Official Report: Minutes of Evidence

The Deputy Chairperson (Mr Frew): I welcome to the Committee, via StarLeaf, Grace Nesbitt, director of pensions provision; Blathnaid Smyth, assistant director of public service pensions; and Stephen Ball, public service pensions policy and legislation branch. Thank you for your attendance. The evidence session will be reported by Hansard. Grace, I invite you to make your opening statement.

Mrs Grace Nesbitt (Department of Finance): Thank you, Chair and members. I declare an interest as a member of a public service pension scheme, as are my colleagues. It is appropriate that that is registered.

My opening remarks will be brief, as I provided the Committee with a full overview at my previous appearance to set the context. In addition, there was an evidence session on this matter on 4 November, and written updates were provided to members on the outcome of the consultation and the next steps.

The key points from the latest briefing, which includes further analysis of the consultation responses on the main proposal, can be divided into retrospective and prospective. On retrospective, the consultation addressed unlawful discrimination in public service pension schemes since 2015 by providing affected members with the choice for legacy or reformed scheme terms for service from April 2015 to March 2022. The choices are termed immediate choice (IC) or deferred choice underpin (DCU) and relate to when members make the decision about how that period of service should be treated. Prospective is about removing unlawful discrimination in the reformed schemes in the future for all service from 2022.

On retrospective, the overwhelming majority view was that immediate choice would present an unacceptably high level of risk from members making ill-informed or wrong decisions that will have been based on estimates. Conversely, most respondents felt that the deferred choice underpin provided members with more real-world certainty about their entitlements as it would be based on factual information about earnings and personal circumstances that would be available at their chosen point, which, for most members, would be retirement. The Department considered all the responses and considers, therefore, that the deferred choice underpin represents the fairest option to ensure that members have the appropriate choice, clarity and control concerning their remedy period entitlements, while comprehensively removing age discrimination.

On prospective, a wide variety of views was expressed on the proposal to remove discrimination and maintain equality of treatment for the future by ensuring that all members will accrue benefits in the reformed schemes from April 2022 only. Some respondents agreed that that approach would ensure equality of treatment, and others felt that those previously protected should, nevertheless, be allowed to remain in the legacy schemes indefinitely. That was often articulated alongside continued opposition to the original reforms that were introduced in 2015. Where responses argued for continued membership of the legacy schemes, the reasoning provided did not demonstrate how that would better resolve the unlawful discrimination rather than perpetuate it through the continued use of an unlawful age-based difference in treatment. The Department considered all responses received on the issue, and its view remains that the proposed approach to reaffirm the reformed schemes for all future service ensures that all members are treated equally in respect of the scheme design available to them after the discrimination identified by the courts has been addressed. It would not resolve the unlawful discrimination if some members of the public-sector schemes and not others continued to be in the legacy schemes after April 2022 as that difference in treatment would still be attributed to unjustified age-based criteria.

The Department's policy approach resolved the age discrimination for Northern Ireland public servants in the same way to that adopted by Treasury for members of other public service schemes in Great Britain. To deviate from that approach or to grant continued legacy scheme membership for any sector within the devolved schemes would require bespoke funding provision from the block grant. That would also leave the schemes in question extremely vulnerable to further costly legal challenge, and it would not resolve the discrimination issue.

As its next steps, the Department now proposes to implement the deferred choice underpin and to reaffirm the reform schemes for future service in primary legislation. That will require changes to the Public Service Pensions Act (Northern Ireland) 2014. The Department's view is that a legislative consent motion, which will, of course, be subject to Executive and Assembly approval, would represent the most efficient way to accomplish that. My team and I will continue to meet key stakeholders, including all the public-sector trade unions. I am happy to take questions from the Committee.

The Deputy Chairperson (Mr Frew): OK, Grace, thank you very much for your presentation and your time here today. I have a number of questions, as do other members.

Has the Department any leeway in respect of the changes to public-sector pensions that it must make in order to maintain parity with the rest of the UK? What flexibilities are there for individual schemes?

