The key issue under consultation was how to address the age discrimination inherent in the way the latest round of public sector pension reforms were implemented. In particular, workers below a certain age were automatically moved to a new pension scheme but those closer to retirement were able to stay in the old (‘legacy’) arrangements.
This approach was ruled unlawful by the courts and in response the government has been consulting on how best to address this. The two options were:
a) An ‘immediate choice’ where millions of teachers, nurses and civil servants would make a choice now as to which scheme they wanted to be members of for the period from 2015 to 2022;
b) A ‘deferred choice underpin’, where members would stay in their ‘legacy’ scheme but could opt at retirement for the alternative scheme if this would produce a larger pension; workers will have to trust that this provision will not have been changed by the time they retire;
The Treasury has today announced that it will be implementing a ‘Deferred Choice Underpin’. However, this means that members of these schemes will not know for certain what rules will apply to their pension until they retire. They will receive forecasts of their pension based on their legacy scheme, but their final pension may turn out to be different if the alternative scheme would have been better. Schemes will face a huge communications challenge in ensuring that members understand the calculations and can verify them, and to make sure that this new complexity does not lead public servants to become disengaged from their pensions.
In addition, for some workers there will be complex tax implications to be resolved if they end up switching schemes at retirement.
Commenting, Steve Webb said: “It is understandable that the Treasury would opt for a ‘deferred choice’ where members can look back and see which scheme would have been better for them. But between now and retirement this means that members will simply not know what their pension is going to be and will also have to hope that future governments keep this promise. This will make retirement planning even more uncertain. Pension schemes will need to retain the ability to work out pension rights under two different arrangements for decades to come and will have to be able to explain those calculations so that members can check if they are correct. Members will need clear communications about where they stand and support in understanding how their pension has been worked out. There is no doubt that unpicking this mess will lead to decades of complexity and uncertainty for public service pension scheme members”.
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