Official Report: Minutes of Evidence

Committee for Finance, meeting on Wednesday, 22 September 2021

Members present for all or part of the proceedings:

Mr Keith Buchanan (Deputy Chairperson)
Mr Pat Catney
Miss Jemma Dolan
Mr Maolíosa McHugh
Mr Matthew O'Toole
Mr Jim Wells


Mr Stephen Ball, Department of Finance
Mrs Blathnaid Smyth, Department of Finance

Public Service Pensions and Judicial Offices Bill: Department of Finance

The Deputy Chairperson (Mr K Buchanan): The Committee will now receive a briefing from the Department on the legislative consent memorandum (LCM) for the Public Service Pensions and Judicial Offices Bill. I welcome, via StarLeaf, Blathnaid Smyth, the assistant director of public service pensions; and Stephen Ball, from the public service pensions policy and legislation branch. The relevant papers are in members' packs. The session is being recorded by Hansard. You are very welcome. I ask you to make an opening statement, after which we can come back with questions.

[Long Pause.]

The Deputy Chairperson (Mr K Buchanan): Blathnaid, you are on mute.

[Long Pause.]

Mrs Smyth: Hello? Thank you, Chairman. I welcome this opportunity to update the Committee on the legislative consent memorandum for the Public Service Pensions and Judicial Offices Bill. I will endeavour, in my opening remarks, to address some of the issues raised by the trade union representatives in the previous session.

The Bill is designed to remedy the unlawful discrimination in public service pension schemes arising from the McCloud ruling. On 3 June, the Executive agreed in principle for a legislative consent motion (LCM) to extend the provisions of the Bill to devolved schemes here.

The Bill was introduced in the House of Lords on 19 July. It has had its Second Reading there and the next stage will be the Committee Stage, possibly around 11 October. I think that the unions were concerned that it was about to achieve Royal Assent, but there are still quite a few stages to go through, with Royal Assent not expected until early 2022.

I understand that members are now well informed about the McCloud judgement and the issues behind the Bill. The judgement in 2018 ruled that the transitional measures incorporated in the introduction of the reformed schemes in 2015, which allowed older scheme members to remain in their legacy arrangements, unlawfully discriminated against younger members. It is that discrimination that is being addressed in the Bill. It must be remedied, and legal advice confirms that identical transitional measures in our schemes must also be remedied. If members are content, I will give a very brief overview of how the Bill achieves that and the rationale for the use of an LCM as the most pragmatic solution to ensure that unlawful age discrimination is timeously addressed for all members of our public service schemes. I am happy to take questions afterwards.

The Bill provides the legislative framework for each public service scheme to provide their members who have been affected by discrimination under schemes with a choice of benefits for the remedy period of 2015 to 2022. They can be calculated under the reformed scheme rules or the legacy scheme rules. That will enable all members to have access to the best benefits package for them that is available for that remedy period.

That choice is important. It would have been a lot simpler to return all members to the legacy scheme for the remedy period. However, not all members will be better off having their benefits calculated under the old scheme rules, and many will, in fact, be more advantaged by using the reformed scheme rules. That choice also introduces considerable complexity, as is evidenced by the number of clauses in the Bill. I think that there are currently 114 clauses.

Whilst the details of the remedy are complex and diverse, thankfully, for the purposes of administrating it, the differences between schemes here and in GB are not. The devolved schemes are practically identical in provision to the equivalent schemes in Great Britain, and the proposed changes in the Bill are designed to provide a comprehensive policy response to address the discrimination to the satisfaction of the courts across all similarly affected schemes. It is not simply a matter of extending an externally developed Treasury solution to the devolved schemes here. The core policy response that the Bill gives effect to has been developed over the past two years, with collaborative engagement between the Department of Finance and Treasury, with input from the policy representatives from the affected devolved and GB schemes. In that regard, while the Assembly could legislate separately on that matter, the nature of the technical changes that are required to address the legal challenges across identically constituted schemes means that there would practically be no realistic scope or rationale to deviate from the core response, which is now being developed and is carried in the Bill.

The rationale for the deferred choice underpin remedy solution, which the Bill delivers, is clear. It represents the overwhelming majority preference of those who responded to the Department of Finance consultation on the issue. It removes the discrimination that occurred while providing clarity, control and choice and is based on the accurate, up-to-date information that is necessary to inform decision-making at the time of retirement.

The Bill provides the framework for the required changes, but scheme-level regulations that are required to implement the changes, remove the discrimination and give choice to members for the remedy period will be scrutinised and made in the relevant Assembly process. The unions said that statutory instruments are looked at in Westminster, but statutory rules, obviously, are looked at by the Committees and the Assembly. I hope that that addresses Mr Lowry's concerns in that regard.

