Official Report: Minutes of Evidence

Committee for Finance, meeting on Wednesday, 4 November 2020

Members present for all or part of the proceedings:

Dr Steve Aiken OBE (Chairperson)
Mr Paul Frew (Deputy Chairperson)
Mr Jim Allister KC
Mr Pat Catney
Miss Jemma Dolan
Mr Philip McGuigan
Mr Maolíosa McHugh
Mr Matthew O'Toole
Mr Jim Wells


, Department of Finance
, Department of Finance

Consultation and Changes to the Transitional Arrangements 2015 Scheme: Department of Finance

The Chairperson (Dr Aiken): Blathnaid, would you care to make an opening statement, please?

Mrs Blathnaid Smyth (Department of Finance): I will, surely, and it will be a short one. I welcome the opportunity to update the Committee on the current consultation. Our correspondence to the Committee on 17 August set out the main background and rationale for the proposed changes that are detailed in the consultation. A further briefing was provided in advance of today's meeting.

Committee members are now likely to be familiar with the background to the issue. The transitional protection element of the 2015 reforms was deemed discriminatory on the grounds of age by the courts, so we now need to remedy that position both retrospectively from 2015 and by removing discrimination for the future. DOF is consulting on the options to deliver that. The options would enable eligible members to choose to retain the benefits of the legacy scheme or of the reformed scheme. If they are in the reformed scheme, they can return to the legacy scheme. If they have been protected and are in the legacy scheme, they will have access to the reformed scheme, so it is about whichever benefits suit them best. To remove the discrimination for the future, all members of schemes will accrue benefits only in the new reformed scheme. That will happen from April 2022. That date is set as the earliest date when it is deemed that the legislative changes could be made to implement it.

I will provide you with an update on our consultation to date. We have had 216 responses, mainly from private individuals, although a few organisations have now responded as well. The consultation launched on 19 August and is open until 18 November. We have some campaign responses out of the 216, and 67 of those are one template letter from people in the health scheme.

The Chairperson (Dr Aiken): Most of us, as MLAs, have probably had sight of some of that correspondence, because many of our MLA offices have been contacted on these issues as well.

Mrs Smyth: Yes, and we have dealt with quite a bit of correspondence coming through for our Minister.

On trade union engagement, we are coordinating the central policy consultation with employee representatives through our collective consultation working group (CCWG), which is the recognised forum for consultation on public service pensions policy. We had meetings throughout September and October and are scheduled to meet again next week prior to the close of the consultation. We have facilitated relevant experts at those meetings to update the unions. We had a Treasury tax expert at the last meeting, and the Government Actuary's Department also attended to talk about the cost implications.

Following the end of the consultation, our next steps will be to analyse the results and publish a response on the issues that were raised, and the Minister will update the Executive on firm proposals for remedy. The legislative options will also then be considered. There are tight deadlines to do this, with the end of the remedy period being 31 March 2022.

I am happy to take questions on anything to do with the consultation.

Mr Wells: We have, obviously, had a lot of correspondence from constituents about this issue, including from people in the security forces. You picked the date of March 2022. Is that in line with those in the rest of the UK? Are they all going for the same date?

Mrs Smyth: It is. That is in line with the UK.

Mr Wells: What would happen if the legislation was not through in time? Would it be extended to 2023?

Mrs Smyth: It would have to be extended if we did not have legislation through. It is the date that they proposed at Treasury. They are going to take a Bill through Westminster. Even on that, there are questions about whether it is achievable, but that is the current target date.

Mr Wells: That will still leave people who took up employment on the basis of a final salary scheme and who from 31 March 2022 will go into what you call the reformed scheme. Let us be honest; the reformed scheme is a lot less beneficial to most pension holders than the final salary scheme. It is a career average —.

Mrs Smyth: It is a career average scheme. The legacy scheme, or the final salary scheme, is more beneficial for most but not for all. That is why two options are being considered. To satisfy what the courts require, you just have to remove the transitional protection and put everybody back in the old scheme, but some people will actually have accrued better benefits in the new scheme and will be better off. That is why there are two options.

