Public Service Pensions and Judicial Offices Bill [HL]

Explanatory Notes

Policy background

Public service pensions reform and the Court of Appeal’s judgment

7 In 2010 the Chancellor of the Exchequer invited Lord Hutton of Furness to chair the Independent Public Service Pensions Commission ("the IPSPC"). The IPSPC was tasked with undertaking a fundamental structural review of public service pension provision.

8 The IPSPC published its final report in 2011, setting out recommendations to reform public service pensions to better balance the interests of taxpayers, employers and members. The Government accepted the IPSPC’s recommendations as the basis for discussions with public service workers, trades unions and other representative bodies.

9 In November 2011 the Government published a Command Paper1 setting out the Government’s framework for reform of the public service schemes. Further discussions were undertaken with each of the workforces to develop scheme design proposals.

10 In April 2015 (April 2014 in the case of the Local Government Pension Scheme in England and Wales) new schemes were introduced for each of the main workforces – local government, teachers, the NHS, the armed forces, firefighters, police, judiciary and civil service. The reforms were implemented by regulations made under the Public Service Pensions Act 2013 (PSPA 2013).

11 As part of the 2015 reforms, those within 10 years of retirement remained in their legacy pension schemes. This transitional protection was not a recommendation of the IPSPC but was agreed following discussions with member representatives.

12 In December 2018 the Court of Appeal found in Lord Chancellor v McCloud, Secretary of State for the Home Department v Sargeant [2018] EWCA Civ 2844 (the McCloud judgment) that the transitional protection unlawfully discriminated against younger members of the judicial and firefighters’ pension schemes (and also gave rise to indirect sex and race discrimination). On 27 June 2019 the Supreme Court denied the Government permission to appeal the Court of Appeal’s judgment.

13 On 15 July 2019 the Chief Secretary to the Treasury made a written ministerial statement 2 setting out that the Government considered that the Court of Appeal’s judgment had implications for all of the public service pension schemes and planned to come forward with proposals to remedy the discrimination across the schemes.

14 On 16 July 2020, the Government published a Command Paper: Public service pension schemes: changes to the transitional arrangements to the 2015 schemes3. The consultation set out two proposed options for retrospectively removing the discrimination suffered by members who were not eligible for transitional protection due to their age and proposed that the legacy schemes would be closed to all members on 31 March 2022.

15 It is normal practice in discrimination cases to remedy unequal treatment by reverting to the most beneficial option. However, the reforms that were introduced in 2015 were progressive reforms and were in part intended to even out the value of pensions between some of the highest and lowest earners, resulting in some, particularly lower and middle earners, being better off in the new schemes. Simply extending transitional protection to all affected members would address the discrimination identified by the Court but would also mean that some members would be placed in a worse position. Instead, the Government proposed that members should be given a choice of which scheme benefits they wish to receive during the period from when the new schemes were introduced to the date that the legacy schemes are to be closed. The consultation sought views on whether the choice should be made immediately (once the necessary legislative changes were made) or deferred until the point that a member’s pension benefits become payable.

16 In February 2021 the Government published its response 4 , confirming that the legacy schemes would close on 31 March 2022 and that affected members would be given a choice of which pension benefits they wish to receive when those benefits are paid. The Government explained that it preferred this approach as it would provide members with greater certainty about their decision and avoid the need for them to make assumptions about matters such as their future career and retirement age, which would increase the risk of making imperfect decisions, particularly for younger members. The response confirmed that affected members who are already in receipt of pension benefits will be given a choice as soon as possible after necessary changes to the schemes are implemented via legislation, or earlier if possible.

17 Separate consultations were undertaken in relation to the Judicial Pension Schemes and the Local Government Pension Schemes because of the unique arrangements within those schemes. The Northern Ireland Department of Finance also undertook a separate consultation in relation to the public service pension schemes that are their responsibility under the devolution arrangements.