Mrs Nesbitt: Public-sector pensions in Northern Ireland are a devolved matter. In general, however, the policy has been to maintain parity with the counterpart schemes in Great Britain, and that has served well over many decades. There is flexibility in the design of secondary schemes, but, on this issue, the general view has been that we would wish to keep in step with our counterparts throughout the United Kingdom. There is a lot of common sense behind that. That is why, on this issue, the view would be that we would go with, for example, a legislative consent motion to change the primary legislation.

My colleagues and I were chatting earlier about the introduction of pension reform when we had our primary legislation here. When we look back, we see the substance of that legislation was very much the same as the primary legislation that was introduced in Great Britain. Our schemes are very much the same. The question that we should be asking is: why would we want to do something differently?

The Deputy Chairperson (Mr Frew): Yes. Can you explain why you are obliged to charge interest on the difference between contribution levels for employees who may choose a legacy scheme over a reform scheme? Is that to keep parity with the United Kingdom?

Mrs Nesbitt: I am not quite sure what you mean by "charge interest", Chair.

The Deputy Chairperson (Mr Frew): Looking through your briefing paper, I think that the Fire Service raised the issue of contribution levels in the different schemes. If you are on one scheme and you change to the other scheme that may be advantageous to you, is it the case that the Department is charging interest on that?

Mr Wells: It is just that the contributions are charged at a higher level. I understand the confusion.

Mrs Nesbitt: Right; I am sorry, Chair. Some pension arrangements have different levels of employee contributions. If your choice of a legacy or a reform scheme has different employee contributions, of course you will have to pay the difference, which would be fair. However, you are not being charged interest per se, if that makes sense.

The Deputy Chairperson (Mr Frew): OK. Is that the case right across the UK?

Mrs Nesbitt: If the pension scheme that you opt for has a different level of employee contribution, of course you will have to pay that contribution amount. However, not all schemes have that. For example, in the two main Civil Service schemes — the reform career average scheme is known as alpha and the final salary scheme is known as classic — the rates of employee contributions from 2015 are identical. Therefore, that is a non-issue for the Civil Service schemes. However, there are different rates of employee contributions for schemes other than the final salary scheme and the career average scheme. There are differences between each public service pension scheme. I do not know whether my colleagues, Blathnaid or Stephen, want to elaborate on that.

Mr Stephen Ball (Department of Finance): Yes. In some circumstances and occasions, interest would be applied. Currently, it applies under different rates across different schemes. It was deemed more appropriate in this instance to levy a universal interest rate. There are reasons for equality included in that, in that members who were not subject to discrimination may have paid a certain level of contribution, and it was deemed appropriate that interest be applied so that there is no difference in benefits as a consequence.

Interest will also be paid where contributions have been overpaid. That will also be set with a universal rate, again to ensure that there is equality among members and that nobody is treated differently.

The Deputy Chairperson (Mr Frew): OK. Thank you very much.

Mr Wells: First, Grace, can I get the name of your internet provider, because your message has come over crystal clear? That is unusual on StarLeaf. [Laughter.]

It would be helpful to know why your —.

Mrs Nesbitt: I could not possibly comment; it would be seen as advertising. [Laughter.]

Mr Wells: Do slip the name of your provider in afterwards. It is refreshing to see something so clear.

Sad person that I was, I hung on every word of your presentation on the issue before Christmas. I declare a huge conflict of interest. I am the chair of the Assembly pension scheme, and I think that everybody in the room is a member of either the Assembly pension scheme or an affiliate scheme. It is a final salary pension scheme, or it was before the changes.

First, are we in line with the other devolved Administrations? Have Scotland and Wales proposed a similar change to meet the changes set down by the McCloud judgement?

Mrs Nesbitt: Identical.

Mr Wells: Right. That heads off a lot of questions immediately.

Mrs Nesbitt: Great [Laughter.]

Mr Wells: In other words, you are saying to us that we are more or less bound. If GB generally, England, Westminster and the two other devolved Administrations have all adopted that approach up to March 2022, we would have great difficulty stepping aside from it.

