31-03-2025
This outrageous public sector pensions gamble is costing taxpayers dearly
The Equality Act has cost British taxpayers at least £19bn over one unintended age 'discrimination' that was once perpetrated by the Government.
This is a woeful tale of mismanagement, misjudgement, self-serving behaviour and greed – all standing as a metaphor for the UK and where it has gone wrong in the first quarter of the 21st century.
It started innocently enough when the then-prime minister David Cameron announced in 2010 that he was commissioning an enquiry into the value, design and suitability of public sector pensions.
The former prime minister appointed Lord Hutton of Furness – a former Labour Cabinet minister – as commission chairman. It was initially thought that the commission would recommend a move from 'defined benefit' to 'defined contribution' pensions, a move that almost all large private sector business had undertaken in the preceding decade on cost grounds.
But the commission, which issued its final report on March 10 2011, did not recommend the abolition of the defined benefit model.
Instead, amongst the 27 recommendations, it recommended that the existing 'final salary' model of defined benefit pensions, which gives a retiring employee a proportion of his or her final salary dependent on the number of years worked, would be replaced by a 'career average' scheme.
This meant the retiring employee would receive a pension based on the inflation-adjusted average earnings over their career, also dependent on the number of years worked.
It sounds quite technical, but the overall effect is to somewhat worsen the pension of higher-paid, faster promoted staff, and somewhat improve the pensions of lower-paid, static status staff – in effect narrowing pension differentials.
The Government accepted Hutton's recommendations, and implemented the changes, mostly in March 2015, depending on the scheme. As part of the negotiations with the public sector unions, it was agreed that the changes should be calculated to be 'cost neutral' to the Government.
All this sounds like a modest change, but that's not how pension schemes work. With enormous expenditure of time and effort, new career average revalued earnings (Care) schemes were set up for all the main public sector schemes (of which there are around 200), and discussion ensued as to how long the legacy final salary schemes should survive – immediate closure, or some transitional delay.
Departing from the Hutton recommendations, the Government made a seemingly reasonable attempt to mitigate the proposed changes (particularly negative changes) for those nearing retirement.
So the Government offered employees within 10 years of retirement age, dated from 2012 (i.e. typically their last seven years of service), the opportunity not to change pension scheme.
Another group, those between 10 and 13.5 years away from retirement, could stay in the old scheme for longer than the final group – those more than 13.5 years away from retirement – who would be moved immediately.
These younger employees would be moved to the new pension schemes on March 31 2015 (2014 for local government pension schemes). Finally, everybody would be moved onto the new schemes by March 31 2022.
Remember, in these new arrangements, there are winners and losers – most of the losers are the higher-paid. and vice versa.
In 2015, a young member of the judiciary, Victoria McCloud, led a complaint initially to an Employment Tribunal that these provisions breached the Equality Act 2010 by discriminating against younger members on grounds of age.
Judges near retirement could keep their old (and generally better) pensions – younger members could not. A similar case was also bought by a group of firefighters.
After a very protracted set of legal wrangles and judgments, the Court of Appeal finally ruled in December 2018 that the Government had indeed breached the Equality Act. This judgment required the Government to provide a remedy for this breach. The Government appealed to the Supreme Court for permission to Appeal the Appeal Court Judgment, but this was denied.
The Appeal Court judgment required the Employment Tribunal to determine the remedy which the Government would be obliged to make. In 2019, the Government essentially gave in, and accepted that the McCloud judgment, itself specific to the Judicial Pension Scheme, would be accepted across all public sector pension schemes.
There then ensued a period of consultation and negotiation over exactly how the Government would remedy their Equality Act breach.
It was already agreed that by March 31 2022, everyone (young and old) would be moved to the new career average scheme – hence there was a seven year period (2015-2022) when all employees would in theory have a choice as to whether to stay in the old scheme, or move to the new scheme.
The consultation therefore focused on the question: 'How would you like to be able to choose which plan (old final salary or new career average) you will be a member of in these seven years?'.
The financial mathematics of pension funds are quite complex, and in seven years quite a lot of new information can arise, including promotions, redundancies, inflation and interest rate changes.
So if the recipients of the question are future pensioners, and are asked how they would like to decide, in logic they will say, 'I want, with the benefit of hindsight, to be in the most lucrative scheme for me personally'.
So a consensus emerged, that, yes please, we would like to have our cake and eat it – i.e. as much money for each of us as possible.
And since the party which asked the question – the Government – all members of whom, both civil service and elected, are ultimately members of schemes covered by the McCloud judgement – there was no-one involved who would be adversely affected by this consensus. Except, of course, the taxpayers, but they did not have a real voice in the consultation process.
So the McCloud remedy is as follows: if you are public sector pensioner, when you retire you can decide which scheme actually turned out to be the best one for you in the seven years between 2015 and 2022, and choose that one.
The pension schemes have helpfully agreed to do all the maths for you, so in effect they will say to each retiree at retirement, 'Here are two pensions, both available to you, would you like the higher one or the lower one?'.
And this absurdity is estimated by the Government Actuary to cost taxpayers £19bn. Final irony – pensions, by their nature, discriminate on grounds of age. That's their whole raison d'être. Oh what monster has the Equality Act become?
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