Pensions and redundancy – McCloud and Prospect legal challenge to £95,000 cap

The consultations to remedy age discrimination in all public sector pension schemes have been concluded and we are awaiting the Government’s response which we expect to receive in the new year.

The Government’s consultation outlines a plan to enrol all public sector workers into the reformed schemes on 1 April 2022. The proposed remedy period will therefore be from 1 April 2015 to 31 March 2022 and members will be required to make a choice as to whether their service for this period is in the legacy or reformed scheme. The consultation gave two options on when this choice would be made my members. The first is an immediate choice that would be made within 2 years of the remedy period ending and ran as an options exercise by each pension scheme. The second is a deferred choice underpin which we expect for most members would be a choice at retirement.

We are continuing to hold detailed discussions about the appropriate remedy to McCloud where we are pressing for “deferred choice underpin”. We believe that this is the best option for members as making this decision at the point of retirement will mean that members have as much information as possible which will ensure that they are best placed to make the right decision for them.

As a result of pressure from Prospect and other unions the government has lifted the “pause” on the valuation of public sector pension schemes. The “pause” was introduced because of the uncertainties that surrounded the “McCloud” judgement and the cost of this. Revised guidance from HM Treasury is required before the valuations can be recalculated, therefore we do not anticipate significant progress on this until Spring 2021.

Within the public sector schemes, a cost sharing mechanism exists whereby there is a set “cost envelope” regarding how much, in percentage of pay terms, the pension scheme costs. The previous valuation showed that the cost of the scheme had decreased, and changes were therefore required to bring the scheme back within the cost envelope. These changes were beneficial to members.

The government has classified the cost of remedying the McCloud judgement as a “member cost” which would mean that members would no longer receive the level of improvements that were previously agreed. These were – a reduction in member pension contributions, an improvement to accrual, death benefits and an end to the cliff edges for pension contributions. We are an interested party to a Judicial Review challenging the designation of the McCloud remedy as a “member cost”.

We continue to believe that the outcome of the scheme valuation will be that there is an underspend which triggers the cost cap mechanism and benefit improvements. The calculation of any benefit improvements must be calculated on the basis of benefit improvements having been due from 1 April 2019. In that context we are arguing that the focus should be on reducing members contribution rates.

This is all the more pressing given the governments announcement on pay. We are pressing for the benefit improvements to be introduced as soon as practically possible and opposed to a blanket roll over of member contributions for the coming year.

Public sector exit payment cap

It has been a longstanding government policy to cap severance payments in the public sector and The Restriction of Public Sector Exit Payment Regulations 2020 came into force on 4 November 2020 to implement this policy.

The public sector exit payment cap is an overall limit to the amount that an employer can pay to an employee, or to a pension scheme in respect of that employee, when they leave their employment.

The cap has been set at a level of £95,000 and unfortunately there is no index-linking of this amount or any mechanism to automatically increase this figure. In effect this means that the value of the cap will decrease each year and more people will be subject to it.

The original stated intention from the Conservative party was that the cap was being introduced to “end taxpayer-funded six-figure payoffs for the best paid public sector workers”. Whilst the policy was presented as being focused on the exit packages for the more highly paid, it is clear that because the arrangements also cover pension strain payments made by an employer to a pension scheme, the arrangements will impact upon longer serving staff on modest salaries.

Generally, the cap applies to all exits from an employer that is under the scope of the cap. However, the government has confirmed though that there will be circumstances where the cap can be waived, and these have been split into mandatory and discretionary waivers. The situations in which a waiver can be applied are disappointingly narrow though and the expectation is that these will not be applied on a regular basis.

The process that the government have followed in introducing these regulations is fundamentally flawed. The Restriction of Public Sector Exit Payment Regulations 2020 were made and came into force prior to any consultation taking place with the affected pension and compensation schemes.

Within the Civil Service, Prospect has been arguing that the cap represents a change to the Civil Service Compensation Scheme (CSCS) and no changes can happen unless consultation has taken place with Prospect and other unions. The consultation requirement under the Superannuation Act 1972 means that this consultation must be conducted “with a view to reaching agreement”.

The Cabinet Office have now launched a consultation that is restricted to incorporating the exit payment cap into the CSCS. In our opinion, the current consultation cannot satisfy the requirements of the Superannuation Act 1972, because it takes as its starting point the premise that changes will be made to the CSCS to reduce the value of benefits which amount to ‘exit payments’ to give effect to a cap of £95K.  A consultation which has already decided what its outcome will be is not, to our understanding, one which satisfies the requirements of the Superannuation Act 1972.

Prospect has been working with our lawyers to challenge the introduction of the 95k cap on severance payments and are seeking a judicial review of how the government has introduced these regulations.

Further information on the exit payment cap is available on the Prospect website.

Joe Anderton is Prospect’s Pensions Officer