Mrs Nesbitt: To answer your question — I was going to say truthfully, but I am always truthful, or I certainly aim to be —

we have the power to do something different because pensions are a devolved matter; in practice, however, my strong advice would be not to do so for lots of very good, sensible and practical reasons. Most of those would be for the benefit of scheme members and the cost to the public purse. My challenge would be and the question that I would ask myself is, "Why would we?". Having worked in pensions since 2008, I cannot come up with a good answer why we would do something different on this occasion.

Mr Wells: A good answer would be that there are employees in very difficult situations, such as those who work in the police, who signed contracts many years ago to go into a job that could have been quite dangerous at the time and had all the risks, with families being moved overnight and people being attacked in the streets. One of the reasons why they went into the old RUC scheme, which became the PSNI scheme, was that it was a final salary scheme based on their last three years' earnings. That was an important reason why they went into that profession.

Mrs Nesbitt: Yes.

Mr Wells: They could have done something a lot easier. They are saying to me — some of them are saying to me — that it is a breach of contract. If they went into a difficult job and assumed that a final salary scheme, with retirement at 60 in some cases, was an integral part of their contracts, what right have we, at Stormont, if we have the power, to break that contract?

Mrs Nesbitt: I have huge sympathy for those who work in the police and other public service workers; they provide a great service, and I admire them for it. That is one of the reasons why I work in pensions. As I often say to my staff, we do a great job and provide for public servants and their dependents. I am very committed to public service and public servants, so I caveat my responses with that.

However, there is a cost to that. The issue of whether final salary schemes would continue for public servants, including the police, was dealt with and dispensed with. When I say, "dispensed with", please take that in the right context. I do not mean that harshly, and I say it with compassion for those who work in the police and, indeed, other public servants. So, please do not take that as my being harsh or in any way lacking in compassion for those working in the police or other public servants. I do not mean that in that way at all, Mr Wells. I have huge sympathy.

However, that argument was put forward and was dealt with when it was decided that public service pensions needed to be reformed, and they needed reformed for a good reason. They needed to be reformed to make them sustainable, and I regard that as precious because we want to keep pensions for public servants, but all our public servants, including the police. The particular issue that we are dealing with is transitional protection. In that sense, it is a narrow issue that was found to be discriminatory, and these issues that we are dealing with are to remove the discrimination associated with the transitional protections.

The Court of Appeal did not find that pension reform per se was discriminatory; it found that the particular issue of transitional protection was discriminatory, and that is the issue that is being dealt with. The argument for pension reform still stands, as, I would argue very strongly, does the argument for maintaining public service pensions.

That is the best answer that I can give. I am committed to maintaining public service pensions, and that is what we intend to do. That leads on to the second point that I made about the future and maintaining public service pensions, and the prospective issue that we dealt with in the consultation.

I trust that that provides some clarity as to the thinking behind that, and the intention going forward.

Mr Wells: Unfortunately, it does. I find your arguments persuasive, which grieves me, but I think that, yes, you are right. At the last hearing, however, you said that if we as an Assembly decided, as we have the power, not to go down the legislative consent route but to have our own legislation, we would have to pick up the tab for that decision. It is unlikely that Westminster would fund any decision that we made to maintain final salary legacy pensions for public servants.

You quoted a figure of roughly £300 million. You said that you could not stand over it, and I understand that. Has there been any further refinement as to what it would cost the Northern Ireland Assembly if we decided that we wanted to retain final salary schemes for all who are already in them up to retirement, on even an annual basis?

Mrs Nesbitt: No, there has not, but the figure would be significant. Again, that issue was dealt with when pension reform was introduced. We know that the cost of the remedy is about £100 million per year, which is a significant figure.

Public service pensions are a huge cost, and delay in implementing any changes is a huge amount of money and a huge cost. There is a balance to be struck by how much we spend on providing sustainable pensions to public servants and how much we spend on providing public services. It is important that we get that right because they are all provided for by the taxpayer. It is vital that we strike the right balance and manage the limited resources that we have for public expenditure right across the United Kingdom.