Mr Wells: The simple solution to that is to, on 31 March 2020, give everybody the option of either staying in a final salary scheme or a career average scheme.

Mrs Smyth: In 2020?

Mr Wells: On 31 March 2020. That would allow people to have that flexibility so that those who wish to stay permanently in a final salary pension scheme can do so. After the 31 March 2020 they have not got that option.

Mrs Smyth: It is 2022.

Mr Wells: Sorry, 2022.

Mrs Smyth: The case for the reform of pensions still stands. That was clearly set out by Lord Hutton and was about making them sustainable and fair to the taxpayer. Reforms were required because increased longevity and increased costs in pensions were having a severe impact. Those reforms were not subject to the current litigation, where the discrimination was identified. It is only the transitional protection element of the reform that is in question; the other reforms still stand.

Mr Wells: There is not a lot of satisfaction with this cut-off date, but let us assume that it becomes law. How much will it cost, and who is going to pay for it?

Mrs Smyth: Do you mean the cost of the actual remedy period and giving the option? In the consultation document a cost of £100 million per year is given, so —.

Mr Wells: Is that to the Northern Ireland block grant?

Mrs Smyth: No, that is a cost in the public service schemes for Northern Ireland. It is £100 million per year, so it is £700 million altogether over the seven-year remedy period. It is a broad-brush approach because we do not know the outcomes. These costs are calculated in the valuations of the schemes. The 2016 valuation has a cost-cap mechanism. The cost cap was paused at that stage. The indicative outcomes of the valuations looked like they were going to be a real windfall in that they breached the floor of the cost-cap mechanism, meaning that schemes would then have to decide whether they decreased contributions or increased scheme benefits. Now that the remedy is in the picture and people are getting a choice of benefit, there will be an increase in employee costs.

The Chairperson (Dr Aiken): Do we know what that increase is going to be?

Mrs Smyth: That was the broad-brush impact of £100 million across all public-sector schemes. That will factored in to the valuation process as an employee cost, and the cost-cap mechanism will be reapplied then. We do not know yet what the outcome will be. It is likely to be not so much a windfall but something that falls within the 2% tolerance for the cost-cap mechanism. It could fall below, or it could fall above that, but that depends on the outcome of the consultation, at which stage we would write directions for the completion of the valuations. Those directions are also subject to consultation.

The Chairperson (Dr Aiken): Obviously, that might go the other way, but I do not think that it will, so it will be a 2% increase. Some people have a contribution of 8%, and some pay a 4% contribution. Is that an average 2% increased contribution?

Mrs Smyth: No, the 2% that I referred to is a tolerance on the cost cap. A percentage rate is set with an actuarial calculation of the cost cap of the scheme.

In the valuation, if the cost cap is breached by more than 2% below or above, some sort of —

Mrs Smyth: — adjustment has to be made. That adjustment can be made by either increasing —

The Chairperson (Dr Aiken): Contributions or reducing the benefits.

Mrs Smyth: — the benefits, impacting the contributions or a combination of both. We are not suggesting that there will be a 2% increase in employee contributions because of this — not at all.

The Chairperson (Dr Aiken): OK. Sorry, that was just a small point.

Mr Wells: At the end of the day, if there is an extra cost, who will bear that? Will it come directly from Westminster, or will our Departments have to bear it?

Mrs Smyth: It is not the Departments as such; it is identified as an employee cost in the valuations. The employer costs for the 2016 valuation were set from 2019 to 2023 and will not change before 2023.

Mr Wells: You have lost me.

Mrs Smyth: It is a balance of employee and employer costs.

Mr Wells: Yes, so if there are additional employer costs —

Mr Wells: — who will that come from? Will it come through directly as a Barnett consequential from Westminster so that we get the extra money, or will we be expected to dip into our Departments' budgets to pay it?

Mrs Smyth: We do not know that there will be an employer cost, because that rate has already been set until 2023. The employer cost will be set in 2023 at the earliest after the 2020 valuations, and other things could impact that. I could not say that there would be a McCloud impact on that. What will impact on it is the superannuation contributions adjusted for past experience (SCAPE) discount rate. There is a scheduled review of the methodology for the SCAPE discount and a review of the rate of the SCAPE discount. We also had a decrease in the SCAPE discount rate at the last valuation, which put employer rates up. For part of that we got funding from Treasury, and part of it had to be absorbed.