18 In the Queen’s Speech on 11 May 2021 the Government announced its intention to bring forward legislation to implement retrospective changes to remedy the discrimination that arose when transitional protection was afforded to older public service workers when new public service schemes were introduced in 2014/15 and to ensure equal treatment for all members within each of the main public service pension schemes by moving all members into the reformed schemes on 1 April 2022.

19 For the main public service pension schemes (the non-judicial schemes), where the Bill refers to the "new scheme", this refers to the reformed 2015 schemes, introduced following an independent review of public service pensions, and made under the PSPA 2013. In respect of the judiciary, the scheme made under the PSPA 2013 is referred to in the Bill as the "judicial 2015 scheme" rather than "new scheme". This is to avoid confusion with the newly designed, reformed scheme which will provide for future accruals for the judiciary from April 2022. The pre-2015 public service pensions schemes are in each case referred to as the "legacy scheme".

Non-judicial schemes (except local government)

20 Following consultation on the approach to implementing remedy, the Government is proceeding with the Deferred Choice Underpin (DCU), which enables members to make a choice as to whether to take legacy or new scheme benefits for the remedy period when their pension benefits become payable. The Bill brings forward changes required for effective implementation of the remedy.

21 The new schemes themselves are not discriminatory, and the Government wishes to ensure that all members are treated equally in respect of the scheme design available to them after the discrimination has been addressed.

22 Therefore, all public servants who continue in service from 1 April 2022 onwards will do so as members of their respective new scheme. Legacy schemes will be closed in relation to service after 31 March 2022, closing the remedy period during which members in scope have a choice of benefits.

Local government schemes

23 A different approach was adopted for the Local Government Pension Schemes (LGPS), where all members still accruing benefits were moved to new schemes either on 1 April 2014, for the LGPS England and Wales, or 1 April 2015, for the LGPS for Scotland and Northern Ireland. In those schemes, older members in service on 31 March 2012 were provided with an underpin - giving them the better of accrual as if under their previous legacy scheme provisions or under the reformed scheme provisions, for pensionable service from the date they moved to their new LGPS scheme.

24 For these LGPS schemes there will be no change that service should be under reformed schemes. However, the underpin will be extended to all those members affected by the discrimination. The underpin will not apply to service after 31 March 2022 or for service rendered after the member’s Normal Pension Age (NPA) 5 , if earlier.

Judicial schemes

25 There are a number of important differences between the proposed remedies for the judiciary and for the wider public service which arise from the unique nature of judicial office and the judicial legacy schemes. The key difference is that, unlike the wider public service remedy in which eligible individuals will be returned to their legacy scheme and make a choice at retirement as to the basis on which they would like their benefits calculated, for the judiciary the remedy will be provided by way of an options exercise. Subject to parliamentary timetables and approval, it is anticipated that the options exercise will take place in autumn 2022.

Cost control mechanism – 2016 valuations

26 The Bill also includes bespoke measures related to the cost control mechanism (CCM). The CCM aims to protect both the value of member benefits and the cost to the taxpayer from unforeseen changes in pension scheme costs. The CCM was introduced alongside the reformed schemes in 2015, following a recommendation by the Independent Public Service Pensions Commission in 2011, and subsequent discussions with trade unions. The CCM assesses certain elements of scheme costs and compares these costs to a base level (the "employer cost cap"), set at the first valuation. If the costs measured in the CCM have decreased/increased by more than the specified margins below/above the employer cost cap, then member benefits are increased/reduced to bring costs back to target. The upper and lower margins have been specified in Treasury Regulations as a percentage of pensionable pay. So, there is effectively a corridor either side of the employer cost cap, with margins representing the ‘ceiling’ and ‘floor’.

27 The mechanism was first tested at the 2016 valuations. However, the cost control element of the 2016 valuation process was paused in light of the McCloud judgment regarding transitional protection. The potentially significant and uncertain impact arising from the Court’s judgment made it impossible to assess the value of the schemes to members with any certainty. Additionally, in 2018, the Government announced that it would ask the Government Actuary (GA) to conduct a review of the mechanism. This reflected a concern that the CCM may not be operating in line with its original objectives.