Mr Wells: You took widespread consultation responses on the immediate/deferred choice.

Mrs Nesbitt: Yes.

Mr Wells: I think that the overwhelming response was that members of pension schemes could make that decision at the crucial stage when they decide how to take their pension.

Mrs Nesbitt: Yes.

Mr Wells: Was there any opposition to that idea? Do any complexities or problems arise from it? It would mean that the vast majority of people will not make that decision until they reach 60 or 65 or, indeed, 66. Is there any downside to that? It seems too good to be true that that option can be offered to everybody.

Mrs Nesbitt: Wearing my Civil Service administration hat, the huge downside is to pension administrators, because it means, in a sense, that we will have to run dual systems until everybody works their way through. One example is when a life event, as we term it in pensions, occurs. When, for example, somebody wishes to medically retire, we will to have to do double the work, but that is fine; that is what the decision will be. We will have to give somebody their option on what that particular period of service would look like. Using the Civil Service terms for ease, what would that period of service look like should they take their benefits under alpha or what would the option look like should they take that period of service under classic? It will have significant implications for administrators. That is the main issue. There is a huge plus for members, as it gives them certainty, but it certainly has implications for scheme administrators across the public service.

Mr Wells: You said that, if we agree with everything that you say — you have been very persuasive — it will cost us £100 million just to do that. That is not to enhance anybody's pension but, just to carry out what you are recommending through the legislative consent motion, we will have to pick up the tab of £100 million.

Mrs Nesbitt: The costs will be met by the scheme. Blathnaid will provide you with more details on the cost mechanism.

Mrs Blathnaid Smyth (Department of Finance): Mr Wells, that £100 million would be identified in the scheme valuations for the public-sector schemes, and it will be identified as an employee cost, so it will form part of the calculations that work out what the employer and employee costs of McCloud are. The McCloud costs are over a period of seven years, and they will be reflected in the reworking of the 2016 valuations, so it will apply then over four years.

Mr Catney: Will the unaffected employees have to subsidise employees who benefit from the changes?

Mrs Smyth: All employees will have the choice of whichever scheme benefits they want to take and the better scheme benefits. The employee contribution rate will be set following the valuation, and there is no change in employer contributions. They were set in 2019 for the period 2019-2023, and there are no plans to change that rate. The outcome of valuations and the impact on employees will not be known until the cost cap has been reworked on the 2016 valuations. We expect the results of those imminently through some indicative findings. We are drafting directions for the completion of the cost-cap calculations in the 2016 valuations, and we will have results shortly after that. It is not expected that there will be any increase in employee contributions.

The Deputy Chairperson (Mr Frew): If there is no increase and there is no charge on employers, I take it that unaffected employees will not have to subsidise anything or add to the burden or share.

Mrs Smyth: No, they will not be paying anything additional. I think where some employees may see a perceived difference is that the initial valuations had indicated breaches to the cost-cap floor, but they were the first valuations where the cost cap mechanism was applied, and the Government had doubts that it was fit for purpose. As a result, they have asked the Government Actuary's Department to review the cost-cap mechanism. That is an ongoing review on which we expect to hear an outcome, initially in draft form, some time in April. Obviously, changes would then be consulted on by the Government. That is a central Westminster Government process.

The Deputy Chairperson (Mr Frew): I think that I am right in hearing that, with voluntary members' contributions, where members may pay extra at any given time to retire early or where people resolve to go out on ill-health retirement issues, those things will not really be resolved in the lifetime of the recipients in the schemes.

Mrs Smyth: There is a huge piece of work ongoing on all the complexities of the pension schemes, such as additional years, whether they can be transferred into cash-equivalent transfer values, and how they should be applied. Those will be centrally agreed policies so that the outgoings of the schemes can be treated equitably across the UK. There is a huge amount of policy development going on on the finer detail of the complexities of applying a remedy, whether that is under immediate choice or deferred choice underpin, but, obviously, the decision is for deferred choice underpin. It also involves working with HMRC, because there are a lot of tax complications to applying remedy for the schemes, giving choice and applying remedy, retrospectively, for the period to 2015. Tax is not a devolved matter, so the same tax rules will apply here as apply across the UK.