Mr Wells: In saying all that, why have you not included the option of allowing those who entered in to a final salary scheme in good faith — I am thinking about a police constable, for instance — and expected to be in a final salary scheme until the end of their career and retire at 60 on a final salary scheme to choose? What was wrong with the option of including that as a potential scenario, where, in other words, you could have the 2022 option or go on to the end of your career if you want?

Mrs Smyth: Because the case for the reform of public service pensions still stands. It was agreed by the Assembly in the Public Services Pensions Act (Northern Ireland) 2014. Removing the transitional protection element of those reforms is all that has to be addressed at this stage.

Mr Wells: Are we bound by whatever Westminster decides to do on this? In other words, can we decide to be more flexible or generous, or are we stuck with whatever England, Scotland and Wales do?

Mrs Smyth: Public service pensions are devolved to the Department of Finance here with the Public Services Pensions Act (Northern Ireland) 2014. When we brought through that reform, there was a very strong message from Treasury that, if we did something differently or did not implement those reforms, there would be a financial penalty to the NI block grant.

The Chairperson (Dr Aiken): That was the extent of Her Majesty's Treasury taking into account our views when designing the consultation.

Mr Wells: In other words, what you are saying is that we have no choice. Our Departments could not afford that.

Mrs Smyth: No, you would not want to impact the NI block grant. There are good reasons why we apply the same things or similar schemes in GB. It is the same legislation, and only tweaks are made for Northern Ireland.

The Chairperson (Dr Aiken): We could also work on the principle that the Treasury will listen respectfully to what we say and go ahead with it anyhow.

Mrs Smyth: We are doing our own consultation to take on board the views of Northern Ireland stakeholders.

Mr Frew: Thank you for your presentation. Like Jim, you have lost me, but that is not your fault [Laughter.]

You are clearly on top of your game and the detail, and I am not, so please excuse my ignorance.

Can I be provocative for one moment in my questioning and try to tease some detail out? If we are asking the employees to share some of the costs of the valuations, are we really saying, "We have discriminated against you, and we are going to stop discriminating against you, but it will cost you"? Is that really what we are saying?

Mrs Smyth: It is a situation where you get what you pay for. If you are given the choice to have higher benefits, that means a higher employee cost in the calculation.

Mr Frew: So, the employee has a choice of whether they go for the repaired scheme or a more lucrative scheme, because that is different —.

Mrs Smyth: Yes. "More lucrative" comes down to a personal choice.

Mrs Smyth: There are scheme benefits that would be more attractive to one person than to another depending on whether they have dependents and whether they want to have an automatic lump sum at retirement or to commute some pension into a lump sum. They are just two very different schemes. When the career average schemes were introduced, they were seen to very much benefit lower-paid people and people with a more static career path, whereas final salary schemes were very generous to people who flew up through the ranks.

Mr Frew: The discrimination has now been shown and declared on. Even with the choices, the new repaired scheme will completely do away with the discrimination that people have faced.

Mrs Smyth: Yes. The repaired scheme that you refer to will be the new career average reform schemes that have been introduced since 2015. The discrimination will be removed because everybody will be in them. You are not given a choice related to age; somebody could stay in the legacy scheme because they are older. That is the whole point of this.

Mr Allister: McCloud was based on the fact that there was age discrimination. The answer to that was to give people the option of reverting to the final salary scheme but only until 2022. Will that not mean that the age discrimination will resume in 2022?

Mrs Smyth: Not when everybody is treated the same and is in the same scheme.

Mr Allister: Everybody was in it in the sense that everybody was moved on to the career average scheme.

Mrs Smyth: But not everybody moved on to the career average scheme. There was an age-related provision whereby people who were aged 50 or within 10 years of their normal pension age on 31 March 2012 could just stay in their legacy scheme. There was also some tapered protection that was age-related so that people maybe got to stay in the legacy scheme longer. However, if you did not fall into those age-related criteria on 31 March 2012, you automatically moved in to the new scheme.

