave an interim declaration that the named claimants (who all fell within category (b)) are entitled to be treated as if they had been given full transitional protection and had remained in their current scheme after 1 April 2015.

The process of determining the most effective remedy is complex as some members may fare better in the new career average pension arrangements and would suffer a detriment if they simply moved back to the old schemes.

Consultation on remedy proposals

On 16 July 2020, HM Treasury issued a consultation document which set out proposals and options for addressing the discrimination across the public sector schemes. Further background information and the consultation document can be accessed via

http://www.fpsregs.org/index.php/legal-landscape/age-discrimination-remedy-sargeant

The consultations recognised that due to individual circumstances, scheme members may be better off in the reformed schemes rather than the legacy schemes. The key proposal within the consultation is to provide members with a choice between receiving legacy or reformed scheme benefits in respect of their service during the remedy period (1 April 2015 and 31 March 2022). Thereafter, it is proposed that all members will move to the 2015 scheme.

The consultation identified two possible approaches to making this choice, and provided details on how each of these approaches may work. The two possible approaches are:

1)           an immediate choice to be made after the end of the remedy period; or

2)           a deferred choice underpin (DCU).

Under the immediate choice exercise, members would be required to make a decision after 31 March 2022, although the timeframes for making a decision have not been specified. For many members, this will be some years prior to retirement, and at a time when there is still some uncertainty over the precise benefits that may arise. In contrast, under DCU, the decision would be deferred until the point at which a member retires. Under the DCU option, all members would be deemed to have accrued benefits in the legacy scheme for the remedy period.

Under either approach, those who have already retired and/or received a pension award will be asked to make their choice as soon as practicable after the changes are implemented. The position they choose would be applied retrospectively to the date the award was made.

Technical discussions have been held with both scheme administrators and the Scheme Advisory Board for Wales which includes both employer and employee representatives across Wales. 

The consensus from the technical discussions was that it was important to reduce the risk of further discrimination and to ensure proper administrative arrangements. The DCU option was considered to be the preferred option for reducing the risk of further discrimination as the member will be afforded the choice at the point of retirement or leaving the Service. Furthermore, it was considered that requiring members to make an immediate choice would require access to good quality impartial advice from a professional advisor and this may be problematic given the timescales.

The administrative burden from either option will be significant. Intuitively, from an employer’s perspective, the immediate choice would be the preferred option as this provides for greater certainty in terms of financial modelling. However, this also poses a substantial challenge as it requires the rewriting and introduction of software to provide members with up to date, complete and accurate information. Furthermore, administrators do not have capacity to undertake this exercise across the public sector within the timescales suggested.

The deferred choice underpin was deemed to be the preferred option as the administrative burden was more manageable and reduced the risk that members may feel aggrieved if they subsequently felt that they had made the wrong choice.

The consultation questions and responses are detailed within Appendix A.

Timescales and next steps

The consultation exercise concluded on 11 October 2020 and it is anticipated that the over the forthcoming months there will be further clarity on the steps that will be undertaken to bring the matter to a full conclusion. This will include confirming the final remedy which will need to be incorporated into the underlying pension scheme regulations. The current working assumption is that the amendments to the regulations may not be effected until 2022.

A number of members will reach their normal retirement age for the legacy scheme before the regulations have been amended. Such members are deemed to be in immediate detriment. This reflects that under the proposed remedy they would be eligible for retirement but as the regulations have not been amended the scheme manager is unable to process this.

A legal view has been sought on whether the current regulations permit scheme managers to process the pensions for members in immediate detriment. Technical discussions have also been held with both Welsh Government officials and colleagues from other fire and rescue services to agree how such cases would be processed in the event that legal confirmation allows them to be processed ahead of the regulation amendments.

Financial aspects of the remedy

The remedy proposals suggest that eligible members will revert to the legacy scheme for the period of remedy. This provides enhanced benefits to those members affected. The financial implications of this have already been calculated by the Government Actuary Department (GAD) and the estimate is circa £11m. This has been included in the Authority’s overall pension liability.

Members who revert to their legacy scheme will be required to make good an underpayment of employee contributions. The consultation proposed that the underpayment should be made good over a number of years and it is anticipated that this will be agreed as part of the final remedy. In addition, requiring members to revert to their legacy scheme will give rise to backdated employer contributions and it is not yet clear how these will be administered. 

The full scheme valuation is undertaken on a four yearly basis. The scheme data to enable the next full valuation is currently being prepared and this will be used to calculate future contributions for both the employer and the employee. 

The future funding for the impact of the legal challenge has not yet been determined and officers are maintaining close dialogue with Welsh Government colleagues.

IMPLICATIONS

Wellbeing Objectives - Although not directly linked to the well-being objectives all members of the public pension schemes offered by the Authority will be impacted by the proposed changes. 

Budget - Future remedy will have an implication on the Authority’s budget; remedy will result in increased administration and employer superannuation costs.

Legal - The Authority is under a legal duty to ensure compliance with the Scheme Regulations.

Staffing - This matter directly impacts on employees who are members of the public sector pension schemes offered by the Authority; depending on the scheme, members may choose to retire earlier under the new proposals than under current regulations.

Equalities/Human Rights/Welsh Language - The proposals address the unlawful age-based transitional protection arrangements in the 2015 pension schemes, ensuring fair treatment for all pension members.

Risks - Non-compliance with legislation leads to legal and reputational risk.