As I have already noted, this is a complex exercise. It will involve adjustments to benefit entitlements for affected members for the period 2015-2022 as related adjustments or contributions and tax amounts for that period may have been overpaid or underpaid. The guiding principle is that affected members will be compensated for any overpayment of contributions or tax for that period. To ensure fairness for all scheme members, including those who have already paid the appropriate amounts of scheme contributions or tax in the period in question, the Bill sets out processes by which adjustments will also be required where underpayment of contributions for tax liability occurs for an extra pension entitlement due as a consequence of implementing the remedy and the choice made.

Where both overpaid and underpaid contributions occur, interest will apply in line. That will be set in directions by the Department of Finance following consultation with the Government Actuary's Department. In the case of deceased members, overpaid and underpaid contributions may also arise where a beneficiary of the member elects to take higher remedy benefits available in the scheme. Again, that is intended to ensure fairness for all scheme members. However, the Bill also provides scope for the individual schemes to reduce or completely waive any underpayment of contributions in scheme regulations where it deems that to be appropriate, for example, where it would cause hardship.

There will also be cases where other members have already retired and received pension benefits in respect of the remedy period service or will do so between now and the introduction of the regulations for retrospective changes, which are due to be made by October 2023. The Department will work with schemes to develop processes and guidance to best ensure that those members can exercise an immediate choice at the earliest available opportunity concerning their revised entitlements where adjustments are required.

The Department's response to the consultation also set out its rationale to ensure equality of treatment for the future so that, from 1 April 2022, after the remedy period in March 2022, all active members will accrue their future service in the reformed schemes only. The LCM ensures that all members of comparable schemes are treated equally in respect of the scheme design that is available to them after the discrimination has been addressed. It would be unfair — it would perpetuate the unlawful discrimination — if some members of public service schemes and not others continued to be in legacy schemes after April 2022 as that difference in treatment would still be attributable to unjustified age-based criteria.

Although the Assembly could legislate separately on that matter, no practical scope or rationale for a different outcome has been identified in the course of policy development and consultation. It is acknowledged that not all scheme members who originally received the transitional protections will favour that outcome, but it is an unavoidable implication of the court's ruling on McCloud.

It is important to be clear — I have made this point previously to the Committee — that it is only the transitional protection element of the reformed schemes that have been deemed to be discriminatory and which must be removed. The case for reformed schemes, as approved by the Assembly in 2014, and which most members have already moved to, remains valid. The schemes are appropriate for future service. As well as promoting fairness across scheme members, the changes that were legislated for by the Assembly were, and still are, necessary to ensure that schemes remain sustainable and fit for purpose.

The 2015 reforms were based on the recommendation of the Independent Public Service Pensions Commission in 2011. The recommendation was that all active scheme members should move to new, more sustainable, equitable, career-average revaluated earnings schemes, with normal pension age linked to state pension age. The Bill, with its prospect of remedy, completes the delivery of the recommendation. It will also effectively set the scheme model and funding envelope for the public service scheme design, which will be funded by the Treasury and, by extension, the taxpayer from April 2022. Any alternative approach would deviate from that design or cost envelope by providing a more-generous benefit package, for any cohort or workforce, and would inevitably require additional funding outside normal Treasury arrangements.

The conjoined policy approach across analogous schemes that the Bill legislates for and that the LCM delivers for devolved schemes accomplishes a number of important objectives. The LCM fully removes unlawful discrimination to ensure that affected members of the devolved schemes are treated fairly and to the same timescales as other members of similarly constituted schemes in Great Britain and therefore are not disadvantaged.

The Assembly's legislative timetable is already extensive, as we know, and it is extremely unlikely that the Assembly would deliver a Bill in the current mandate. The provisions of the devolved schemes are broadly identical to those of the analogous schemes in Great Britain, and the target changes in the LCM will mitigate the risk of further legal challenge and avoid the risk of cost pressures on the block grant, should an NI remedy otherwise deviate from the required core policy response that is necessary to address the unlawful discrimination.

I will touch on the judicial arrangements. Additional provisions in the Bill affect judicial pensions and terms of judicial office. The devolved judicial scheme contains the same unlawful discrimination transitional protections as other schemes established under the Public Service Pensions Act (Northern Ireland) 2014. However, it has a very small membership of only 56 registered members, approximately 30 of whom are affected by the age discrimination and are within the scope of the remedy.

Since its introduction in 2015, the scheme has already differed from other schemes in that, due to concerns about value for money, efficiency, economy of scale and data volatility, it does not complete its own actuarial evaluation but applies the outcome of the Ministry of Justice valuation for existing schemes in Great Britain in order to determine appropriate contributions and cost controls for scheme members and employers. Governance and some administration functions for the scheme are also already linked to or shared with the Ministry of Justice scheme. Under the LCM, the devolved judicial scheme would be incorporated into a reformed judicial scheme established by the Ministry of Justice.