Mr Allister: Jim Wells referred to the policeman. Take the policeman who joined when it was a final salary scheme. Recent recruits, for example, will probably always have been on the career average scheme. Once it reverts to everyone being on the career average scheme, surely the older person who joined sooner is being prejudiced because of his age.

Mrs Smyth: All the benefits that they had accrued in the final salary scheme are protected.

Mr Allister: Yes, but he cannot go on accruing. That was the legitimate expectation.

Mrs Smyth: No. If they fell into that age group, there would be a combined thing where they would have the final salary scheme. It is also linked to their final salary. If you had somebody who had final salary of 20 or 30 years up to 2015 and then did not retire until 2025, it would be their final salary at 2025 that their 20 or 30 years' service would be based on. Their final salary scheme would be based on that service. It is not that it shuts down and that that is what your salary is and then you are moved over; it is that it is your final salary when you retire that impacts on it.

Mr Allister: For that portion.

Mrs Smyth: Yes, for what scheme benefits you have and what service you have accrued for your final salary scheme.

Mr Allister: What about the fact that, when someone joined a particular service, they had a legitimate expectation that the pension scheme on offer would continue to be the pension scheme? That is just tough, is it?

Mrs Smyth: Yes. The reforms were deemed necessary. They were agreed in both Westminster and the Northern Ireland Assembly.

Mr Stephen Ball (Department of Finance): On that point, the normal approach for pension reform is that these changes would be introduced from a future date and would affect new entrants from a future date. As Blathnaid highlighted, one of the main recommendations of the Hutton commission was that all members moved over to the career average schemes. However, during the negotiations on the design of the new scheme, it was decided that they would introduce quite an obvious age discrimination to enable those people who were within 10 years of their retirement age to remain in the schemes. The Government's position was that that was a legitimate aim to protect those people closest to retirement and that it was a proportionate means of doing so. I think that that is the point about the discrimination. The courts have now found that the Government at the time have not demonstrated that that was a legitimate aim and was a proportionate means of protecting those people from the effects of the reforms.

The Chairperson (Dr Aiken): If I might be so bold, I will say that the age profile in the Northern Ireland Civil Service, of course, and the fact that not very many people are joining should be considered. The fact that people go in to the new scheme as they join means that there has been a considerable gap. The expense of people remaining in the original scheme is significant, so there is an imperative to get people moving in to the new scheme.

Mrs Smyth: That is obviously just one of the schemes. In this consultation, we are looking across all the —.

The Chairperson (Dr Aiken): The Police Service of Northern Ireland will have younger people coming through the system, but other organisations have not been recruiting for a considerable period.

I apologise, Maolíosa: tell me exactly how to say your name correctly.

Mr McHugh: Maolíosa.

Mr Wells: Sorry, I am also interested because —.

The Chairperson (Dr Aiken): We genuinely do not want to give offence. How do we say it correctly?

Mr Wells: Just give it to us again.

Mr McHugh: Maolíosa.

Mr Wells: Maolíosa.

The Chairperson (Dr Aiken): Maolíosa. OK. I apologise profusely for getting your name wrong, Maolíosa.

Mr McHugh: Tá fáilte romhaibh anseo an tráthnóna seo. You are very welcome here this evening, agus gabhaim buíochas as do ráiteas sin fosta. Thank you for your statement; it has helped to clarify things for me.

It is to be commended that people at least now have a choice between two schemes that have existed in parallel. However, it is unfortunate that employees will have to carry the cost of the remedy, that is, them and the employer. Is there any suggestion about the proportion of that cost that will be borne by employees?

Mrs Smyth: You are really asking whether we know if there will be a change in their contribution rate.

Mr McHugh: Exactly.

Mrs Smyth: That will all be in the outworkings of a scheme valuation. The likely outcome is that there will be no change, but we do not know. When we have the result of this consultation, decide whether we go with immediate choice or deferred choice underpin, and write directions that will enable the valuations for 2016 to be completed and the cost-cap calculation to be redone, we will know the impact on the results of the valuations. Before McCloud costs were taken into account, the previous valuations indicated that there would be a breach to the floor.