28 In July 2020, the Government announced that this pause would be lifted, the GA’s review should proceed, and the 2016 valuation completed. The Government also announced the legislative remedy should be taken into account when completing the cost control process, as the remedy affects the value of schemes to members.

29 Now that the pause has been lifted and the Government is completing the cost control element of the 2016 valuations, taking account of the remedy, early estimates indicate that some schemes may breach the ceiling, which would lead to significant reductions in benefits under existing legislation.

30 The Government decided that there should not be reductions to member benefits as a result of the 2016 valuations, particularly based on a mechanism that may not be working as intended. The Bill therefore includes measures to waive the impact of any ceiling breaches that may occur once the results of the 2016 valuations have been finalised, so no member will see a reduction in their benefits. Any floor breaches that occur will be honoured. This means that when results have been finalised and implemented, any benefit improvements that are due will be delivered.

Judicial Pensions

31 The Public Service Pensions Act 2013 (PSPA 2013) introduced a statutory framework for the reform of public service pension schemes. Following a public consultation exercise, the New Judicial Pension Scheme 2015 (NJPS) was established under the Judicial Pensions Regulations 2015 (JPS 2015).

32 This resulted in many changes to judicial pensions, with the most significant being that members in NJPS were now subject to annual and lifetime allowance limits on the tax-relief benefits accrued due to the tax-registered nature of the scheme. These changes had a disproportionate impact on the judiciary; resulting in recruitment and retention issues. These were underlined by the fact that the first ever unfilled vacancy at the High Court occurred in the 2014/15 recruitment exercise.

33 In 2018, the Senior Salaries Review Body (SSRB) published its Major Review of the Judicial Salary Structure which confirmed evidence of significant and escalating recruitment and retention problems at all levels of the judiciary. They concluded that the principal cause of this was the cumulative impacts of the 2015 public pension reforms and subsequent changes to pension tax thresholds.

34 This is an issue for the judiciary because many senior judges are in a position where they have accrued significant private sector pensions prior to taking up judicial office, which means that the pension tax charges would be felt more acutely and by a significant proportion. Moreover, owing to the judiciary’s unique constitutional role, salaried judges are not able to work in private practice after taking up office and they are also appointed on the understanding that they will not return to private practice once they have retired. Their options for supplementing their income are therefore limited. Furthermore, many judges are also in the unusual position of taking a pay cut to join the judiciary. These factors are key to explaining why the judicial pension scheme is a vital part of judicial remuneration and integral to recruitment and retention.

35 Responding to the SSRB’s review in June 2019, the Government introduced a temporary Recruitment and Retention Allowance for certain senior salaried judges who were eligible to join NJPS and made a commitment to develop a pensions-based solution for the whole judiciary, which would address, in the long-term, the recruitment and retention problems identified by the SSRB.

36 In July 2020, the Government published a consultation setting out its plan to introduce a reformed judicial pension scheme that would be in line with the main principles of the 2015 reforms but also retain key elements of the legacy schemes. For this reason, the reformed scheme contains many features of the 2015 schemes: benefits are based on career average earnings rather than final salary; the Normal Pension Age is linked to State Pension age; and members have an option to commute part of their pension in exchange for a lump sum, instead of being given an automatic lump sum on retirement. Crucially, to address the recruitment and retention issues, the reformed scheme will be tax-unregistered, like the judicial legacy schemes, and have a higher accrual rate compared to NJPS. The aim, as confirmed by the consultation, is to have this open to all eligible salaried and fee-paid judicial office holders from 2022, where they can accrue benefits under it.

37 The response to this consultation published by the Ministry of Justice in February 2021 confirmed the intention to implement the reformed scheme in line with the proposals set out in the published consultation document in July 2020.