The LCM will also deliver additional reforms for some judicial terms of office, including a higher mandatory retirement age of 75, rising from 70, provisions to regularise arrangements for sitting in retirement, including for fee-paid judges, and provisions to ensure consistency in payment of allowances. The Department of Justice has consulted separately on these changes, and the Committee for Justice has also been briefed and, I am advised, is content that they be made.

In summary, the Public Service Pensions and Judicial Offices Bill will implement a remedy solution for unlawful discrimination that has been developed in a conjoined policy response between the Department of Finance and the Treasury and with extensive input from the devolved schemes. The changes are designed to address the complex requirements of the McCloud ruling and will require unlawful discrimination, as it applies across similarly constituted and affected public service schemes here and in the rest of the UK, to be removed.

The solution is required by 1 April 2022, and any delay or deviation from the required policy response to address the matter will risk continued disadvantage for scheme members affected by the discrimination. Consistency of outcome with other similarly constituted schemes is necessary to avoid scheme-responsible Departments here remaining vulnerable to future protracted and costly legal challenge.

I move now to the context of the legal imperative to remove unlawful discrimination. An Assembly Bill for that purpose could achieve no additional benefit for the public service scheme members here in the timescales available. The LCM represents the most pragmatic solution to meet the full requirements of the courts' ruling on unlawful discrimination.

I am happy to take questions. I know that you are interested in knowing about Treasury meeting the cost of McCloud. The overarching requirement from the McCloud ruling is to remove the discrimination. It aims to put people back in the position that they would have been in had the discrimination not occurred, and, where they get the choice of benefits and return to the legacy scheme, it is seen as an employee cost in the valuation process. That is where the McCloud difference in the 2016 valuations has come about. Are there any questions?

The Deputy Chairperson (Mr K Buchanan): Thank you very much. I will kick off. I want clarity on the Treasury picking up the tab for the individual. In your paper, you state:

"Any breaches of the cost cap floor (resulting in increased benefits via increased accrual rates or decreased employee rates) will be honoured."

What does that mean?

Mrs Smyth: I will give a quick explanation of the cost cap. A cost amount is set for each scheme — it is different for each scheme — with a 2% corridor. If a scheme's costs fall above or below that corridor, when the 2016 valuations are carried out, there is an impact on scheme benefits or contribution rates for members. It is only the actual cost of the benefits that is taken into account. It is not other outside costs, such as the superannuation contributions adjusted for past experience (SCAPE) discount rate, which would affect employer costs. Once the cost of the benefits to the scheme fall outside, there is an impact. If there is a ceiling breach, it could end up increasing the contributions or decreasing the accrual rate and scheme benefits. The Bill waives any ceiling breaches arising from the 2016 valuations, so there will not be any detrimental impact from the 2016 valuations on members' contributions or scheme benefits. However, where a scheme would breach the floor and fall 2% below the current cost-cap figure, members would expect to have an increase in benefits or a decrease in contributions. That would be honoured should that occur in the 2016 valuations.

The Deputy Chairperson (Mr K Buchanan): I apologise; I missed part of that. Are you saying that members will not have additional contributions to make? Will that be covered by Treasury?

Mrs Smyth: Yes, Treasury is covering that, and it is covered in the Bill that any ceiling breaches that occur in schemes will be waived.

Mr McHugh: Tá fáilte romhat, a Blathnaid, agus gabhaim buíochas leat as do ráiteas. Thank you for your statement, Blathnaid. I want to check a comment that you made. You said that it is not realistic for people to depart from the scheme as proposed. Are you suggesting that that is not realistic for the like of the unions, which seem to be pursuing their own scheme here in the North of Ireland, if they are not happy with what is proposed in Britain?

Mrs Smyth: There would be funding implications to doing something differently in Northern Ireland. The cost envelope for the schemes is set, and the funding arrangements are in place with Treasury. Should Northern Ireland do something different in that remedy, which would cost additional money, it would have to be funded locally. Treasury would not pay additional money just for Northern Ireland schemes when it is legislating to do it differently for the rest of the United Kingdom. That would then have a subsequent knock-on effect on departmental budgets and public services.

Mr McHugh: What would be the consequence for pension scheme members if legislation to deal with the issue is not in place by 1 April?

Mrs Smyth: If there is a delay and we do not have the legislation through for 1 April 2022, the first impact would be that the prospective remedy would not be in place to move everybody into the new schemes. So, it would increase the remedy period. We would have to start and do our own Bill, and, then, if it did not get through in this mandate, which is highly unlikely, it would go into the next mandate.

