On 4 February 2021 the Government published its response to the December 2018 Court of Appeal ruling that the transitional protection arrangements in place across public service pension schemes based on years from retirement constituted a form of unlawful discrimination on the basis of age, commonly known as the ‘McCloud-Sargeant case’. This box explored the potential fiscal impacts of the Government’s remedy, as it was not possible to reflect the costs directly in our March 2021 EFO due to remaining uncertainty around the schemes’ implementation of the response.
In February 2021 the Government published its response to the Public service pension schemes: changes to the transitional arrangements to the 2015 schemes consultation.a This consultation was in response to the December 2018 Court of Appeal ruling that the transitional protection arrangements in place across public service pension schemes gave rise to unlawful discrimination on the basis of age, commonly referred to as the McCloud-Sargeant case. The remedy the Government has chosen will have material implications for spending over the long term, since they allow affected scheme members to choose the most beneficial terms on which to calculate their retirement benefits at the point at which they retire. It is not yet clear precisely how individual schemes will implement this response, so it has not been possible to reflect it in our current forecast. This is therefore a policy risk that will raise spending at our next forecast.
The Government presented its own estimate of the long-term cost in the consultation, but did not
updated this in the February response.a This cost was estimated at £2.5 billion per year of affected accruals (also known as the remedy period, which runs from 1 April 2015 to 1 April 2022), giving a total cost of £17.5 billion.b This should not be confused with a public spending cost of £2.5 billion a year – this figure represents the discounted future cost of pension rights accrued in each year of the remedy period, but these will only begin to be paid once each affected member retires and will be spread over the period of their retirement.
This means that if the Government’s estimate of overall cost is a reasonable guide, the £17.5 billion will be spread over the next 60 to 70 years, with implementation unlikely to begin until October 2023 for most schemes. Approximately two thirds of affected scheme members are currently under 60 years of age and are therefore unlikely to retire and start drawing on their more generous pension payments within our present medium-term forecast horizon.
Members who have retired or died before these changes are implemented will require retrospective remediation. Such members would typically not have been in active service for the whole of the remedy period and as such they would be expected to receive a smaller additional benefit compared to future retirements. These retrospective benefits will be paid as a single backdated payment, although the exact scale and timing is uncertain. This is likely to mean that when costed, the remedy will involve relatively small annual costs over the medium term (perhaps in the low hundreds of millions), but with the potential for a somewhat larger spike at the point at which retrospective remediation payments are made.
This box was originally published in Economic and fiscal outlook – March 2021