38 Public service pensions are a devolved matter for Northern Ireland (NI) and are established under separate primary legislation to that in Great Britain. NI scheme provisions are broadly identical to the comparable schemes in Great Britain. Separate consultations were carried out for public service pensions schemes in Northern Ireland. The Department of Finance consulted on the broadly identical policy options as Treasury and the outcome of their consultation reflected that of Treasury. The Department for Communities carried out a consultation for the Local Government pension scheme NI. Their approach remains identical to that proposed for the equivalent scheme in Britain.

Judicial Allowances

39 The judicial allowances measure will place the power to determine allowances for judicial office holders on a statutory footing. Allowances have been used to recognise work undertaken outside of a judge’s core work of hearing cases, such as providing leadership or significant support to other judges and courts administrative staff, to address temporary recruitment and retention problems, or to recognise temporary periods of additional responsibility. Allowances are useful as, unlike judicial salaries which are subject to statutory protection, they can be removed when the need for them falls away, for example, a judge stops undertaking leadership responsibilities, and so will be used to make temporary and ad-hoc payments where appropriate.

40 There are inconsistencies within current legislation in that the Lord Chancellor has a statutory power to determine provision of an allowance to some, but not all, judicial office holders for which the Lord Chancellor has the power to determine salary. This measure is therefore intended to resolve such inconsistencies by putting any residual common law powers in this area on a statutory footing and to ensure sufficient flexibility in judicial remuneration in certain specific circumstances, particularly where such remuneration is on a temporary basis.

Judicial Mandatory Retirement Age

41 The judicial mandatory retirement age (MRA) is the upper age at which judicial office holders, including judges, tribunals’ non-legal members, magistrates, and coroners, are required to vacate office. The MRA does not prevent judicial office holders from resigning or retiring earlier should they wish to.

42 The MRA may be seen as an important requirement of judicial office which helps to preserve public confidence in the health and capacity of those appointed, while protecting judicial independence by avoiding the need for individual assessments and the possibility of judicial office holders being removed at the whim of the Executive. It also supports judicial resource planning and promotes the diversity of the judiciary by ensuring a steady flow of new appointments.

43 Although retaining an MRA remains important for the above reasons, it has been over 25 years since the MRA was set at 70 for the majority of judicial office holders. Since then, the structure and operation of courts and tribunals have developed and so have the resourcing needs of the judiciary. Meanwhile, the average life expectancy in the UK has increased significantly and a greater number of people are now working for longer.

44 The UK Government consulted in 2020 on proposals to increase the MRA. Following careful consideration of over 1000 responses, the Government decided to raise the MRA to 75. This is intended to help ensure the judiciary can continue to meet the demands of courts and tribunals by retaining valuable judicial expertise for longer and attracting a greater number of potential candidates for judicial office from diverse backgrounds.

45 Unlike judges, there is no existing provision which allows magistrates to have their appointments extended beyond the current MRA. To further support the resourcing of magistrates’ courts, the Government have decided that, as part of the MRA increase, provision will be made to allow the reinstatement of those retired magistrates who are younger than 75 and who wish to return to continue sitting, where this is necessary to meet business needs.

46 The Scottish Government, the Welsh Government and the Department of Justice in Northern Ireland conducted separate consultations on similar proposals for those judicial office holders whose MRA is a devolved matter for their legislatures, and they have also decided to raise the MRA of those offices to 75. Their consultation response noted the importance of maintaining parity across the United Kingdom to preserve public confidence in the judiciary and ensure equal opportunities for judicial office holders across jurisdictions.

Sitting in retirement

47 Sitting in retirement (SIR) is the current policy which permits a salaried judge to retire from their salaried office, draw their pension in relation to that office, and continue to sit as a fee-paid judge if there is a business need to do so.

48 While salaried judges can apply to sit in retirement, this option is not equally available to fee-paid judges under current legislation. To remove this differential treatment and provide a policy which applies consistently across salaried and fee-paid offices, the Bill introduces a new judicial office to which both salaried and fee paid office holders in scope can apply on retirement.