This was the first valuation round where we had this cost-cap mechanism in place. It was not expected that any scheme would fall any more than 2% above or below this stated figure; it is different for each scheme. Taking into account the McCloud costs, they are more likely to not have such a significant floor breach. However, I cannot really say whether there will be a breach in the ceiling or a breach in the floor or whether it will fall between the 2% tolerance on each side of the cost cap.

Mr McHugh: Go raibh maith agat. Thank you.

Mr O'Toole: Thank you, Blathnaid and Stephen for your evidence. To get the basics right, what parts of the scheme are you consulting on? Is it the design? You have said that the principle is happening.

Mrs Smyth: With the consultation document, it is more about the timing. It is not about what is going to happen; it is about when it is going to happen. The policy is set that there will be a choice, and that is above and beyond what is required. As I explained, it is because some people were better off in the new schemes. So immediate choice or deferred choice underpin is more or less just about the timing of when it will be done. It will have a big impact on schemes. We also have to look at the legal risk. It is extremely complex, as you will have seen from the consultation document. However, there are pros and cons. It is a huge administrative burden to implement it quickly within a few years. If someone was not retiring for another 20 or 30 years, other things could impact in the meantime. The person could get to retirement age and say, "If I had known that, I would not have made that decision at that time".

Mr O'Toole: OK. I should declare a tangential interest as I am a civil service pension holder, albeit not in Northern Ireland but in the UK.

Is it the case that you are not retrospectively changing the 31 March 2012 timing but changing when the new choice comes in? The choice is basically that a person can remain in the re-engineered career average scheme or can remain in the career average scheme but pay a bit more to get, roughly speaking, closer to the benefits that you would have got under the final salary scheme?

Mrs Smyth: It is not about paying more. You can choose to stay in the reformed career average scheme for the remedy period that starts from the 1 April 2015 until 31 March 2022. For the remedy period, you can choose to be in the career average scheme, if you were in it.

Mr O'Toole: Sorry, these are remedy people who are within 10 years of retirement?

Mrs Smyth: Everyone falls within the remedy who falls into the scope of being in post on 31 March 2012 and still in post on 1 April 2015.

Mr O'Toole: To be eligible for the remedy, do they have to be within 10 years of retirement in 2012?

Mr Ball: No. It covers everyone who falls within the period where discrimination is deemed to have occurred. The consultation seeks views on when a choice should be taken about that chunk of service and how it should be treated with either the legacy scheme or the new scheme. Additionally, the consultation seeks views on what arrangements should be in place after 1 April 2022. It is an opportunity to address some of the points that members raised today about how appropriate the career average scheme model is.

Mr O'Toole: On the £100 million, the cost of public service pensions is paid as DEL from the budget of the relevant Department. For example, a PSNI pension will come out of the Justice budget. Do Civil Service pensions come out of the Department of Finance budget and are accounted as DEL?

Mrs Smyth: My understanding is that the employer contributions come out of DEL, and pensions and payments are paid out of AME. A lot of projections are made for the payments.

Mr Catney: Thank you for your evidence. I see that the trades unions have been consulted. Has the full equality impact assessment that was necessary for the changes to the scheme been carried out?

Mrs Smyth: An equality screening exercise is being carried out. As part of the consultation, we have asked for a comment on the equality impacts and any other suggestions.

Mr Catney: Are all the trades unions represented in that scoping exercise?

Mrs Smyth: All the trades unions are included in our collective consultation working group. The Northern Ireland committee of the Irish Congress of Trade Unions facilitates the trades union side; it has affiliate members and sometimes observer status. Some non-unionised people, such as representatives of the Police Federation, have also attended meetings.

Mr Catney: The trades unions were concerned about the attributable costs. Chair, would it be possible for us to get the trades unions' submissions on the changes? That would give us a clearer view of the options for the proposals. Would it be fair for the Committee to ask for that to get sight of it?

The Chairperson (Dr Aiken): Would you be content to forward those to us?