The Deputy Chairperson (Mr Frew): I think that I understand this a wee bit. If there is no burden on employees or the employer, who pays for the extra awards? Is it anticipated that it will be cost-neutral through the lifetime of the scheme? Who gets the burden of cost?

Mrs Smyth: It is worked out on the scheme valuation. Before McCloud had to be taken into account, initial 2016 valuations showed significant floor breaches when the calculation was done on the cost-cap mechanism. The outworking of a floor breach would be that the scheme advisory boards would have to advise the Minister on changes to the scheme, which could be an increase in scheme benefits or a decrease in contribution rates. Therefore something that looks like a good outcome for members might not be when the McCloud costs are taken into account. The detail, per scheme, of their final calculation is not yet available, but we know how it looks. They have identified costs for McCloud, and they are taking it into account in the scheme valuations.

Employers had an increase in contribution rates from 2019; they have been paying that since 2019 and will be until 2023. It was set on the understanding that they would bear some of the costs of the breach. They therefore had an increase. That was applied because, at that stage, it was known that McCloud was on the horizon and that costs would have to be absorbed for it.

The Deputy Chairperson (Mr Frew): There are still a lot of variables in the system, even at this stage.

Mrs Smyth: There are. Changes in primary legislation are required. A pension schemes Bill to make amendments to the Public Service Pensions Act 2013 in GB and our 2014 Act will be required to close the schemes down to future accrual after 2022 and to ensure that all members are moved into the new schemes from April 2022. That primary legislation is required, but there will also be regulation changes required at scheme level. There will be two sets of changes, because regulation changes will be required to make the prospective changes for people moving into the 2022 scheme and for retrospective changes to apply the deferred choice underpin remedy solution for 2015 to 2022. They will be consulted on locally for our schemes.

The Deputy Chairperson (Mr Frew): I suspect that there will be a sequence of events for that, starting with the LCM, then primary legislation in the Assembly, and then the regulations that will come out of that, which will be the two sets that you have just outlined: one for forthcoming regulations and one for retrospective regulations. Have we a timescale for any of that, most importantly, the LCM?

Mrs Smyth: There is a broad timeline. Obviously, before we sought Executive approval for an LCM, we would have to know about the content of the proposed Westminster primary legislation. That is in its early stages and there are drafting instructions, but we have not yet seen a draft Bill. Once we have further detail as to what will be in that primary legislation, we will do a paper for the Executive and seek their approval for a legislative consent motion in the Assembly.

There will be a tight time frame should we do that. The primary legislation needs to be through before 1 April 2022. If a legislative consent motion was not approved, our only other option would be to take primary legislation through the Assembly, but that would be doing the same thing as the Westminster Bill. The time frame for getting that done in this mandate for April 2022 will be very tight.

The Deputy Chairperson (Mr Frew): Yes. We will also have the end of the mandate to contend with. Just so that I am clear, and for the record: we have the LCM which is, for all intents and purposes, the way to go. Are you also saying that we need primary legislation in Northern Ireland to complement that?

Mrs Smyth: No, we would not need additional primary legislation.

The Deputy Chairperson (Mr Frew): Right, OK. So, then, we go straight into the two sets of regulations that you spoke about.

Mrs Smyth: Yes, that is right.

Mr Frew: OK, thanks very much for that clarification, Blathnaid. No other members want to come in. Jim has sucked up all the questions. He is a font of knowledge on pensions.

Mr Wells: I just want Grace's job. You have one of the best jobs in the country, Grace; I want your job. [Laughter.]

Mrs Nesbitt: I must admit that I love it.

The Deputy Chairperson (Mr Frew): It was a pleasure to meet you all again. Thank you very much for your time and for being with us today.

Mrs Nesbitt: Thank you very much.

Mrs Smyth: Thank you.