49 While it is hoped that, in time, the changes to judicial pension and the higher MRA will lead to improvements in recruitment and retention of judicial office holders that will reduce the business need for judges to sit in retirement, drawing upon retired judicial office holders remains an important flexibility to help the judiciary meet immediate demands where there may be temporary shortages. Extending powers for judges to be appointed to sit in retirement to a wider range of judicial offices, including relevant fee-paid offices, is designed to enhance this flexibility.

UK Asset Resolution (UKAR)

50 The Bradford and Bingley Staff (BBS) Pension Scheme and NRAM Pension Scheme are two public sector pension schemes which respectively pay the pension payments and other benefits of former employees (and their beneficiaries) of Bradford & Bingley plc (B&B) and Northern Rock, two banks which were taken into public ownership as a result of the 2007-2008 financial crisis. 

51 The schemes previously resided under B&B and NRAM Limited (NRAM), two companies holding the mortgage and loan assets of B&B and Northern Rock that the Government acquired during the financial crisis. The Government has gradually been returning these assets to the private sector. The Government announced the final sale of B&B and NRAM and their remaining assets in February 2021. 6 As part of the sale, the liability for the payment of the pensions was novated from B&B and NRAM to the Government-owned holding company UK Asset Resolution (UKAR). 7  

52 The Treasury has a statutory obligation to guarantee that the assets in the BBS Pension Scheme are sufficient to meet the pension liabilities. 8 It has also extended this guarantee in relation to the NRAM Pension Scheme through a credit support deed in May 2019. 

53 The Government are now seeking to relieve UKAR of its remaining liabilities (including the BBS and NRAM pension schemes) such that UKAR may be wound down. 

54 In the 2020 Budget, the Treasury announced its intention to "create a new central Government pension scheme for the members of the BBS and NRAM schemes [and to] sell assets held by the NRAM and BBS schemes over 2023-24 and 2024-25, subject to the necessary legislation being brought forward, supportive market conditions and achieving value for money." 9  

55 This Bill confers the necessary powers upon the Treasury to effect this policy. It confers powers on the Treasury to create one or more public pension schemes to provide for pensions and benefits to and in respect of the members of BBS and NRAM pension schemes. It also confers powers on the Treasury to transfer the assets and liabilities of the BBS and NRAM schemes to Government.

56 The Bill also contains a number of related provisions, including provisions to ensure that affected individuals do not experience adverse treatment; and provisions to require the surrender of personal data necessary to effect the transfer.

1 Public Service Pensions: good pensions that last, November 2011, Cm 8214
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/205837/Public_Service_Pensions_-_good_pensions_that_last._Command_paper.pdf

2 Public Service Pensions Statement made on 15 July 2019 (HCWS1725): https://questions-statements.parliament.uk/written-statements/detail/2019-07-15/HCWS1725

3 Public service pension schemes: changes to the transitional arrangements to the 2015 schemes Consultation, CP 253, July 2020: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/900766/Public_Service_Pensions_Consultation.pdf

4 Public service pension schemes: changes to the transitional arrangements to the 2015 schemes Government response to consultation, CP373, February 2021: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/958635/Public_Sector_Pensions_Consultation_Response.pdf

5 Normal Pension Age is the age at which a pension scheme member can start taking pension benefits on a voluntary basis without any reductions. NPA is set in scheme rules. A member can retire voluntarily before NPA, as long as they are over their MPA, but will then face a reduction to their benefits.

6 ‘Government completes final £5 billion sale of Bradford & Bingley plc and NRAM Limited’, 26 February 2021
https://www.gov.uk/government/news/government-completes-final-5-billion-sale-of-bradford-bingley-plc-and-nram-limited

7 Glen, John, ‘Contingent Liability Notification’, 9 May 2019
https://questions-statements.parliament/uk/written-statements/detail/2019-05-09/hcws1553

8 See Article 26 and paragraph 10 of Schedule 3 to the Bradford and Bingley plc Transfer of Securities and Property etc Order 2008 (S.I. 2008/2546)

9 ‘Budget 2020’, HM Treasury, 11 March 2020, p. 101 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871799/Budget_2020_Web_Accessible_Complete.pdf

 

19 July 2021