In April 2015, most public sector pension schemes were reformed largely due to the cost to the government of continuing to operate the existing “legacy” public sector schemes. The new 2015 Schemes, referred to as the “reformed schemes”, were based upon a career average revalued earnings design, effectively average salary allowing for cost-of-living increases, (replacing the previous final salary structure) and had higher normal retirement ages to save on costs. As part of the reforms, those with 10 years to retirement at a cut-off date of 1 April 2012 were permitted to remain in the legacy scheme after the new schemes were introduced in April 2015.
In December 2018, the Court of Appeal found that some of the reforms unfairly discriminated against members of the judicial and firefighters’ pension schemes and required that this unlawful discrimination be remedied by the Government, commonly referred to as the McCloud/Sargeant judgement. The Government subsequently decided to offer remedy to all the public sector schemes and not just limit this to the judicial and firefighters’ pension schemes.
The regulations to implement retrospective remedy in respect of the McCloud/Sargeant judgement for the main public sector pension schemes are due to take effect from 1 October 2023. As we are getting closer to this date, some of the schemes have launched consultations or published draft regulations and this issue is generally getting more attention.
Actuaries for Lawyers has recently carried out an exercise to model the potential impact of remedy on CEVs under a range of schemes and circumstances and consider the implication for divorce settlement. Based on this analysis, we expect that these changes could have a very material impact in some cases, while in many other cases there may be no change to the value of benefits at all.
In general, for members who have not yet retired, I understand that any Cash Equivalent Value (CEV) calculations will be based on the higher of legacy benefits or reformed benefits for the remedy period (2015 to 2022), which will in turn impact the benefits awarded to an ex-spouse if the impacted pension is shared on divorce.
When the impacted member retires from the scheme, they will then have legacy benefits for service prior to April 2015, reformed benefits for service from April 2022 and a choice between the two benefit structures for their service from April 2015 to March 2022.
In this blog I comment on some circumstances where extra consideration might be needed where public sector pensions form part of a financial settlement on divorce.
Not all members of public sector pension schemes will be entitled to an assessment of remedy. The consultation document issued by the Government on 16 July 2020 entitled “Public Service Pension schemes consultation: changes to the transitional arrangements to the 2015 schemes” set out the eligibility criteria for a public sector pension scheme member to qualify for a remedy assessment. This was stated to be as follows: All individuals who were members or were eligible to be members of a legacy scheme immediately prior to 1 April 2012, and have a period of service after 31 March 2015 during which they were members of a legacy or reformed scheme, will be given such a choice where those periods of service are continuous (including those with a qualifying break in service of less than 5 years). This is irrespective of whether they have submitted a legal claim or not, or whether they are currently an active, deferred or pensioner member.
Uniformed services schemes
Members of the uniformed services legacy schemes, including Police, Firefighters’ and Armed Forces, generally accrue benefits at a faster rate compared to other schemes and benefit from favourable early retirement terms, once they have reached the minimum age and completed the minimum length of service, to retire from active service on an unreduced pension. The benefit structure of these schemes means that once retrospective remedy is implemented, some members of these schemes are expected to see large increases to the value of their benefits. For example, a 50-year-old firefighter who has served at least 25 years in the Firefighters Pension Scheme 1992 could see the CEV of their benefits built up in the remedy period (between 2015 and 2022) more than double. This is primarily because at this age, the legacy benefits can be accessed immediately without reduction while the reformed benefits are not payable until the member’s State Pension Age, which for an individual currently aged 50 would be age 67. This means that legacy benefits could be drawn unreduced 17 years earlier than the reformed benefits. Therefore, benefits calculated in line with the legacy structure are significantly more valuable than the reformed benefits.
The immediate impact on CEV calculations is not expected to be as large for younger members who have not yet reached the age or completed the length of service required to draw their benefits immediately without reduction. However, it is worth noting that these members may still see a large benefit increase at the time of their future retirement.
By contrast, the non-uniformed public sector schemes generally do not have the same generous early retirement terms and as a result the difference in value between legacy and reformed benefits is generally smaller. For example, a 50-year-old member of the Civil Service Pension Scheme might not see any increase to their CEV at all as a result of remedy. This is because while the normal retirement age for legacy benefits is generally earlier, making retirement at an earlier age more attractive, the accrual rate (that is the rate at which the pension builds up for every additional year of service) for the reformed scheme is more generous. This means that even though the benefits on retiring early in the reformed scheme may be reduced to an early retirement factor, the higher accrual rate for pension benefits in the reformed scheme may more than compensate for this. Hence in this case, the benefits originally built up in the reformed scheme for the 2015 to 2022 remedy period may have a higher CEV than the alternative benefits that would have been granted to the member had they been a member of the legacy pension scheme for this period of time.
Large salary increases
In general, I would expect the value of public sector remedy to be higher for members with large salary increases compared to those with more modest salary growth.
The reformed schemes introduced in 2015 were based upon a career average design instead of the final salary structure in place under the majority of legacy schemes. This means that instead of the pension being based on a proportion of a member’s final salary at the time of retirement or leaving the scheme, the pension payable under the reformed schemes is based on the average pensionable salary that the member has earned during their membership. For each year the member earns a pension equal to a proportion of their pensionable salary for that year. Instead of being linked to their future salary increases this pension is then revalued before retirement in line with some measure of inflation.
This means that for a member who has experienced large salary increases, their benefits built up in the reformed scheme may not have increased to the same extent. Therefore, public sector pensions remedy may result in a significant increase to their pension accrued in the remedy period, as when benefits are recalculated in line with the legacy structure, they will be based on the increased salary.
It is difficult to precisely predict when a pension share will be implemented as the pension scheme has up to four months to implement a pension sharing order from the date that the pension share takes effect or the date that the scheme has received all the required information to implement the order if later. The pension share takes effect on the later of 28 days after the order has been sealed by the Court or the date of the Final Order (Decree Absolute). The date of implementation is the date at which the CEV is calculated, and the pension credit benefits are determined based upon that CEV. This means that as we get closer to 1 October 2023, there is a risk that pension shares that are agreed based on calculations carried out before remedy takes effect could be implemented after this date.
Based on the information published to date, it appears that pension sharing orders implemented before or after 1 October 2023 will be subject to different regulations and procedures. However, it is not entirely clear to us how schemes will implement pension sharing orders that take place after 1 October 2023.
Where there is a possibility that a pension sharing order may not be implemented until after 1 October 2023, it may be prudent to check with the scheme administrators precisely how they are intending to implement the order, prior to serving the final order upon the relevant scheme.
If you would like to learn more about Public Sector Pensions Remedy and the implications for divorce you may wish to attend one of our upcoming seminars, where there will be a session dedicated to this issue. You can find additional information here:
Disclaimer – The views expressed here are the views of the writer only and do not necessarily represent the view of Actuaries for Lawyers. Whilst every effort has been made to ensure the accuracy of the information in this post, it is important to always check the benefit rules with the schemes before making any financial decisions based upon these. Actuaries for Lawyers cannot be held responsible for any losses incurred as a result of relying upon information contained in the blog section of our website as these do not constitute advice or act as a substitute for providing individual advice in relation to the specifics of a particular case.