Government facing £4bn final salary pension shortfall after losing appeal in the courts by Andrew Houghton

It has emerged that the Government may be obliged to pay out
an additional £4bn per annum following a December age discrimination ruling
relating to public sector pensions.

The ruling concerned changes made to the pension rights of a
group of judges and firefighters following the 2015 pension reforms. The
coalition Government in power at the time made a series of changes to the
pension entitlements of impacted public servants, moving them to new schemes
which typically provided a less generous entitlement.

Prior to April 2015, the judges were members of the Judicial
Pension Scheme. Following its closure on 31 March 205, the judiciary were moved
to a new scheme, the imaginatively titled New Judicial Pension Scheme. However,
it emerged that older judges were either permitted to remain members of the
existing scheme until their retirement, or were offered a period of grace
during which they could continue to accrue benefits under the old scheme and
the length of which was dictated by their age. The case, brought by law firm
Leigh Day on behalf of 230 members of the judiciary, claimed that such
arrangements allowed to unlawful age discrimination.

A similar case brought by the Fire Brigades Union on behalf
of 6,000 firefighters was considered at the same time as it raised similar
issues and the judgements were handed down on 20 December 2018. The Court of
Appeal concluded that the differing treatments amounted to age discrimination
and ordered the Government to level the playing field.

Whilst the case was brought on behalf of the judicial and
firefighters’ pension schemes, work will be required to assess the extent to
which it impacts other public sector schemes and the final cost could top the
£4bn figure. Concern has been raised that the ruling will leave what has been
termed a ‘gargantuan’ hole in public sector finances.

In a 30 January ministerial statement, chief secretary to the
treasury Liz Truss said:

‘In December 2018, the
Court of Appeal ruled that the ‘transitional protection’ offered to some
members as part of the reforms amounts to unlawful discrimination. The
Government is seeking permission to appeal this decision. If this is
unsuccessful, the Court will require steps to be taken to compensate employees
who were transferred to the new schemes.

A mechanism for
assessing the value of pensions (the “cost control mechanism”) was also
introduced as part of the 2015 reforms. In September of last year, Government
announced that provisional results indicated that the cost control mechanism
would be engaged, triggering automatic changes to member benefits.

However, given the
potentially significant but uncertain impact of the Court of Appeal judgment,
it is not now possible to assess the value of the current public service
pension arrangements with any certainty. The provisional estimate is that the
potential impact of the judgment could cost the equivalent of around £4 billion
per annum. It is therefore prudent to pause this part of the valuations until
there is certainty about the value of pensions to employees from April 2015
onwards.

The value of public
service pensions will not be reduced as a result of this suspension. If the
Government is successful in court, we will implement the changes to employee
benefits as planned. If the Government is defeated, employees will be
compensated in a way that satisfies the judgment.’

The upshot of this is that the Government intends to seek
permission to appeal the decision to the Supreme Court. If unsuccessful, it
will be ordered to compensate those affected.

How the deficit will be addressed remains to be seen. But any
which way you slice it £4bn per annum is a whole lotta money and likely to
necessitate some form of tax increase and/ or spending cuts. To say nothing of
the implications for any future plans the Government may have for cost savings
via amendment to pension schemes.

Interesting to see how this one pans out…