Social Housing Speed Read – McCloud / Sergeant and the social housing sector
13th January, 2020
The McCloud / Sergeant cases were finally decided in June 2019 when the Supreme Court refused to grant permission for the Government to appeal the Court of Appeal's judgment in December 2018. Subsequently, in July 2019, the Government conceded that the judgment was applicable not only to the firefighters' and judges' schemes that were the subject-matter of the decision, but to all public sector pension schemes.
The transitional protection offered to certain members of public sector pension schemes, delaying their transition from old final salary schemes to new career average schemes in 2015, was determined to be discriminatory against younger members who did not qualify for the protection. Accordingly, these younger members who were transferred to the new schemes immediately stand to be compensated.
How this compensation will be calculated is yet to be determined. The employment tribunal has issued an Interim Declaration in relation to the firefighters’ scheme on 18 December 2019 and expects to issue a Final Declaration in July 2020. Other hearings in relation to other schemes have been scheduled in the first half of this year. The Interim Declaration provides some pointers, but it is far from comprehensive. Some central government guidance is expected during the course of this year on a scheme by scheme basis.
In any event, the compensation mechanism will have to clear two very tricky hurdles:
- there must be no reverse discrimination as a result of the compensation, i.e. the compensated members must not be better off than the transitionally protected members – as there was a sliding scale of protection, simply compensating to match the most protected members will cause the less protected members to be discriminated against in turn; and
- some of the discriminated class of members would actually be better off if left in their current arrangements (either as a result of accrual or tax treatment), so there must be an underpin (or a choice exercise) mechanism to permit compensated members to receive the better of their current benefits or their adjusted benefits.
How is this likely to affect members of the LGPS?
This all depends on how the compensation will be delivered: will this be reinstatement in the old scheme, additional accrual in the new scheme, or a cash payment? How can this compensation be delivered without there being adverse tax consequences (such as exceeding any annual or lifetime allowances, losing protected status, or having to pay income tax in a higher bracket or a benefit in kind charge)?
Dealing with active members will be complex enough, but there will also be affected pensioners, affected members who transferred out (or TUPE transferred to new employers), ex-spouses and ex-partners of affected members, and dependants of affected members who have passed away within the period when discrimination was taking place. The Interim Declaration mentioned above concentrated on:
- members without transitional protection who had taken (or who are in the process of claiming) ill-health early retirement during the discrimination period, but who were considered under the new scheme rules rather than the old; and
- members without transitional protection who were unable to take early retirement by reference to the “rule of 75” (age 50 plus 25 years’ service), or who have been deterred from applying for this, due to being considered under the new scheme rules rather than the old.
In both cases, the Interim Declaration requires these members to be treated as if still members of the old scheme rather than the new. Both of these situations have corollaries in the LGPS (e.g. the “rule of 85”), and it is very likely that LGPS members in comparable situations will be able to claim comparable remedies without having to wait for any official announcements. LGPS employers would do well to prepare by checking how many of their past and present employees may be affected.
Preparing for compensation, whether or not on the limited basis discussed above, will require a significant data gathering exercise to identify all recipients and quantify their entitlement. Clearly, such an exercise is unlikely to happen once and for all at a specified point in time. This is likely to be an ongoing identification and processing exercise, and there are likely to be many occasions for members to dispute the findings. It is likely also that there will be spurious claims depending on how robust the compensation model will be, and an increased workload for the internal dispute resolution process.
The biggest issue is that the LGPS is a funded pension scheme as opposed to all the other taxpayer-funded pay-as-you-go public sector pension schemes. This will make reinstatement in the old scheme particularly complex compared to the other taxpayer-funded public sector schemes (and hence it is likely that the LGPS will be treated differently overall). In particular, who is going to pay for the cost of the compensation itself and the cost of administering the compensation? It is likely that this burden will fall on the LGPS employers, even though this discrimination issue is a self-inflicted central Government error (the Government had been advised that discrimination problems would arise from their proposals, but decided to go ahead regardless in order to placate the unions).
How will this burden be shared between two or more employers of a given member who were employers during the discrimination period? Does the last employer hold the burden? Does the chain of liability have to be examined?
Once liability is established, how is the compensation to be funded? Will LGPS employers have to find the money out of their own resources? Will outsourced contractors be able to recover these costs from their contracting authority through the contract fee? And what about the liabilities of contractors that contracting authorities often guarantee?
Social housing considerations
For social housing employers this uncertainty constitutes a considerable risk. Current funding is unlikely to provide any wriggle room to carry out a complex and expensive compensation exercise. Funding applications for the future will have to take these additional liabilities into account despite not being in a position to quantify them with any certainty. Accounts in this year as well as future years will have to make provision for these additional liabilities (current practice is not consistent from local authority to local authority, let alone amongst private sector contractors and other bodies). Risk registers will have to be updated to identify immediate liabilities as well as liabilities that may arise as a result of any outsourcing of services and the terms of the outsourcing. Charities will have particular difficulties with these presently unquantifiable liabilities due to the constraints on their finances.
Should you require any assistance in dealing with these issues, please contact John Murray for the social housing perspective or Tristan Mander for the pensions perspective.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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