Mrs Smyth: If you forward me the request in writing, I will get it cleared.

The Chairperson (Dr Aiken): Is the Committee content?

Mr Wells: I want to develop something that was raised by Jim and Paul. We are not the only ones listening to this; quite a few people out there will be very interested in what you are saying.

Employee Smith was just under 55 on the day that the changes were made in 2015. He loses out on the final salary scheme. You are giving him seven years extra in the final salary scheme. Is that, in effect, what you are doing?

Mrs Smyth: I think that, if they were 55 when the scheme came in, they would have been protected.

Mr Wells: No, under 55.

Mrs Smyth: There are different criteria for every scheme, and even different normal pension ages and minimum pension ages —

Mr Wells: You should be a politician [Laughter.]

The Chairperson (Dr Aiken): Do not do it. No.

Mr Catney: Do not go near it.

Mrs Smyth: I try to look at it as a whole, but every scheme has different rates, different scheme designs, different benefits and, where the police are concerned, a different normal pension age in the new scheme from the other public service pension schemes.

Mr Wells: Let us not take a policeman but a mythical public service employee who was told that, because he was just slightly under 55 in 2015, he came out of the final salary scheme and moved into a career average scheme. In effect, you are giving him seven years more in the final salary scheme until 31 March 2022. Is that correct?

Mrs Smyth: There is an example of that, yes. The age of 55 would not be relevant, but somebody who had to move over because they were not protected through the specific age criteria — being in post on 31 March 2012 and within 10 years of your normal pension age — as I said, it varies from scheme to scheme — would get an additional seven years should they choose the legacy scheme.

Mr Wells: In response to Jim, you said that for the three years from 31 March 2022 until he or she retires in 2025.

Mrs Smyth: If they were retiring in 2025, say, yes.

Mr Wells: At 65. They will go on to the career average scheme for three years, but you will protect all the benefits for the previous 20 or 30 years.

Mrs Smyth: Yes.

Mr Wells: Is there anything that they can do to opt in, at their own expense, to maintain the same benefits as if they had stayed in the final salary scheme?

Mrs Smyth: They are two completely different scheme designs. There are so many different elements to them.

Mr Wells: What would have been wrong with having an option in your paper that allowed someone, at their own expense, to continue to accrue the benefits for the last three years until they were 65?

Mrs Smyth: The point is only to remove the transitional protection element of the public service pension reforms. The basis of the reform of public service pensions stands. The consultation asked whether it is appropriate for us to do that from 2022.

Mr Wells: Yes, and many people said that it is not and that they want to retain their final salary scheme right up to the day of their retirement. That is a reasonable expectation; that is what they signed up to and what we are being lobbied about.

The Chairperson (Dr Aiken): OK. Thanks.

I have a couple of points to finish up. One of the figures that we talked about was roughly £700 million —

Mrs Smyth: Over seven years, yes.

The Chairperson (Dr Aiken): — over seven years. Your documents state that there are about 1,300 legal cases in the system.

Mrs Smyth: For Northern Ireland, yes.

The Chairperson (Dr Aiken): That is 1,300 legal cases that will have a potential cost, so I presume that that is on top of the £700 million.

Mrs Smyth: The £700 million is a factor in the valuation. The legal cases would not be.

The Chairperson (Dr Aiken): Yes, but I am thinking about what the overall cost is likely to be.

I hate to use the phrase, but we will probably need a new IT system, will we not?

Mrs Smyth: I could not possibly comment. [Laughter.]

The Chairperson (Dr Aiken): And we are not very good at IT systems, are we?

Mrs Smyth: New administrative processes and system requirements will be necessary. Whether those are new or existing contracts, whether they tweak something that they already have, or whether we need a completely new system are all implementation issues.

The Chairperson (Dr Aiken): Obviously, there will be a cost to that as well.

Mrs Smyth: Yes.

The Chairperson (Dr Aiken): OK. That was fun.

Mrs Smyth: Oh, it was. [Laughter.]

The Chairperson (Dr Aiken): Thank you both very much for coming in.

Mr Ball: Thank you.

Mrs Smyth: Thank you.

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