There would be a complexity involved for any different arrangements that would be secured through primary legislation passage here in Northern Ireland. Cost aside, we are talking about adding years on to rectify this discrimination. For every year, there would be more cost, but there is also further risk of legal challenge. Members would, quite rightly, want to have that sorted as soon as possible.

Mr McHugh: Finally, what discussions did the Department conduct with trade union representatives on the issue?

Mrs Smyth: We have a collective consultation working group with all public-sector trade unions, and we have engaged regularly with them right through from prior to the consultation. We have had regular meetings. We had a meeting arranged last week, which could not go ahead, but we have met them separately in an ad hoc meeting on their concerns about the employee cost of McCloud. It is because it is figured into the 2016 valuations. Trade union side made some good points when they were describing what their expectations were out of the 2016 valuation.

I will point out that the new schemes were introduced in 2015. At the time of the 2016 valuation, the new schemes had been in place only for a year. There was a cost-cap mechanism set with a 2% corridor, and it was only expected to be breached in the most extraordinary outcomes and circumstances. So, it was quite a shock at the time when the indicative results came out showing a lot of significant floor breaches. It was the first time that the system was tested, therefore the Government in Westminster called for a review of the cost-cap mechanism. That review is ongoing. The consultation period has closed, but the Government's response to that has not issued yet.

The value to scheme members of the McCloud remedy is accounted for in the valuation period. Obviously, the assumption is made that the majority of members will go for the financially better option for them, which, quite often, would be the legacy scheme. So, it is right, if that is what scheme members are getting, it is a scheme member cost and it is counted as such in the valuation process.

The Deputy Chairperson (Mr K Buchanan): To go back to a point there, the unions were here prior to this session, and you were online. Just for clarity, are they right or are you wrong? I do not mean that with any disrespect. Who is paying for McCloud? Is the Treasury paying for it or are the employee contributions paying for it? I am not clear on that.

Mrs Smyth: It is not as straightforward as that. McCloud is an employee cost. It is worked out because members' scheme benefits are increased if they choose to move from one scheme to another, so you are taking member costs into account in the valuation, and it increases the member costs. However, it works out that those floor breaches may not materialise, because the schemes will be more costly because people are taking legacy schemes benefits. The actual cost across Northern Ireland's public service schemes — it was raised earlier, and the trade union side was not clear on it — is £97 million a year for each of the seven years of the remedy period. As I said, the cost-cap mechanism was not working as anticipated.

Mr O'Toole: You have had it confirmed by the Treasury that that £97 million would have to come out of the block grant and that it would not be funded in any way. Did you make an argument to the Treasury about why it should be funded, or is the Treasury's position just that, if Northern Ireland decided to have its own bespoke legislation, the cost would have to be met out of the block grant?

Mrs Smyth: Yes, that has been the Treasury's position, as it was on the introduction of the reforms in 2015. We were looking at a difference of £350 million a year if we did something different. [Interruption.]

Apologies for that. At least it is not a pigeon. [Laughter.]

The Deputy Chairperson (Mr K Buchanan): It is a shame that it is not a pigeon.

Mrs Smyth: The Treasury has made its position clear: if we were to do something different, it would have to be paid for. In fact, in the 2015 reforms following the Public Service Pensions Act (Northern Ireland) 2014, a slight difference was made for the Fire and Rescue Service scheme, in that the retirement age could be set in regulations, within parameters, but even with that, any deviance at all had to be paid for by members. It had to be a cost-neutral arrangement.

Mr O'Toole: OK. On the question of timing, one of your arguments about doing anything divergent or bespoke here is that it would just cause more delay. Do you not anticipate a delay, in any case, from legal action? It sounds as though unions in Britain and, probably, here will attempt to take the matter to judicial review.

Mrs Smyth: The Fire Brigades Union raised a case over the pausing of the cost cap, which was brought around a query over making it an employee cost. Unions here have made their position clear on that as well, which is that they would support any such union challenge. That is a bit of a separate issue to the LCM, however, because it is about the valuation process and how the costs are attributed. The main focus of the LCM is to remove the discrimination. It is a court ruling that we have to address the age discrimination in the schemes. Our time pressures are mainly focused on that.

Mr O'Toole: OK. The court ruling does not say that you had to do it in a particular way, though. I do not have anything else. Thank you.

The Deputy Chairperson (Mr K Buchanan): No other members have indicated that they wish to speak, so I will thank Blathnaid and Stephen. We appreciate your coming along, giving your presentation and answering questions today. Thank you very much.

Mrs Smyth: OK. Thank you.

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